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March 31, 2005

Max Sawicky Reports on Brookings

Max Sawicky reports from the Brookings Institution:

MaxSpeak, You Listen!: GUNFIGHT AT THE
BROOKINGS CORRAL:
"Dean Baker and Paul Krugman presented their paper, co-authored with Brad DeLong, on 'Asset Returns and Economic Growth,' at the Brookings Institution today. They lay out the problem of what makes a logically consistent scenario of economic growth, in terms of assumptions on interconnected variables, including labor force growth, productivity, immigration, stock prices, returns on equity, etc. N. Gregory Mankiw, late of the President's Council of Economic Advisers, acted as discussant.

The authors zero in on 4.5 percent as the most plausible estimate of future returns to stock ownership. This tracks closely with the 4.6 of Robert Shiller, discussed here previously. When you include this in a diversified portfolio that has bonds and government securities, the average rate of return is much lower than the numbers routinely thrown around by privatization snake oil salesmen.

The paper discusses how plausible economic growth elsewhere does not change the basic scenario, a previously neglected subject.

Mankiw gave me a Groucho Marx moment -- as in, 'who are you going to believe, me or your own two eyes? -- by suggesting that the connection between stock returns and Social Security privatization was spurious. So why, you may ask, are the President and Vice Pres . . . Oh never mind.

Mankiw also accused the authors of Galbraithian lack of faith in 'corporate capitalism,' due to what he construed as their assumptions about corporate dividend policy. This was good timing, since there happens to be an event at Brookings next week about Galbraith and his life's work.

Nobody in the room (about 50 heavy-weight economists) sided with Mankiw's comments. Robert Gordon and Benjamin Friedman made fun of him. Gordon for Mankiw's New Republic article, where Mankiw cited the investment opportunities of the Harvard faculty as a model for working people. Friedman noted that he was implicitly attacking George W. Bush for mixing up the issue of Social Security privatization with that of solvency.

Gordon is much more optimistic about economic growth than the Social Security trustees. This suggests better stock market performance, but it also means the Trust Fund balances persist for much longer than 2041. He said 'the big deal here is immigration.' He went on to point out that a modest assumption about immigration meant a huge difference for labor force size in the long run.

There was a fair degree of consensus, as there is in the literature, that privatization and solvency are two separate matters that don't have much to do with each other. Privatization -- not necessarily in the form proposed by the Bush Administration -- allows the individual to revel in his own risk-taking, enjoying the thrill of success and the agony of failure. It entails the replacement of social insurance with individual saving. You could be for this irrespective of whether the market rate of return is much higher than that under Social Security, or under riskless U.S. government bonds.

Solvency or 'pre-funding' is the grim task of matching the present value of future spending to future receipts, mostly by reducing benefits. An irony of this is that 'solvency' proposals typically take a burden that is otherwise spread over all future generations and concentrate it on . . . why, on you, dear reader. As long as you're under 55. The people who have been told they benefit the most from 'privatization' are precisely the ones who get screwed the worst.

I met Mankiw afterwards. He wasn't too familiar with this site, which was predictable and is probably just as well. I told him I quoted him periodically. He was pleased.

Most of the conference was on some crazy little thing called the current account deficit, which maybe could cause interesting problems in the future.

So Mankiw didn't even say that a 3% real clawback on private accounts is too high? That the clawback rate should be matched to the actual Treasury borrowing rate?

Sigh

Bob Gordon is--as is almost invariably true--smart. Raising immigration by 0.3% of the workforce every year wipes out nearly half of the 75-year Social Security deficit.

Posted by DeLong at 08:15 PM | Comments (0) | TrackBack

Economics 113 Midterm 2

Economics 113, Second Midterm

Posted by DeLong at 03:10 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Shut Up or We'll Kill Your Development Bank! Department)

The Washington Post "argues" that critics of Paul Wolfowitz as World Bank President should be quiet. Why? Because "the World Bank is necessary.... People who care about this institution and its mission -- as many of Mr. Wolfowitz's detractors do -- should think carefully before they damage it by attacking its new boss."

No argument that Paul Wolfowitz is the best candidate for World Bank President. No argument that he is even a good candidate. No argument that he is either minimally qualified--in his understanding of development, in his understanding of international finance, or in his ability to manage a large bureaucracy.

Pathetic. Contemptible.

washingtonpost.com: Mr. Wolfowitz and the Bank: THE WORLD Bank's board will meet today and will almost certainly confirm the nomination of Deputy Defense Secretary Paul D. Wolfowitz as its new president. The initial expressions of shock from Europe have proved unserious and, in some cases, even hypocritical.... Imposing a particular deputy on Mr. Wolfowitz is not going to help. It will push the World Bank toward the nationality-driven hiring that is the bane of United Nations agencies.... It's true that the No. 2 at the International Monetary Fund, who is always an American, does boost U.S. clout within the World Bank's sister institution....

Mr. Wolfowitz's critics, domestic as well as international, should now get beyond their dislike of his role in the Iraq war.... [T]he institution will have a hard time facing down the inevitable attacks on its decision if it is simultaneously having to defend itself against critics who dislike its new president.

Most people agree that the World Bank is necessary. There are few competent organizations that can help manage the challenges of globalization.... The World Bank brings big financial and intellectual resources to all of these challenges; it provides around $20 billion a year to developing countries and houses the largest concentration of development thinkers anywhere. People who care about this institution and its mission -- as many of Mr. Wolfowitz's detractors do -- should think carefully before they damage it by attacking its new boss...

Posted by DeLong at 01:07 PM | Comments (0) | TrackBack

Argentina's Last Crisis

Brad Setser looks back at Argentina's recent crisis:

Brad Setser's Web Log: What happened to Argentine banks in 2001? And why?: Retrospective analysis of what went wrong in Argentina back in 2000 and 2001.... Argentina's crisis was a searing experience for me. In my no doubt biased view, the case studies are the real strengths of this just released IMF paper (fully disclosure: I contributed to the Argentine case study).... The core thesis of the Argentine case study is simple: Argnetine's banks were in far better positioned to survive a devaluation and a government debt restructuring at the end of 2000 than they were at the end of 2001. Consequently, waiting a year had real costs....

[D]uring the course of 2001, Argentine banks got rid of precisely those assets that would (potentially) have performed in the event of a devaluation and government debt restructuring. They ran down their best assets -- their liquid offshore reserves -- to pay off depositors (and to pay off maturing cross border credits). They also reduced their peso lending to Argentine firms dramatically. Peso deposits fell more rapidly than dollar deposits (that, incidentally, does not mean dollar depositors did not run: some peso depositors shifted into dollars, and some dollar depositors ran). To stay matched, currency wise, the banks had to reduce their peso lending commensurately.

That left the banks with dollar-denominated lending to the government, and dollar-denominated lending to Argentine firms. Both types of lending were almost sure to go bad in the event of a restructuring and a devaluation...

Posted by DeLong at 01:07 PM | Comments (0) | TrackBack

Ed Andrews Writes About Asset Returns and Economic Growth

Ed Andrews of the New York Times writes about "Asset Returns and Economic Growth":

The New York Times > Washington > Social Security, Growth and Stock Returns: In barnstorming the country over Social Security, administration officials predict that American economic growth will slow to an anemic rate of 1.9 percent as baby boomers reach retirement. Yet as they extol the rewards of letting people invest some of their payroll taxes in personal retirement accounts, President Bush and his allies assume that stock returns will be almost as high as ever, about 6.5 percent a year after inflation.

'For the life of me, I can't imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future,' Treasury Secretary John W. Snow said Wednesday in a speech in Bozeman, Mont.

A growing number of economists, however, including many who favor personal accounts, say Mr. Bush's assumptions are optimistic. Many believe that stock returns will be lower than they have been in the past, closer to 5 percent than 6.5 percent, and that returns on a balanced mix of stocks and bonds will be much lower than that.... The statistical battle is politically important. If investment returns are just one percentage point lower each year than predicted, a person would end up with 35 percent less money than she expected after 30 years of saving. Under Mr. Bush's plan, moreover, people would need to earn at least 3 percent a year after inflation just to make up for automatic cuts in traditional Social Security benefits.

In a paper to be presented on Thursday at the Brookings Institution, three economists who are longtime critics of Mr. Bush argue that stock returns are likely to be about 4.5 percent if economic growth slows as much as the administration predicts. 'We find it arithmetically very difficult to construct scenarios in which asset returns are at their historic average values and real G.D.P. growth is markedly slowed,' wrote the economists, Paul Krugman of Princeton University, whose Op-Ed columns in The New York Times have long been sharply critical of Mr. Bush's plan; J. Bradford DeLong of the University of California, Berkeley; and Dean Baker of the Center for Economic Policy and Research, a liberal research organization in Washington.

To make the numbers work, the economists contended in their paper, domestic profits would have to grow far more rapidly than they have in the past, or American companies would have to become huge exporters of capital to faster-growing countries. At the moment, the United States is a huge net importer of foreign capital.... [M]any Wall Street analysts warn that stock returns are likely to be significantly lower in the future for a separate reason: stock valuations are high relative to expected earnings, and they are likely to remain that way. The S.&P. 500 index is currently valued at about 20 times earnings, which translates to an expected return of about 5 percent a year....

William C. Dudley, chief United States economist at Goldman Sachs, estimates that stock returns are likely to be about 5 percent in the future, because investors are accepting lower 'risk premiums.'... 'My view is that stocks really can't deliver the same returns in the future as in the past, unless we have a major decline in stock prices,' said John Y. Campbell, a professor of economics at Harvard University and an adviser to the Social Security trustees on the issue in 2001.... Two recent computer simulations, one by Robert J. Shiller at Yale University and one by the Congressional Budget Office, suggest that even historical stock returns are no guarantee against losing money....

Stephen Goss, chief actuary for the Social Security program, defended the administration's assumptions. 'Keep in mind that we are trying to make projections over a very long time, 75 years,' Mr. Goss said. 'I would suggest that 5 percent at the moment makes perfect sense. But if you buy at another time, when the price-earnings ratio is 10, you would expect a higher return over time.'...

White House officials may be revising their assumptions. N. Gregory Mankiw, who recently stepped down as chairman of the Council of Economic Advisers, said Mr. Bush's proposed break-even rate of 3 percent on personal accounts may be too high. The yield on inflation-protected Treasury bonds is about 2 percent.

White House officials say they are open to proposals for changing the break-even point, which would raise the plan's cost, but Democratic lawmakers remain fundamentally opposed to Mr. Bush's plans.

'The basic arguments are over the extent to which people ought to be given more freedom over their risk and return choices,' Mr. Mankiw said. 'Returns on the stock market may affect the choice people make, but the question of whether they should be given a choice is broader than the issue of returns.'

Four points:

  1. It's not clear to me that Dudley-Campbell is anything other than Baker-DeLong-Krugman seen from the other side. High price-earnings and price-dividend multiplies coupled with slow GDP and profit growth imply low returns. Only if GDP and profit growth is rapid can current stock market levels be consistent with high returns.
  2. The issue separating Baker-DeLong-Krugman from Goss (and others, like MIT's Peter Diamond) is whether the stock market knows what it is doing. As we see it, there are three possibilities. We see all three of these as live. Goss sees only the third:
    1. The stock market knows what it is doing, and it is expecting low long-term returns (because of a fall in the equity premium and an anticipated fall in the rate of profit.
    2. The stock market knows what it is doing, and it is expecting normal long-term returns because it is anticipating relatively rapid long-term GDP and profits growth.
    3. The stock market doesn't know what it is doing, is currently overvalued, and will decline over the next decade to levels that are consistent with historical return patterns.
  3. A Bush plan that had a 2% real clawback rate (or set the clawback rate equal to the Treasury borrowing rate) would be vastly preferable to the current Bush plan: it would accomplish the important task of providing a vehicle for the poorer half of America's population to easily invest in equities on reasonable terms.
  4. Mankiw's invocation of the language of consumer choice and consumer sovereignty makes me very, very uneasy, for reasons I don't have time to set out here...

Posted by DeLong at 01:06 PM | Comments (0) | TrackBack

Soft Landing, or Hard?

David Altig asks (rightly) why I didn't link to his and Nouriel's pieces in the Wall Street Journal. Ummmm... Sloth?

macroblog: Soft Landing, Or Hard?: Nouriel Roubini and I debate the issue in the latest installment of the Wall Street Journal Online's Econoblog. Get it while it's still free.

UPDATE: Andrew Samwick agrees with me, as does William Polley (and both add to the argument). But I didn't dent Brad Setser's resolve, and be sure to check out the discussion board at Econoblog where, last I looked, the sentiment was running heavily in Nouriel's favor.

UPDATE, THE SEQUEL: The Eclectic Econoclast reports that Peter Drucker agrees with Roubini and Setser.

MORE: Michael at Global Trader's Diary adds his thoughts.

YET MORE: An excellent summary by Kash ar Angry Bear.

ONCE MORE: Brad DeLong comments on Kash's post (thanks, pgl). However, he does neglect to link to the Econoblog debate that instigated Kash's remarks Hey, Brad! Give us some love!

Posted by DeLong at 01:06 PM | Comments (0) | TrackBack

Argentina's Most Recent Crisis

Note to self: Back-of-the-envelope calculations suggest that between the start of 1999 and the end of 2001, investors in Argentina bonds were compensated ex ante for only about 36% of their losses. They were much too sanguine about Argentina's prospects until the very end.

Posted by DeLong at 01:06 PM | Comments (0) | TrackBack

John Snow Is Genuinely Embarrassing...

Jesse Taylor of Pandagon watches Treasury Secretary John Snow embarrass himself, and gets positively shrill:

Pandagon: An Internal Dialogue: John Snow can't figure out why America is opposed to the vague set of platitudes that he's paid to shill for.

Snow, in remarks to the Chamber of Commerce in Bozeman, said he believed personal accounts for young workers would be cost-free for the existing Social Security system and would not affect benefits to retirees or near-retirees.

'For the life of me, I can't imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future,' Snow said.

'Why wouldn't we do this? I have not heard one good reason not to and it's hard to figure out why anybody would oppose it,' he said.

Here are four off-the-top-of-my-head reasons to oppose the Bush private-accounts plan, all of them very good ones:

  1. As private-accounts plans go, it is a lousy one: the high three percent real clawback means that the working class and the lower middle class run an unacceptably large chance of losing money if they sign up.
  2. It is not cost-free for the existing Social Security system: it increases the Social Security deficit: contrary to what administration spokesmen claim, the shift to private accounts costs more in reduced revenues flowing to the standard Social Security system than it saves in reduced standard Social Security benefits.
  3. It doesn't do a thing to raise national saving; in fact, if people treat their private accounts as close substitutes for their other saving, it could well significantly reduce our already much-too-low national saving rate.
  4. The Bush administration has a demonstrated skill at getting the important details of policies wrong: at turning gold into straw. Even a good plan would be wrecked in implementation by this crew.

It is pathetic that John Snow has not heard any of these reasons. The Treasury Secretary should not be an ignorant, underbriefed doofus.

Posted by DeLong at 01:06 PM | Comments (0) | TrackBack

March 30, 2005

Asset Returns and Economic Growth

A note for the next time I teach graduate macro:

A fall in the rate of economic growth--whether because of slower labor-force growth or slower growth in technology and organization--should carry with it a reduction in rates of profit and asset returns. Why? The intuition is clear: slower growth in labor, technology, or organization all reduce this generation's supply of effective labor relative to the capital stock provided by last generation's saving and investment. Effective labor becomes relatively scarcer, and capital becomes relatively more abundant. Thus the wage paid to an effective unit of labor rises, and rates of profit and asset returns fall: supply and demand.

However, it is especially interesting that one of the standard models--the Ramsey-Cass-Koopmans model as set out in Romer's Advanced Macroeconomics--predicts that while rates of return should fall when labor productivity growth falls, reductions in labor force growth have no effect on rates of profit and asset returns. In the R-C-K model, labor-force growth takes the form of an increase in the number of members of the representative household. The utility of the representative household is equal to the number of its members times a function (with declining marginal utility) of consumption per capita. Thus big households are better at turning consumption into utility than small ones. A R-C-K household that controlled its own fertility would choose to grow in size as rapidly as possible (even if the real wage its members earned were zero) in order to grasp the possibility of becoming more efficient at transforming goods into utility.

Thus it turns out that in the R-C-K model a reduction in the labor force growth rate has two effects. First, it reduces the relative supply of effective labor in the future. Second, it reduces the efficiency of the household in the future at turning consumption goods into utility. The first effect raises the relative abundance of capital and causes rates of return to fall. The second effect diminishes incentives to save, reduces the relative abundance of capital, and causes rates of return to rise. It turns out that they exactly offset each other.

But is this a result we want--to say that a reduction in the rate of population growth reduces savings rates because households recognize that their future versions will be less efficient at turning goods into utility because they will be smaller in number? I suspect not, especially once one recognizes that the representative agent is a fiction and that the households doing the bulk of the saving are in all likelihood not the same as the households doing the bulk of the growing.

There is a general lesson here: these models are clean, elegant, powerful, and have lots of hidden subtleties that commit you to implicit assumptions you probably do not want to make. Inspect them carefully.

Posted by DeLong at 08:35 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled By These Liars? (Assistant Secretary Rob Nichols, This Is Your Life! Department)

From Josh Micah Marshall:

Talking Points Memo: by Joshua Micah Marshall: March 27, 2005 - April 02, 2005 Archives: TPM Reader JM could barely believe what he was hearing ...

It was a bit shocking to hear Rob Nichols, assistant secretary for public affairs at the Treasury Department, actually say out loud that U.S. government bonds in the trust fund are just worthless IOUs, causing an uproar from the audience. (This guy works for the Treasury Department!?) He also was emphatic that there would be exactly zero transition costs for establishing private accounts. 'After all, it is simply like pre-paying your mortgage.' He said this prepayment would require only $700 billion for the first 10 years, and to shouts of what about the second 10 years, claimed that they hadn't run the numbers. The audience wasn't buying it judging from the catcalls. Finally, Sally Canfield, assistant to Denny Hastert, tried to throw out the line about how each year we delay costs another $690 billion, until brought to a screeching halt by a cry of 'Liar' from someone in the crowd.

"They hadn't run the numbers" for what happens in the second decade of Bush private accounts? Do they really think the press corps and the people are dumb enough to believe that? And why do they think it's to their advantage to set out such transparent lies? Would anyone support a long-run plan proposed by people who haven't "run the numbers" beyond the first ten years?

Posted by DeLong at 08:34 PM | Comments (0) | TrackBack

General Ricardo Sanchez Commits Perjury

Atrios directs us to Insomnia:

insomnia: The filthy Sanchez.: The ACLU today released a memo signed by Lieutenant General Ricardo A. Sanchez authorizing 29 interrogation techniques, including 12 which far exceeded limits established by the Army’s own Field Manual. More specifically, it points out that Gen. Sanchez committed perjury when testifying before Congress.

From Sanchez' testimony of May 19, 2004:

U.S. SENATOR JACK REED (D-RI): General Sanchez, today's USA Today, sir, reported that you ordered or approved the use of sleep deprivation, intimidation by guard dogs, excessive noise and inducing fear as an interrogation method for a prisoner in Abu Ghraib prison. Is that correct?

SANCHEZ: Sir, that may be correct that it's in a news article, but I never approved any of those measures to be used within CJTF-7 at any time in the last year.

That is absolutely refuted by the newly released memo, which says:

Presence of Military Working Dog: Exploits Arab fear of dogs...
Sleep Management: Detainee provided minimum of 4 hours sleep per 24 hour period, not to exceed 72 continuous hours.
Yelling, Loud Music, and Light Control: Used to create fear... (Sanchez's wording, not mine.)

Posted by DeLong at 08:34 PM | Comments (0) | TrackBack

Advances in Infotech Usability

Meanwhile, from the nineteenth floor of a building at the southern end of the Malay Peninsula, Belle Waring uses Google and TypePad to teach us how to improve our diets by eating the Power Grain of the Incas while lying in bed nursing a grumpy, teething child! (That's her. We can eat the Power Grain of the Incas out of bed, even if there's no nearby child at all.)

Aren't the Internets amazing?!

John & Belle Have A Blog: Quinoa Tastes Good: Quinoa, on the other hand, is yum-tastic. I'm lying in bed right now nursing a grumpy, teething child, so I can't check the ratio. I think it's 1 1/2 c water to 1 c quinoa? No, OK, 2 to 1, I can use google even in my reduced state. It's a good idea to wash it, as it can retain a bitter coating, but I'm lazy and never bother, and it's always been fine, so... First, cook some onion and/or garlic in a few T olive oil. Then add 1 1/2 t cumin, or whatever, and then the quinoa, and toast for a minute or two. Put in the stock (or water), cook over low heat 17-20 minutes, turn off the heat and let it sit a minute or two, fluff it, and there you go. You could stir in chopped tomato or cilantro at the end, include red bell pepper or chilis at the start, generally let your mood and the contents of the vegetable drawer guide you. The grains are very pretty; they are translucent, and each has a curling tail wrapped around it. They have a lovely texture. Also, the are super good for you. I think it is the only grain which is a complete protein. If you are pressed for time, cook quinoa, mustard greens in olive oil and garlic, and pan-fried pork chops or boneless chicken breast with teriyaki sauce. 30 minutes start to finish, and mad healthiness along the way.

Posted by DeLong at 08:34 PM | Comments (0) | TrackBack

The "Hard Landing" Scenario...

Kash at Angry Bear sets out what the "hard landing" scenario is, and then why he is skeptical about it:

Angry Bear: [A]t some point those Asian central banks will decide to stop lending additional funds to the US. They do not have to dump their current dollar assets to cause a crisis; simply stopping the accumulation of new dollar assets will suffice to cause difficulties. When that happens, the US current-account deficit must necessarily fall by a (roughly) similar amount over a short period of time. The only way that that can happen, particularly given continued US government deficits, is for a sharp fall in the dollar, a sharp rise in interest rates, a sharp fall in asset values, a sharp fall in consumption, and a large rise in US saving...

And here's why he is skeptical:

Assuming that Asian CB lending to the US is indeed a crucial determinant of the US's CA deficit (see #1 above), will it be in the best interest of Asian CBs to stop lending additional funds to the US any time soon? The costs to those CBs of additional lending to the US are large: enormous potential capital losses when the dollar depreciates, growing inflationary pressures in their home countries (perhaps particularly in asset markets), and heightened protectionist pressures in the US.

But the costs that Asian CBs will incur if they stop lending to the US could be even greater: the sharp fall in exports to the US that would surely happen, a likely sudden rise in domestic interest rates, the crash in asset prices that would probably follow... all of which would make a recession -- possibly a rather severe one -- quite likely. Right now these costs are apparently greater than that aforementioned costs of continued lending to the US.

Is it likely that this calculus will ever change? I've generally been in the hard landing camp on this issue, but on this last question I'm not so sure. It seems entirely possible to me that the enormous downside risk of recession, asset price depreciation, and domestic economic dislocation could well outweigh any other consideration for a long time to come. If so, then Asian CBs will have every reason to only very gradually taper off their additional lending to the US -- gradually enough to ensure that the hard landing scenario never happens...

What this leaves out is that the associated central banks may lose control of the situation. As long as they all act in concert, things continue to work (at least in the short run). But suppose that one decides to hedge its reserve position against the risk that the dollar will decline. What happens then? The other central banks will have to step in to take up the slack--to buy its dollar holdings, and then to take up its share of new dollar holdings. The first central bank to decide that the game is up wins and escapes all risk. The rest are left holding the rotting hot potatoes. As the stakes at risk rise, the strains on the dollar-buying cartel that is the associated central banks of Asia rise. And when those strains become too great and the first one decides to try to get out the door first...

And what this also leaves out is the other actors in the game. As long as the dollar-buying cartel continues, you can move your assets from dollars into other currencies, wait for the dollar to fall, move them back, and thus have made 30% or more on your money. At the moment Americans are doing this at a rate of $600 billion a year as they trade bonds for net imports. There are about $30 trillion of dollar-denominated financial assets in the world economy. If their holders decide to convert only 2% of these from dollars into other currencies this year, that means that the central bank cartel will have to eat not $50 billion of new dollar holdings next month but $100 billion of new dollar holdings this year; if they decide to convert 6% this year than the central bank cartel will have to eat $200 billion of new dollar holdings next month. When the associated investors of the world who hold dollar-denominated assets decide on any significant scale that it's time to try to grab the 30% gain from the coming fall in the dollar, the game is over that very week.

If either of these happen--either a move by a couple of central banks to abandon the dollar-purchase cartel, or a decision by a significant number of investors to try to grasp the 30% profit from the forthcoming dollar decline--then things get wild immediately. Karen Johnson at the Federal Reserve, Kristen Forbes at the CEA, and Randal Quarles and Tim Adams at the Treasury will know what to try to do--or at least guess at what the least-bad course of action will be. But will anybody in the White House listen to them?

Posted by DeLong at 10:23 AM | Comments (0) | TrackBack

Grownup Republican Watch

Jack Danforth:

The New York Times > Opinion > Op-Ed Contributor: In the Name of Politics: Take stem cell research. Criminalizing the work of scientists doing such research would give strong support to one religious doctrine, and it would punish people who believe it is their religious duty to use science to heal the sick.

During the 18 years I served in the Senate, Republicans often disagreed with each other. But there was much that held us together. We believed in limited government, in keeping light the burden of taxation and regulation. We encouraged the private sector, so that a free economy might thrive. We believed that judges should interpret the law, not legislate. We were internationalists who supported an engaged foreign policy, a strong national defense and free trade. These were principles shared by virtually all Republicans.

But in recent times, we Republicans have allowed this shared agenda to become secondary to the agenda of Christian conservatives. As a senator, I worried every day about the size of the federal deficit. I did not spend a single minute worrying about the effect of gays on the institution of marriage. Today it seems to be the other way around.

The historic principles of the Republican Party offer America its best hope for a prosperous and secure future. Our current fixation on a religious agenda has turned us in the wrong direction. It is time for Republicans to rediscover our roots.

Late to the party, but welcome.

Posted by DeLong at 10:23 AM | Comments (0) | TrackBack

Time to Pull the Plug on Heritage

If you work for Heritage, and ever want to be taken seriously again, quit today. This is your last chance.

Kevin Drum reports:

The Washington Monthly: "A WEE ASSIGNMENT FROM THE HERITAGE FOUNDATION....From the description of a Heritage Foundation event to be held April 19:

A growing number of scientists around the world no longer believe that natural selection or chemistry, alone, can explain the origins of life. Instead, they think that the microscopic world of the cell provides evidence of purpose and design in nature — a theory based upon compelling biochemical evidence. Join us as Dr. Stephen C. Meyer, a key design theorist and philosopher of science, explains this powerful and controversial concept on the mysteries of life.

Posted by DeLong at 10:23 AM | Comments (0) | TrackBack

March 29, 2005

Weblog Pledge Drives

Two weblogs I very much want to see continue are having pledge drives. First, Arthur Silber:

Light of Reason: I’m having a pledge week here at The Light of Reason.... [W]hat market is there for a libertarian blog at the moment? Moreover, a libertarian, non-interventionist blog? A blog that manages to offend almost everyone at one time or another? (Now that’s a distinction not everyone can claim, if distinction it be.) When I began two and a half years ago, I was linked very often by the major prowar, liberventionist blogs. Not so much in the last year or so; in fact, hardly ever (or never). Nowadays, it’s the liberal blogs that link to me. Well, that’s evolution for you. But there isn’t any “camp” that I belong to, and there isn’t any group in which I feel completely at home. Talk about living one’s advocacy of individualism. Not that I wouldn’t mind finding a group of like-minded people, but thus far that has proven to be elusive in the extreme...

And Alameida on behalf of Gary Farber:

I, the not-particularly-mysterious Alameida, will make you, dear reader, a personalized gift of a nature I cannot fully reveal here, because it is against the law, sort of. (No, not that.) Not a real law, but more of an RIAA-type law.... So, c'mon, people, pony up. You'll get something nice of an undisclosed nature, and Gary Farber will get some of those sweet sweet prescription drugs he's been hankering for, like the ones that lower your blood pressure. (I hear that s*** is amazing)...

Just think: contribute to each 100 times the pro-rated time-cost of watching Crossfire, and you still come out *way* ahead. I would like to see it proven possible that the tip jar turn out to be bountiful enough to keep high-powered, idiosyncratic commentators like these active. Posted by DeLong at 09:11 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Howard Kurtz Edition)

Wonkette notes a typical Kurtzianism:

Wonkette - College Faculties Infested with Liberals: Howard Kurtz reports: 'College faculties, long assumed to be a liberal bastion, lean further to the left than even the most conspiratorial conservatives might have imagined, a new study says.' Or maybe that should have been, Howard Kurtz interprets. Here's an actual excerpt from the new study, which is based on a study from six years ago: 'The 1999 study found 72% of faculty to the left of center, including 18% who were strongly left...'

So, fewer than one out of five evil liberal professors actually identify themselves as strongly left? Does Kurtz actually know any 'conspiratorial conservatives'? Believe us, Howard, they can conspire way more imaginatively than that! Once again, the insular nature of the liberal MSM reveals itself...


UPDATE: Ezra Klein throws down the gauntlet:

Ezra Klein: Why Professors Tilt Left: "it's time to stop the head-scratching. Being a libertarian is perfectly fine, as is being an economic conservative and a neocon. But the weird merging of the Christian Right, the Neocons, and Karl Rove's theories that's currently directing the Republican party makes no sense at all. It's an administration where the President believe the 'jury's still out' on how the earth was formed and the Senate Majority Leader -- a trained doctor! -- thinks AIDS can be transmitted through tears (to say nothing of the House Majority Leader who couldn't go to Vietnam because those damn minorities had gobbled up all the spots).

And so people who care about their party making sense shy away from Bush. Sometime they find more elements of their beliefs in him than in the Democrats, and so they pull the lever for the 'R', but the more that intellectual coherence matters, the less they make that bargain. And so as you climb up the rungs of academia, where internal coherency and intellectual rigor become values to live and die by, you find fewer Republicans. Simple as that...

Ezra is completely right.

A good deal of it, in economics at least, is that you simply cannot dare not--not if you want to look others in the eye (or yourself) adopt the line of the Bush administration. Consider what I was writing about yesterday--White House Social Security point man and "substance" person Charles Blahous, and his claims like:

BLAHOUS: It's also not a problem that, under the current system, we can grow our way out of. The current system is designed so that benefits grow as fast as wages and the economy grow. And what this means is that if the economy does grow faster than projected, then wages will grow faster than projected; we will collect higher revenues, to be sure, and we might be able to push off that 2018 date, or 2042 date by a few years, but we would also owe more benefits as a consequence of the higher growth.

No economist--no real academic economist--would dare to endorse this. The closest anyone comes is the Council of Economic Advisers, in its "Three Questions About Social Security", which states:

While economic growth makes it easier to sustain some government spending programs, this does not apply to Social Security, because Social Security benefits themselves increase with earnings.

But it immediately pulls back and corrects itself in the next paragraph (emphases added):

Some commentators have wondered whether the Social Security Trustees have underestimated future productivity growth and, thereby, future economic growth. If productivity grows faster than expected, the economy will indeed grow more rapidly, as will worker wages. But this won’t provide that much help to Social Security. As workers’ wages rise, their payments to Social Security go up, providing a short-term benefit to the program. However, their future benefits increase as well. Thus, while there is a short-term benefit to Social Security from economic growth, the long term benefit is relatively small. It is almost like running on a treadmill—-getting ahead requires more than is reasonable to expect. Specifically, the indexation of initial Social Security benefits to wages means that increased benefits offset much of the higher revenue from faster wage growth...

Note the "that much," the "long-term benefit is relatively small," the "almost," and the "much." What these mean is this: "Given current benefit and funding structures, an 0.1 percentage point increase in the long-run growth rate of productivity reduces the 75-year deficit number by about 0.1 percentage point; an 0.1 percentage point increase in the long-run rate of population growth due to higher net immigration reduces the 75-year deficit number by about 0.3 percentage points." Are these effects "small"? Does it mean that faster growth wouldn't help? Put it this way: an 0.6% markup of annual productivity and an 0.4% markup of annual population growth due to higher immigration would together wipe out the 75-year deficit.

It's acceptable in academia to be a Democrat. It's acceptable to be a libertarian. It's simply embarrassing to be a Republican.

Posted by DeLong at 08:22 PM | Comments (0) | TrackBack

Fly! Monkeys, Fly!

Joshua Micah Marshall watches the circular firing squad of flying attack monkeys in action:

Talking Points Memo: by Joshua Micah Marshall: March 27, 2005 - April 02, 2005 Archives: Club for Growth loads up again and starts firing away at Sen. Lindsey Graham (R) of South Carolina for having the temerity to raise the possibility of raising the payroll tax cap to fund phase-out. This press release out from Le Club bashes Graham for considering raising taxes rather than being a principled conservative and just borrowing the money.

Posted by DeLong at 08:21 PM | Comments (0) | TrackBack

I Should Have Assigned This to My Undergraduates

Very nicely done: very much worth reading:

Sam Bowles and Herb Gintis (2002), "The Inheritance of Inequality," Journal of Economic Perspectives.

Posted by DeLong at 08:21 PM | Comments (0) | TrackBack

Brad DeLong's Spring 2005 Berkeley Schedule

Brad DeLong's Spring 2005 Berkeley Schedule

Econ 211: Economic History Seminar: M 2-3:30 Evans 639

Econ 113: American Economic History: TTh 2-3:30 LeConte 4. Lecture notes page.

Econ ???: Economic Growth Lunch: W 12 Evans 597

Econ 195: Senior Thesis Seminar: F 2-3:30 Evans 5

Office Hours: THIS WEEK: 2-4:30 on Wednesday March 30. Regularly F 12-2 in Evans 601, or by appointment: email delong@econ.berkeley.edu.

Posted by DeLong at 03:13 PM | Comments (6)

Economics 113: Problem Set 3 Answers

Sketch of answers to Problem Set 3.

Posted by DeLong at 06:31 AM | Comments (0) | TrackBack

Klaatu Barada Nikto!

Matthew Yglesias writes:

Matthew Yglesias: "Policy Imitates Star Trek: I had this cunning plan to wait until tomorrow link to the Gary Farber fundraising drive on the theory that a link would do more good with a little bit of delay between when I offered it and when John Holbo offered up a link on Crooked Timber. But Gary's gone and emailed in to say he likes old-fashioned blog-links, too, highlighting in particular this post which reveals (really) that at least one member of the President's Bioethics Council (really) came to the view that "that cloning and embryonic stem cell research are evil . . . in part, by watching Star Trek." Really. Personally, I'm more of a Star Trek: The Next Generation fan, but I'd really prefer not to launch a dispute on the topic. My hope would be that we can all agree this is perhaps not the soundest method of formulating bioethics policy. Although, considering the low knowledge level of the White House's in-house Social Security expert I suppose we'll take what we can get. Ironically, while the Trekkie bioethicist is not a scientist, the Social Security expert is not an economist but . . . a chemist. I suppose it's very pointy-headed elite of me to think that people should be basing their views on actual knowledge, but that's just what you get...

Let me agree that in this case for Republicans to arrive at their policy views by watching Hollywood science fiction has gone drastically wrong. But in general it seems to me that for Republicans to get their views on important issues from Hollywood science fiction is much better than the alternative. Consider the case of Klaatu Barada Nikto:

Life was certainly interesting when Ronald Reagan was president. For the neoconservative Cold Warriors who largely staffed the foreign policy side of his administration, it became most interesting when Reagan began wandering around the White House saying, "Klaatu Barada Nitko!" and asking people whether they had seen The Day the Earth Stood Still. "Here come the Little Green Men again!" Colin Powell would say.

Rotten.com has a timeline of some of this:

4 Dec 1985
Anticipating arms control discussions with his Soviet counterpart, President Reagan draws on an extraterrestrial analogy: "[H]ow easy his task and mine might be in these meetings that we held if suddenly there was a threat to this world from some other species from another planet outside in the universe. We'd forget all the little local differences that we have between our countries ..."

17 Feb 1987
Soviet premier Mikhail Gorbachev reveals Reagan's preoccupation with space aliens: "At our meeting in Geneva, the U.S. President said that if the earth faced an invasion by extraterrestials, the United States and the Soviet Union would join forces to repel such an invasion. I shall not dispute the hypothesis, though I think it's early yet to worry about such an intrusion..."

15 Sep 1987
During a luncheon with Soviet Foreign Minister Eduard Shevardnatze in the White House, President Reagan once again wondered what would happen if the Earth were under attack from an external threat: "Don't you think the United States and the Soviet Union would be together?"

4 May 1988
During a question-and-answer session in Chicago, President Reagan revisits his 'invaders from space' notion: "I've often wondered, what if all of us in the world discovered that we were threatened by an outer -- a power from outer space, from another planet. Wouldn't we all of a sudden find that we didn't have any differences between us at all, we were all human beings, citizens of the world, and wouldn't we come together to fight that particular threat?"

The Cold Warriors thought that they had a man who hated Communism and was eager for an expensive and bloody crusade against the Evil Empire. And they did. But there was also another Reagan roaming around inside Ronald's head: A Reagan who wanted SDI not to gain the U.S. an advantage in the Cold War but to protect people against the horrors of death-by-nuke--and who sincerely wanted to give SDI technology away for free to all nations so that no one would have to fear nuclear destruction. A Reagan who genuinely hoped to eliminate nuclear weapons from the face of the earth. A Reagan who had been profoundly influenced by the movie "The Day the Earth Stood Still," and bought 110% its powerful message about how small were the differences that divided the world's nations when seen from the right point of view. A Reagan who was definitely willing and eager to give peace--and Gorbachev--a chance.

This Reagan freaked his National Security Council staff out. But he proved remarkably powerful when pitted singlehanded against virtually his whole administration in 1987 and 1988. And we should not forget that Nancy Reagan was a powerful voice backing Ronald-the-Peacemaker in the waning days of the administration.

For that, thanks.

Posted by DeLong at 06:12 AM | Comments (0) | TrackBack

Economics 113: Problem Set 2 Answers

Sketch of answers to Problem Set 2.

Posted by DeLong at 06:12 AM | Comments (0) | TrackBack

Freedom Is on the March in Florida!

And the Medium Lobster deals with this on the only level appropriate:

Fafblog! the whole worlds only source for Fafblog.: "Freedom is ever-marching, and its latest target for emancipation is none other than the Gulag Academia, where millions of students are held hostage by totalitarian educators whose cruel practice of teaching them things they don't already believe could soon be put to an end.

Florida Republicans are considering passing an 'Academic Freedom Bill of Rights' which will give college students the power to sue 'dictator professors' who offend their beliefs by teaching material which contradicts them. The Medium Lobster hails this as a measure long overdue. For far too long, higher education has been concerned with 'education' and 'instruction,' mere euphemisms for harsh indoctrination into the totalitarian ideology of Fact. But now students will be given the tools to fight back, to free themselves of their oppressive enslavement to a world in which life evolved over millions of years through natural selection, dinosaurs weren't wiped out six thousand years ago by the flood of Noah, and the evil Xemu was not responsible for the existence of body thetans...

For a limited time, the Medium Lobster is $8.99. But watching students sue because their professors refuse to consider the idea that their poor performance on the last exam was the fault of the evil Xemu? Priceless.

Posted by DeLong at 06:12 AM | Comments (0) | TrackBack

Upsetting Dominant Link Patterns...

Chris Bowers writes:

MyDD :: Diversity and the Two Lefty Blogospheres: In the comments section, angry moderate made an observation that caught my attention:

If you remove Atrios, the left blogosphere is neatly divided into two mutually-linking spheres: the moderate/intellectual(academicky) types - Drum, DeLong, Yglesias, TPM, Tapped, Crocoked Timber - and the left activist types - Kos, MyDD, Digby, Left Coaster, Pandagon (only this one surprised me a bit). Even at the modest 5-link level, none of these blogs link to anyone on other side. They'd be completely unlinked communities if not for Atrios who has links to TPM and Tapped, but also Kos and Digby. I suppose no surprise since Atrios is an academic leftist activist type.

I checked the paper and found that while generally accurate, this statement is not entirely true, since Dailykos did in fact have link exchanges greater than five with both Political Animal and Mathew Yglesias. Still, it is more or less true.

But the fun thing about social science is that your subjects have minds of their own:

Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon

Steve Gilliard
Oliver Willis

Posted by DeLong at 06:08 AM | Comments (0) | TrackBack

March 28, 2005

Upsetting Dominant Link Patterns...

Chris Bowers writes:

MyDD :: Diversity and the Two Lefty Blogospheres: In the comments section, angry moderate made an observation that caught my attention:

If you remove Atrios, the left blogosphere is neatly divided into two mutually-linking spheres: the moderate/intellectual(academicky) types - Drum, DeLong, Yglesias, TPM, Tapped, Crocoked Timber - and the left activist types - Kos, MyDD, Digby, Left Coaster, Pandagon (only this one surprised me a bit). Even at the modest 5-link level, none of these blogs link to anyone on other side. They'd be completely unlinked communities if not for Atrios who has links to TPM and Tapped, but also Kos and Digby. I suppose no surprise since Atrios is an academic leftist activist type.

I checked the paper and found that while generally accurate, this statement is not entirely true, since Dailykos did in fact have link exchanges greater than five with both Political Animal and Mathew Yglesias. Still, it is more or less true.

But the fun thing about social science is that your subjects have minds of their own:

Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon

Steve Gilliard
Oliver Willis

Posted by DeLong at 08:51 PM | Comments (0) | TrackBack

Upsetting Dominant Link Patterns...

Chris Bowers writes:

MyDD :: Diversity and the Two Lefty Blogospheres: In the comments section, angry moderate made an observation that caught my attention:

If you remove Atrios, the left blogosphere is neatly divided into two mutually-linking spheres: the moderate/intellectual(academicky) types - Drum, DeLong, Yglesias, TPM, Tapped, Crocoked Timber - and the left activist types - Kos, MyDD, Digby, Left Coaster, Pandagon (only this one surprised me a bit). Even at the modest 5-link level, none of these blogs link to anyone on other side. They'd be completely unlinked communities if not for Atrios who has links to TPM and Tapped, but also Kos and Digby. I suppose no surprise since Atrios is an academic leftist activist type.

I checked the paper and found that while generally accurate, this statement is not entirely true, since Dailykos did in fact have link exchanges greater than five with both Political Animal and Mathew Yglesias. Still, it is more or less true.

But the fun thing about social science is that your subjects have minds of their own:

Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon

Steve Gilliard
Oliver Willis

Posted by DeLong at 08:49 PM | Comments (0) | TrackBack

Upsetting Dominant Link Patterns...

Chris Bowers writes:

MyDD :: Diversity and the Two Lefty Blogospheres: In the comments section, angry moderate made an observation that caught my attention:

If you remove Atrios, the left blogosphere is neatly divided into two mutually-linking spheres: the moderate/intellectual(academicky) types - Drum, DeLong, Yglesias, TPM, Tapped, Crocoked Timber - and the left activist types - Kos, MyDD, Digby, Left Coaster, Pandagon (only this one surprised me a bit). Even at the modest 5-link level, none of these blogs link to anyone on other side. They'd be completely unlinked communities if not for Atrios who has links to TPM and Tapped, but also Kos and Digby. I suppose no surprise since Atrios is an academic leftist activist type.

I checked the paper and found that while generally accurate, this statement is not entirely true, since Dailykos did in fact have link exchanges greater than five with both Political Animal and Mathew Yglesias. Still, it is more or less true.

But the fun thing about social science is that your subjects have minds of their own:

Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon
Daily Kos
MyDD
Digby
Left Coaster
Pandagon

Steve Gilliard
Oliver Willis

Posted by DeLong at 07:17 PM | Comments (0) | TrackBack

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

William Powers of the National Journal writes:

Off Message (03/18/2005): Maybe I'm just another out-of-touch journalist, but I have a hard time sharing the public's sense of disappointment in the media...

Well, let me try to make it easier for him to share our disappointment. Let me express my disappointment in him.

William Powers reads a paragraph from AP:

While mortgage rates and other interest rates are expected to keep rising this year, those increases are likely to continue at a gradual pace unless inflation becomes a threat. But with oil prices surging to record highs, the worry about out-of-control inflation remains very real. Analysts said if policy makers at the Federal Reserve grow concerned that inflation is becoming a problem, they are likely to start pushing up interest rates at a much more rapid clip.

and his reaction is:

Off Message (03/25/2005): A lot of what we do in the news business is glorified busywork.... But when the economy is in the news, and particularly when Federal Reserve Board Chairman Alan Greenspan is jiggering interest rates, the shocking busywork reality becomes painfully clear.... Like economics itself, economic journalism is a dismal, foggy realm where the hapless news consumer is constantly bumping into weird conditionals and subjunctives.... The real problem is the nonstop stream of gassy speculation that predominates in economic coverage and does little except fill empty space and airtime.... This is cotton-candy journalism, devoid of substance...

This makes me want to bang my head against the wall. The AP reporter is trying to say--is succeeding at saying--four things:

  1. The Federal Reserve is currently planning to raise short-term interest rates on Treasury securities at a gradual pace this year (say, a quarter of a percentage point every two or three months).
  2. As a result, mortgage and other interest rates will probably rise at that same gradual pace.
  3. If the Federal Reserve sees signs in the data that it has significantly underestimated rising inflation, all bets are off.
  4. In that case, interest rates--all interest rates--will go up much faster.

If that AP paragraph takes one into "a dismal foggy realm" of "weird conditionals and subjunctives"... Excuse me, ahem, were that AP paragraph to take one into "a dismal foggy realm" of "weird conditionals and subjunctives," then I would be Queen Marie of Roumania.

It's not a weird conditional. It's a straightforward one. It's not a foggy point. It's a clear one. William Powers bewilders himself because he ventures into a realm where he knows nothing, nothing at all about the substance of what is going on, and where he doesn't bother to try to learn.

Let's be clear: I am not disappointed with William Powers because he is (initially) ignorant about Federal Reserve policy and American finance. I am disappointed with William Powers because he doesn't try to cure his ignorance.

Feh. Some quality control, please.

Posted by DeLong at 07:16 PM | Comments (0) | TrackBack

Peering into the Future of China

Outline notes for a talk on China I gave a week ago...

Peering into the Future of China

J. Bradford DeLong
U.C. Berkeley
(925) 708-0467 delong@econ.berkeley.edu

March 2005

The Setting

  • China's historical advantages

    • Literacy
    • Unity
    • Trade (reached in 1100s levels not reached in Europe until 1700s)
    • But: office-land-corruption complex
  • Mao Zedong

    • Leveller (land redistribution)
    • Soviet tutelage (communes; heavy industry)
      • Fortunately it didn't really take
    • Mao goes insane
      • Great Leap Forward
      • Famine
      • Cultural Revolution
  • Deng Xiaoping

    • "We cannot find him"
    • "To get rich is glorious"

China Today

  • 1.3 billion people: population growing at 0.6% per year, 1.12 male/female newborn ratio
    • All in a space the size of U.S. east of the Mississippi
  • Economic growth: up to 10% per year
    • Investment: 43% of GDP
    • Industrial production growth: 30% per year
  • Economy size: $2 trillion GDP ($1,500 per person per year)
    • $6 trillion PPP GDP ($4,500 per person per year) (cf. U.S.: $40,000)
  • Economy sectors: agriculture 15%, mfg mining 52%, services 33%
    • But: labor: agriculture 50%
  • Economy distribution:
    • Top 10%: 33% of income
    • Bottom 10%: 2% of income
  • Exports: $500 billion a year and growing...
    • Coasts disconnecting from the interior...

China's Problems

  • 400 million people on the coasts
    • 800 million people in the interior
  • 400 million people in the cities
    • 800 million people in the interior
  • People doing well:
    • Beijing
    • Coastal cities
    • Party bosses
    • Peasants near coastal cities
    • Migrant workers
  • People doing badly:
    • Heavy industry
    • Rural peasants without migrants in their families
  • The Communist Party's task
    • Move 10 million people a year into the coastal cities
    • Find them jobs
    • Make them happy

The Communist Party's Strategy

  • Export at all costs...
  • Redistribute income to the interior...
  • Hope that nobody remembers they're supposed to be Communists...
  • Keep the economy growing...
  • Avoid the financial crisis...
  • Someday, somehow, grow a middle class big enough to serve as a source of demand...

How long can China keep growing?

  • 400 million peasant workers whose productivity is 1/3 the average
  • 100 million manufacturing workers whose productivity is 4 times the average
  • Do the math:
    • Basic mechanization of agriculture plus transfer of 250 million peasants will triple the size of China's economy and its desired manufacturing exports...

Dangers to Business-as-Usual

  • The bond market
  • The next U.S. recession
  • China's interior
  • Lack of a legitimate politics
  • Taiwan
  • North Korea

Posted by DeLong at 07:16 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Richard Stevenson Takes Another Dive Edition)

Matthew Yglesias is unhappy with Richard Stevenson of the New York Times. He writes:

[TAPPED: March 2005 Archives:][1] MEET THE EXPERTS. Richard Stevenson's written a little love poem to Karl Rove in today's New York Times which, one hopes, will give him the access he needs to score important scoops in the future. For now, though, he's trying to get us to believe that the president's decision to put Rove in charge of policy as well as politics represents not the further decline of Republican seriousness, but rather Rove's unique brilliance as a substantive thinker. The only actual evidence is this:

'He can talk the specifics even with Chuck Blahous,' Mr. Card said. 'I've never actually seen him correct Chuck, but I have heard him tell Chuck how to explain what he's saying so the rest of us can understand.'

Blahous is the administration's main man on Social Security policy, and I'd say that if there's only one other person at the senior level who can understand what he's saying, that says more about the problematic situation inside the White House than about the unique virtues of Rove. Either they need to hire someone to do Blahous' job who's better at explaining things, or they need to hire some people to do other jobs who aren't too dumb to understand policy exposition. It's kind of an important part of running the government. I note incidentally that Blahous is a chemist by training, which some would find an odd qualification for being top policy official in a policy domain that's about economic policy. Nevertheless, it's good to hear that there are specifics being hashed out inside the West Wing. Maybe Bush will enlighten the public as to what the content of his secret plan to privatize Social Security is one of these days. Or maybe Blauhous is the only one who understands it and that's why they can't tell us.

I'm afraid it's considerably worse than that. Yglesias assumes that Blahous knows what he's talking about. But Blahous doesn't understand the Bush Social Security Plan. He can't hash out specifics inside the West Wing.


Here are some selections from a briefing he gave the morning of the State of the Union address. He says a great many things that are simply wrong. For example:

(1) BLAHOUS: The problem that we now face is not one that we can tax our way out of, for a very simple reason: The costs and the current program are growing faster than the underlying tax base. So if we were to raise taxes today to deal with it, and the costs of the program continued to grow faster than the tax base, then in the future, future generations would simply have to come back and raise taxes again.

Here Blahous is simply wrong: The 2005 Trustees Report says that a 1.8 percentage point increase in Social Security taxes would be expected to balance the system out to 2075, and that a 3.5 percentage point increase would be expected to balance the system out to infinity. I think these numbers are high: I think it's more like 1.2 and 2.0, respectively.

Let's move on:

(2) BLAHOUS: It's also not a problem that, under the current system, we can grow our way out of. The current system is designed so that benefits grow as fast as wages and the economy grow. And what this means is that if the economy does grow faster than projected, then wages will grow faster than projected; we will collect higher revenues, to be sure, and we might be able to push off that 2018 date, or 2042 date by a few years, but we would also owe more benefits as a consequence of the higher growth.

Here also Blahous is simply wrong: faster productivity growth improves Social Security's finances by an amount equal to roughly half of life expectancy at retirement times the change in the productivity growth rate. 1% per year faster productivity growth reduces the deficit by about 1 percentage point. The point is that faster productivity growth raises the current Social Security tax base relative to its current obligations: pay-as-you-go systems like Social Security make sense only if productivity growth is relatively high, and the faster is productivity growth the more sense they make.

(3) BLAHOUS: With respect to the fiscal effects of the personal accounts, in a long-term sense -- and I know those of you who have talked to me have heard me say this before -- but in the long-term sense, obviously, the personal accounts, as we would structure them, would not create a net new cost for the system. To the extent that people put money in these accounts and invest in these accounts, there would be a corresponding reduction in the government's liabilities from the Social Security system that is equal in present value to the money placed in the personal accounts up front. 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.

Here, once again, Blahous is simply wrong: given divorces, remarriages, the progressivity of the benefit formula, and so forth, in a large number of cases the government does not have a large enough Social Security liability to be able to reduce it enough to balance the cost of the money diverted to the private account. A ballpark estimate is that the Bush private accounts proposal has a net fiscal cost to the U.S. government of some $1.1 trillion in present value--half a percentage point or so of taxable payroll.

Most of this net fiscal cost comes because the private accounts proposal is biased toward the rich. The working and middle classes essentially borrow from their traditional Social Security benefit at 3% per year plus inflation to fund their private accounts (this is what makes private accounts a relatively lousy deal for them). Because of the limited reach of the clawback, the upper middle class and the rich get to borrow to fund their private accounts at less than 2% per year.

(4) Q: In saying that there is no net added cost to the program, are you implying -- is it implicit that there is a benefit offset of one-third current guaranteed benefit because you're diverting one-third of revenues away from this program? If that's not correct, what would the benefit offset be to traditional benefits, and how would it be calculated?

BLAHOUS: The way that the election is put before the individual in a personal account structure of this type is that in return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive. So, 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 as a consequence of making that decision.

Q: So he would only get a benefit to the extent that his portfolio performed in excess of 3 percent?

BLAHOUS: Right. You can think of it as saying -- if you were making a decision on where to put your money going forward over the next 10 years, and you're saying, should I put it in this account or that account, if you're choosing to put your money over here instead of over here, then the net effect on you, as an individual, is to compare what would be the rate of return you get from this system, as opposed to putting it over here. And that would be the difference between the two.

Blahous is simply wrong yet again. It's 3% only if you're in the working or middle class--for the upper middle class, it is less. There is a net fiscal cost to the private accounts proposal, and it is a transfer from taxpayers in general to those whose earnings are near or above the Social Security maximum.

Last, let's go to Blahous simply being evasive:

(5) BLAHOUS: In the near-term, however, of course, there will be transition financing required. Our estimate of the total amount of transition financing for the accounts, according to the schedule that I've outlined before, is about $664 billion through the end of the budget window of 2015. If you assume that -- debt service effects on top of that, that would be another $90 billion.

Q: You talked about the $664 billion for the near-term costs. There's been a lot of speculation in advance that it would be something like $2 trillion. Talk a little bit more about that. How do you square that?

BLAHOUS: I don't want to say too much about it. Obviously, the $2 trillion number is not a number that was ever generated by us or by the Social Security actuaries, or any of the other nonpartisan scoring agencies. There were different assumptions that went into that number, and they reflected, I think, the thinking of other people beyond the scoring agencies.

Q: If I could follow up on a couple of questions that have already been asked -- can you give us a second 10-year estimate on the revenue effect? Can you tell us how you would pay for that, in the first 10 years' revenue loss? 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?

BLAHOUS: On the second point, that's a fair inference. On the first point, the long-term picture, of course, as you know, is very -- it's a very comprehensive picture. You're looking forward 75 years over all time, depending on how you gauge things. And that can only be done accurately in the context of a comprehensive plan to fix the system. For example, if we were to do projections out beyond 2015, we would have to model what were the hypothetical changes made to fix the system's finances, which are at this time yet undetermined.

Q: Putting those aside, what is the revenue implication of a fully phased-in 4 percent account of the type that you've laid out?

BLAHOUS: It would be very different depending overall on whether or not it was done alone or in the context of a comprehensive plan.

Q: Assuming it's done alone, since that's all you're putting out here --

BLAHOUS: And the problem with assuming it's done alone is that we aren't advocating that it be done alone. We're advocating that it be done in the context of a comprehensive plan.

Q: But you're not saying what else is in there. You're not saying what else is in the comprehensive plan, so --

BLAHOUS: Well, when we have -- at the point where we can attach numbers to a comprehensive plan and model the effects of the accounts in that context, of course we'll put those numbers forward. But until that -- those specifications exist, we don't have the ability to project that.

The answer to the question he's being asked is: "Over the next twenty years, transition costs are about $2 trillion. To the extent that we do other reforms that cut--excuse me, slow the growth--of benefits, we recapture some of those."


With (5), it's clear that Blahous knows the answer to the question he's being asked, but has been told not to give it out under any circumstances. (4), (3), (2), and (1) are somewhat harder to evaluate.

I've been told by people who worked with Bush Social Security Commission staff that (1) and (2) reflect Blahous's general low level of knowledge about how the Social Security system actually works. Within the Social Security community, claims that prefunding tax increases cannot balance the system or that productivity growth does not improve the system's financing are ludicrous. Yet Blahous makes them with a straight face.

I have heard from people who have talked to Social Security Administration staff that (3) and (4) result from the fact that Blahous simply did not do the staffwork to properly understand the impact of his own private-accounts proposal. That the proposal widened the fiscal deficit because in many cases the reach of the clawback was insufficient appears to have come as a great surprise to Blahous: he had only evaluated the impact of his plan on the median worker. That the proposal winds up transfering $1.1 trillion of wealth from the average taxpayer to the upper middle and upper classes also, I am told, came as a surprise to Blahous. I don't know how reliable the sources of my sources are.

But if Blahous is being held up a the gold standard of substantive knowledge on Social Security... we're in a lot worse shape than Matthew Yglesias imagines.

Posted by DeLong at 07:15 PM | Comments (0) | TrackBack

Zeal Does Not Counter But Amplifies Incompetence

Kevin Drum on Paul Wolfowitz:

The Washington Monthly: DECONSTRUCTING WOLFOWITZ.... As regular readers know, every few months I like to find an excuse to post a reminder of Paul Wolfowitz's testimony before Congress on February 28, 2003, three weeks before the Iraq war started. Here's a summary of the New York Times account:

Mr. Wolfowitz...opened a two-front war of words on Capitol Hill, calling the recent estimate by Gen. Eric K. Shinseki of the Army that several hundred thousand troops would be needed in postwar Iraq, 'wildly off the mark.' Pentagon officials have put the figure closer to 100,000 troops.

....He said there was no history of ethnic strife in Iraq, as there was in Bosnia or Kosovo....He said Iraqi civilians would welcome an American-led liberation force....And he said that nations that oppose war with Iraq would likely sign up to help rebuild it....Mr. Wolfowitz spent much of the hearing knocking down published estimates of the costs of war and rebuilding, saying the upper range of $95 billion was too high.

....Moreover, he said such estimates, and speculation that postwar reconstruction costs could climb even higher, ignored the fact that Iraq is a wealthy country, with annual oil exports worth $15 billion to $20 billion. 'To assume we're going to pay for it all is just wrong,' he said.

This is, I think, the prime reason to oppose Wolfowitz's nomination to head the World Bank. Lots of people favored the Iraq war, after all, but how many of them displayed such convincing evidence of their appallingly poor judgment on such a wide range of topics in such a public venue? Do we really want a guy like that running anything, let alone the World Bank?

And yet.... here I have to confess something: I'm not a Paul Wolfowitz hater.... Guys like Kristol and Cheney and Rumsfeld, for example, talk a lot about democracy but mostly use it as a thinly disguised excuse for installing friendly pro-American leaders in countries that just happen to have lots of oil. Wolfowitz, conversely, really seems to believe this stuff.... The fact that Wolfowitz was willing to criticize Suharto at all, or that he's willing to tell a pro-Israel audience that they should be more mindful of Palestinian suffering, says something about what he really believes.

Of course, there's still that appalling judgment (see Wolfowitz, Paul, Congressional Testimony of, op cit)...

But, Kevin, zeal and enthusiasm do not counteract the flaw of analytical incompetence: they magnify it.

Posted by DeLong at 07:15 PM | Comments (0) | TrackBack

IMF Public Communication Modes

Brad Setser is puzzled by IMF Chief Economist Ragu Rajan:

Brad Setser's Web Log: The financing of the US current account deficit: That is why I was slightly disappointed with this speech by Ragu Rajan, the IMF's chief economist. If any institution is well placed to track global reserve accumulation, it is the IMF. Yet rather than emphasizing central bank financing, Rajan goes to great lengths to minimize it.

Rajan argues that the US deficit is financed primarily by private investors:

Overall, the bulk of US assets sold to foreigners are still [sold] to the private sector. That may come as a surprise to some of you who believe that the US current account deficit is being financed by foreign central banks ... the [foreign official sector] still only amount to about one-third of the total gross inflows into the US. ... It is therefore entirely correct to say the US current account deficit is more than fully financed by foreign private investors while US private investment abroad is partially financed by foreign central bank investment in the US...

Rajan appears to be saying that (a) if foreign central banks stopped buying U.S. Treasury and other securities, (b) U.S. investors and businesses would stop investing abroad, (c) would buy those U.S. Treasury and other securities instead, and so (d) the U.S. current account would be unchanged--exchange rates wouldn't move.

Conversely, he appears to be saying that (e) if foreign private investors' taste for dollar-denominated assets were to fall, (f) there would be no change in U.S. gross investment abroad as long as central banks kept buying, but (g) there would be a substantial reduction in the U.S. current account--the value of the dollar would fall.

A model of international trade and finance that made these predictions would be a very strange model of international trade and finance indeed. The same purchases of dollar-denominated assets would have different effects on the value of the dollar depending on who was making them.

I read Ragu Rajan's speech differently. In my experience, the IMF has two public communication modes. The first mode, Communication Mode (1), is when there are serious long-run problems with economic policies (and when are there ever not serious long-run problems with economic problems?) but the short-run outlook is relatively quiet. Then the task of the IMF is to aid national Treasuries in getting their High Politicians to take the long run problems seriously. And the IMF does this through public pronouncements of: "DOOM!! DOOM!! DOOM--not tomorrow, but in the long-run, sure as the sun will set!"

The second public communication mode, Communication Mode (2), is when the IMF judges that the long run is at hand, that there is very limited time before the crunch comes, that a market panic would bring the crunch now, and that the key task is calm markets and buy time so that--perhaps--last minute policy changes to avert utter disaster can be made. Then the IMF talks about the medium-run sustainability of policies, the depth of markets, the commitments of governments to reform, and so forth.

Rajan's speech looks as if the IMF has just switched, as far as the U.S. current account deficit and the value of the dollar are concerned, from Communication Mode (1) to Communication Mode (2).

That is pretty frightening.

Posted by DeLong at 07:15 PM | Comments (0) | TrackBack

Will Somebody, Anybody Please Brief John Snow?

Bloomberg reports:

Bloomberg.com: News & Commentary: Productivity: Treasury's Snow says high stock-market returns will be possible because gains in productivity -- or output per worker -- will continue to be strong, offsetting slowing population growth. GDP growth is a function of both growth in the workforce and productivity, he said in a March 23 interview. ``Productivity stays strong, and productivity per capita remains high,'' predicted Snow, who has a Ph.D. in economics. ``And it's productivity per capita that drives returns on assets.''

Yet the Social Security Administration expects productivity growth to plummet in the coming years, falling from last year's 4.1 percent gain to about 2.1 percent starting in 2010, according to the agency trustees' report released March 23....

I pity Mark Warshawsky. I know he's doing his best, but it looks like a very hard job indeed.

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Yet Another Voice Against the Bush Private Accounts Proposal

The 3% per year + inflation clawback is deadly:

NewsFinder: "BOSTON (MarketWatch) -- Personal Social Security accounts could bring more risk than reward to investors, and would shift more responsibility for saving for retirement to individuals, Standard & Poor's said Monday. 'The key question is whether an individual account holder can build enough money in savings to retire comfortably while withstanding any inevitable investment risk,' said David Blitzer, chairman of the index committee at S&P. Given the risks in the market, not all aggressive savers will retire with ease, S&P said...

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Brad DeLong on NPR's Weekend Edition

And sounding both (a) reasonably coherent and (b) relatively allergy-free:

NPR : Inflation's Impact on Industries and Finances: The Federal Reserve suggested this past week that the pressures of inflation are picking up. But the industries that might be most affected -- and what to expect in the future -- remain a subject of debate. Sheilah Kast speaks with Brad DeLong, a professor of economics at the University of California at Berkeley.

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WWJD?

This Easter Sunday, Susan of Suburban Guerrilla finds some more of the bats*** crazies:

Suburban Guerrilla: SIGH. What would Jesus do?

CHARLOTTE, N.C. - A church has withdrawn its support for a food pantry serving the needy because the pantry works with Roman Catholics. Central Church of God explained its decision in a letter March 1 from minister of evangelism Shannon Burton to Loaves & Fishes in Charlotte. 'As a Christian church, we feel it is our responsibility to follow closely the (principles) and commands of Scripture,' the letter said. 'To do this best, we feel we should abstain from any ministry that partners with or promotes Catholicism, or for that matter, any other denomination promoting a works-based salvation.'

Loaves & Fishes isn't the only ministry with which the large church has cut ties, and Catholics have not been the only reason they've given. The Rev. Tony Marciano, executive director of Charlotte Rescue Mission, said Burton told him the church could no longer support the agency after it allowed three Muslim students from UNC Charlotte to help serve a meal.

"Promoting a works-based salvation." Like St. Matthew? Or Jesus Christ?

Matthew 25:31-40: When the Son of man shall come in his glory, and all the holy angels with him, then shall he sit upon the throne of his glory. And before him shall be gathered all nations: and he shall separate them one from another, as a shepherd divideth his sheep from the goats. And he shall set the sheep on his right hand, but the goats on the left. Then shall the King say unto them on his right hand, "Come, ye blessed of my Father, inherit the kingdom prepared for you from the foundation of the world: For I was an hungred, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in: Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me."

Then shall the righteous answer him, saying, "Lord, when saw we thee an hungred, and fed thee? or thirsty, and gave thee drink? When saw we thee a stranger, and took thee in? or naked, and clothed thee? Or when saw we thee sick, or in prison, and came unto thee?"

"And the King shall answer and say unto them, "Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me."

Posted by DeLong at 07:14 PM | Comments (0) | TrackBack

The Demand for Marshmallow Peeps Is Extremely Seasonal

This extreme seasonality in the demand for peeps must pose a complex economic problem for the Just Born Company.

Today they are reminding us that "peeps aren't just for Easter": they are for Halloween, Christmas, and Valentine's Day as well...

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Just and Unjust Worlds

Admetos: Who's Don Kohn?

Glaukon: In a just world, Don Kohn might well be Alan Greenspan's successor.

Admetos: And in the unjust world we live in, who will be Alan Greenspan's successor?

Glaukon: Well, in a world in which the successor to Jim Wolfensohn at the World Bank is Paul Wolfowitz, clearly the successor to Alan Greenspan can be only one man: Donald Rumsfeld.

Posted by DeLong at 07:14 PM | Comments (0) | TrackBack

The Innumerate Right (Michael Barone Is an Embarrassment to the Press Corps Edition)

Why can't Michael Barone count? Wonkette deals with his overall argument at the level it deserves. But I want to point out that only a truly mighty degree of innumeracy could have led Michael Barone to even make this argument in the first place:

Michael Barone: The trustfunder left: a previously unidentified segment of the American electorate... a critical mass... a major force... the trustfunder left. Who are the trustfunders? People with enough money not to have to work for a living, or not to have to work very hard. People who can live more or less wherever they want....

These people... very liberal... have done nothing to earn their money... elite private or public high schools... colleges and universities... propagandized about the evils of capitalism and globalization.... Patriotism is equated with Hiterlism.... [T]hey are citizens of the world with contempt for those who feel chills up their spines when they hear 'The Star Spangled Banner.'...

Where can you find trustfunders?... Places with kicky restaurants... tolerant of alternative lifestyles... art galleries... organic food stores... Starbucks competitors. The... San Francisco Bay area.... Without the Bay area's 1.15 million-vote margin for Kerry, California would have come within 82,000 votes of voting for George W. Bush.... Blaine County, Idaho (Sun Valley).... Teton County, Wyo. (Jackson Hole).... Martha's Vineyard....

The good news for Democrats is that they have found a new source of votes and money. The bad news is that an important part of their core constituency has the characteristic that the British Prime Minister Stanley Baldwin ascribed to the press, 'power without responsibility, the prerogative of the harlot throughout the ages.'

Let's do the math. People with "enough money not to have to work for a living, or not to have to work very hard." How much money is that for an upper middle class lifestyle (have to go to all those restaurants and art galleries: organic produce is expensive)? Figure $70,000 (pretax) per year in property income (and even at that you still have to work pretty hard). If you spend 4% of your capital each year, that's a wealth level of $1.7 million.

Emmanuel Saez tells me that there are roughly 600,000 people living in households with $1.7 million or more of wealth--and that's including the value of their house. Only a fraction have that much income-producing wealth. More than half of that fraction are over 60. More than half of the ones who are left are Republican. And at least half of the remainder have earned all their money--not inherited any of it.

So we are down to less than 75,000 "trustfunder lefties" in America. And they--those of them who live outside the major cities--are supposed to be responsible for the worries about sprawl and environmental degradation that make Sun Valley and Jackson Hole lean Democratic? For the Bay Area's 1.2 million vote edge for John Kerry? Michael Barone embarrasses himself.

Furthermore, one might have thought that Michael Barone might have noticed that over the past generation the San Francisco Bay has been the most powerful engine of capitalist economic development anywhere, anytime. The merchant prince of Silicon Valley today are only fabulously rich rather than unbelievably fabulously rich because the market system works, and competition in the market system pumps wealth out of producers and into the hands of users and consumers. Nevertheless, they and their workers have created, accumulated, and pumped out more wealth than any other region in any other era. The last time I went to a chi-chi restaurant in San Francisco (Nancy Oakes's Boulevard, 1 Mission Street: truly excellent) I betcha I had the biggest trust fund at the table (a 1/12 share of my late grandmother's couple of million) and I also betcha that my household net worth was comfortably less than 1% of the table average. You could go through the restuarants of San Francisco's waterfront some Friday night and not find a single "trustfunder" eating a creme brulee.

Only a true idiot could begin raving about those who have "enough money not to have to work for a living, or not to have to work very hard" without wondering how many such people there are. And only the truly quantitatively innumerate--like Michael Barone--could avoid immediately figuring out that there are very few such people: that they aren't "a critical mass... a major force... a new source of votes... [a] core constituency" at all.

I don't know why Michael Barone is totally innumerate. I do know why he doesn't find innumeracy an obstacle to his career in Washington: if he were numerate, after all, he'd have a harder time just making stuff up.

Posted by DeLong at 07:14 PM | Comments (0) | TrackBack

Donald "Big Brother" Rumsfeld Speaks!

As compiled by Tim Dunlop:

the road to surfdom: "Yes! There are no guerillas! There is no insurgency!

I guess the reason I don't use the phrase 'guerrilla war' is because there isn't one, and it would be a misunderstanding and a miscommunication to you and to the people of the country and the world.

Yes! There are guerillas! There is an insurgency:

U.S. Defense Secretary Donald Rumsfeld acknowledged today that the United States failed to predict the strength of the insurgency in Iraq, but he defended the size of the US force deployed to stabilize the country.

We didn't stop them because the invasion was so successful and we were just so damn quick:

In an interview with The New York Times, the president said for the first time that he made a 'miscalculation of what the conditions would be' after U.S. troops went to Iraq and toppled Saddam's regime in May 2003. The insurgency, he maintained, was the unintended result of a 'swift victory' that led to Iraqi troops disappearing into cities and mounting a rebellion.

Hang on. We didn't stop them because Turkey slowed us down!

'Given the level of the insurgency today, two years later, clearly if we had been able to get the 4th Infantry Division in from the north, in through Turkey, more of the Iraqi, Saddam Hussein, Baathist regime would have been captured or killed,' Mr Rumsfeld told Fox News. 'The insurgency today would be less.'

The archetypal Bush declension: There is no problem; there might be a problem; it's only a small problem; we've got this huge problem; X caused this problem.

I'll stop calling this crew "Orwellian" when they stop using 1984 as an operations manual.

Posted by DeLong at 07:13 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Liars? (Tommy Thompson Edition)

Outsourced to the Carpetbagger Report:

Now He Tells Us: There's an annoying tendency of high-ranking Bush administration officials to grow bothered by the politics, road blocks, and ineffectiveness surrounding their work, only to have them talk about after they've left and it's too late. The latest in Tommy Thompson.

Yesterday, during a rambling question-and-answer session at the Kaiser Family Foundation, Thompson complained bitterly and broadly about his frustrations while working in the administration. But there was one complaint in particular that undermines Thompson's already-weak credibility.

Speaking to a luncheon of health policy experts, Thompson said another major frustration was Congress' refusal to let him and future HHS secretaries negotiate drug prices for the new Medicare prescription-drug plan. Critics say using Medicare's 42 million enrollees as bargaining leverage in price negotiations – a tactic that Congress never seriously considered – could save the program billions of dollars.

How wonderfully convenient for Thompson. He wanted to use Medicare's buying power to lower the price of prescription drugs, but those mean Republicans in Congress wouldn't let him. That's a wild distortion of what happened.

Republicans in Congress, to be sure, never even considered using Medicare to negotiate more affordable drugs, but the Bush administration's plan – personally championed by Thompson – designed its Medicare proposal this way.

In his State of the Union address this year, President Bush urged members of Congress to work with him to help control the rising costs of medical care. Just months ago, however, the president worked with Congressional leaders to block attempts to control the fastest growing health care cost: prescription drugs. The Medicare prescription drug benefit that the President signed into law and lauded in his speech omits any effective mechanisms to lower prescription drug prices. Instead, the President and Congressional leaders drafted the law with the intent of emulating the private market practices that have brought us to where we are today – exploding prescription drug costs that are increasingly borne by patients due to health insurers' restructuring of drug benefits. Even if the Medicare program experiences similarly unsustainable costs, the new law expressly forbids the secretary of Health and Human Services from acting to ensure reasonable prices under the drug benefit.

This report, the first in a series on the new Medicare law and its implications for beneficiaries and taxpayers, examines the law's provisions regarding prescription drug prices. After identifying concerns with the legislation as passed, the report offers options for legislative changes that would lower drug costs for Medicare beneficiaries and taxpayers.

The new Medicare law relies on private drug plans (e.g., HMOs and other private health insurers), in conjunction with pharmaceutical manufacturers, to establish the prices beneficiaries and taxpayers will pay for prescription drugs under the Medicare drug benefit. Moreover, it states, "In order to promote competition under this part and in carrying out this part, the Secretary (1) may not interfere with the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs."

These provisions were as subtle as a sledgehammer. The Bush administration didn't want HHS to be able to lower prices in negotiations with pharmaceutical companies, so the law reflected this, making it literally illegal for Thompson or any HHS secretary to even try.

Not only did Thompson go along with this, he was on the House floor, twisting GOP arms during the vote, making sure this bill became law.

And now he wants us to believe he wanted to help lower prices through Medicare? Please. It's kind of sad Thompson would even try such nonsense; the Medicare vote wasn't that long ago and too many of us remember his role in this fiasco.

Posted by DeLong at 07:13 PM | Comments (0) | TrackBack

March 25, 2005

Great Responsibility without Great Power S**** Bigtime

It is hard for the Bush administration to find people to fill the empty seats in the U.S. Treasury because--in this administration--senior Treasury officials have great responsibility but no power. The New York TImes is displeased, and inveighs against the vacant Treasury Bench:

Treasury's empty seats are cause for alarm: Don't be fooled by the location of the U.S. Treasury, right next door to the White House. The department has suffered a steady diminution of prestige and influence during the Bush administration, starting with the unceremonious firing of its first Treasury secretary, Paul O'Neill, less than two years into the job, in part for suggesting that deficits do, in fact, matter. Things have been downhill ever since. Last December, Republican power brokers made no bones about wanting to oust the current Treasury secretary, John Snow, only to find that the administration couldn't entice anyone better to take the job....

[F]rom the start of his administration, tax policy and economic policy - the purview of the Treasury - have been handmaids to politics and ideology emanating from the White House. Without the clear-cut opportunity to drive policy-making, the best and the brightest aren't exactly clamoring for jobs at Treasury. And Snow is still in his post, reprising his first-term performance as cheerleader for Bush's tax cuts in his current role as salesperson for Bush's misbegotten plan to privatize Social Security.

Meanwhile, vacancies are piling up. The post of deputy secretary, the No. 2 job, has been vacant for nearly two months, and the first-choice candidate recently removed his name from consideration. The post of under secretary for domestic finance, the Treasury's main liaison with Wall Street and the person responsible for issuance of the federal debt, has been open all year. The job of assistant secretary for tax policy has also gone unfilled this year, a disturbing absence at a time when the president is calling for comprehensive tax reform. And on Monday, the under secretary for international affairs, the person who coordinates with the World Bank and International Monetary Fund and steps in when a country like Argentina or Brazil teeters on collapse, announced his resignation effective April 22.

The United States faces unprecedented financial risks, uncertainties and challenges, right now. The interplay of the federal budget deficit with record deficits in trade and global transactions has become the focus of the international financial community, with repercussions for the dollar, inflation, interest rates and economic growth.

The clear lack of a deep bench from which to fill vacancies is cause for alarm, as is the extent to which America's complex economic problems are beyond the ken of a mostly political, loyalist band of policy makers. That alarm, insistent though not yet overwhelming, would quickly reach deafening proportions if the United States were forced to respond to a sudden, destabilizing event like the Sept. 11 attacks without a credible Treasury team.

To attract the people the Treasury needs, the White House must assure the best candidates that they will exercise true power and influence. The administration must also work in good faith, and with all due speed, to reach consensus with the Senate on its Treasury nominees, which would streamline the confirmation process and, in so doing, begin to restore the Treasury to its vital place and function.

Let's see who is at the Treasury right now:

Secretary: John W. Snow
Deputy Secretary: VACANT
Under Secretary (International Affairs): Tim Adams (designee) Under Secretary (Domestic Finance): VACANT
Under Secretary (Enforcement): Stuart Levey
General Counsel: Arnold I. Havens
Treasurer: Anna Escobedo Cabral
Assistant Secretary (Economic Policy): Mark Warshawsky
Assistant Secretary (Financial Institutions): VACANT
Assistant Secretary (Financial Markets): Timothy Bitsberger
Fiscal Assistant Secretary: Donald V. Hammond
Assistant Secretary (International Affairs): Randal K. Quarles
Assistant Secretary (Legislative Affairs): John Duncan
Assistant Secretary (Management): VACANT
Assistant Secretary (Public Affairs): Rob Nichols
Assistant Secretary (Tax Policy): VACANT
Assistant Secretary (Terrorist Financing): Juan C. Zarate
Assistant Secretary (Intelligence and Analysis): VACANT

Now that's just loony...

Now the reason that 1/3 of the most senior posts are vacant is clear: in spite of the faux-investment-banker fashion style of the Treasury, the jobs are not that highly paid, and so they are worth doing only if they are fun. And if you lack power and influence and the authority to implement good policies, the jobs aren't fun. Great responsibility without great power makes for unhappy campers.

Why this Treasury has no power is unclear. Paul O'Neill was extremely effective as a Deputy Director of the Ford OMB and as President of Alcoa, where he successfully organized a global aluminum cartel. He was well known to have very close ties with Cheney, Rumsfeld, and Greenspan. With the depth and power of the Treasury staff that Summers and Rubin left him, he ought to have wiped the bureaucratic floor. John Taylor was, I am told, highly effective in the Bush-the-First administration at the CEA, and is a superb economic thinker and macroeconomic analyst.

The stories I hear--which may or may not be accurate--are that Paul O'Neill had caught a very bad case of CEO disease while at Alcoa, that John Taylor never figured out how to use his staff as he went from a boss of 3 at the CEA to a boss of 300 at the Treasury, and that Assistant to the President Larry Lindsey never figured out that his influence and longevity depended on his orchestrating a consensus on good policies within the economic policy team, and that his use of the press corps to leak-bomb other economic policy team members was highly counterproductive (Lindsey was fired when O'Neill was, at the end of 2002).  

Posted by DeLong at 01:13 PM | Comments (0) | TrackBack

Grownup Republicans Missing in Action

The St. Petersburg Times is unhappy with John McCain:

Opinion: Shame on John McCain: At least President Bush didn't kiss John McCain again. Last year during his re-election campaign, Bush planted one on McCain as the Arizona senator pretended to like his old nemesis. Maybe McCain isn't faking it anymore, because he too easily damaged his reputation for principled straight talk to join Bush's misguided bid to privatize Social Security.

By diverting a portion of payroll taxes from Social Security into the stock market, Bush would add risk to retirement income and burden the program with trillions of dollars of debt. Bush's real purpose is to cut traditional retirement benefits, which could be necessary to control costs, but he won't provide any details on that part of his plan.... By his side at several stops was McCain, resorting to the kind of questionable tactics that once had been used against him.

The administration is trying to demonize AARP, which is putting up a spirited fight against private accounts. Bush and McCain suggested that older Americans are standing in the way of change to protect their own retirement incomes - an insulting tactic that could backfire. Those who have already reached retirement age understand better than anyone that a guaranteed safety net could be as necessary for coming generations as it is now, when nearly two out of three retirees rely largely or solely on Social Security. So they are looking out for their children and grandchildren, an act of responsibility not self-interest.

Shame on McCain for being a part of this effort to divide the generations. Usually noted for candid speech, he even resorted to misinformation when he said in 2042 'we stop paying people Social Security.' McCain knows that isn't true. That is the date (actually it was changed to 2041 the other day) when Social Security reserves are expected to be used up. Even then, with no change in the program, recipients would continue to get about 75 percent of what was promised them.

McCain should be familiar with such tactics. After his surprising showing in the 2000 presidential primary, McCain became the target of a smear campaign in South Carolina. People connected to Bush questioned McCain's patriotism and morality - distorting the facts of his Vietnam War record and his adoption of a Bangladeshi child.

It's too bad McCain didn't lead an honest debate on the challenges facing Social Security. Americans are going to have to face up to the fact that while a crisis is decades away, the program could be made indefinitely sustainable by a combination of increased payroll tax revenues and reasonable benefit cuts. Private accounts are merely a distraction, and the public has apparently figured that out.

Not only is the future of Social Security at stake, but so is McCain's reputation.

Posted by DeLong at 01:13 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Insurance-Ain't-Welfare Department)

Writing from Oregon, Mark Thoma laments that Newsweek's Robert Samuelson doesn't know the difference between welfare and social insurance, and thinks Social Security is welfare. Thoma's right. You would think--Roosevelt thought--that a program in which you only got substantial benefits if you paid in substantial contributions could not be mistaken for a giveaway-handout. But Roosevelt misoverestimated Robert Samuelson:

Economist's View: No it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not welfare. Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.

Social Security is no different, it is an insurance program against economic risk.... There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives)....

The main feature of Social Security is... insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading... ignores and obscures the important role Social Security plays...

Posted by DeLong at 01:13 PM | Comments (0) | TrackBack

William Polley Inveighs Against the Efficient Market Hypothesis

Particularly as applied to market reactions to the change of CEO:

Stumbling and Mumbling: What do bosses do?: How much difference do chief executives really make to a business? ‘A lot,’ say shareholders in Prudential. They raised the price of the company by £580 million yesterday when they learned that Jonathan Bloomer was to be replaced as CEO by Mark Tucker. If this judgment right, there's something very wrong about the market for chief executives; either Mr Bloomer was massively overpaid or Mr Tucker is grossly underpaid. But is it right? Of course, the Pru’s price fell sharply under Mr Bloomer’s watch. But how much of this is really his fault?...

If I were to say that CEOs made no difference to a company, and that the belief to the contrary were just an application of the fundamental attribution error or managerialist ideology, what hard evidence could you present to the contrary, except for pointing to a handful of extreme cases, such as Enron?

There’s one more problem here, though. Let’s say CEOs can make a difference. It doesn’t follow that investors can spot the bosses who are good enough to turn a company around.

Two cases will show my point. When Simon Wolfson took over at Next, many shareholders were sceptical. They thought he was too inexperienced for the job, and was the beneficiary of nepotism. Next’s price rose sharply in the following months. By contrast, when Rick Haythornthwaite took over at Invensys, shareholders welcomed his appointment. He’d done a good job, they thought, at Blue Circle. Invensys' share price has since collapsed.

As Warren Buffett once said: 'when a chief executive with a good reputation takes over a company with a bad one, it is the company that keeps its reputation.'

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Large-Scale Social Cooperation in the East African Plains Ape

Of all the puzzles in xenobiology, perhaps the most remarkable is the existence of large-scale (but very imperfect) social cooperation among the East African Plains Ape of Sol III. Elsewhere on Sol III, large-scale social cooperation is limited to the social insects, in which each (sterile) worker is genetically identical to the (fertile) queen, and thus through standard Darwinian mechanisms treats the queen's children as if they were her own children and sisters. Aside from these social insects in which large-scale cooperative behavior is evolutionarily stable by virtue of genetic identity, cooperation on Sol III is limited to herds or packs of at most 100 individuals--and even there the pack must be closely genetically related.

By contrast, one million East African Plains Apes are involved in the complex social division of labor that we have termed "Toyota"--and those one million engage in complicated acts of social reciprocity with at least twenty times their number of outsiders who are not engaged in the "Toyota" social network.

How can this be?

We have recovered and are analyzing a textual artifact that we hope will provide the answer:

Paul Seabright (2004), In the Company of Strangers: A Natural History of Economic Life (Princeton: Princeton University Press: 0691118213).

Highly recommended.

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Justifications for the Long-Run Productivity Growth Forecasts in the Trustees' Reports

Justifications for the Long-Run Productivity Growth Forecasts in the Trustees' Reports

MEMORANDUM

To: Dean Baker, Paul Krugman, Other Interested Parties
From: Brad DeLong
Date: March 25, 2005

Paul Krugman observed:

a strange asymmetry between what is updated [in the Social Security Trustees' Report to reflect recent data, and what isn't.... [H]igh productivity growth since 2000... seems like big news... [but] isn't factored in at all. The reason is that the trustees use an average over the past four "full business cycles," measured from peak to peak (Section IV.B.7).... [T]hey won't take the good productivity news since 2000 into account [at all in forecasting the future] until the economy [begins] another recession. There's something very wrong with that...

This raises two natural questions:

  1. Why have the Social Security Trustees adopted this estimating convention of taking average productivity growth over the past four peak-to-peak complete business cycles and projecting it forward into the indefinite future?
  2. How long have the Social Security Trustees been using this--peculiar--rule of thumb for long-run forecasts of productivity growth?

The answer to question (2) is simple. The 2005 Trustees' Report is only the second year that the Trustees have used this rule of thumb that throws away all the favorable information about productivity growth since the 2000 business cycle peak.

Back in the 1990s the Trustees formed their long-run productivity growth estimates by taking the average level of productivity growth over the previous forty years and then marking down from that average because productivity growth had declined over time. Back in 1996 when the 40-year average was 1.8% per year their forecast was 1.4%. In 1997, 1998, and 1999 when the 40-year average was 1.7% per year their forecast was 1.3%.

In 2000, 2001, 2002, and 2003 as the fast productivity growth of the post-1995 period showed that we were no longer in an ongoing productivity slowdown, the Trustees shrank their markdown and brought their estimate of future long-run productivity growth toward the 40-year average: the gap was 0.4% per year in 2000, 0.3% per year in 2001, 0.2% per year in 2002, and 0.1% per year in 2003.

Then in 2004 the Trustees freeze the long-run rate of productivity growth at 1.6% per year, thus for the first time choosing a forecast of future productivity growth lower than both the 40-year and the 10-year average, and for the first time justifying their forecast by saying that since "productivity growth can vary substantially within economic cycles... it is more useful to consider historical average growth rates for complete economic cycles." Had the SSA Trustees followed the 2000-2003 pattern of cutting the gap by 0.1% per year, they would have forecast 1.7% per year. Had the Trustees adopted the convention of averaging the past 40-year and the past 10-year growth rates, they would also have forecast 1.7% per year.

And in 2005 the Trustees continue to freeze the long-run rate of productivity growth at 1.6% per year, again justifying it by chopping off the data at the 2000 business cycle peak. Had the SSA Trustees followed the 2000-2003 pattern of cutting the gap by 0.1% per year, they would have forecast 1.9% per year. Had the Trustees adopted the convention of averaging the past 40-year and the past 10-year growth rates, they would also have forecast 1.9% per year.

Possible answers to question (1) are left as exercises to the readers.


2005 Trustees' Report:

For the 40 years from 1963 to 2003, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.5, 1.1, 1.5, and 2.0 percent for the 10-year periods 1963-73, 1973-83, 1983-93, and 1993-2003, respectively. However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively...

2004 Trustees' Report:

For the 40 years from 1962 to 2002, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.6, 1.1, 1.6, and 1.7 percent for the 10-year periods 1962-72, 1972-82, 1982-92, and 1992-2002, respectively. However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.5 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.3, 1.2, 1.2, and 1.5 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively...

2003 Trustees' Report:

For the 40 years from 1961 to 2001, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.7, 1.4, 1.3, and 1.5 percent for the 10-year periods 1961-71, 1971-81, 1981-91 and 1991-2001, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are the same as the ultimate rates assumed for the 2002 report...

2002 Trustees' Report:

For the 40 years from 1960 to 2000, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.7, 1.6, 1.4, and 1.6 percent for the 10-year periods 1960-70, 1970-80, 1980-90 and 1990-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are 0.1 percentage point higher than the ultimate rates assumed for the 2001 report. This increase reflects ongoing assessment of historical data, including the period of rapid productivity growth between 1995 and 2000...

2001 Trustees' Report:

For the 40 years from 1959-99, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.6, 1.8, 1.3, and 1.5 percent for the 10-year periods 1959-69, 1969-79, 1979-89 and 1989-99, respectively. The ultimate annual increases in productivity are assumed to be 1.8, 1.5, and 1.2 percent for alternatives I, II, and III, respectively. These are the same ultimate rates assumed for the 2000 report...

2000 Trustees' Report:

For the 40 years 1959-98, annual increases in productivity for the total U.S. economy averaged 1.9 percent, the result of average annual increases of 3.0, 1.8, 1.3, and 1.4 percent for the 10-year periods 1959-68, 1969- 78, 1979-88 and 1989-98, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.8, 1.5, and 1.2 percent for alternatives I, II, and III, respectively...

1999 Trustees' Report:

For the 40 years 1958-97, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 2.9, 2.0, 1.0, and 0.9 percent for the 10-year periods 1958-67, 1968- 77, 1978-87 and 1988-97, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively.

1998 Trustees' Report:

For the 40 years 1957-96, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 3.1, 2.0, 1.1, and 0.6 percent for the 10-year periods 1957-66, 1967- 76, 1977-86 and 1987-96, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively...

1997 Trustees' Report:

For the 40 years 1956-95, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 2.8, 2.0, 1.2, and 0.9 percent for the 10-year periods 1956-65, 1966-75, 1976-85 and 1986-95, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively.

1996 Trustees' Report:

For the 40 years 1955-94, annual increases in productivity for the total U.S. economy averaged 1.8 percent, the result of average annual increases of 2.8, 2.1, 1.4, and 1.0 percent for the 10-year periods 1955-64, 1965-74, 1975-84 and 1985-94, respectively.... The ultimate annual increases in productivity for all sectors - wage-and-salary workers, self-employed persons, and the total economy - are assumed to be about 1.7, 1.4, and 1.1 percent for alternatives I, II, and III, respectively...

1995 Trustees' Report:

For the 40 years 1954-93, annual increases in productivity for the total U.S. economy averaged 1.6 percent, the result of average annual increases of 2.4, 2.3, 0.8, and 1.0 percent for the 10-year periods 1954-63, 1964-73, 1974-83 and 1984-93, respectively.... The ultimate annual increases in productivity for all sectors - wage-and-salary workers, self-employed persons, and the total economy - are assumed to be about 1.7, 1.4, and 1.1 percent for alternatives I, II, and III, respectively.

Posted by DeLong at 01:13 PM | Comments (0) | TrackBack

March 24, 2005

We Mourn...

There are many things to mourn about the Schiavo case. That her heart attack destroyed Ms. Schiavo's mind. That for a decade and a half a woman whose soul has irrecoverably fled has been kept breathing. That the family is so dysfunctional--the parents have long hated the husband and the husband has long hated the parents--as to be unable to reach a collective decision on what to do. That the parents have been unable to listen to the doctors who tell them that their daughter's soul has irrecoverably fled. These, however, are "normal" tragedies that are created every day by the enormous power and yet limited reach of modern medicine.

What is abnormal is for the Republican slime machine to step in, with its standard mix of lies: "She talks and she laughs and she expresses likes and discomforts," said Tom DeLay. "It won't take a miracle to help Terri Schiavo. It will only take the medical care and therapy that patients require." False witness on this scale is definitely not a help.

And what is even more abnormal, terrifying, and pitiable is that some people appear to have convinced the Schindlers, Ms. Schiavo's parents, that, in the words of their lawyer Pat Anderson, removal of her feeding tube deprives her of the "free exercise of her religious beliefs ... and, in fact, imperil[s] her immortal soul."

Now I'm a Pascal's Wager type myself. But for the Schindlers and others who trust that Jesus spoke with Authority and that the evangelists faithfully recorded his words, there is a direct message from God to the Schindlers on this point:

Jesus said unto [Martha], "I am the resurrection, and the life: he that believeth in me, though he were dead, yet shall he live: And whosoever liveth and believeth in me shall never die."

Who preaches a God who would damn someone because their feeding tube had been removed?

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The White House Thinks About the Clawback

Greg Ip and Jackie Calmes of the Wall Street Journal report signs of thought about issues of substance inside the White House:

WSJ.com - Bush May Alter Private-Accounts Plan: As currently envisioned, an account-holder would need a real return -- that is, return after inflation -- of 3% to exceed the offset in the traditional benefit. But many outside experts say 3% is too high, and will limit the accounts' appeal. They noted Treasury bonds are now expected to return only about 2%, and stocks a few percentage points more. Thus, a private account of half stocks and half bonds would run a significant risk of returning less than 3%, leaving the account-holder worse off than someone who stuck with the traditional benefit.

Some experts have urged the administration to use a lower offset rate. That would make the accounts costlier to finance as long as Social Security sticks to its assumption that real Treasury yields average 3% in the long run.

Mr. Hubbard said the administration picked 3% because Social Security actuaries estimate that figure to be the government's long-term cost of borrowing. It is the figure that makes private accounts 'fiscally neutral,' he said.... Mr. Bush's proposed accounts are closely patterned on the second of his 2001 Social Security commission's three proposals, although that model used a 2% offset rate. A former administration official says a change to the offset rate to between 2% and 3% has been discussed, with special attention on 2.7%.

It really does look as if they chose 3%, and then never ran the numbers--never ran the numbers at all to see what the distribution of private account returns would be.

One underlying problem, of course, is that private accounts shift risk onto beneficiaries, and that beneficiaries are more averse to risk than the government. Thus it is genuinely hard to make private accounts both attractive to those non-rich beneficiaries who are most averse to risk and also fiscally neutral.

Posted by DeLong at 01:35 PM | Comments (0) | TrackBack

Asset Returns and Economic Growth: Full Draft

Yes, we have a full draft of:

Dean Baker, J. Bradford DeLong, and Paul Krugman (forthcoming 2005), "Asset Returns and Economic Growth," Brookings Papers on Economic Activity 2005:1.

Abstract:

We in America are probably facing a demographic transition—a slowdown in the rate of natural population increase—and possibly facing a slowdown in productivity growth as well. If these two factors do in fact push down the rate of economic growth in the future, is it still prudent to assume that the past performance of assets is an indication of future results? We argue “no.” Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return. Moreover, if you assume that current asset valuations represent rational expectations, simple arithmetic tells us that it is next to impossible for past rates of return to continue through a forthcoming growth slowdown. Only a large shift in the distribution of income toward capital or current account surpluses larger than those of nineteenth century Britain sustained for generations give promise for reconciling a slowdown in future economic growth with a continuation of historical asset returns.

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Ezra Klein Has Joined the Collective!

Welcome, Ezra! You have been successfully assimilated!

However, he is really horrified:

Ezra Klein: Social Security Trustees Report: By the way, two years ago, when I was starting at UC Santa Cruz and spending a great deal of my time intoxicated, I really didn't think I'd ever be disappointed because I couldn't read the latest Social Security Trustees Report in a timely fashion. I mean, Jesus, what's happened to me? I can't even drink yet (well, legally), and yet I'm genuinely fascinated by actuarial assumptions regarding the long-term fiscal health of the state-run pension program? You must be kidding me.

Of course, he cannot hold a candle to Mark Schmitt's daughter:

The Decembrist: You know you've been in Washington too long...: when your 3-year-old interrupts at the dinner table and complains, 'I don't know anything about PAYGO!' The sad thing is, we've only been here for six months!

Resistance to assimilation is futile.

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The Social Security Trustees Explain Their Productivity Assumptions

The Social Security Trustees explain their long-run productivity growth assumptions. From pp. 82-83 of the 2005 Trustees' Report:

1. Productivity Assumptions

Total U.S. economy productivity is defined as the ratio of real gross domestic product (GDP) to hours worked by all workers. The rate of change in total productivity is a major determinant in the growth of average earnings. For the 40 years from 1963 to 2003, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.5, 1.1, 1.5, and 2.0 percent for the 10-year periods 1963-73, 1973-83, 1983-93, and 1993-2003, respectively.

However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are the same as the ultimate rates assumed for the 2004 report.

One would think that the fact that productivity growth has averaged 3.0% per year in the four years since 2000 would be worth a mention. One would expect some reason for completely throwing away the last four years' worth of data on productivity.

But it isn't there.

What would happen if the Trustees' Report had forecast productivity growth of 1.8% per year? How different would the numbers be? My back-of-the-envelope is that it would knock a bit more than a quarter of a percentage point off the 75-year actuarial deficit--reduce it down to 1.5% from the 1.8% of taxable payroll in the Trustees' Report.

Small differences, yes. But we've had good productivity news in the past four years: the Trustees' Report should recognize it.


UPDATE: Paul Krugman comments:

[T]he slight deterioriation in the near-term [Social Security] outlook is the result of a strange asymmetry between what is updated to reflect recent data, and what isn't.... [T]wo very recent events affect the projections for many years to come.... this year's [substantially] oil [price]-driven inflation rate leads to a reduction in the assumed real wage rate in all future periods... this year's low real interest rate leads to lower assumed earnings [on] the trust fund for a very long time.... On the other side, high productivity growth since 2000... seems like big news... [but] isn't factored in at all. The reason is that the trustees use an average over the past four "full business cycles," measured from peak to peak (Section IV.B.7).... [T]hey won't take the good productivity news since 2000 into account [at all in forecasting the future] until the economy [begins] another recession. There's something very wrong with that...

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March 23, 2005

Thinking About the Weather...

A very unusual day in Berkeley for late March: cold, blustery, with occasional storms scudding across the sky.

Fortunately, La Strada at College and Telegraph Bancroft has a covered portico, so one can sit outside and sip one's lattes.

And, more fortunately, the roof of the portico has munga munga space heaters. It's 50 degrees "outside": it's 68 degrees "in here."

There is no wireless connection. But that is by and large an advantage: one wants to be present to the weather and the latte, after all...

Posted by DeLong at 08:58 PM | Comments (0) | TrackBack

We Will Make an Economist of Him Yet

The sharp-eyed Matthew Yglesias:

Last year the Trustees said that "Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.3 percent in 2030, and to 6.6 percent in 2078." This year things have gotten better, not worse. "Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.1 percent in 2030, and to 6.4 percent in 2079."

So why is the administration saying that Social Security projections have gotten worse? He puts his finger on it:

Apparently, the Trustees have changed their mind about what proportion of the overall economy in the future will come in the form of tax[able] payroll.

Posted by DeLong at 01:13 PM | Comments (0) | TrackBack

The 2005 Social Security Trustees Report

The 2005 Social Security Trustees Report lowers the estimate of Social Security's deficit through 2079 to 0.6% of GDP. Last year's Trustees Report pegged the deficit through 2078 at 0.7% of GDP.

Social Security's financial status improved even though the new forecast window adds a big deficit year--2079--to the calculation. And its financial status improved even though the Bush administration assumed:

  1. Reduced earnings on the part of the young.
  2. Reduced death rates on the part of the old.
  3. Lower labor force participation on the part of the young and old.
  4. More short term inflation.
  5. No change in long-run productivity growth (in spite of very good productivity news).
  6. No change in immigration (in spite of immigration running ahead of assumptions).

That's six thumbs on the scales, and still the long-run deficit shrinks.

So why is the headline that the financial status of Social Security has gotten worse? Can you say "an easily snowed press corps"? I knew you could.

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Why Oh Why Are We Ruled by These... Whatever-They-Ares?

At TAPPED, Jeffrey Dubner quotes Senate Majority Leader Bill Frist on his Schiavo bill:

TAPPED: March 2005 Archives: Mr. FRIST: Nothing in the current bill or its legislative history mandates a stay. I would assume, however, the Federal court would grant a stay based on the facts of this case because Mrs. Schiavo would need to be alive in order for the court to make its determination. Nevertheless, this bill does not change current law under which a stay is discretionary...

It's hard to tell if Frist was indicating a willingness to accept a court decision not to grant a stay, or indicating that he didn't think there was any question about it. If the latter, it just goes to show how little some of these Republicans appreciate how the law works in this country. They're like little kids taking sledgehammers to a jungle gym because it wasn't actually a rocketship.

Does Bill Frist have no lawyers on his staff--or in the Republican Senate Caucus--to listen to when they told him that a stay requires that the plaintiffs show a substantial likelihood of success on the merits of the case, and that given the inherent weakness of the federal deprivation-of-constitutional-rights claims the federal judge would probably not issue a stay? Is he a fool? Or did he know full well that the bill he was passing would probably have no effect on Ms. Schiavo's case? Is he a devious S.O.B.?

I think the first...

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Is Chocolate Good for You?

From Commonsense Desk:

[CommonSenseDesk: Chocolate][1]: NEW YORK (Reuters Health) - Dark chocolate -- but not white chocolate - may help reduce blood pressure and boost the body's ability to metabolize sugar from food, according to the results of a small study. Investigators from the University of L'Aquila in Italy found that after eating only 100 grams, or 3.5 ounces, of dark chocolate every day for 15 days, 15 healthy people had lower blood pressures and were more sensitive to insulin, an important factor in metabolizing sugar. In contrast, eating roughly the same amount of white chocolate for the same period of time did not affect either blood pressure or insulin sensitivity...

[1]:

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Stephen Roach Goes to China

His report:

Morgan Stanley: China is a huge growth machine, but it is growth with a big asterisk.  Rapid GDP growth of at least 7% per annum is necessary to compensate for the headcount reductions that arise from ongoing reforms of state-owned enterprises -- an elimination of some 8–10 million jobs each year.  As such, sustained rapid growth is vital for stability of the Chinese system -- stability in economic, social, and even political terms.... By celebrating the successes of last year’s tightening campaign, the Chinese leadership is telling us that it has no desire to go overboard and trigger an unexpected hard landing that would jeopardize its all-important stability constraint.  Instead, the leaders would rather err on the side of tolerating more rapid growth....

For world financial markets, the China call is obviously very important.  Those banking on a prompt policy response from Beijing to the surprisingly strong Chinese data for early 2005 are likely to be disappointed.  At a minimum, the authorities seem willing to let the economy run for a while before they see how the data shake out in the months ahead.  Barring a growth accident elsewhere around the world, that suggests little relief on the demand side of energy or other commodity markets -- further fueling inflationary expectations, central bank tightening, and a general back-up in the bond market.  My bottom line for the markets: With China’s risk-reward calculus acutely sensitive to the all-important stability constraint, I read the message from this year’s China Development Forum as pretty much a green light on the growth front. 

As always, the highlight of this conference is a private session with the Premier... this year’s discussions were framed around the hot topic du jour -- Chinese currency policy.  Our group of outside experts laid out both sides of the debate to Wen Jiabao.  He said nothing to tip his hand and simply reiterated that China continues to actively study the issue and is ‘now trying to select both the proper plan and timing for RMB reform.’  Here, as well, I suspect it will all boil down to stability.... At the end of the meeting, the Premier shook his head and exclaimed, ‘I cannot sleep well at night with this issue of the RMB.’   He then glanced at his watch and politely excused himself.  As we left the Great Hall, a noisy motorcade rolled up to the official entrance.  We went out one door, and US Secretary of State Condoleezza Rice literally went in the other door.  There was a lot on Premier Wen Jiabao’s plate that day.  The growth and currency debates are only one piece in the big Chinese puzzle.  But in the end, always think stability when it comes to China -- whether the issue is economic or geopolitical.  For that reason alone, and based on what I picked up at this year’s China Development Forum, I have little reason to doubt that China is once again going for growth...

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Why Oh Why Are We Ruled by These Liars? (Tora Bora Edition)

They do lie about everything. Everything. From ThinkProgress:

George W. Bush, 10/29/04: Unfortunately – unfortunately, my opponent, tonight, continued to say things he knows are not true – accusing our military of passing up a chance to get Osama bin Laden in Tora Bora. As the Commander in charge of that operation, Tommy Franks had said, it’s simply not the case. It’s the worst kind of Monday morning quarterbacking. It is especially shameful in the light of a new tape from America’s enemy.

Associated Press, 3/23/05: A terror suspect held at Guantanamo Bay, Cuba, helped the al-Qaida leader escape his mountain hide-out at Tora Bora in 2001, according to a U.S. government document. The document, provided in response to a Freedom of Information request, says the unidentified detainee ‘assisted in the escape of Osama bin Laden from Tora Bora.’

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Fed Funds Rates at 3.75% by Year's End

Andrew Balls of the FT writes about the Federal Reserve's interest rate policy. The Fed's language has led the market to mark up its expectations of end-of-year Fed Funds rates from 3.5% to 3.75%:

FT.com / World / US - Fed signals concern on inflation: The US Federal Reserve on Tuesday signalled increased concern about inflation, as it again raised interest rates by a quarter point to 2.75 per cent. The rise was widely expected, and the policymaking Federal Open Market Committee said it expected to continue raising rates at a ‘measured’ pace, generally interpreted to mean quarter point increases. But the central bank held out the possibility that it might have to move more aggressively to curb inflationary pressures, or at least to continue with quarter-point increases for longer than investors had been expecting.

‘Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident,’ the statement said. The FOMC said it saw the risks to growth and inflation as roughly equal. But, in contrast to its statement in January, it made clear that this judgment was based on ‘appropriate monetary policy action’....

Futures markets, which had priced in a federal funds rate of about 3.5 per cent at year-end, increased this to 3.75 per cent, Mr Hooper said...

I'm beginning to understand the Fed a little better. I've tended to focus on falling real wages and wage shares as indicating that we are still very far from full employment, and that rapid increases in interest rates are inappropriate. The Fed is focusing much more on non-wage causes of increasing prices, and is very concerned not to get into a position where fighting inflation requires large and sudden interest rate increases in the context of a financial system that is much more fragile than we would like. Better higher unemployment now than even a chance of running into a conflict down the road between risking a financial crisis and letting inflation accelerate.

Posted by DeLong at 01:12 PM | Comments (0) | TrackBack

Some Damn Fool Thing in the Strait of Taiwan

I was reading the always-incisive (though sometimes mad) Niall Ferguson's analogy of Taiwan today to Belgium in 1914:

t r u t h o u t - Niall Ferguson | Sinking Globalization: It is true that the Chinese have no obvious incentive to pick a fight with the United States. But China's ambitions with respect to Taiwan are not about to disappear just because Beijing owns a stack of U.S. Treasury bonds. On the contrary, in the event of an economic crisis, China might be sorely tempted to play the nationalist card by threatening to take over its errant province. Would the United States really be willing to fight China over Taiwan, as it has pledged in the past to do? And what would happen if the Chinese authorities flexed their new financial muscles by dumping U.S. bonds on the world market? To the historian, Taiwan looks somewhat like the Belgium of old: a seemingly inconsequential country over which empires end up fighting to the death...

Scary. Deservedly scary. But let me transport Niall's paragraph back in time 150 years, replacing "Taiwan" with "Canada":

It is true that the Americans have no obvious incentive to pick a fight with the British Empire. But America's ambitions with respect to Canada are not about to disappear just because Washington knows that Lancashire needs to buy its cotton. On the contrary, in the event of an economic crisis, America might be sorely tempted to play the nationalist card by threatening to take over its errant province. Would the British Empire really be willing to fight America over Canada, as it has pledged in the past to do? And what would happen if the American authorities flexed their new economic muscles by embargoing cotton exports?...

A hundred and fifty years ago it was our "manifest destiny" to own the entire North American continent. Today the desire to annex Canada is limited to us left-of-center Democrats desperate to turn the marginal voter from a guy outside of Nashville with a hound dog to a guy in suburban Toronto with a Greenpeace card. May an analogous process take place between China and Taiwan.

Posted by DeLong at 01:11 PM | Comments (0) | TrackBack

Why Are We Ruled by These Liars? (Nuclear Material to Libya Edition)

They do lie about everything. Everything. From the Road to Surfdom:

the road to surfdom:I know it's hard to believe that the Bush administration would lie about anything to do with weapons of mass destruction, but apparently the Bush administration lied--to allies--about weapons of mass destruction:

In an effort to increase pressure on North Korea, the Bush administration told its Asian allies in briefings earlier this year that Pyongyang had exported nuclear material to Libya. That was a significant new charge, the first allegation that North Korea was helping to create a new nuclear weapons state.

But that is not what U.S. intelligence reported, according to two officials with detailed knowledge of the transaction. North Korea, according to the intelligence, had supplied uranium hexafluoride -- which can be enriched to weapons-grade uranium -- to Pakistan. It was Pakistan, a key U.S. ally with its own nuclear arsenal, that sold the material to Libya. The U.S. government had no evidence, the officials said, that North Korea knew of the second transaction.

Thanks to Laura Rozen for the link.

The lying to allies is one thing. To do it to protect probably the biggest single WMD-terrorist-threat nation on earth, Pakistan, is another. The fact that the lies subsequently buggered up ongoing negotiations between North Korea, China and South Korea is just icing on the cake.

But hey, did someone say lying about WMD?

It seems the head of Britain's MI6, Richard Dearlove, has revealed that he advised the Blair government nine months before the invasion that the Bush administration was planning to go to war with Iraq come what may, and that ''The facts and intelligence' were being 'fixed round the policy' by US President George Bush's Administration'.

Posted by DeLong at 01:11 PM | Comments (0) | TrackBack

Stan Collender Watches the Budget Battles

Stan Collender is a very good reason to subscribe to http://nationaljournal.com/. (I would--if it were not for the fact that Stuart Taylor's playing footsie with torture turned my stomach too much.)

BUDGET BATTLES A Bad Week For The White House, by Stan Collender secollender@nationaljournal.com:

[Y]es, the Bush administration told anyone who would listen that it was pleased with the budget resolution passed by the Senate. But... President Bush was seriously hurt by the specifics of what happened last week.... The specific rejections by the Republican-controlled Senate of several of the president's highest-priority spending cuts are the most obvious.... That makes Bush promise to cut the deficit "in half" by the end of this decade -- a questionable pledge to begin with -- even less likely to happen....

And yet for all that, the collateral political damage from the White House's failure to get the Senate to go along with its proposals is far more important. There are now real questions about the ability of the House and Senate to agree on a fiscal 2006 budget resolution. Without that, there can be no reconciliation. That would mean that most of the Bush administration's other budget initiatives would be in serious trouble....

The fact that a number of Republican senators who in the past have been loyal to the Bush administration were willing to vote against the president on parts of the budget resolution should be a real concern to the White House. Many of these senators previously had been willing to sacrifice their own concerns to help the president achieve his priorities....

And if there was any doubt before, the Senate's budget resolution debate clearly shows that the president's plan for Social Security is in serious trouble.... [T]he Bush administration's "starve the beast" approach must now be considered a failure as well. Republicans obviously are not prepared to reduce spending on domestic programs just because a series of tax cuts helped create a record-high budget deficit....

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Daniel Gross on Social Security and Income Insecurity

A very nice piece by Daniel Gross, taking off from Gosselin, Moffitt, and Hacker. He gets bonus points by citing the extremely smart and thoughtful Raj Chetty:

The New York Times > Business > Your Money > Economic View: Social Security as Dramamine, by DANIEL GROSS:

President Bush's plan to transform Social Security from an insurance program that guarantees a minimum income into something more closely resembling a 401(k) investment program isn't going very well.... [E]conomics could help explain the public's reluctance, too.... As we learn more about income volatility in the information age, some scholars say, Social Security - an insurance program designed for the industrial age - may be even more essential.

Income volatility has long been a hallmark of the American economy.... [S]cholars have concluded that incomes are much less stable - i.e., much more volatile - today than they have been in the past. 'There has unequivocally been general upward-trend income volatility since at least 1975,' said Bruce A. Moffitt, the Krieger-Eisenhower professor of economics at Johns Hopkins University.... According to a measure of volatility constructed by Jacob S. Hacker, a Yale political scientist, which tracks the five-year moving average of family incomes, income volatility rose 88 percent between 1978 and 2000.... A series of articles last year in The Los Angeles Times, written by Peter G. Gosselin, who worked closely with Professor Moffitt and other scholars, reported that in the 1970's, income for middle-class Americans tended to fluctuate by 16 percent a year. But in the 1980's and 1990's, middle-class incomes fluctuated an average of 30 percent. For those whose earnings placed them in the bottom fifth, income volatility rose from 25 percent in the early 1970's to 50 percent in recent years....

[I]ncome volatility can wreak greater havoc now than it did in the past. 'The old view among economists was that income volatility didn't affect consumption much,' said Raj Chetty, an economist at the University of California, Berkeley. It was generally thought that when families' incomes fell sharply and unexpectedly, they would borrow, tap into savings or send a second adult (frequently a mother) into the work force rather than sharply reduce consumption. But, Professor Chetty said, 'that no longer seems to be the case today.' Why? Many families already rely on two incomes. What's more, fixed commitments have risen as a percentage of total income....

THE factors that functioned as internal shock absorbers for families have weakened. And so, too, have external buffers. Over the last three decades, the percentage of workers covered by defined-benefit pension plans and employer-provided health insurance - guarantees that provide ballast for fluctuating incomes - has declined. Add this to the trend of rising volatility - especially for people in the lower and middle income levels - and it's easy to understand the reluctance to transform a government program that guarantees seniors an income. 'Social Security provides a vital kind of insurance,' Professor Hacker said. 'The real issue lurking behind this debate is whether we should have a program that provides the bedrock protection against economic risk.'

Posted by DeLong at 01:11 PM | Comments (0) | TrackBack

April Fool's Day Comes Early This Year!

April Fool's Day comes early this year!

My scheduled once-every-three-months surf over to Donald Luskin's website was supposed to happen on April 1. But a correspondent writes that Washington Post reporter Jonathan Weisman could use a little backup:

Donald Luskin on Social Security, Life-Cycle Accounts, and Robert J. Shiller on NRO Financial: The economics professor who may have coined the expression ‘irrational exuberance’ has been acting pretty irrational himself lately....

Here are the first two sentences from Jonathan Weisman’s story about the so-called ‘paper’ in last Friday’s Washington Post:

Nearly three-quarters of workers who opt for Social Security personal accounts under President Bush’s ‘default’ investment option are likely to earn less in benefits than those who stay with the traditional Social Security system, a prominent finance economist has concluded. A new paper by Yale University economist Robert J. Shiller found that under Bush’s default ‘life-cycle accounts’... nearly a third of workers would bring in less in benefits than if they remained in the traditional system.

Wait a second — is it ‘three-quarters of workers’ or ‘nearly a third of workers’?...

Readers of Weisman know that the "nearly three-quarters" number is if future returns have the same distribution as past global returns, and that the "nearly a third" number is if future returns have the same distribution as past U.S. returns. (Shiller thinks, quite reasonably, that the U.S. has had a bunch of good and lucky economic breaks over the past century and a half, and that as a result past U.S. returns overestimate what we should expect average luck to bring in the future.)

Only by artfully chopping and excerpting the lead of Weisman's article can Luskin create even the appearance of confusion between "nearly three-quarters" and "nearly a third."

Luskin's claim that Shiller coined the phrase "irrational exuberance"? It seems to be another piece of evidence of Luskin's isolation from reality. Shller writes:

Definition of "Irrational Exuberance": The term "irrational exuberance" derives from... Alan Greenspan... in a black-tie dinner speech... at the Washington Hilton Hotel December 5, 1996.... [P]eople ask me whether I coined the term irrational exuberance, since I (along with my colleague John Campbell and a number of others) testified before Greenspan and the Federal Reserve Board only two days earlier, on December 3, 1996.... I very much doubt that I am the origin of the words "irrational exuberance."... Greenspan is quoted in a Fortune Magazine article in March 1959... about "over-exuberance" of the financial community. Probably, "irrational exuberance" are Greenspan's own words... probably Alan Greenspan had written a draft of his 1996 speech even before I testified.

You do have to wonder just what National Review thinks it is doing by sponsoring Luskin. The overall effect is loony. After all, we have seen Luskin's ignorance of what a real exchange rate is, his claim that David Brooks is both 100% correct and is a traitor to his party for saying that the Bush administration routinely lies, his denial that the yield on a bond is an interest rate, his accusation that Gretchen Morgenstern is a plagiarist, his claim that George Soros might try to crash the market on October 31, 2004, his being off by a factor of five in calculating the liabilities of the Social Security system, his erroneous claims that faster productivity growth doesn't help the Social Security system--you get the picture.

Is National Review trying to damage the reputation of all its contributors? The blowback is something the smart ones are worrying about. The blowback should be something that we all worry about. Dean Esmay likes to quote John Stuart Mill: "Lord, enlighten thou our enemies... sharpen their wits, give acuteness to their perceptions and consecutiveness and clearness to their reasoning powers. We are in danger from their folly, not from their wisdom: their weakness is what fills us with apprehension, not their strength." A poor and stupid right wing is a dangerous menace--to us as well as to itself.

Posted by DeLong at 01:09 PM | Comments (0) | TrackBack

March 20, 2005

Paul Krugman on the "$600 Billion a Year" Number

Paul Krugman tries his hand at showing what's wrong with the Bush-Lieberman "waiting a year to fix Social Security costs $600 billion" number:

Bruce Willis, Asteroids, and Unfunded Liabilities

Sometimes you really have to wonder. It should be obvious that the Social Security Administration’s estimate of the growth of unfunded liabilities says nothing – nothing at all – about the cost of delaying a “fix”, whatever that might mean. But it seems that even many economists – to say nothing of Joe Lieberman – don’t get it.

So here’s an example, to illustrate the point.

Suppose that an asteroid is bearing down on our planet. If nothing is done, it will strike in 2019, inflicting $20 trillion in losses. At a nominal interest rate of 5 percent, that’s a present value of $10 trillion.

If we do nothing about the asteroid, by next year the present value of the future losses from the asteroid strike will be $10.5 trillion. So the “unfunded liability” from the asteroid strike rises by $500 billion a year.

Suppose that there is a way to fix the problem: we can send Bruce Willis into space to blow up the asteroid. So here’s the question: if we wait a year to send Bruce Willis into space, does that cost $500 billion?

Of course not: it could cost either more or less. If waiting a year means that we’ve lost our last chance to stop the asteroid, it costs $10 trillion – the full present value of the avoidable losses the asteroid would inflict. On the other hand, if Bruce Willis can still blow up the asteroid next year (or any year before 2019), there is no cost at all to waiting. In fact, if waiting increases the Willis expedition’s chances of success, there’s a benefit to delay.

In other words, the $500 billion increase in the present value of the future costs from the asteroid says nothing about the costs of delaying action. All it says is that the future is getting closer.

The same is true for Social Security. The future is getting closer, so the unfunded liabilities of Social Security are rising in present value (though not as a percentage of GDP). This says nothing at all about the cost of delaying a “fix.” Those costs, if there are any, depend on the nature of the fix.

And it’s hard to see any costs of delaying the Bush version of a fix. After all, the problem is that in the absence of changes in the system, at some future date Social Security may have to pay reduced benefits. The only thing the Bush plan does to help the system’s finances is – guess what – reduce future benefits. Why does waiting a year to announce benefit cuts that won’t happen for several decades have any cost?

One last point. Lieberman defends himself by saying that unfunded liabilities do too grow $600 billion a year. But that’s not what he said earlier: he said that each year we delay costs $600 billion, which isn’t at all the same thing.

Posted by DeLong at 07:44 PM | Comments (0) | TrackBack

General Motors

Lee Hawkins of the Wall Street Journal reports on GM:

GM Cuts Outlook For 2005 Profit: General Motors Corp. rattled financial markets as it slashed its earnings estimates for the first quarter and full year of 2005.... GM faces a 'perfect storm' of health-care and pension costs and rising commodity prices.... GM continues to see its market share fall and inventories of unsold vehicles in North America rise. New models it has touted have failed to grab consumers' attention. It faces increased competition from nimbler overseas rivals, especially Japan's Toyota Motor Corp., and is burdened by heavy costs from health-care and pension obligations to its 1.1 million employees, retirees and their dependents....

In a conference call yesterday, Mr. Wagoner and John Devine, GM's vice chairman and chief financial officer, said swifter and starker changes are needed to restore GM's profitability in North America. 'We made a lot of progress on reducing structural costs, but what we saved on the operating side has been filled in by higher legacy costs,' Mr. Wagoner said, using a shorthand term for the comparatively rich health and pension benefits that are a legacy from the days when GM controlled more than 40% of the U.S. market.... Mr. Wagoner faces significant hurdles in turning GM around. Weighed down by high health-care costs and pension obligations, the company is struggling to compete with lower-cost rivals, led by Toyota... new models that GM executives said would turn the tide for the company have yet to deliver significant enough gains to offset slumping demand for older models. Sales of large SUVs such as the Chevrolet Suburban and GMC Yukon, GM's highest-profit vehicles, have collapsed as gas prices have risen and competition has increased from lighter, more maneuverable crossover wagons that offer many of the functions of a larger SUV....

Mr. Wagoner has overseen strong gains by GM in productivity and steady progress on product quality. But those improvements haven't slowed GM's slide in U.S. market share. The auto maker's share fell to 25% at the end of February, down from nearly 33% a decade ago....

In its warning, GM said it expects to incur a loss of $1.50 a share in the first quarter of 2005, excluding special items, compared with a previous estimate of break-even or better. The company also lowered its full-year expectation to $1 to $2 a share from a previous estimate of $4 to $5 a share, and said that instead of generating $2 billion in cash this year, as previously forecast, it will burn $2 billion in cash. In 2004, GM reported net income of $3.7 billion, or $6.51 a share.

The fiscal year before last GM pulled in about $20 billion, of which $2 billion went to the pension plan, $5.5 billion to health care (for current workers and for the 2.3 retirees for every current worker), $9.5 billion to bondholders, and $0.7 billion to the tax guys--leaving $2.8 billion for the shareholders (on an equity base now valued at some $16 billion).

With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly.


Annual Financials for General Motors Corporation: Fiscal Year-End:12/31 
 All amounts in millions except per share amounts.
2003  2002  2001  2000 
  12/31/2003 12/31/2002 12/31/2001 12/31/2000
 Net Sales 185,524.0 177,324.0 169,051.0 184,632.0
 Cost Of Goods Sold 152,071.0 146,793.0 138,847.0 145,664.0
 Gross Profit 33,453.0 30,531.0 30,204.0 38,968.0
 SG and A Expenses 21,008.0 20,690.0 19,433.0 22,252.0
 R and D Expenditures - - - -
 Depreciation and Amortization - - - -
 Income Before Depreciation and Amortization 12,445.0 9,841.0 10,771.0 16,716.0
 Interest Expense 9,464.0 7,503.0 8,317.0 9,552.0
 Investment Gains (Losses) - - - -
 Total Operating Expenses 30,472.0 28,193.0 27,750.0 31,804.0
 Non-Operating Income - - - -
 Other Income 612.0 281.0 -138.0 -319.0
 Income Before Tax 2,981.0 2,338.0 2,454.0 7,164.0
 Provision For Income Taxes 731.0 644.0 1,094.0 2,393.0
 Income After Tax 2,250.0 1,694.0 1,360.0 4,771.0
 Minority Interest - - - -
 Net Income Before Extra Items 2,862.0 1,975.0 1,222.0 4,452.0
 Extra Items Discontinued Operations 960.0 -239.0 -621.0 -
 Net Income 3,822.0 1,736.0 601.0 4,452.0

Posted by DeLong at 07:44 PM | Comments (0) | TrackBack

March 19, 2005

M$FT

Microsoft spent $4.4 billion on research and development in the year ending June 30, 2001. $6.3 billion on R&D in the year ending June 30, 2002, $6.6 billion on R&D in the year ending June 30, 2003, and $7.8 billion on R&D in the year ending June 30, 2004.

Just what, exactly, is it doing? By and large, Word and Excel are the same programs they were when Wordperfect, Lotus, and Borland went down in the middle of the 1990s. Explorer is the same program it was when Navigator went down in the late 1990s. The mail and presentation programs are nice (perhaps), but. And there have been a lot of improvements to Windows: it doesn't crash any hour anymore, and the flaws that now have the Berkeley sysadmins on a search-and-destroy mission looking for installations of Windows 3.1, 95, and 98 by and large no longer exist.

What will users have to show for R&D expenditures that may crack $9 billion this fiscal year? What will shareholders have to show for this $9 billion. I know, they say "10% sales growth." But what would sales growth be if R&D were cut back to, say, $1 billion?

If anyone understands Microsoft as a business enterprise, I'd like to hear from them...


MICROSOFT FINANCIALS

All amounts in millions except per share amounts.
2003 2002 2001 2000
06/30/2004 06/30/2003 06/30/2002 06/30/2001
Net Sales 36,835.0 32,187.0 28,365.0 25,296.0
Cost Of Goods Sold 6,716.0 6,059.0 5,699.0 3,455.0
SG and A Expenses 13,306.0 9,988.0 8,095.0 5,742.0
R and D Expenditures 7,779.0 6,595.0 6,299.0 4,379.0
Income Before Depreciation and Amortization 9,034.0 9,545.0 8,272.0 11,720.0
Non-Operating Income 3,162.0 1,509.0 -397.0 -195.0
Other Income - - - -
Income Before Tax 12,196.0 11,054.0 7,875.0 11,525.0
Provision For Income Taxes 4,028.0 3,523.0 2,520.0 3,804.0
Income After Tax 8,168.0 7,531.0 5,355.0 7,721.0
Minority Interest - - - -  
Net Income Before Extra Items 8,168.0 7,531.0 5,355.0 7,721.0
Discontinued Operations - - - -375.0
Net Income 8,168.0 7,531.0 5,355.0 7,346.0

Posted by DeLong at 11:55 AM | Comments (0) | TrackBack

Joenertia II

Senator Joe Lieberman is at it again:

The New York Times > To the Editor:

Paul Krugman ('The $600 Billion Man,' column, March 15) claims that when I say that every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities, I am 'helping to spread a lie.'

Nonsense. Experts we've consulted at the Social Security Administration have confirmed this estimate.

Everyone knows that Social Security is on a path to insolvency. Every year that we wait to make the program solvent will cost us more.

I know that Mr. Krugman opposes the president's carved-out private savings accounts. So do I. But if we stop there, the victims will be tens of millions of seniors who need Social Security to escape poverty.

As a columnist, Mr. Krugman has the right to just say no. As a lawmaker, I have a responsibility to work with other members of Congress in both parties and with the administration to protect this great program.

And as a Democrat, I feel a special responsibility to preserve one of my party's most effective initiatives ever.

Joe Lieberman
U.S. Senator from Connecticut
Washington, March 16, 2005

I don't doubt that the SSA actuaries "confirmed this estimate" that "every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities" to Lieberman's staff. But if Lieberman's staff had continued the conversation a little bit, they might have learned some other things.

For example:

  1. Of the $600 billion, $250 billion is a simple inflation adjustment--the difference between valuing an obligation in 2004-value dollars and valuing the same obligation in 2005-value dollars.
  2. If we are going to close the Social Security funding gap by cutting benefits in the future, moving the valuation date forward in time raises not just the present value of the unfunded liability but also the present value of benefit cuts in, say, 2080. The same benefit cuts in 2080 and beyond are required to close the gap whether the gap is measured as $10.4 trillion 2004 dollars or as $11.0 trillion 2005 dollars.
  3. If we are going to close the Social Security funding gap by raising taxes, then what we should compare the present value of the funding gap to is the present value of the tax base. And the present value of the tax base also grows larger as we move the valuation date forward in time. The present value of GDP in 2004 was $867 trillion. The present value of GDP in 2005 will (I think) be higher by $58 trillion--$21 trillion because of the inflation effect on nominal values, $26 trillion because of moving the valuation date forward a year, and an additional $11 trillion because productivity growth in 2004 was faster than the SSA had anticipated and that has implications for the entire forecast path of GDP.

If Lieberman had said, "The SSA projects that each year we delay the present value of the infinite-horizon unfunded Social Security obligation goes up by $600 billion. It also projects that the present value of all of America's future wealth--all future GDP--goes up by $58 trillion," then Paul Krugman would not be complaining. If he had said, "In 2004 the infinite-horizon unfunded Social Security obligation was 1.20% of the present value of GDP. It looks as though in 2005 it will be 1.19% of the present value of GDP," then Paul Krugman would not be complaining.

But Lieberman strips the $600 billion number of the surrounding context needed for it to make sense. That is why he is guilty of spreading a lie. He pretends that $600 billion is the extra economic cost of delaying the Social Security fix for a year, and it is not. What it is is a combination of an inflation adjustment and a valuation-year effect.

The fact that he is so easily snookered into repeating deceptive Republican talking points makes me wish that he would curb his feeling of "responsibility to work with other members of Congress in both parties and with the administration": he's going to get taken to the cleaners.

Posted by DeLong at 11:55 AM | Comments (0) | TrackBack

Shiller: Private Accounts a Bad Deal

The precis from Robert Shiller (2005), "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation":

Methodology:

The paper uses historical returns from 1871-2004 to assess the President’s personal accounts proposal. It does 91 different simulations for a worker born in 1990 assuming that he or she experiences the actual returns from 1871-1914, 1872-1915, 1873-1916, all the way through 1961-2004. This sample has an average real stock market return of 6.8% annually, slightly above the 6.5% annual return assumed by the Social Security actuaries.

These historical returns are not, however, a good guide to future returns. The United States economy and stock market performed extremely well over the last century. Many factors suggest this lucky experience is not likely to be repeated: most analysts project slower GDP growth in the next century, the risk premium required for investing in equities may have diminished, and the P-E ratio is very high by historical standards.

The Wall Street Journal recently surveyed 10 leading financial economists, the median projection for the stock market real rate of return in this survey was 4.6% above inflation. This is slightly lower than the median real return of 4.8% in a 15 countries from 1900-2000 surveyed by Dimson et. al.

As a result, the paper also use “adjusted” stock market returns designed to match the median stock return in 15 countries from 1900-2000, this is slightly above the return in the Wall Street Journal survey and is a more accurate projection of future returns.

Life-cycle Portfolio: The paper analyzes a range of potential portfolios. The featured portfolio is a “lifecycle portfolio” designed to capture the President’s proposal. According to the President’s plan, workers would be defaulted in a specific mixture of stocks and bonds. At age 47, workers would automatically be shifted into the “lifecycle portfolio” unless they signed a form to opt out. The President has not specified the portfolio allocation of this account, this paper assumes a benchmark portfolio is invested 85% in equities through age 29 and then phase-down to 15% equity investment by age 60.

Key Findings:

Using historical returns, the life-cycle portfolio loses money 32% of the time (i.e., 32% of the time the internal rate of return is less than the 3% real return required to break even in the proposal). The median rate of return is 3.4% annually.

Using more realistic adjusted returns, the life-cycle portfolio loses money 71% of the time and has a median rate of return of 2.6%.

Discussion: These rates of return are considerably below the 4.6% that the Social Security actuaries have assumed for. In addition there is considerably more risk than one would generally associate with previous discussions of “lifecycle portfolios.” The most important reason this happens is that the life-cycle portfolio is invested in higher-yielding assets in early years and lower-yielding assets in later years. Because contributions are made annually, the returns in later years matter much more (i.e., the return in the first year only affects the first contribution but the return in the last year affects all 44 years of contributions). This effect is heightened because the typical worker reaches peak earnings in his or her fifties.

Other Findings:

The optimal portfolio for a worker choosing the personal account as a replacement for much of the guaranteed Social Security benefit is considerably different from the optimal portfolio for a worker investing a 401(k) in addition to Social Security. If you have a Social Security benefit that is not subject to market risk, then you can invest your additional savings in a higher return/risk portfolio. But in the President’s proposal, the investments are replacing a large fraction of the existing Social Security benefit. Thus you would not want to invest them in as risky a portfolio.

A worker that has the correct balanced portfolio of stocks and bonds should not even participate in the accounts. Conditional on participating, he or she should invest entirely in bonds in order to avoid changing their current portfolio. Other psychologically constrained workers might benefit from shifting their portfolios more into equities. Social Security design has to take seriously psychological barriers to enlightened saving and investing; workers not subject to these barriers are very different from workers who already do things right. Overall, any proposals to encourage savings and investment should be designed with a variety of different types of workers clearly in mind.

Posted by DeLong at 11:55 AM | Comments (0) | TrackBack

Yes, Bush Private Accounts Are a Bad Deal

Jonathan Weisman writes a pretty good article about Robert Shiller's calculations in "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation". The 3% real interest rate on the clawback of contributions to private accounts is too high to make them a good deal. Shiller's right:

washingtonpost.com: Retirement Accounts Questioned: Nearly three-quarters of workers who opt for Social Security personal accounts under President Bush's 'default' investment option are likely to earn less in benefits than those who stay with the traditional Social Security system, a prominent finance economist has concluded. A new paper by Yale University economist Robert J. Shiller found that under Bush's default 'life-cycle accounts,'... a third of workers would bring in less in benefits than if they remained in the traditional system... [if future returns are like] historical rates of return in the United States. Using global rates of return, which... more closely track future conditions, life-cycle portfolios could be expected to fall short of the traditional system's returns 71 percent of the time.... Shiller used 91 computer simulations to analyze the past performance of stocks and bonds in a variety of portfolios. He measured the returns in 44-year increments, beginning in 1871, to approximate a worker's lifetime contributions to personal accounts.

The results 'showed a disappointing outlook for investors in the personal accounts relative to the rhetoric of their promoters,' concluded Shiller, a leading researcher in stock market volatility who gained fame in the late 1990s for his warnings of a stock market bubble. Shiller's paper... is adding to research that suggests the White House has been overly optimistic in its assumptions about personal investment accounts. A recent paper by Goldman Sachs economists said the White House's anticipated 4.6 percent rate of return above inflation could be nearly 2 percentage points too high.... Under the Bush proposal, workers would be better off choosing private accounts only if those accounts earned annual returns that exceed inflation by 3 percent.

'I'm one of these people who maintain the 3 percent rate is too high a trade-off,' said Jeremy J. Siegel, a finance professor at the University of Pennsylvania's Wharton School and a longtime advocate of stock investing. 'You can't get 3 percent in the market anymore.' Trent Duffy, a White House spokesman, said the administration is not contemplating changes to the proposal at this point. 'We're confident returns on the market will be well in excess of what we need to make the program work well for seniors,' he said....

[T]he 3 percent hurdle appears too high for many to clear, Shiller found, especially with the conservative strategy the administration has embraced. According to U.S. historical rates of return, the life-cycle portfolio fell short of the 3 percent threshold 32 percent of the time, meaning nearly a third of personal account holders would have been better off sticking with the traditional Social Security system. The median rate of return was 3.4 percent, barely better than the traditional system. Upon retirement, accounts would yield an annuity payment of about $1,000 a year, 'hardly a windfall,' Shiller said.

But he also adjusted for what he expects to be lower future rates of investment return by using historic rates of return from international stock and bond markets.... The life-cycle portfolio under these adjusted returns lost money compared with the traditional system 71 percent of the time, with a median rate of return of just 2.6 percent, $2,000 less in annual benefits than those of workers who stick with the traditional system. 'To say that there is a money machine in the stock market, that it can be tapped to yield great wealth without significant risk if one uses life-cycle investment methods, is a big mistake,' Shiller concluded...

I've been talking about this here, here, and here. But Shiller has real Monte-Carlo simulation results.

Posted by DeLong at 11:55 AM | Comments (0) | TrackBack

"Packed with Economists"?

The Economist loses its mind:

Economist.com | Economic policy: It is hard to claim that economists guarantee success: witness for instance the Clintons' economist-packed health-care plan...

"Economist packed"? I remember Ken Thorpe, Len Burman, Sherry Glied, and David Cutler (all of whom are superb). I remember me translating what they said for the benefit of the Treasury non-economists. I remember their having little impact on what came out of the White House. I remember *lots* of internal Treasury memos from civil servants like Jim Ukockis and Mike Springer--both of whom gave the American taxpayer at least ten times their salary in value added--discussing economic issues that Ira Magaziner and company simply did not get, and warning that the process was not set up to deal with issues of economic or administrative policy substance.

For example... due to freakish administrative mishap by the White House, some of their--very frank and very private--memos wound up getting publicly released. The picture is not of an "economist-packed" health-care plan with flocks of us darkening the skies and ruling the roost, but of a small shrill band desperately trying--and failing--to get the White House to listen to them:

Box Number: 1403
To: all health care task force and working group psnl
From: John D. Podesta, asst to pres and staff secy
Title: Task Force and Working Group Records

Summary: 1. must preserve all records; 2. may not delete electronic documents; 3. all property of White House and you may not take copies for any personal use or retention with permission of Marjorie Tarmey; 4. segregate TF from agency documents; 5. return all TF documents to intake center to Mary Schuneman, OEOB 287; identify general category of docs in each box...


Box Number: 1407 Date: 3/23/93
From: James R. Ukockis
Title: meetings 18, 20, 22 of Cluster Groups on short-term cost controls

Summary: "One particularly important point was made by Farah Walters (the CEO of a large non-profit health system in Cleveland) (fallacy of assuming high cost=inefficiency). Ms. Walters is a recent, and invaluable, addition to our wg. She is perhaps the only one who is sufficiently familiar with the institutional circumstances to be able to understand the real-world havoc the various constraining measures would entail." "Every option has fatal flaws." IM using euphemisms "a consensus is forming..."

Comment: Ukockis questions who is forming the consensus and what arguments/evidence are being considered; he may think the process is a sham and that outcome is predetermined; Also evidence of private sector participation.


Box Number: 1407 Date: 3/23/93
From: James R. Ukockis
Title: March 18, 20 and 22 Meetings of the Health Care Working Group--Cluster Group on Short-term Cost Controls

Summary: cont. from previous record "Every option has fatal flaws, which, although passed off as problems 'still under examination', are actually major roadblocks to successful implementation. Yet, because this adversarial process ahs been missing one adversary -- the con side -- there is substantial risk at least one of the cost containment options may become part of the May 3 reform package by default. ... Mr. Magaziner is employing euphimisms such as '...the current thinking is...', and '... a consensus is forming around...' to indicate certain policy choices are winning out. But, who makes up the consensus, and what arguments/ evidence are being considered? We need to press these issues or the Secretary may find he is confronted by a fait accompli when he is finally brought into the health policy process."


Box Number: 1407 Date: 3/30/93
From: Mike Springer
Title: Activity report: working group on health policy initiatives for underserved populations.

Summary: Concerning federal grants, "there are no mechanisms to hold states accountable in terms of consumer -oriented performance standards. In other words, it is the old categorical game would be covered with a grant consolidation fig leaf." "The Pres and Mrs. C’s committee will not be provided the analysis necessary to make that assessment; it appears that the decision has already been made by the leadership of a WG largely made up of agency and congressional staff whose perspectives and interests predispose them to continuation of the full array of existing categorical grant programs with as little change as possible."

Comment: WG mere window-dressing; main decisions already made to serve entrenched govt interests


Box Number: 1435 Date: 3/26/93
From: James R. Ukockis
Title: Comments on cost Control Options

Summary: "All four of the cost control options being considered involve generic problems common to any attempt to control price behavior. Non-price responses such as quality degradation, decreased availability, and investment disruptions can be expected to varying degrees if price is eliminated as an adjustment mechanism to cope with changing circumstances.... The need to judge the necessity of volume changes would be further confounded by the expected addition of large numbers of individuals seeking health care as the goal of universal coverage is pursued and accomplished. The surge of newly insured would make available aggregate volume data essentially noncomparable with data for the transition period..." [more]

Comment: dissension within the TF Classification: substance

Box Number: 1435 Date: 3/26/93
To:
From:
Title: Ukockis, p. 2

Summary: "If the marginal tax rates are made more draconian... it would not produce much tax revenue and would only force providers to take their income gains in nonmonetary form --particularly increased leisure.... In the present circumstance, the Medicare payment rates can be tolerated without bankrupting providers because the providers have an escape in the rates charged other payers. If the Medicare rate structure is extended to all payers, the escape is no longer available and great care would be needed to avoid financial havoc for many providers..."

Comment:

Box Number: 1435 Date: 3/26/93
To:
From:
Title: Ukockis, p.3

Summary: Problems with premium regulation. "The policy looks favorably upon the prospective forced exit of many companies from the health insurance field. The scenario is hardly one to entice timid investors. Second, the long run outlook is no more attractive. In return for exposure to significant short-term risk, aggressive investors dema nd a chance for big winnings later on. Nothing in the current policy rhetoric suggests the surviving insurance companies will have the chance to reap large profits under the new system. The result is obvious -- aggressive investors will not be attracted either. With both timid and aggressive investors excusing themselves, we are left with only crazy investors, which brings us to the government...." More on interest subsidies, drug price controls

Comment: pitfalls of price controls Classification: substance

How the Economist came to think that the Clinton health-care effort was "packed with economists" is a very interesting question. During the key months most of the Clinton administration's economists were working on the budget or NAFTA or both.

I'll try to find out.

Posted by DeLong at 11:55 AM | Comments (0) | TrackBack

When Webservers Attack!

Crooked Timber is down.

Kieran Healy explains:

Kieran Healy's Weblog: Crooked Timber is Down: Our transition to WordPress radically increased our database usage. Then we got a bit of an uptick in traffic on top of that and our host provider pulled the plug on us because we were gobbling up a lot of resources that needed to be shared. I have to say I think they were a bit peremptory about it. But in any event it seems we’re going to have to get a dedicated server now. Bit more pricey. Hopefully we’ll turn this around quickly and be back online soon.

Posted by DeLong at 11:54 AM | Comments (0) | TrackBack

Bruce Sacerdote on Nature and Nurture

Quoted from Steven Levitt and Stephen Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow: 0060776137):

In a paper titled "The Nature and Nurture of Economic Outcomes," the economist Bruce Sacerdote... takes a long-term quantitative look at the effects of parenting... three adoption studies.... Sacerdote found that parents who adopt children are typically smarter, better educated, and more highly paid than the baby's biological parents. But the adoptive parents' advantages had little bearing on the child's school performance... outweighed by the force of genetics. But, Sacerdote found... by the time the adopted children became adults, they had veered sharply from the destiny that IQ alone might have predicted. Compared to similar children who were not put up for adoption, the adoptees were far more likely to attend college, to have a well-paid job, and to wait until they were out of their teens before getting married...

Posted by DeLong at 11:54 AM | Comments (0) | TrackBack

March 18, 2005

Freakonomics

So a copy of the galleys to Steven Levitt and Stephen Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow: 0060776137), arrived today. I open it at random and find:

[A] crack gang works pretty much like the standard capitalist enterprise: you have to be near the top of the pyramid to make a big wage.... [M]ost of J.T.'s foot soldiers also held minimum-wage jobs in the legitimate sector to supplement their skimpy illicit earnings. The leader of another crack gang once told Venkatesh that he could easily afford to pay his foot soldiers more, but that it wouldn't be prudent. "You got all these n****** below you who want your job, you dig?" he said "So... you try to take care of them, but.. you also have to show them you['re] the boss.... If you start taking losses, they see you as weak." Along with the bad pay, the foot soldiers faced terrible job conditions. For starters, they had to stand on a street corner all day and do business with crackheads.... Foot soldiers... risked arrest and... violence... The results are astonishingly bleak. If you were a member of J.T.'s gang for all four years, here is the typical fate.... arrested 5.9 [times].... Number of nonfatal wounds or injuries (not including injuries meted out by the gang itself for rules violations)... 2.4.... Chance of being killed... 1 in 4.

A 1-in-4 chance of being killed. Compare those odds to being a timber cutter.... Over four years' time, a timber cutter would stand only a 1-in-200 chance of being killed.... So if crack dealing is the most dangerous job in America, and if the salary is only $3.30 an hour, why an earth would anyone do such a job? Well... they all want to succeed in an extremely competitive field in which, if you reach the top, you are paid a fortune.... To kids growing up in a housing project on Chicago's south side, crack dealing was a glamor profession.... [T]he job of gang boss--highly visible and highly lucrative--was easily the best job they thought they had access to. Had they grown up under different circumstances, they might have thought about becoming economists.... But in the neighborhood where J.T.'s gang operated, the path to a decent legitimate job was practically invisible.... [B]arely one in three adult men worked at all.... [F]oot soldiers often asked... help in landing what they called "a good job": working as a janitor at the university of Chicago....

I have a feeling that I am going to recommend this very highly indeed when I have finished it...

Posted by DeLong at 02:40 PM | Comments (0) | TrackBack

March 17, 2005

20050317: Economics 113: Practice Exam for Second Midterm

Practice Exam for Second Midterm

Posted by DeLong at 11:24 AM | Comments (0) | TrackBack

When Collaborative Filtering Programs Attack!

Michael Berube writes:

Michael Bérubé Online: I bought "Goodbye Yellow Brick Road" from Amazon.  I’m not sure why I did it.... [O]ver the short term, that purchase was a terrible mistake.  For weeks afterward, folks, I was presented with Amazon e-mails telling me that the people who’d purchased Goodbye Yellow Brick Road had also purchased the whole Parade of Lite Horribles, from Rod Stewart to Billy Joel to Phil Collins to Michael Bolton Himself.  Panicking, I quickly ordered all of Brian Eno’s ambient albums as well as some Soul Coughing to throw Amazon off the scent...

Posted by DeLong at 11:24 AM | Comments (0) | TrackBack

On the Radio

Madeleine Peyroux just sang an absolutely amazing version of "You're Going to Make Me Lonesome When You Go" on the radio...

Posted by DeLong at 11:23 AM | Comments (0) | TrackBack

In the Army

From the New York Times Dining section:

The New York Times > Dining & Wine > K.P. With the Culinary Arts: "CONDITIONS at the 30th National Military Culinary Championships here were almost identical to those in Mosul, Iraq: 36 degrees, snow and driving winds.... [A]ll the cooks have seen battlefields, or probably soon will.... Staff Sgt. Jesus Camacho, the Army's reigning king of sugar sculpture, recently finished a tour of duty in Afghanistan. Last Wednesday, the 6-foot-2, 220-pound sergeant spent 90 minutes creating an undersea tableau: a lobster on a bed of coral, near a green wine bottle with a message curled inside, all made from sugar. In Afghanistan, he was responsible for feeding 500 soldiers a day. 'There's no time to practice sugar when you're deployed,' he said. 'But at night I would read Pastry magazine.'

Posted by DeLong at 11:23 AM | Comments (0) | TrackBack

Yuval Rubenstein Is a Genius!

He writes:

The Left Coaster: Democrats Must Find the "Evolutionary Middle": By remarkable happenstance, I just experienced a 'mind meld' with Al From, Bruce Reed, and Ed Kilgore of the Democratic Leadership Council, similar to the one Marshall Wittmann experienced with Joe Lieberman. The occasion for this supernatural occurrence was a front-page article in the Washington Post highlighting a growing nationwide campaign to curtail the teaching of evolution in our nation's schools. Here is a summation of our 'meeting of the minds' (sorry, couldn't resist).

Fellow Democrats (even you, Chairman Dean):

We here at the Democratic Leadership Council were most distressed to read an article in the Washington Post highlighting ongoing efforts in 19 states to counteract the teaching of evolution:

Propelled by a polished strategy crafted by activists on America's political right, a battle is intensifying across the nation over how students are taught about the origins of life. Policymakers in 19 states are weighing proposals that question the science of evolution.

The proposals typically stop short of overturning evolution or introducing biblical accounts. Instead, they are calculated pleas to teach what advocates consider gaps in long-accepted Darwinian theory, with many relying on the idea of intelligent design, which posits the central role of a creator.

[...]

They are acting now because they feel emboldened by the country's conservative currents and by President Bush, who angered many scientists and teachers by declaring that the jury is still out on evolution. Sharing strong convictions, deep pockets and impressive political credentials -- if not always the same goals -- the activists are building a sizable network.

Undoubtedly, the liberal urban elites in our party, led by Michael Moore and Eli Pariser, will scoff at these latest efforts. But we believe that this attitude is dangerously misguided. By fully embracing the theory of evolution, Democrats risk alienating millions of voters in our nation's heartland who would otherwise be attracted to our party's agenda. Therefore, instead of turning their backs on these Red State evolution skeptics, we strongly encourage Democrats to embrace the 'evolutionary middle.'

What exactly is the 'evolutionary middle,' you may ask? Well, one thing it most certainly is not is a wholesale embrace of creationism. After all, we do realize that, however much we at the DLC may dislike it, the Democratic party will never turn its back on the scientific community, let alone rational empiricism. Instead, we believe that the 'evolutionary middle' involves accepting the basic tenets of evolutionary theory, but loudly and insistently reminding our Red State brethren that it is, after all, only a theory. Furthermore, we must also go out of our way to emphasize that there is room for both evolution and the rival theory of 'intelligent design.' Rather than adopting a Howard Dean-like rejectionism, we must find common ground with ID proponents. To that end, we are announcing a partnership with the Discovery Institute, the leading proponents of Intelligent Design. Our goal is to adopt a set of scientific principles that are acceptable to both evolution adherents and ID theorists.

The Democratic party is at a critical juncture in its history. Held hostage by militant secularists and anti-religious zealots, our party is in danger of ceding a wide swathe of political ground to Republicans by failing to heed the concerns of evolution-hostile voters throughout the country. This is why our initiative to reach the 'evolutionary middle' is such a pressing concern. Please join us.

I'm enough of a fan of the DLC to think that it has a powerful productive role to play in the Democratic Party (if it would do things like actually produce a reasonable Social Security plan rather than complaining that other Democrats haven't). But Yuval's parody of the DLC is *so* *so* true.

Posted by DeLong at 11:23 AM | Comments (0) | TrackBack

March 16, 2005

Off Message

Think Progress watches George W. Bush go off message:

Think Progress: "I have not laid out a plan yet, intentionally." --George W. Bush, 3/16/05

VERSUS

"President Bush's plan allows you to make a decision to put your money in a different kind of prudent investment, with the potential for receiving higher pay-outs." --White House press release, "Fact Sheet: Setting the Record Straight," 2/3/05

"Bush's plan for Social Security" generates 6,190 hits on Google and 11,900 hits on Google News.

Posted by DeLong at 06:45 PM | Comments (0) | TrackBack

About Brad DeLong

Brad DeLong is Professor of Economics at the University of California at Berkeley and is a Research Associate of the National Bureau of Economic Research. He is also Chair of Berkeley's "Political Economy of Industrial Societies" International and Area Studies major, and Associate Director of Berkeley's COINS center. From 1993-1995 he worked for the Clinton Administration's Department of the Treasury as one of the Deputy Assistant Secretaries for Economic Policy. He has taught at Boston University, Harvard University, and MIT in addition to Berkeley. He tries to focus his research on economic history, business cycles, economic growth, comparative technological revolutions, and the history of economic thought.

He has a substantial internet presence as well. His website can be found at www.j-bradford-delong.net and his (recently moved) weblog at delong.typepad.com.

Posted by DeLong at 06:45 PM | Comments (0) | TrackBack

Charity Begins with Big Watching Robotic Eyeballs

Neuroeconomics is really fun!

Kismet the Robot

Boing Boing reports:

Boing Boing: Humans are generous if watched, even by photo of robot: Last week, I posted about a scientific study demonstrating that monkeys think about whether they'll be seen before they swipe food that's not theirs. Similarly, humans donate more to charity if they're being watched. And oddly, this is true even if the gaze is coming from a photo of an anthropomorphic robot. Researchers at Harvard University tested the altruism of 96 volunteers with a game involving the donation of money. From New Scientist:

The researchers split the group into two. Half made their choices undisturbed at a computer screen, while the others were faced with a photo of Kismet - ostensibly not part of the experiment. The players who gazed at the cute robot gave 30 per cent more to the pot than the others. (Investigators Terry) Burnham and (Brian) Hare believe that at some subconscious level they were aware of being watched. Being seen to be generous might mean an increased chance of receiving gifts in future or less chance of punishment...

Burnham believes that even though the parts of our brain that carry out decision-making know that the robot image is just that, Kismet's eyes trigger something more deep-seated. We can manipulate altruistic behaviour with a pair of fake eyeballs because ancient parts of our brain fail to recognise them as fake, he says.

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Why Oh Why Can't We Have a Better Press Corps? (Economist-on-Wolfowitz Idea)

Simply bizarre:

Economist.com | The World Bank: But [Wolfowitz's] lack of experience in the development community does not necessarily make him a bad candidate. Having served under Donald Rumsfeld during the controversial ‘Revolution in Military Affairs’, Mr Wolfowitz might, some argue, be well placed to bring radical change to an organisation sorely in need of it...

Should one say that this Rumsfeldian "Revolution in Military Affairs" simply has not happened? That with the exception of the 3rd ID's masterful outflanking march on Baghdad, Rumsfeld's tenure at the Pentagon has not seen a revolutionary modernization of the U.S. military but (a) attrition as too-few soldiers are tied down in Iraq on military police missions they are not organized for, (b) waste of money on missile defense systems that do not work, and (c) Abu Ghraib? That "radical change" is not good in itself if the people undertaking it have no clue what kind of change is desirable?

The Economist needs to shape up quickly if it wants to keep its reputation.

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

Sensitive Dependence of Answer on Grading Professor...

Barry Eichengreen and I are giving a makeup exam today:


Economics 210a Makeup Final Exam

Spring 2005

Answer one question from each part:

Part I

  1. How is it possible to have commerce without law? How much commerce are you likely to have without law?
  2. In what respects was the experience of humanity between the invention of agriculture and the industrial revolution "Malthusian"? In what respects is the Malthusian model inadequate to understanding pre-industrial economic history?

Part II

  1. Studies of both capital and labor markets have used the spatial dispersion of rates of return as a measure of market development. Is this a sensible way of analyzing this issue? What does it capture and what does it leave out? Studies applying this methodology to 19th century American factor markets seem to reach very different conclusions depending on the markets on which they focus. Describe these different conclusions. Are these differences indicative of the limitations of the methodology, or are they telling us something important about how markets develop and about American history?
  2. The speed with which Britain rose to become the first industrial nation and then lost its relative edge have struck economic historians as unusual and in need of explanation. Is the rapidity of these transformations in fact faster than we would have expected? If so, what factors in your estimation played major roles both in Britain’s ascent and in Britain’s relative decline?

Part III

  1. Historical studies of the classical and interwar gold standard pay close attention to the so-called “rules of the game.” What were these rules? When were they invented? Is this focus on the so-called rules of the game a productive way of understanding differences in the operation of the international gold standard in these two periods?
  2. It is sometimes argued that the case of the United States does not conform to the "international interpretation" of the Great Depression that has been extensively discussed in recent years. In what respects, if any, does U.S. experience in the 1920s and 1930s differ from that of other industrial countries. Do these differences suggest that international factors have less to say about this country’s Depression experience?


The interesting thing is that the correct answer to III.2 depends heavily on whether Barry or I am grading it. I say that the "international interpretation" by and large doesn't apply to the U.S.--it's a small part of the story (while it is an enormously large part of the story outside the U.S.) Barry says that the Great Depression in the U.S. is not that different from the Great Depression elsewhere.

I hope we made it clear that Barry is grading III.2...

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

The Bush Clown Show Continues

Can anyone come up with any reason to think that Paul Wolfowitz is the best person to be President of the World Bank?

FT.com / World / US - Wolfowitz to be named to lead World Bank: Paul Wolfowitz, US deputy secretary of defence, is to be nominated by president George W. Bush to replace James Wolfensohn as the president of the World Bank. The nomination of Mr Wolfowitz, one of the chief architects of the Iraq war and a former US ambassador to Indonesia, would likely be highly controversial, and could raise new questions about the process by which the World Bank chief is selected. One administration official said his nomination ‘would have enormous repercussions within the development community’.

Leadership of the World Bank and International Monetary Fund is decided by all the shareholders in the institutions. But the US and Europe in effect divide up the top jobs, with an American heading the bank and a European running the fund.

The effort to pick the US candidate has been led by the White House National Security Council and the Council of Economic Advisers. The Treasury led consultations with other World Bank shareholders.

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

This Is Not Good

From Unqualified Offerings:

US Kills Iraqi Leader § Unqualified Offerings: Not a resistance leader, mind you.

The deputy commander of the Iraqi army in western Al-Anbar province was shot dead by US troops at a checkpoint Tuesday night, a police officer said. ‘The US forces opened fire at 8:00 pm on Brigadier General Ismail Swayed al-Obeid, who had left his base in Baghdadi to head home,’ police Captain Amin al-Hitti said. ‘They spotted him on the road after the curfew, which goes into effect at 6pm,’ the officer said in Baghdadi, 185 kilometres west of the capital.

Damned Commie Italians screw up everything, then lie about it.

To get all anti-imperialist on you like usual, I must note that this man was shot by Americans for being out after ‘curfew’ in his own country.

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

Dealing with Trolls...

Our first two trolls have shown up in the comments here on typepad. Pity.

I don't have time to moderate the comments to this thing properly. But I will try.

Here is some food for thought:

Teresa Nielsen Hayden: Some things I know about moderating conversations in virtual space:

  1. There can be no ongoing discourse without some degree of moderation, if only to kill off the hardcore trolls. It takes rather more moderation than that to create a complex, nuanced, civil discourse. If you want that to happen, you have to give of yourself. Providing the space but not tending the conversation is like expecting that your front yard will automatically turn itself into a garden.
  2. Once you have a well-established online conversation space, with enough regulars to explain the local mores to newcomers, they’ll do a lot of the policing themselves.
  3. You own the space. You host the conversation. You don’t own the community. Respect their needs. For instance, if you’re going away for a while, don’t shut down your comment area. Give them an open thread to play with, so they’ll still be there when you get back.
  4. Message persistence rewards people who write good comments.
  5. Over-specific rules are an invitation to people who get off on gaming the system.
  6. Civil speech and impassioned speech are not opposed and mutually exclusive sets. Being interesting trumps any amount of conventional politeness.
  7. Things to cherish: Your regulars. A sense of community. Real expertise. Genuine engagement with the subject under discussion. Outstanding performances. Helping others. Cooperation in maintenance of a good conversation. Taking the time to teach newbies the ropes. All these things should be rewarded with your attention and praise. And if you get a particularly good comment, consider adding it to the original post.
  8. Grant more lenience to participants who are only part-time jerks, as long as they’re valuable the rest of the time.
  9. If you judge that a post is offensive, upsetting, or just plain unpleasant, it’s important to get rid of it, or at least make it hard to read. Do it as quickly as possible. There’s no more useless advice than to tell people to just ignore such things. We can’t. We automatically read what falls under our eyes.
  10. Another important rule: You can let one jeering, unpleasant jerk hang around for a while, but the minute you get two or more of them egging each other on, they both have to go, and all their recent messages with them. There are others like them prowling the net, looking for just that kind of situation. More of them will turn up, and they’ll encourage each other to behave more and more outrageously. Kill them quickly and have no regrets.
  11. You can’t automate intelligence. In theory, systems like Slashdot’s ought to work better than they do. Maintaining a conversation is a task for human beings.
  12. Disemvowelling works. Consider it.
  13. If someone you’ve disemvowelled comes back and behaves, forgive and forget their earlier gaffes. You’re acting in the service of civility, not abstract justice.

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

Buttonwood Thinks About the Dollar

From the Economist:

Economist.com | The Buttonwood column: the dollar: In two of the past three weeks, the dollar took a pasting on reports that various Asian central banks, whose purchases of America’s debt help it to go on borrowing and consuming, were planning to diversify their foreign-exchange reserves away from dollars. Bond yields spiked up....

America’s economic growth... mammoth consumption by both the private and public sectors... big trade and fiscal deficits... needs foreigners willing to suspend disbelief and buy shiploads of securities denominated in a currency that has steadily lost value for about 40 years.... Asian central banks have accumulated about $2.5 trillion in foreign-exchange reserves, up a quarter in little more than a year, most of it in dollars; Japan and China alone have reserves of nearly $1.5 trillion between them.

Central banks have more reason to purchase dollar assets than to dump them. Buying American securities keeps their own currencies low, their exports competitive and their workers free to move from fields to factories.... But the Faustian deal... whereby America gets to spend beyond its means and Asia gets to invest in export-led growth... turns out to have a shorter horizon than most people reckoned. It could turn sour at any time now. And confirmation of that comes from another set of economic data, this time due out on Wednesday: figures for America’s fourth-quarter current-account deficit. Officials have already warned that it will be a stinker....

[W]hat will happen if a significant portion of countries decided not to add to their dollar holdings? More than the dollar would weaken. Big foreign buyers of bonds have been keeping interest rates down, perhaps by one percentage point, as Alan Greenspan suggests. That would change, for a start. Without this support, the yield on the ten-year benchmark Treasury bond could rise to more than 5%, pushing up interest rates on mortgages. That, in turn, could prick America’s house-price bubble and prompt a general deleveraging, with implications for economic growth both in America and elsewhere. Standard & Poor’s, a rating agency, warned on Monday that a weak dollar would substantially increase concerns about credit quality. This is perhaps not the week to air such apocalyptic concerns, though they are much on Buttonwood’s mind. In the end, what foreign central bankers have it in their power to do is to reveal before all the world that the mighty American economic empire has no clothes...

Meanwhile, it seems as though the spring Brookings Panel on Economic Activity has four dollar papers--Mike Dooley and Peter Garber, "TBA," discussed by Barry Eichengreen and Jeffrey Frankel; Sebastian Edwards, "The U.S. Dollar and Twenty Five Years of U.S. Current Account Imbalances," discussed by Kathryn Dominguez and Pierre-Olivier Gourinchas; Olivier Blanchard and Francesco Giavazzi, "The U.S. Current Account, the Dollar, the Euro, and the Yen," discussed by Ben Bernanke and Helene Rey; and Maury Obstfeld and Ken Rogoff, "TBA," discussed by Richard Cooper and T.N. Srinivasan--and us on "Asset Returns and Economic Growth." The only one of the four dollar papers I've seen is Blanchard and Giavazzi.

Posted by DeLong at 06:44 PM | Comments (0) | TrackBack

Feingold and Chaffee Are Senators...

Mark Schmitt writes that Feingold and Chaffee are trying to do good this week. Let's salute them. We need more senators like this, and fewer who either have two faces or no sense of their responsibility to the country:

The Decembrist: PAYGO!: There's a lot going on on Capitol Hill this week.... One vote in the Senate will be of profound importance, however: On Wednesday, Senators Chafee and Feingold are expected to offer an amendment to the budget resolution restoring the 'Pay-as-you-go' rules, known as PAYGO, which will require Congress to pay for any further tax cuts with offsetting tax increases or spending cuts. The budget resolution as passed by the Senate Budget Committee lasts week instructs the Senate Finance Committee to come back with tax cuts totaling $70 billion, which will add to the deficit.

If the PAYGO rules, which were rejected on a party-line vote in the Budget Committee, pass, those tax cuts will either have to be paid for, or they will be subject to a 'point of order' in the Senate which will require 60 votes.

More likely, if the PAYGO amendment passes in the Senate, it will not pass in the House, and the two houses will not be able to agree on a budget resolution, which is not the end of the world. It happened last year. Without a budget resolution, though, there can't be a budget reconciliation bill, which has the same effect: Any further tax cuts will have to be subject to full debate in the Senate, and can't be rammed through with 50 votes.

Few things are more arcane than congressional PAYGO rules. And yet, little is more important, especially right now.... If Republicans are serious about cutting taxes and making government smaller, they must be willing to come forward simultaneously with the cuts they are willing to make and bear the consequences. Or, if they do not want to make cuts but still want to cut taxes for the top 0.2% of the population, they must be willing to say whose taxes they are willing to raise to pay for those cuts....

Like the bankruptcy bill, this is one of those things that most Senators assume no one pays attention to. A little bit of attention might make a real difference. It's probably the single most important vote in the budget process, because it sets a limit to just how much nefarious, dishonest tax-cutting is possible. So call your Senator and urge them to vote with Feingold and Chafee on the PAYGO rules.

I also noted from Steve Clemons that the key votes on John Bolton's nomination to the U.N. happen to be Feingold and Chafee. So it might be worth a call to those two offices also. Tell the receptionist, 'I want to thank Senator Chafee/Feingold for his leadership on honesty in our budget. And I'd also like to urge him to oppose John Bolton.' Mix a little love in with the pressure -- it's a time-honored strategy.

Posted by DeLong at 06:43 PM | Comments (0) | TrackBack

March 15, 2005

Nino Scalia, by Grace of God Justice and Lord

Don Herzog is weirded out by Nino Scalia:

Left2Right: Justice Scalia's blooper: News flash, or, dubious blast from the past:  like the medieval theorists, like the Stuart monarchs, Justice Scalia doesn't believe that political authority ascends from the people.  Here's what follows his joke.

JUSTICE SCALIA:  And when somebody goes by that monument, I don't think they're studying each one of the commandments.  It's a symbol of the fact that government comes — derives its authority from God.  And that is, it seems to me, an appropriate symbol to be on State grounds.

. CHEMERINSKY:  I disagree, Your Honor.  For the State to put that symbol between its State Capitol and the State Supreme Court is to convey a profound religious message....

JUSTICE SCALIA:  It is a profound religious message, but it's a profound religious message believed in by the vast majority of the American people, just as belief in monotheism is shared by a vast majority of the American people.  And our traditions show that there is nothing wrong with the government reflecting that.  I mean, we're a tolerant society religiously, but just as the majority has to be tolerant of minority views in matters of religion, it seems to me the minority has to be tolerant of the majority's ability to express its belief that government comes from God, which is what this is about.

There are different claims here.  Justice Scalia appeals to 'our traditions.'  He urges that the 'vast majority' may 'express its belief that government comes from God.'  (This blatantly implausible claim about what the vast majority believes reminds us why the law is reluctant to let judges take judicial notice of facts not on the record.)  But — it bears repetition — he asserts in his own voice 'that government comes — derives its authority from God.'  That, he tells us, is a 'fact.'

Nino Scalia's views on this are profoundly--there is no other word for it--UnAmerican. Here in the United States, we are all children of Thomas Jefferson. God does not give us rulers. Instead, God gives us rights: to life, liberty, and the pursuit of happiness. We then institute governments to secure these rights, and they derive their just powers from our consent, not from God's decree. Moreover, it is not the YHWH of Revealed Religion but instead "Nature's God" and Nature itself that are the source of these rights.

Where does Scalia's anti-Jeffersonian belief that God gives us not rights but rulers come from? It comes from Paul, whom Scalia likes to quote with approval:

Paul (Romans 13:1-5): Let every soul be subject unto the higher powers. For there is no power but of God: the powers that be are ordained of God. Whosoever therefore resisteth the power, resisteth the ordinance of God: and they that resist shall receive to themselves damnation. For rulers are not a terror to good works, but to the evil. Wilt thou then not be afraid of the power? Do that which is good, and thou shalt have praise of the same: for he is the minister of God to thee for good. But if thou do that which is evil, be afraid; for he beareth not the sword in vain: for he is the minister of God, a revenger to execute wrath upon him that doeth evil. Wherefore ye must needs be subject, not only for wrath, but also for conscience sake.

Note what Paul is saying in this passage. The government that is "ordained of God" and that one has a duty to obey is not a representative democracy or a merciful Christian king but the Principate--the government of the Roman Empire under the Julio-Claudian dynasty: Caligula, Claudius, and Nero. To fail to obey that government is contrary to the will of God: not just a crime but a sin.

What is the payoff from this belief of Scalia's that power comes from above? In his speech "God's Justice and Ours," Scalia says that God hates not just crime and open revolt but peaceful campaigns of civil disobedience which are, in Scalia's view, based on the false assumption that "what the individual citizen considers an unjust law... need not be obeyed."

Thus from Scalia's point of view for Blacks to sit at an all-White lunch counter when the law decrees they shall not--that is not just a crime but a sin. And the Martin Luther King, Jr. holiday--a celebration of his civil disobedience campaigns--is blasphemous: hateful to God, because it teaches people that there are circumstances in which they should disobey those whom God has commanded them to obey.

Now this is a free country. And Nino Scalia is allowed to break with those like Jefferson, Madison, and Lincoln who think that legitimate power ascends from the consent of the people. It's a free country. He can take his stand with those like James I Stuart, Innocent III, and Khomeini who think that legitimate power descends from God.

But does such a guy have any business being a Justice of the Supreme Court of a free country? No.

Posted by DeLong at 11:20 AM | Comments (0) | TrackBack

20050315: Economics 113: Midterm Changed to March 31

The second Econ 113 midterm exam is being moved up to March 31. It will cover "Slavery," "Gilded Age and Progressive Era," "The Great Depression," and "Labor and Capital."

Posted by DeLong at 11:10 AM | Comments (0) | TrackBack

Joe "Let Me Endorse Some Phony Republican Numbers" Lieberman

Paul Krugman notes that not only is he Joe "I voted for the bankruptcy bill before I voted against it" Lieberman, he's Joe "Let Me Endorse Some Phony Republican Numbers" Lieberman as well:

The New York Times > Opinion > Op-Ed Columnist: The $600 Billion Man: The trustees never said that waiting a year to 'fix' Social Security costs $600 billion. Mr. Bush was grossly misrepresenting the meaning of a technical discussion of accounting issues (it's on Page 58 of the 2004 trustees' report).... The same type of 'infinite horizon' calculation applied to the Bush tax cuts says that their costs rise by $1 trillion a year. That's not a useful measure of the cost of not repealing those cuts immediately. So anyone who repeats the $600 billion line is helping to spread a lie....

But in his latest radio address, Mr. Bush - correctly, this time - attributed the $600 billion figure to a 'Democrat leader.' He was referring to Senator Joseph Lieberman, who, for some reason, repeated the party line - the Republican party line - the previous Sunday. My guess is that Mr. Lieberman thought he was being centrist and bipartisan, reaching out to Republicans by showing that he shares their concerns. At a time when the Democrats can say, without exaggeration, that their opponents are making a dishonest case for policies that will increase the risks facing families, Mr. Lieberman gave the administration cover by endorsing its fake numbers....

Mr. Lieberman stated clearly what was wrong with the bankruptcy bill: 'It failed to close troubling loopholes that protect wealthy debtors, and yet it deals harshly with average Americans facing unforeseen medical expenses or a sudden military deployment,' making it unfair to 'working Americans who find themselves in dire financial straits through no fault of their own.' A stand against the bill would have merged populism with patriotism, highlighting Democrats' differences with Republicans' vision of America.... [M]any Democrats chose not to take that stand. And Mr. Lieberman was among them: his vote against the bill was an empty gesture. On the only vote that opponents of the bill had a chance of winning - a motion to cut off further discussion - he sided with the credit card companies. To be fair, so did 13 other Democrats. But none of the others tried to have it both ways.

Some of the others did try to have it both ways, in a more constructive fashion. They voted against closing debate, and then voted for the bill on final passage. That's a much more real form of opposition that Lieberman's.

Posted by DeLong at 07:10 AM | Comments (1) | TrackBack

20050310: Economics 113: Problem Set 3: Great Depression

Problem Set 3: The Great Depression: Due March 17: Economics_113_ps3.pdf

Posted by DeLong at 07:10 AM | Comments (0) | TrackBack

March 14, 2005

Greenspan Is Alarmed at the Budget Deficit Alarm Once More On Budget Deficit

Greg Ip reports:

WSJ.com - Greenspan Sounds Alarm Once More On Budget Deficit: "Federal Reserve Chairman Alan Greenspan, continuing his warnings over the federal deficit, said the budget shortfall is a larger risk to the U.S. economy than the gaping trade deficit or large household-debt burdens. 'Our fiscal prospects are...a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances,' Mr. Greenspan said in a speech to the Council on Foreign Relations in New York....

Mr. Greenspan said the budget deficit's threat to the economy has been masked by foreigners' readiness to lend to the U.S. to finance its current-account deficit, now running at more than 5% of gross domestic product, or the total value of goods and services produced in a nation. 'The 30 million baby boomers who will reach 65 years of age over the next quarter-century are going to place enormous pressures' on the economy's ability to finance current entitlements, he said, and 'our success in attracting savings from abroad may be masking the full effect on investment of deficient domestic saving.'...

Posted by DeLong at 08:17 PM | Comments (0) | TrackBack

The Abyss Has Looked Into Us

Body and Soul freaks out:

Body and Soul: The Beast in US: I've been very depressed about politics the past few days. My comforting illusions are shattering. Look at some of the things that have come out recently:

  1. Italian, German, and Swedish investigations into American violation of their laws when CIA agents kidnapped and detained people on their soil and deported them to countries where they faced torture.
  2. Details of prison abuse in Afghanistan that caused two deaths military officials originally attributed to 'natural causes.'... 'kicks to the groin and leg, shoving or slamming him into walls/table, forcing the detainee to maintain painful, contorted body positions during interview and forcing water into his mouth until he could not breathe.'...
  3. A formal agreement between the Army and the CIA to hide 'ghost detainees' at Abu Ghraib. The Pentagon has previously admitted that prisoners were kept off the records in Iraq, but claimed they 'slipped through the cracks.' They lied.
  4. The ACLU's latest document dump... the use of dogs to frighten child detainees, the refusal to release even obviously innocent prisoners, and a statement by Lt. Gen. Ricardo Sanchez that is shocking even after all the previous shocks. According to an unnamed soldier, he said of the prisoners, 'Why are we detaining these people, we should be killing them.'
  5. There's a great old gospel song called 'Nobody's Fault But Mine.'... One more time, Donald Rumsfeld is not asked to sing it...
  6. Evidence of prisoners as young as eleven-years-old at Abu Ghraib. Actually, this isn't news. The New York Times mentioned that eleven-year-old (as well as a 75-year-old prisoner) in an article on Abu Ghraib that preceded CBS's revelation of the photographs by more than a month...
  7. The Los Angeles Times ran an editorial about the 'barbarism' of extraordinary rendition. The Pentagon is planning Extraordinary Rendition II -- cutting the population of the Guantánamo detention facility in half by transferring hundreds of the detainees to prisons in Saudi Arabia, Yemen, and Afghanistan.

I've been following these stories for a long time, probably longer than is good for me. They don't surprise me. But I've been telling myself for a long time that if these things started pouring out, day after day, people would not be able to turn their backs.... Last weekend, the excuses for torture sounded panic-stricken to me. It seemed to me that facts were becoming harder and harder to ignore, and people who needed excuses were coming up with ones so feeble even they knew it. God help us, I think those feeble excuses will do the trick...

Impeach George W. Bush. Impeach Richard Cheney. Impeach them now.

Posted by DeLong at 08:16 PM | Comments (0) | TrackBack

Roger Lowenstein Writes About David Cutler and Health Care

Yet another excellent article by Roger Lowenstein:

The New York Times > Magazine > The Quality Cure?: Half of the growth in spending is for chronic conditions like asthma, obesity and diabetes.... In their case, particularly, [David] Cutler argues, quality will pay....

[Mark] McClellan, the Medicare administrator and former Cutler collaborator, is taking a gamble that pay-for-performance will work. Medicare has started half a dozen pilot programs to test various incentives. In one, hospitals scoring in the top 10 percent in a set of quality measures for certain conditions will be given a 2 percent bonus.

Medicare is also testing incentives that reward doctors for savings. The American Medical Association is nervous about anything that smacks of encouraging doctors to withhold care (a battle it fought with H.M.O.'s in the 90's), but it appears to be willing to look at schemes that link pay to quality....

Cutler says that Medicare's willingness to experiment is hugely important. Private health plans do not have the clout to force a clinic to purchase software or adopt performance goals. But Medicare is so big.... Reoriented to managing ''health'' rather than merely costs, H.M.O.'s might again become a useful part of the health-care landscape, Cutler says. Managing care, he says, was a necessary idea that went off the tracks as H.M.O.'s became remote, single-minded cost-control freaks....

Cutler says that the next step is for Medicare to go beyond trials and move from a fee-for-service model to, in part, pay-for-performance. ''If Medicare has to pay more to doctors -- which it will, given current projections -- don't raise fees across the board,'' he explains. ''Set up a bonus fund that goes to M.D.'s who follow guidelines or have the best measures of outcome.''...

To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others)....

Cutler's idea is to preserve the diversity of America's system while subsidizing people's access to it -- to let the G.E.'s and the HealthPartners of the world, and also the Mercks, continue to innovate.... [T]he government might spend an additional $100 billion a year.... Cutler's plan would seem not to brake the projected future escalation of spending. By 2040, according to various projections, that spending could rise from its present $1.8 trillion to something like $3 trillion -- that is, to 20 percent of G.D.P. or conceivably 25 percent. This is why so much attention is focused on cost.... Cutler's answer to these fears is not exactly cavalier.... If we institute a more results-oriented, and a more health-conscious, system, our dollars will buy us better care and probably cheaper care. By emphasizing prevention and effective treatments for the chronically ill, we might also reduce the rate at which spending grows.... But the drive to keep spending down will forever be challenged by technology's efforts to overcome it. If it turns out that gene therapy delivers a cure for cancer, and if that turns out to be something that most Americans want, we should be prepared to pay for it and indeed to tax for it, Cutler says. Spending a fifth, even a quarter, of our resources on life-enhancing and life-prolonging miracles would not be the worst of fates.

Posted by DeLong at 08:16 PM | Comments (0) | TrackBack

Admonishment...

In comment, Matt writes:

Though he's probably the 4th smartest person at the Tax Policy Center thinking about social security, he is a heavyweight, and as such we should learn to spell his name correctly. Eugene Steuerle.

I always miss the second "e." I always have. My brain simply cannot process it.

Eugene Steuerle
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Eugene Steuerle
Eugene Steuerle

There. Maybe now it will stick.

Maybe not.

Posted by DeLong at 08:16 PM | Comments (1) | TrackBack

It Is Useless to Resist Tor Books...

Michael Froomkin wrote:

Discourse.net: A Literary Note: TOR, incidentally, is on a roll. I'm amazed that well more than half of the quality SF/Fantasy I've read in the past year was a TOR product.

Let me endorse that, and praise:

Scott Westerfeld (2003), The Risen Empire (New York: Tor: 076534467X).

Posted by DeLong at 08:15 PM | Comments (0) | TrackBack

The Geological Formation Formerly Known as the Snows of Kilimanjaro

Billmon at the Whiskey Bar reports:

snows.jpg

From Great-Great-Uncle (by marriage)* Ernie:

Kilimanjaro is a snow-covered mountain 19,710 feet high, and is said to be the highest mountain in Africa. Its western summit is called the Masai 'Ngaje Ngai,' the House of God. Close to the western summit there is the dried and frozen thawed carcass of a leopard. No one has explained what the leopard was seeking at that altitude.

Ernest Hemingway, The Snows of Kilimanjaro, 1938

Billmon quotes the Grauniad:

Whiskey Bar: Modernizing Hemingway: "Africa's tallest mountain, with its white peak, is one of the most instantly recognisable sights in the world. But as this aerial photograph shows, Kilimanjaro's trademark snowy cap, at 5,895 metres (1,934ft), is now all but gone -- 15 years before scientists predicted it would melt through global warming."

"The peak of Mt Kilimanjaro as it has not been seen for 11,000 years," March 14, 2005

I'm going to go get a stiff drink.


*Yep. I'm not kidding. When my grandmother Florence Usher was a small child, they would send her out to sit in the backseat when Ernest took her Aunt Hadley for a drive...

Posted by DeLong at 08:15 PM | Comments (0) | TrackBack

Gene Steuerle on Social Security

If you want a right-of-center take on Social Security, ask Gene Steurle--Reagan's Assistant Secretary of the Treasury for Tax Policy. Via Max Sawicky:

washingtonpost.com: Whichever Way We Go, Some Get Left Behind: Social Security has morphed into a middle-age retirement system even though the very old have greater healthcare needs, can work less, and are more likely to have no spouses to help out.

That's why those Bush foes who insist on protecting the Social Security program exactly as it is are misguided. By the same token, Bush has not made the original Social Security mission -- protecting the vulnerable -- his primary one. The president has focused instead on giving Americans 'ownership' over their retirement benefits by creating private accounts, which simply give back the most to those who pay in the most.

The Social Security program was never intended to treat everyone equally. And it currently redistributes income in five major ways:

  1. From richer workers to poorer workers through a progressive benefit formula.... Social Security's formula provides a benefit equal to 90 percent of former earnings to those with very low incomes, but only 40 percent to those with average earnings.
  2. From shorter-lived groups (such as men, African Americans and the less educated) to longer-lived groups (such as women and the highly educated) through annuities whose value depends upon life expectancy...
  3. From singles to married couples...
  4. From the healthy to the disabled, through disability benefits; and from later generations to earlier ones.

Like other public programs, Social Security will have winners and losers if its rules are rewritten. But when Lee Cohen, a Social Security Administration economist, Adam Carasso of the Urban Institute and I studied the numbers, we found that some widespread assumptions about who is hurt and who isn't are wrong. For instance, though Social Security is perceived as progressive, blacks don't get much better rates of returns (in the form of benefits) on the taxes they pay during their lifetimes than whites. Nor do high school dropouts fare better than the college educated. In both cases, shorter life expectancy for the poorer groups offset the Social Security formula's tilt in their direction.... [I]t is possible to design reforms -- even those that cut the growth rate of future benefits -- that would do a better job than current law does in protecting the elderly, disabled and survivors against poverty.

For instance, giving the truly old and those with lower lifetime incomes a greater edge in the Social Security system wouldn't be hard. A solid minimum benefit of about $9,000 per person (roughly the poverty line) could be provided easily, especially if concentrated on the later part of old age.... With any proposal aimed at protecting the elderly, solid testing and assessment are required. Currently, the government does not make public the information needed to measure Social Security's effectiveness as an anti-poverty program for the elderly against proposed alternatives.

The seemingly straightforward goal of protecting the most vulnerable first and foremost has been muddled in the recent Social Security debates. The right argues that personal accounts are fairer to blacks and those with less education because these people die younger on average and otherwise can't spend their retirement money freely before their time comes. The left, meanwhile, insists that the retirement age can't be increased for the same reason: It's unfair to the poor, who are less healthy and more likely to hold physically demanding jobs.

Both arguments share the same flaw -- the assumption that the fairness and effectiveness of the whole system can be judged by looking at a specific provision or particular set of losers or winners....

Making protection of the vulnerable the first order of business does have a cost. It means less -- whether lower benefits or higher taxes -- for those of us who are not as likely to be poor. But if that seems threatening, remember that Social Security benefits are already equivalent in value to about a $400,000 401(k) plan for the average-income couple retiring today. Add in Medicare, and the total package of benefits for a couple is projected within less than 25 years to exceed $1 million.

With benefits soaring this high, Social Security reform should not be mainly about enabling the average American to retire in middle age, pay little tax and avoid saving. Rather, changes should aim to keep necessary sacrifices manageable while demanding fewer transfers from our children to us and more from them to our grandchildren. Social Security's creators believed the system should keep the wolf from the door at the end of life. Any system that does that helps reassure us all since none of us knows whether we will outlive our good health -- and our money.

Posted by DeLong at 08:14 PM | Comments (0) | TrackBack

If You Offer Free Ice Cream, People Will Complain...

Technorati offers free ice cream, and Leslie Michael Orchard complains that it doesn't also provide whipped cream and nuts:

Weekend quick things - Archives - Blog - 0xDECAFBAD Blog: I’ve just subscribed again to a Technorati search feed on ‘decafbad’ after having forgotten about them for a few months. I’m liking it, but I wish they could exclude links to me found in other people’s blogrolls—while on one hand I’ve been very happy and surprised to find all the links to me, I kinda wish I could limit to links that come up in the middle of a post.

Let me join the chorus: I, too, wish the free ice cream came with whipped cream and nuts! It would be much more delicious that way!

Posted by DeLong at 08:14 PM | Comments (1) | TrackBack

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

I cannot stand it. I really cannot stand it. I'm reading along, thinking that this time Tom Friedman has gotten it right, that yes, reducing trade barriers is good:

The New York Times > Opinion > Op-Ed Columnist: New Signs on the Arab Street: Egyptian workers... into the streets. They were furious. They were enraged. Why?

They were not included in the new trade deal with Israel.

Now, that's a new Middle East. On Dec. 14, Egypt, Israel and the U.S. signed an accord setting up three Qualified Industrial Zones (Q.I.Z.'s) in Egypt. The deal stipulated the following: Any Egyptian company operating in one of these Q.I.Z.'s that imports from an Israeli company at least 11.7 percent of the parts, materials or services that go into the Egyptian company's final product can then export that finished product to the U.S. duty free. This is a big deal for Egypt, which, unlike Jordan and Israel, does not have a free-trade treaty with the U.S. As part of the accord, the U.S. named Greater Cairo, Alexandria, and Port Said the three Q.I.Z.'s...

And then I hit the next sentence:

It had to be limited to only three municipalities so that the U.S. would not be swamped with Egyptian exports...

"Swamped with Egyptian exports"?!?! Jeebus save us! Egypt's current exports to America are less than $3 billion: if they were to triple they would still be only $30 per American per year--and only 1/150 of total worldwide exports to America. Egypt's annual GDP is $75 billion dollars (yes, that's less than $1000 per capita per year). If *everything* produced in Egypt this year were shipped to us, that would be $250 per head here in America and less than 5% of our expected imports this year.

"Swamped"? Feh.

Posted by DeLong at 08:14 PM | Comments (0) | TrackBack

Jim Henley Reports on Shots in the Dark

He writes:

Shots in the Dark § Unqualified Offerings: Hesiod e-mailed me a particularly interesting Iraq news article by Elizabeth Piper from Reuters. Flipping all the cards we come to:

In Baghdad, insurgents posing as policemen killed a police chief, stopping his truck at a fake checkpoint, asking his name then shooting him in an attack claimed by al Qaeda followers...

Tell me again how there’s one obviously right course of action when uniformed figures fire weapons and flash lights at your car in the dark.

Posted by DeLong at 08:13 PM | Comments (0) | TrackBack

March 13, 2005

Tyler Cowen Relays Advice About Music for Your Dog

Yet more useful advice:

Marginal Revolution: Markets in everything: A Dog's Life: Jacqueline Passey (whose excellent blog relates the gripping and  dramatic story of her life) sent me this NPR article and clip about music and songs for your dog.  Apparently dogs don't like percussion, or the word 'no' in songs.

Betcha they don't like songs in which somebody says, "Bad dog!" either...

Posted by DeLong at 08:43 AM | Comments (1) | TrackBack

March 12, 2005

Four Things We Already Know

Tyler Cowen as Dutch Uncle:

Marginal Revolution: Four things you (I hope) already know: The purpose of our blogging is to circulate ideas that are new, or at least new to us and perhaps to you.  But every now and then there is something to be said for sheer repetition of the important.  If nothing else, this incursion into the known might make those points more memorable, more salient, or more likely to influence your behavior.  So here goes:

  1. Torture is morally wrong, and the U.S. government should not be torturing people or easing the use of torture.  And yes I will make an exception for the ticking nuclear time bomb.

  2. We have dropped the ball on securing Russian nuclear weapons.  There was simply no good reason for this mistake.

  3. Avian flu could be a very very serious pandemic; here is the latest.  We are not prepared.  How about more investment in faster vaccine production technologies, not to mention an improved legal and regulatory climate?

  4. Choose the better, not the worse.  Have you failed to apply for your 401K employer-matched savings contribution?  Do you simply refuse to see the doctor for a needed check-up?  Do you fail to perform small considerate but ultimately costless household chores for the benefit of others around you?  Do you fail to realize that all food tastes better when cooked with sea salt?  Repent and reform.

Me, I thought we were supposed to avoid adding extra salt to our food--that unless our diets were really weird we got enough salt already...

Posted by DeLong at 10:37 PM | Comments (5) | TrackBack

I'll Stop Calling This Crew "Orwellian" When They Stop Using 1984 as an Operations Manual

From 1984:

The orders already issuing from the telescreens, recalling them to their posts posts, were hardly necessary. Oceania was at war with Eastasia: Oceania had always been at war with Eastasia.... [W]ithin one week no reference to the war with Eurasia, or the alliance with Eastasia, should remain in existence anywhere. The work was overwhelming...

Matthew Yglesias has caught a genuinely Orwellian moment. James Glassman and Kevin Hassett--who wrote in _Dow 36,000 that you should invest in stocks now because there were big profits to be gained in the next 3-5 years as stock prices rose and returns fell--are now singing the praises of Bush's Social Security plan, even though it relies on high stock returns over the indefinite future to make sense.

Matthew Yglesias writes:

Matthew Yglesias: The current issue of Reason, not yet online, undertakes the interesting exercise of hosting an intra-libertarian debate on the merits of Social Security privatization. Tyler Cowen writes for the opposition, and James Glassman in favor...

James Glassman? Back in 1998, 1999, and 2000--as the dot-com bubble approached, reached, and receded from its peak--James Glassman and Kevin Hassett were telling the investors of America to buy, buy, buy more, more, more stocks in their book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market:

How much will stocks have to rise? Until they reach our PRP, or perfectly reasonable price.... If the Dow, representing the entire market, were to triple... than dividend yields would decline to their "perfectly reasonable" level...

What is Glassman and Hassett's "perfectly reasonable" level? It's the level at which stock returns are the same 2.9% above inflation as Treasury bond returns.

That forecast of stock returns all by itself makes it impossible for Glassman to support Bush's plan for Social Security privatization. Glassman and Hassett forecast real stock returns at 2.9% per year. They forecast real bond returns at 2.9% per year. And the Bush administration says that under its plan you only win from private accounts if the stocks and bonds in your private account make more than 3% per year:

SENIOR ADMINISTRATION OFFICIAL: [I]n return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system.... [T]he person comes out ahead if their personal account exceeds a 3 percent real rate of return... the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return...

Glassman has no business on the "pro" side of the Bush Social Security plan.

The same goes for Hassett. Yet I find Hassett writing in National Review that:

Kevin A. Hassett & Maya MacGuineas: If optional personal accounts are available, they present choices and possibilities to citizens. How will these be conveyed? What will workers see? What will guide their decision making?....

It would be useful to present a representative expectation.... [A] worker would see a form that tells them the following for each of the choices that they might make: (We base the numbers in this example on the benefit-adjustment proposal that has been floated by the administration, our own back-of-the-envelope calculations, and historical returns.)

If you’re an average wage worker entering the workforce today, you could retire at age 65 with a promised annual benefit of $19,600 (in today’s dollars). If you put one-third of your payroll taxes into a personal retirement account, your government payment would be reduced to around $12,600. However, your projected account balance at retirement would be $165,000....

The purpose of the Social Security statement should be to lay out the likely retirement benefit for a worker while reminding them there are no guarantees. Viewed in this manner, it is almost difficult to see what all the fuss is about. Currently workers have no choices. Reform adds choices, including the possibility of sticking with the old system. If the old Social Security statement were compared to the proposed one in a focus group, it is our bet that a very large number of individuals of all ages and political persuasions would prefer the new statement.

Why is the estimated account balance so large--large enough to yield $9,931 if annuitized at 6%, thus providing the beneficiary with enough to make up the $7,000 cut in his or her Social Security benefit and significantly more? The account balance is so large because of the phrase "historical returns": that portion of the example's private account that is invested in stocks returns not the 2.9% of Hassett in Dow 36,000, but the 6.5% which is the long-run historical average. Make the example consistent with Dow 36,000, and the private account has only $115,000 in it, not enough to make up for the cut in Social Security--and a bad deal for the beneficiary who not only has a lower expected return but bears the risk that things might be significantly worse as well. And why is he using "historical returns" rather than return estimates consistent with his own Dow 36,000? Because if your job is to write a pro-Bush Social Security piece for National Review, you can't use numbers in your example that make the Bush Social plan an obvious loser.*

One of two things can be going on. Glassman and Hassett could simply be betting that the press corps is too naive to even notice that they must repudiate Dow 36,000 in order to support Social Security private accounts. Or the number of people willing to carry the White House's water on this is so small that they have been pressed into service even though it requires an Orwellian change of position on their part.


*Hassett is aware that he is in trouble here. The very following paragraph contains the admission that:

the base calculation might not be best based on historical returns, since most financial observers now agree that the equity premium has been declining over time. Our intent here is not to nail the best possible estimate of the numbers, but rather, to sketch what the typical worker might see.

To translate: Hassett is saying that even though he is putting these numbers out here as a "representative expectation... [of what] a worker might see," the numbers are not "the best possible estimate," which would be significantly less favorable for private accounts.

Posted by DeLong at 10:21 PM | Comments (3) | TrackBack

Joenertia

Marshall Whitman praises Joe Lieberman:

Bull Moose: The Moose has a mind-meld with the esteemed Senator from Connecticut over the bankruptcy bill. The Moose salutes Senator Lieberman for his strong stand against this flawed legislation. The Senator stated,

'I have always supported bankruptcy reform legislation in the Senate when it has reflected a bipartisan effort to enact a balanced bill for both debtors and creditors and I have opposed it when confronted with a bill that seemed one-sided. This is not a balanced bill. I voted against this bill because it failed to close troubling loopholes that protect wealthy debtors, and yet it deals harshly with average Americans facing unforeseen medical expenses or a sudden military deployment. The Senate simply rejected out of hand many worthwhile amendments that would have protected these and other working Americans who find themselves in dire financial straits through no fault of their own. As a result, I believe this is a seriously flawed bill and I am disappointed at its passage.'

This should be a lesson for all those lefties who have been in a full-throated fury against Joe. He is a Democrat in the proud tradition of Truman, JFK and Scoop...

Marshall Whitman's praise is greeted by laughter.

You see, Lieberman voted to close debate on the bankruptcy bill--a vote where 41 votes against would have stopped the bill dead. He only voted against the bill on the final passage vote, where 51 votes were needed to stop it. Thi way Lieberman can truthfully assure his banking-industry contributors that he did the heavy lifting in order to make sure that the bill passed. And he can also convince people like Marshall Whitman--who don't look under the surface of Senate procedure--that he voted against the "seriously flawed" bill and is "disappointed at its passage."

In short, Joe Lieberman has played Marshall Whitman for a fool, and Marshall fell for it.

Marshall Whitman needs to reconsider his political commitments. A politician who makes you look like a fool when you believe what he says--that's not a politician worth supporting.

Posted by DeLong at 01:08 PM | Comments (2) | TrackBack

Mankiw 0, Liberals 3

Greg Mankiw writes:

The New Republic Online: [T]here are three reasons [liberals oppose Bush's Social Security Plan]. The first is that... some Democrats will oppose anything he advances.... The second reason the left hates personal accounts is that... much of the left's rhetoric is a less elegant paraphrase of [Karl Marx's] worldview.... The third reason for the left's opposition to personal accounts is... Democrats are more averse to an economic system in which people play a larger role in taking care of themselves.... [This is] a valid concern... but this is not so much an argument against personal accounts as a reason why we need to get the details right. Any reform should include some restrictions to protect people from themselves. There should be limits on how much risk people can take in their portfolios, especially as they approach retirement. There should be requirements that people annuitize enough of their accumulation upon retirement to ensure they are kept out of poverty for the rest of their lives. 

Let me assure him that I know liberals, liberals are friends of mine, I am a liberal, and that Greg is at least two thirds wrong. Mankiw's claim that our view is a "less elegant" version of Marx's is 120% false, and reminds me of nothing so much as National Review's false claims in an earlier generation that there was no essential difference between John Maynard Keynes and Karl Marx. And seeking to make the country worse off for politial advantage--that's not a Democratic game, that's a game that was, as Mankiw notes, played in 1993 and 1994 by Republicans (like William Kristol, who wrote that the greatest danger was that the Clinton health care reform would pass and be a success). Two shots on goal, both of which miss. Mankiw 0, liberals 0.

As to his third point, Mankiw is correct that Bush's plan is a bad idea unless it "gets the details right." But are there any cases of complicated initiatives sponsored by the Bush administration that "get the details right"? Mankiw doesn't mention any. The farm bill? The corporate tax atrocity? The Medicare drug bill? Iraqi reconstruction? Bush's batting average on the important details is remarkably low. And that is not reassuring: here Mankiw kicks the ball into his own goal. 1-0, liberals ahead.

He scores similar goals against his own position with his claims that liberals mask their real concerns under two fake reasons: "two canards--one involving the deficit, the other involving risk."

The first--that Bush's plan "will require irresponsibly large increases in the budget deficit" is, Mankiw says, "mostly fatuous.... [T]he long-run impact of personal accounts on the government's finances is approximately zero.... [T]he government puts... $1,000 in his or her account.... The initial payment into the account requires $1,000 in extra government borrowing, but that debt is offset by a reduction in the government's liability to pay future Social Security benefits." So why, then, does Mankiw say that this worry is only "mostly" fatuous? Because there is a chance that it isn't fatuous at all. There is a chance that the plan will further reduce America's already too-low national savings rate if the reduction in future liabilities is seen as less salient than the increase in the current deficit. As Alan Greenspan--certainly no liberal--told the Congress:

The issue with respect to the financing is a difficult one to answer, because there are things we don't know.... First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have.... If indeed the financial markets do not distinguish... then one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector'. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

To be sure, I think that Greg is probably right here: I think that the chances that the adverse budget and national savings impact of private accounts will create "more difficulties than we would imagine" are low: certainly less than 50%. 20%? That's my guess. But 20% is enough of a chance that there should be a Plan B in case that 20% probability comes to pass. And there isn't one.

A worry that Greg Mankiw calls "mostly fatuous" is one about which Alan Greenspan says "we don't know... [if] we were wrong, it would be creating more difficulties than I would imagine." Another own goal. 2-0, liberals ahead.

The second "canard," Mankiw says, is:

the claim that [Bush's plan] would leave retirees of the future facing too much risk. They argue that personal accounts would leave the safety net for the elderly with too many holes. The most obvious response is that the proposed personal accounts are voluntary. If you want to stay in a traditional defined-benefit plan, just don't opt in. And, even if you opt in but then want a low-risk retirement income, you can invest in inflation-indexed Treasury bonds. 

Here Mankiw commits a technical foul. Yes, those currently in the labor force can stay in the traditional defined-benefit Social Security system. But under the Bush plan, the traditional system gets smaller and smaller over time. Once the bend points are indexed to prices rather than wages, the share of your wages that are replaced by standard Social Security benefits falls and falls and falls. For my grandchildren born in the 2020s, the claim that they can not opt in and "stay in a traditional defined-benefit plan" that is anything like Social Security today is grossly misleading. The very long-run impact of the Bush plan is to drive the share of income replaced by traditional Social Security benefits to zero.

Moreover, here Mankiw commits yet another own goal. You see, Bush's private accounts are a good deal for the upper middle class and the rich: they effectively borrow from their defined-benefit Social Security account at 1.5% or 2% above inflation to invest their money, and they have enough other assets that they can effectively manage the risk. For poorer Americans for whom private accounts require effectively borrowing from their defined-benefit Social Security accounts at 3% plus inflation? That's a high interest rate. It's worth doing if expected asset returns are the 3% real for bonds and the 6.5% real for stocks that the SSA is projecting. But there are lots of reasons to fear that those projections are overoptimistic. And if they are, then private accounts are a lousy deal for those who are not relatively rich.

So an informed reading of Mankiw's New Republic piece comes up with three reasons to oppose Bush's private accounts plan:

  1. Bush has a track record, and a lousy track record: he gets the important details of policy wrong. He gets them wrong consistently.
  2. There is a serious worry that the Bush plan will reduce national savings yet again. There is no Plan B to guard against this.
  3. Realistic looks at risk and return make it probable that private accounts are a lousy deal for the non-rich.

And does Mankiw score any goals. Does he make any accurate and effective arguments for Bush's plan? He doesn't score any more own-goals--he doesn't claim that private accounts will solve Social Security's long-run funding plans. But he doesn't advance any effective positive arguments for his position either.

He does say that Harvard University offers its professors not a defined-benefit but a defined-contribution retirement program. But are there important reasons to think that the type of program appropriate for relatively rich Harvard professors with ample other assets is the type of program appropriate for a nationwide system covering the non-rich that is supposed to provide social insurance--a retirement income floor that you can count on no matter what? I would like to see such an argument made. But Mankiw doesn't even try the shot.

Mankiw 0, Liberals 3.

Posted by DeLong at 09:59 AM | Comments (4) | TrackBack

March 11, 2005

Reviewing Richard Parker's Biography of Galbraith

The galleys crossed my desk today: J. Bradford DeLong (2005), "Sisyphus as Social Democrat: The Life and Legacy of John Kenneth Galbraith," Foreign Affairs 84:3 (May/June). It is a review of the truly excellent and highly recommended:

Richard Parker (2005), John Kenneth Galbraith: His Life, His Politics, His Economics (New York: Farrar, Straus & Giroux: 0374281688).

Posted by DeLong at 08:18 PM | Comments (0) | TrackBack

How Good Is Alan Greenspan?

Marginal utility tries to evaluate Greenspan as a monetary policy maker:

Marginal Utility: Economic Evaluation of Alan Greenspan: Brad DeLong, trying to make sense of what he calls 'The Three Faces of Alan Greenspan,' distinguishes Greenspan 'the superb monetary policy technocrat' from Greenspan the Ayn Rand disciple and Greenspan the Republican team player. This is relatively kind compared to Josh Marshall, who opens a TPM post from earlier today with, 'It really is amazing that anyone takes Alan Greenspan seriously anymore,' though he notes that Greenspan's position remains 'sacrosanct' in polite political circles.

My thought for the evening is that there is no solid counterfactual underpinning Greenspan exceptionalism. It's not that he's done a bad job as monetary policy steward as such, though consider the financial imbalances over which he's presided and tell me that his final grade isn't Incomplete at the moment.

Rather, as Robert W. Fogel might suggest, the correct question is how has Greenspan done compared to the next best monetary policy technocrat? That standard, I would suggest, would substantially deflate the Greenspan myth.... It is not obvious that he has a unique endowment of monetary policy acumen. I'll suggest that a hypothetical Chairman Rubin, or even a shadow FOMC made up of very bright economics grad students with something like the FOMC's information set to work with, could have made more-or-less equally good monetary policy calls.

And, Chairman Rubin certainly would not have played an equivalent role in the Federal budget train wreck — even if his efforts couldn't have helped convince 1,000 more Floridians to vote for Gore in 2000.

All I can say is that seven times during Greenspan's career I have thought he was making a substantial monetary policy mistake:

  1. In late 1987 when he seemed to me to be expanding the money stock too fast.
  2. In 1991 when he seemed to me to be reducing interest rates too rapidly.
  3. In late 1993 when he seemed too slow to raise interest rates.
  4. In 1995-1997 when he seemed to be too eager to make a big bet on the reality of the new economy.
  5. In 1998 when he did not cut interest rates fast enough in response to East Asia, Russia, and LTCM.
  6. In 2000 when he did not cut interest rates fast enough in response to the NASDAQ crash.
  7. In 2002 when he did not resort to "nonstandard monetary policy measures" to boost aggregate demand.
  8. Today when he seems, to me at least, to be raising interest rates too fast.

On number (8), the jury is still out. On number (6), I was right. I'd claim that I was right on (7) as well, that his decisions were imprudent, and that we were just lucky. But otherwise... it seems clear to me that on (1) through (5) I was wrong. Greenspan does appear to have, if not a unique endowment of monetary policy acumen, lots more than I do.

Posted by DeLong at 11:52 AM | Comments (2) | TrackBack

And This Is Too Bad...

Because there are some very good people at the Cato Institute: Ted Galen Carpenter and Justin Logan are two of them:

Taiwan News Online: ince the Taiwan Relations Act of 1979, the United States has been legally obligated to sell Taiwan 'arms of a defensive character' in order to help deter the PRC from attempting to retake the island by force. In 2001, the Bush administration offered Taiwan an arms sale of roughly US$20 billion to counter a campaign of Chinese military modernization aimed directly at retaking Taiwan. Recently, a version of that package, scaled back to US$18.2 billion, was approved by Taiwan's cabinet, but remains held up in the Legislature.

Opponents of the arms sales package lament that the weapons are too expensive, and that the island has other priorities.... Taiwan's lack of seriousness is unacceptable because it has the effect of pushing the United States to the forefront of the cross-strait conflict.... One apparent factor in Taiwan's irresponsibility is that it is banking on a U.S. security guarantee. However, Taiwanese legislators (and more than a few U.S. officials) would do well to take another look at the Taiwan Relations Act, which some allege commits the United States to defend Taiwan's autonomy.

The act merely asserts that 'efforts to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, would be a threat to the peace and security of the Western Pacific area and of grave concern to the United States.'... [I]t is possible that the United States could decide to involve itself in a conflict between Taiwan and China. That decision would be ill-advised in its own right, given the potential dangers, but it certainly should not be left to Taiwan's government to force such a momentous decision....

The United States should continue, under the obligation of the Taiwan Relations Act, to sell Taiwan defensive arms with which it can deter a Chinese attack. However, at the same time, Washington should indicate to Taiwan that it does not intend to involve itself in a war in the Taiwan Strait. As things stand now, the Taiwanese increasingly expect that the United States will defend them, and the Chinese increasingly suspect that it will not. That is the worst of both worlds, and portends a perilous situation for all parties involved.

I'm not sure I agree with them, however. It seems to me that it would be a very good idea for the U.S. to establish as a founding principle of twenty-first century international law that there will be no net loss of democracy: that changes in the status of Taiwan vis-a-vis China need to be approved by popular vote, and that any alternative makes it less rather than more likely that Taiwan will be a part of China in the long run. The right model seems to be the EU-accession model: China and Taiwan will negotiate changes in status when China has a polity and an economy attractive enough to make closer links seem a no-brainer.

Posted by DeLong at 11:52 AM | Comments (1) | TrackBack

How Stupid Does the Cato Institute Think We Are?

Matthew Yglesias directs us to the Cato Institute's attack on right-wing Republican Senator Lindsay Graham for anti-Social Security Privatization Left Deviationism.

I was more struck by passages later on the Cato Institute's "Daily Debunker" like this one:

Daily Debunker: As the Cato Institute's Mike Tanner wrote in a recent op-ed, titled 'The Point is Ownership':

While solvency is important, the goal of Social Security reform should be more than to just balance the books. We should be trying to provide workers with the best possible retirement options, and this involves giving them more control and ownership of their retirement funds.

Under the current dispensation, once a worker pays his or her Social Security taxes into the system, the worker no longer owns that money. This is a very paternalistic arrangement, in which the daddy government doesn't trust the kids to control their own money.

One of the most enduring myths of Social Security is that a worker has a legal right to his or her Social Security benefits. Most workers assume that because they pay Social Security taxes into the system their whole working lives, they have some sort of legal guarantee to its benefits.

They assume wrong. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that workers have no right to receive Social Security benefits. Congress and the president may change, reduce or even eliminate benefits at any time. Retirees must depend on the good will of 535 politicians to determine whether and how much they will receive in retirement. Where is the dignity in such a system?

In fact, Congress has already voted to reduce Social Security benefits. For example, in 1983, Congress raised the retirement age. Given the system's looming financial crisis, additional benefit cuts and/or tax increases are a mathematical certainty....

The first thing that struck me is that the Cato Institute does not speak of "moral hazard." If we believe--as we do--that in the long run we will not allow significant numbers of the elderly to live in dire poverty, then giving future beneficiaries "more control and ownership" of their retirement funds is a very dangerous thing to do, for it creates a situation in which future beneficiaries have powerful incentives to pursue high-risk investment strategy: if the coin comes up heads, they win big; if the coin comes up tails, the government pays. As we saw in the late 1990s with the S&L crisis, such incentives create very dangerous and very costly situations.

The Bush administration (well, at least some fractions in the Bush administration) realizes this: that's why one of their talking points is how extremely restricted private account investment options will be under their plan. But Cato does not.

The second thing that struck me was the implicit claim that private accounts will provide higher benefits. The argument is not a sophisticated one about the stock-market's failure to mobilize society's risk bearing capacity. It is a crude one: a claim that while workers own their private accounts "the U.S. Supreme Court ruled that workers have no right to recieve Social Security benfits. Congress... may... eliminate benefits at any time... additional benefit cuts and/or tax inceases are a mathematical certainty..." What Tanner doesn't say is the private accounts provide no way out of that mathematical certainty, and that Congress can impose special taxes on private accounts just as easily as it can cut conventional Social Security benefits: the value of the additional protection provided by "ownership" is low.

And, once again, I'm faced with the question I'm faced with so many times these days: Is Michael Tanner stupid? Does the concept of moral hazard elude him? Does he really not understand that calling an account "private" does not manufacture money? Is he ignorant of the extent of Congress's taxing power? The answer is no. He's not stupid: he just thinks that Cato's ultimate audience of journalists and others is stupid.

This is not to say that Michael Tanner lies, exactly. But the things he focuses on--the gain to individual autonomy from choosing one's own investment vehicles, the added protection provided by structuring a cash flow as a property right rather than a government benefit--are of third-order importance. The things he ignores--moral hazard in a world where voters want their government to stop elderly poverty, and the arithmetic that is the expected funding hole in Social Security--are of first-order importance. The fact that people from Cato over and over again assume that I am so dumb as no to notice the first-order considerations they are brushing aside is the reason that, at least as far as I am concerned, somebody I don't know is better off writing as or citing the work of someone writing as an individual than writing as an affiliate of or citing work from Cato. The institutional affiliation has become too strong a signal that this piece of writing is not in the analysis business. And those who want to use Cato as a platform from which to make substantive contributions to policy analysis need to take big steps to raise the quality of what comes out as fast as possible.

Posted by DeLong at 11:51 AM | Comments (3) | TrackBack

March 10, 2005

Moving Day...

Now that internet mountain man Chuq van Rospach and Crooked Timber have abandoned Movable Type, it seems to me that there is no reason why I should be running my own weblog on my own office computer.

So it's time for me, too, to pull up stakes and move. Let's try TypePad first and see how it does...

I'll keep the old front page at http://www.j-bradford-delong.net/movable_type/index_a.html for a while...

Posted by DeLong at 06:25 PM | Comments (4) | TrackBack

George W. Bush: Liar or Fool?

Associated Press reports:

AP Wire | 03/10/2005 | Bush: Social Security wobbly, personal accounts are safety net: Bush said: 'In 1983, they solved the Social Security problem and said it's a 75-year fix. We'll, here we are 22 years later looking at a system that's going to go into the red in 2018. This time we ought to permanently.'

Does George W. Bush really think that the plan back in 1983 was for the Social Security Trust Fund to keep accumulating assets forever? Does he simply not realize that the idea was that the Trust Fund would grow and then shrink?

The Congressional Budget Office projects "trust fund exhaustion" in 2054 (or maybe, once 2004 numbers are factored in, a couple of years later). 75 years after 1983 is 2058. Looks like the 1983 reform did its job.

Posted by DeLong at 06:13 PM | Comments (9) | TrackBack

Martin Wolf on Argentina's Successful Refinancing

He writes:

FT.com / Comment & analysis / Columnists - Martin Wolf: Argentina holds a weak hand: What are the lessons of Argentina's successful debt restructuring? For a success, in its own terms, it unquestionably is: Argentina has gained 76 per cent acceptance of a deal to reduce $100bn in debt by about 70 per cent in net present value. Everybody needs to learn the lessons. But Argentina also needs to exploit its opportunity. Alas, it seems more likely to deserve its reputation for never losing an opportunity to lose an opportunity.

The first lesson is that if a sovereign has decided that it makes more sense to default than to service its debts, only a more powerful sovereign can change its mind.... The second lesson.... Lending to sovereigns can indeed be risky, particularly to those with a deserved reputation for imprudence.... The third lesson is that worries over the moral hazard caused by rescue packages have been hugely exaggerated. Both creditors and debtors now realise that official assistance will not rescue them from the consequences of an insolvency. Creditors have experienced huge losses. Argentina has discovered that the International Monetary Fund lent it the rope with which to hang itself. The external help did not insure Argentina's politicians but made the results of their mistakes more painful.

The fourth lesson is that, however costly a default may be, not defaulting is occasionally costlier still. The costs to the defaulter are obvious: a painful crisis, a lost reputation, higher interest rates and financial disarray. This is not a route to be followed lightly, as Brazil under president Luiz Inacio Lula da Silva rightly concluded. But once creditors realise that the costs of not defaulting are, in the eyes of the indebted country at least, greater than those of defaulting, a vicious circle ensues: interest rates soar, credit dries up, the economy weakens, credibility further deteriorates and interest rates go up still further. In 2001, Argentina's economy was contracting while interest rates on its foreign loans were vastly above those on US treasuries (see chart). In this situation, not defaulting became an incredible and so ultimately infeasible option.

The fifth lesson is that once default becomes the least bad option, the optimal default is likely to be deep.... The sixth lesson is that the international community in general and the IMF in particular need to rethink their approach to life after a default....

Where, finally, might Argentina go now? The country is, alas, capable of throwing away any opportunity. Yet that is all default offers.... From the asymmetric conversion of bank liabilities and assets into pesos, which did such damage to the financial system, to the refusal to permit adequate adjustment of utility prices, which is undermining needed investment, short-sighted populism holds sway. By crowing over the scale of the default rather than regretting its necessity, Néstor Kirchner, the president, can only have frightened creditors and foreign investors further. Argentina is demonstrating once again why it has been both a serial defaulter and long-running economic failure. That may be the least important of the lessons. It is among the most depressing, all the same.

But countries should be able to default and restructure their foreign debt without having real GDP per capita fall by a quarter and without destroying their domestic financial system. Argentina's default was extraordinarily costly, for reasons that seem to me to boil down to large-scale political incompetence.

Posted by DeLong at 11:21 AM | Comments (10) | TrackBack

March 09, 2005

Mufarse

Paul Blustein quotes Barry Eichengreen, writing from BA on August 27, 2001, four months before Argentina's crash and a week after the announcement of yet another support package:

The local stock market, the Merval, jumped by eight percent on the announcement, as jubilant traders shed their pessimism. The streets were bustling that evening and the tango palaces were packed with dancers. But by the next morning the familiar mood of melancholy resignation had returned. The realization had dawned that the IMF package offered no magic formula for getting growth going again. And without growth, it is hard to see how political support for paying the foreign debt can be sustained.

Let me hunt for the full piece...

Ah. Here it is. As a contemporaneous piece of analysis done in late summer 2001, it's really superb. He is very good:

Barry Eichengreen: Argentina After the IMF: August 27, 2001: I was in Argentina last week when the latest IMF package was announced. Never before have I heard an entire nation breathe a collective sight of relief. The local stock market, the Merval, jumped by eight per cent on the announcement, as jubilant traders shed their pessimism. The streets were bustling that evening and the tango palaces were packed with dancers.

But by the next morning the familiar mood of melancholy resignation had returned. The realization had dawned that the IMF package offered no magic formula for getting growth going again. And without growth, it is hard to see how political support for paying the foreign debt can be sustained.

Some simple arithmetic makes this point. Argentina’s external debt is a bit more than 30 per cent of GDP, well below the Maastricht Treaty’s definition of what is sustainable. But the Maastricht definition assumes that the economy will grow, typically by 2 or 3 per cent a year, and that the real interest rate -- the market interest rate minus inflation -- will not much exceed the rate of economic growth. Neither assumption is valid in Argentina. The economy has not grown for three years. And interest rates are still in the 15 to 20 per cent range despite the fact that inflation is nonexistent. When interest rates are so much higher than growth rates, even a relatively modest debt burden can rise explosively. The consequent specter of future debt servicing difficulties keeps interest rates high, which in turn creates the danger of a self-fulfilling prophecy.

President de la Rua and his economy minister Domingo Cavallo have sought to break out of this bind by cutting public spending. In a remarkable feat of political gymnastics, they have gotten a fractured Congress to agree to a zero-deficit law. This requires the budget to be balanced every month. It prohibits current spending, inclusive of debt-service payments, from exceeding current revenues. The government promises that other forms of spending -- on civil servants’ salaries and public pensions, for example -- will adjust to ensure the availability of the revenues needed to service the debt. Hence, there should be no question about the country’s ability to keep current on its financial obligations. Uncertainty about the government’s intentions having been removed, interest rates should come down. And as interest rates fall, consumption and investment will recover. If all goes well, growth will ultimately resume.

The new IMF package is a bet that this gamble can work. By replenishing the government’s coffers and thus giving it the resources needed to provide additional liquidity to the country’s cash-strapped banks, it gives the current strategy a few more months to work. The main condition attached to the new IMF money is that the zero-deficit rule be extended to the provinces. The provinces receive pro rata shares of federal revenues. Traditionally, the authorities agree on a revenue forecast and on transfers proportional to those notional revenues. Argentina’ new program with the IMF requires it to base these revenue-sharing transfers on actual revenues, not on forecast revenues. It thus closes the one remaining loophole in the zero deficit rule.

But the problem with the government’s strategy, which the IMF program does nothing to solve, is that the current government cannot commit future governments, nor can it commit the electorate. Unemployment is already 17 per cent. Pensions and civil-service salaries have already been cut by 13 per cent. Every day sees demonstrations by another aggrieved group. When I was in Buenos Aires, it was the university teachers and the employees of the national television network who were marching in the streets. On other days it is other groups, all of whom express their opposition to current policies and demand a shift to some unspecified alternative. It is not hard to imagine a generalized political backlash which either brings down the government or forces it to abandon its policies of austerity. Either way, the budget deficit will return, and along with it fears about the sustainability of the debt. The next round of Congressional elections is in October, to be followed shortly by a national plebiscite on government’s economic policies. Against this background, it is easy to see why interest rates have not come down and, consequently, why there is no sign of growth on the horizon.

Moreover, the zero-deficit rule only makes the problem worse. Cutting public spending puts more deflationary pressure on the economy. Tax revenues fall as the economy contracts, requiring yet more cuts in public spending. But those further spending cuts cause the economy to contract yet further, in a vicious spiral. And each successive cut in public-sector salaries and pensions fans political opposition to the government’s policies of austerity. By extending the zero deficit rule to the provinces, the new IMF program tightens this noose.

Is there an alternative for which the Argentine government, the IMF, and the United States Treasury might have opted? The alternative advocated by some economists in both Buenos Aires and Washington, D.C. is the so-called “Quadruple D”: devaluation, dollarization, deposit write-down, and debt restructuring. A one-time devaluation of, say, 20 per cent would enhance the competitiveness of Argentine goods at a stroke. The problem with devaluation is that it would also rekindle fears of inflation and therefore push interest rates up rather than bringing them down. Thus, following devaluation with dollarization -- unilaterally replacing the devalued peso with the U.S. dollar -- would eliminate all prospect of future monetary excesses and contain the shock to confidence.

To prevent the Argentine banking system from being destabilized, it would be necessary to write down dollar deposits in the banks to 80 cents on the dollar, since devaluation will reduce the earnings on the banks’ peso-denominated assets by 20 per cent. And since writing down the assets of Argentine residents by 20 per cent while continuing to pay foreigners 100 cents on the dollar is not a political equilibrium, it would be necessary to restructure the external debt as well.

If this restructuring was done constructively -- by carrying out good-faith negotiations with the creditors -- the markets would probably settle for 65 cents on the dollar. The country having resolved the debt situation and having put this source of uncertainty behind it, interest rates would then come down. Domestic demand would recover, and growth would resume.

This radical approach should have appealed to the Argentine government on several grounds. It promised to enhance competitiveness overnight, something that no other policy could achieve. It promised to eliminate uncertainty on both the currency and debt fronts. Moreover, it should have appealed to the IMF. External debt restructuring would have required foreign investors to “take a hit,” rather than again getting off scot free. This would have addressed the moral hazard problem, instead of encouraging more reckless lending by adding yet one more IMF bailout to the already over-long list.

Why then was the “Quadruple D” rejected? The Argentine government, the IMF and the U.S. government all backed away from it because of implementation difficulties and last-minute doubts. The Argentines insisted that devaluation would break the government’s “convertibility contract” with the public -- that is, its promise to never again tinker with the currency which has been the hallmark of its economic policy strategy since 1991. Moreover, given the country’s history of inflation, both the Argentine government and the IMF questioned whether devaluation would in fact enhance competitiveness; instead, it might simply feed through into higher prices.

Even those within the IMF who favored devaluation realized that they possessed no lever with which to force the policy on a reluctant Argentine government, other than withholding financial support, which they were not yet ready to do.

This problem could have been solved by dollarization, but patriotic Argentines continue to oppose abandoning the peso for the dollar. And the Bush Administration could not make up its mind about whether or not to encourage Argentina to adopt the dollar. It did not offer the country the $1 billion it needs to defray the cost of obtaining the necessary greenbacks.

Moreover, restructuring the public debt would have damaged the banks and pension funds, which hold some of the government bonds in question. These are two of the only strong institutions in the country. And the government has no fiscal surplus to use to repair them. In addition, Argentine companies with assets abroad could become the object of bondholders’ lawsuits. Whether this would in fact have happened is unclear. But if it did, attempts to attach these assets would have disrupted their international business, and Argentina’s exports could have fallen by half.

For all these reasons, the “Quadruple D” approach implied too many risks for agreement on it to be reached in the short period of time available.

So what comes next? Perhaps Argentine growth will miraculously resume. This is what the authorities in both Buenos Aires and Washington are betting on. But there is no sign yet of light at the end of the tunnel, and the authorities will run out of room by October, at the latest. The IMF has promised an additional $3 billion for use as collateral in a market-based debt exchange, in the hope that IMF-backed bonds can be issued at lower interest rates, which will in turn reduce the interest charges paid by the Argentine government and allow it to relax its other spending cuts. But $3 billion is a drop in the financial ocean; the government’s debt is well over $100 billion. Unless the IMF and the U.S. Treasury have a strategy for turning this $3 billion into $30 billion, the debt-exchange idea is mere window dressing. And the Bush Administration, having been forced to back down once, is unlikely to allow the IMF to offer more money, much less to offer some itself.

The alternative to growth is more deflation. More spending cuts will lead to more unemployment. Unemployment will fan political discontent. And political discontent will presage the abandonment of the zero-deficit rule. As investors see the writing on the wall, they will abandon the country, whose financial difficulties will return with a vengeance.

What will the authorities do then? Clearly, the “Quadruple D” will be back on the table. It may be more feasible the next time around. The banks and pension funds will have had more time to prepare their balance sheets for the looming devaluation. Patriotic opposition to dollarization will have weakened, hopefully, in the face of reality. The Bush Administration may overcome its reluctance to see Argentina adopt the greenback. In this context, a comprehensive debt restructuring, done right, would eliminate the last remaining source of uncertainty, allowing Argentina to put its economic problems behind it and begin growing again.

Hard decisions are taken only when there is no alternative. The Bush Administration was dragged reluctantly into supporting the latest round of IMF assistance for Argentina, but it is clear that this time is the last. Unless growth resumes, which is unlikely, the outcome of the next crisis, in October, will be different. Devaluation, dollarization, and comprehensive debt and deposit restructuring will not be painless. They will not be an occasion for tangoing in the streets. But they will be necessary for Argentina to finally put the crisis behind it and get growth going again.

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.

Posted by DeLong at 08:02 PM | Comments (25) | TrackBack

The Vengeful Gods of Monetarism

In the 1990s, the sins of the Argentine politicians against the Gods of Monetarism were, while not venial, not obviously mortal either. They did many good things. They halted inflation. They privatized industry. They tried hard to firm up the foundations of the market economy. They did about 80% of things right. They did only 20% of things wrong. During a five-year boom interrupted by a one-year recession, they allowed the country's debt-to-GDP ratio to rise from 29% to 41%. But they did everything else right.

Thereafter the punishment, while not swift, was inevitable. Recession caused rising debt. Rising debt brought forth higher risk premiums. Higher risk premiums caused debt to rise faster. Faster-rising debt pulled higher risk premiums along, which deepened recession, which brought still further increases in debt. The debt-to-GDP ratio went from 41% to 64% in three more years, and then came the crash.

But there is an alternative in which it all turned out well. Turkey and (so far) Brazil are in that alternative.

Paul Blustein blames:

  1. The politicians of Argentina, for pretending not to know that their much-loved currency peg required budget surpluses.

  2. The IMF, for not rubbing Argentina's nose into the fact that their much-loved currency peg required budget surpluses.

  3. The IMF, for not requiring that Argentina have a currency-peg exit strategy when it became clear that the currency peg required larger primary surpluses than Argentina could attain in a recession.

  4. The private market, for being so eager to lend money to Argentina in the mid 1990s that its politicians could ignore the fact that their much-loved currency peg required budget surpluses.

  5. The private market again, for being professionally overoptimistic about Argentina.

  6. The Bush-O'Neill-Taylor led U.S. government, for futzing around.

I'm inclined to give the IMF much more of a pass on (2) at least. The IMF is doing other things while it is dealing with Argentina. In its handling of the East Asian crisis, it became clear that the IMF had placed too much stress on budget surpluses, and to some degree its wariness with Argentina is a reaction to the fact that it had been wrong and knew it had been wrong about the importance of budget surpluses in East Asia. The IMF is also, at this time, coming under regular and sharp criticism for being too aggressive and too dictatorial toward countries seeking assistance. And, remember, the IMF has two successes--Brazil and Turkey--to count alongside one disastrous failure--Argentina--so far in this millennium.

But the most important lesson from Blustein's book, I think, is that the Gods of Monetarism are jealous and vengeful Gods, and you sin against them at your peril: monetarist arithmetic is indeed unpleasant.

And let me highly, highly recommend the book.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at 07:14 PM | Comments (10) | TrackBack

The Second Coming of Norman Angell

Matthew Yglesias also preaches the Second Coming of Norman Angell:

Matthew Yglesias: Norman Angell's Second Coming: Brad Delong quotes Thomas Barnett as saying: 'Yes, as far as the Core is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons.' Praktike glosses that thusly:

Norman Angell, famously, predicted the end of war due to global economic connectivity ... and was promptly proven wrong in 1914. I guess what Barnett is saying here, based on my reading of his books, is that the prospect of nuclear annihilation is so terrifying that great power war is now a thing of the past, and interlocking flows will lead to a better world.

I think people tend to spend too much time thinking about the predictive content of Angell's work, when the important part is the prescriptive element. John Quiggin got into this in a good review of someone else's book a while back:

The classic refutation of international realism [MY: I don't think that's really what this is a refutation of, but nevermind] was put forward in Norman Angell’s The Great Illusion. Angell argued that in a modern economy no economic benefit could be generated even by successful wars of conquest. Writing for a British audience, Angell’s basic point was that, even if Germany succeeded in establishing political mastery in Europe, workers in the newly subjected countries would still have to be paid, goods would have to be purchased at market prices and so on. Hence, individual Germans would gain nothing from being part of a larger country.

Angell’s argument works even better for social democracies, where territorial expansion or even extension of hegemony produces an unpalatable choice. If the benefits and obligations that go with citizenship welfare state are extended to those under the control of the expanded state, existing citizens will almost certainly be worse off. On the other hand, any attempt to maintain a distinction between citizens and noncitizens is bound to be highly problematic.

Angell’s argument showed, beyond reasonable doubt, that war and territorial expansion are not, in general sensible policies. His views have often been derided on the basis that they were falsified by the outbreak of the Great War in 1914, which was pursued to the bitter end even though it destroyed the global market economy that had formed the backdrop to his analysis. But in reality the outcome proved him right. Of course, Germany, the power most influenced by the arguments of Clausewitz and his successors, reaped nothing but grief from the war. But the attempts of the victorious allies to exact reparations, extend their colonial influence and so on were also entirely futile, exactly as Angell had predicted.

That's the interesting thesis, that great power conflict is futile. The further thesis that an absence of great power conflict is inevitable just turns on the rather uninteresting question of whether or not leaders understand this. I by no means agree with Barnett about everything, but like him I would happily claim that 'as far as the Core [roughly, globalization's 'winners' -- the rich countries, India, China, Brazil, etc.] is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons.' The point is that even though we are pre-eminent now, we have nothing to fear from the growth in Chinese, or Brazilian, or Indian power. Nor do we have anything to fear from the prospect that a unifying Europe will become a more coherent -- and therefore more powerful -- actor on the world stage. We call ourselves the second comings of Normall Angell not because connectivity makes conflict impossible, but because it makes it pointless. As Brad Delong put it on an excellent post on Angell a while back:

Norman Angell's argument is simple: It is that in modern industrial warfare between great powers, everybody loses. Losers lose. And the winners lose. Many of their fathers, sons, and husbands are dead. Much of their wealth has been blown up. And it is next to impossible to claim that these sacrifices are counterbalanced by any positive economic advantages. Straightforward plunder of the conquered country yields little. Confiscation of property and the imposition of reparations burdens damages the rule of law on which modern industrial prosperity rests. And even if you do manage to get the conquered country to ship you significant quantities of valued foodstuffs, automobiles, and radios, you then have to cope with mass unemployment among your own farmers and manufacturing workers.

To take a contemporary example, in recent memory Hong Kong was a kind of protectorate of the United Kingdom. Since then, it has fallen under the authority of the People's Republic of China. But since if citizens of the U.K. (or the British government) wished to purchase goods or services produced by the residents of Hong Kong they had to pay money for them in a reasonably free market, and since the citizens of the U.K. can still buy goods and services from the residents of Hong Kong today, the change in sovereignty has no impact on British well-being. Now, of course, when a territory passes from the control of a democray to that of a dictatorship, the residents of the territory may suffer from the change in various ways. Hong Kong, it's worth noting, was not governed democratically even during the British days (until some last-ditch efforts right before the handover) but contemporary Taiwan is a different sort of case and both pose certain moral issues.

As far as actual conflicts of interest are concerned, however, clashes can only bring disaster. Nuclear weapons are relevant because they make clashes less likely (a good thing!) but they also ensure that clashes might become much more disastrous (a bad thing!) The challenge is to try and ensure that the rulers -- and the citizens -- of the relevant powers understand we have much more to gain from working together than from fighting.

Posted by DeLong at 06:27 PM | Comments (15) | TrackBack

Blustein's "And the Money Kept Rolling in (and Out)": Other Notes

Blustein: Other Notes

Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

When are two copies of And the Money Kept Rolling in (and Out) not perfect substitutes? When one has my marginal notes in it and the other does not.

Paul Blustein believes (and I agree) that the IMF in the 1990s should have demanded that Argentina run budget surpluses:

p. 43: The big question facing the IMF [in 1997] was what it should demand of Argentina in return for the Good Housekeeping Seal. Among the Fund staff, plenty of nervousness lingered about how long the convertibility system could last.... But the Fund was not going to insist that Argentina unshackle its economy from convertibility.... [U]nder the IMF's articles of agreement, member countries are allowed to choose [their]... foreign exchange regime...

pp. 46-7: Argentina had a special reason to exercise extraordinary prudence in its budgetary policy... the cherished convertibility system.... Argentina needed to be ultradisciplined.... There were two reasons for this. First, Argentina was borrowing mainly in dollars.... If the government's debt started to look excessive, markets would worry that the government lacked the dollars required not only to pay its creditors but also to exchange pesos with all comers at $1 each.... Argentina needed to keep its debt ratios in check.... The second... reason... was that Argentina... had forsworn use of the monetary printing press... [and] had to be sure it could respond to slumps... by cutting taxes or boosting spending. The only way it could prepare itself... ws by adopting a highly responsible budget policy, preferably sizeable surpluses, during boom times...

Blustein believes that Wall Street financiers danced to the edge of misrepresentation. I have somewhat more sympathy for them: the needed "fiscal adjustment" was small; the consequences of failing to make the fiscal adjustment were so dire; only a country whose political class was truly irresponsible could fail. Indeed, I still find Argentina's failure to make the needed "fiscal adjustment" to be almost totally unbelievable:

p. 66: J.P. Morgan's September 2000 report, "Argentina's Debt Dynamics: Much Ado About Not So Much," was an example. The basic thrust... was that fixing the fiscal problem was essential but that a modest adjustment would enable the country to avert default. In March 2001 anohter Morgan report... said "The government's capacity to service its debt this year is not in question.... We believe that the fears of abandoning convertibility are overdone and point out that devaluation is not a polic option due to the limited benefits..."

Paul Blustein likes Nouriel Roubini. So do I:

p. 104: Born in Turkey to Iranian Jewish parents, raised in Italy, and educated at Bocconi University and Milan and at Harvard, Nouriel Roubini was something of a celebrity in the community of international financial-crisis experts.... [He] had created a website... where he posted important documents, news articles, and academic papers--and for people interested in the subject, the site became a cyberspace version of the place to see and be seen.

Ted Truman talks about decision-making in the Clinton administration:

p. 105: "People knew it was high risk," said Ted Truman... Assistant Secretary of the Treasury for International Affairs. "We managed to convince ourselves that the debt dynamics were sustainable. That was probably a mistake, but it was a serious effort. We looked at a number of analyses and did some of our own." A more serious error, truman added, was that "there should have been a clearer message that the next step would be Plan B..." If the IMF program ailed to improve Argentina's economic situation fairly quickly, the country would have no choice but to restructure its debt and, if necessary, change its currency policy.... A concrete plan for pulliing the plug should have been devised and agreed with...

Posted by DeLong at 06:04 PM | Comments (5) | TrackBack

Paul Blustein on David Mulford and Company

Blustein on Mulford

Paul Blustein does not believe that David Mulford played a constructive role in the Argentine financial crisis:

pp. 125-31: Now the silver-haired Mulford had an idea... a debt "swap."... The purpose was to eliminate... the large amounts of interest and principal payments Argentina was required to make during the 2001-2005 period.... the payments would be stretched out so taht much more would fall due in the years after 2005.... Argentina would gain time to recover and avoid default.... The... megaswap... ranks among the most infamous deals that Wall Street has ever peddled to a government.... For CSFB and a half dozen other Wall Street firms, the megaswap would be a bonanza... more than $90 million in fees.... For Argentina, it would be a bust, rendering the country's solvency even more questionable than it was already....

The new name of the game was "liability management"... arranging for debtors to stretch out or reduce their debt burdens.... In most cases, these deals were used by countries with firm market standing to save money. Mexico and Brazil... used swaps to retire... bonds... difficult to trade. Argentina's situation was different.... [t]he deal Mulford was proposing would increase Argentina's debt costs rather than decrease them; that was the price... to postpone its debt payments....

The appeal the deal had for Cavallo was obvious. Mulford's message... was that for reasons unrelated to his stewardship... Argentina was facing a liquidity crisis... $80 billion... due in the next four and a half years.... There was no need to default or impose a haircut; investors would be happy to reschedule.... Once that was accomplished, markets would start to settle down, giving Cavallo the leeway he needed to work his magic....

Ridicule... greeted this line of reasoning as the swap's terms became clear. Desirable as it might be to reduce near-term payments... the cost was far too high.... The IMF... had kind words for it in public.... But behind the scenes... the swap drew scron from the Research Department.... Mussa's anger boiled over in a table-pounding, finger-pointing exhibition.... Mussa's staff had calculated that the transaction would save $12 billion in debt payments from 2001 to 2005... at an effective interest cost of 16 percent.... To borrow so much at such a high cost made no sense for a country that was already having grave difficulty....

The swap's champions proclaimed the deal a triumph... $29.5 billion worth of securities.... "We have beaten those who were betting against Argentina," Cavallo declared.... Mulford... predicted "the market will now recover," with yields falling so that "future financing will be done at substantially lower rates"....

The markets' disappointing reaction to the megaswap is subject to conflicting explanations.... Mulford and other bankers... blamed the Argentines, accusing them of making two market-rattling mistakes. First, the government continued auctions of treasury bills in which local banks were reportedly pressured to bu.... Second, Cavallo sprang another weekend surprise that some analysts interpreted as undermining credibility... a subsidy would be paid to exporters... a duty charged to importers.... The measure was akin to a 7% devaluation of the peso for trade purposes....

Although these moves were unhelpful, it is a stretch to call them the cause of the letdown that followed the megaswap.... [T]he swap did not produce the miraculous effects that Mulford had predicted, and it arguably made matters worse...


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at 05:57 PM | Comments (3) | TrackBack

Paul Blustein on Stan Fischer and Company

Paul Blustein on Stan Fischer and company:

p. 136: Throughout July... borrowing rates for the government of about 19 to 22 percent.... At the time of Taylor's August 3 visit, reserves totaled $20.4 billion, down from $28.8 billion at the beginning of July.... [T]he de la Rua government was seeking [an augmentation of] aid from the IMF.... Once again, the hope was that a large infusion of money from the Fund would restore calm... and give the government time to address credibly its long-term debt problem.

The Argentine government was offering a monumental quid pro quo--the zero-deficit law.... Convertibility was a legal restriction on the government's ability to print money. Now the government... was putting a legal restriction on its ability to spend....

[W]ith unemployment above 16 percent, questions abounded over whether the government could implement such a policy for long.... [T]he intensified austerity seemed likely to generate a popular revolt--if not in the streets, then in congressional and provincial elections that were looming....

The IMF's stance was that it would back the zero-deficit policy, provided this was truly where the Argentine body politic wished to go.... [T]he managing director admonished Cavallo that he must demonstrate broad political support for it.... By the end of July... both houses of Congress had indeed approved the policy, "so I as in a position to tell Kohler, 'Look, we have demonstrated what you requested'," Cavallo recalled....

[T]he Argentine government could not borrow at affordable rates, so it had no other choice, as Cavallo and his top aides repeatedly emphasized. No other choice, that is, except for default and/or devaluation.... "The Fund said, 'What you're doing [the zero deficit] is not politically sustainable'," recalled Federico Sturzenegger, who was secretary for economic policy at the Economy Minitry. "We told them, 'What is not politically sustainable is the alternative'."...

For three weeks in the second week of August [2001], a pitched battle ensued about the proposal for the additional $8 billion loan.... As Jack Boorman... put it later: "Argentina had a terrible history of credit culture, and it had done a terrific job of signaling to the public [in the 1990s] that it was not going to dishonor contracts. One was loath to give that up." On the other hand... the debt was so burdensome, the interest cost so high, the economy so weak, and the government's ability to achieve the necessary spending restraint more so questionable, that the odds were clearly against....

The most positive assessments... came... from Claudio Loser, as well as Tomas Reichmann. Remarkably, though, the highest probability they attached to success was 30 percent.... Reichmann recalled... "As an institution, we cannot be seen as the ones who pulled the plug on a country the legislators and executive branch are making such efforts, so long as there is a chance the situation will work out--especially given the horrendous costs of the alternative."...

Spearheading the opposition... were... Ken Rogoff... and... Carmen Reinhart. The chances of success, Rogoff said, were essentially zero. Rebutting those who were worried that the Fund would be blamed for Argentina's collapse... Rogoff and Reinhart emphasized that augmenting the program would impose a substantial encumbrance on Argentina's taxpayers. As Reinhart observed later: "These aren't grants; these are loans," which, coming from the IMF, are far more costly to default on than private credits. "And increasing them adds to Argentina's repayment burden."...

One immensely influential participant... Stan Fischer stayed silent.... Fischer favored giving Argentina an augmented loan. Staffers recall him as saying that hen a country was willing to go to such extraordinary lengths to secure IMF support, the Fund had to go the one last mile....

I find the pro-augmentation faction within the IMF hard to understand. They needed to change expectations, but the IMF was simply not able to operate on a large enough scale to do so. As Mussa said, the $8 billion would have done Argentina much more good after an abandonment of the peg than it did when committed before the abandonment of the peg.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at 05:57 PM | Comments (0) | TrackBack

Paul Blustein on Paul O'Neill, John Taylor, and Company

Blustein on O'Neill and Taylor

Paul Blustein does not like Treasury Secretary Paul O'Neill or Treasury Undersecretary John Taylor:

p. 145: Intense as the IMF's internal debate... the one under way within the Bush administration was even more bruising... disjointed and disorganized... high-level conference calls... top members of the administration were on their August vacations. Bush... in Crawford... Paul O'Neill... in Bethany Beach, Delaware....

Hubbard and his colleages on the CEA were the most hawkish.... Representatives of the NSC and the State Department were much more favorably inclined toward giving Argentina more IMF money.... In between... was the Treasury Department. That may seem surprising, given the criticism O'Neill had leveled at the Clinton administration.... Treasury officials concluded that the IMF ought to give the country a new sort of loan.... The upshot... was to make a hash of a rescue that was already a very long-shot proposition. Argentina... would be done a disservice by being used as a guinea pig for a novel approach... that can only be described as muddle-headed. For this, blame belongs to O'Neill and... undersecretary John Taylor....

Taylor... guarded his access to O'Neill and made it clear that he was the one primarily responsible for delivering advice.... Taylor tended to resist... prodding with the explanation that Washington could not, and should not, order countries around.... Treasury economist found him unwilling even to entertain the idea that Argentina should be challenged on the need to forcibly restructure its debt....

From that conversation [between Cavallo and O'Neill] sprang the idea... that at least some of the IMF money would be used to help Argentina restructure its debt. How this was supposed to work was never spelled out in detail, and even some of the economists who worked on it later pronounced themselves mystified....

Treasury staffers protested that the numbers did not add up... a few billion dollars in IMF money could not be "leveraged" into a much greater amount of debt restructuring as O'Neill seemed to think. In response, O'Neill went into... CEO [mode].... "You're smart people," O'Neill told them. "Why can't you figure this out?"...

As much as Hubbard preferred to refuse any IMF loan... he said that if a loan must be granted, he would favor making it much bigger than the $8 billion being contemplated, so that it could actually do some good.... Hubbard... declared during one interagency conference call that the Treasury position "failed introductory finance."...

Rogoff fired off a scathing memo.... The memo ridiculed the notion that the money could be leveraged into a restructuring of much greater value. "After one strips out all the window dressing, there is no way to make $6 billion in liquidity worth more than $6 billion in liquidity," the memo stated. "But there are many creative ways to make it less."...

O'Neill's heals were well dug in, however, and Taylor showed no sign of breaking ranks with his volatile boss, telling those who questioned the approach that some way had to be found of making it work.... [T]he British, Canadians, Japanese, and others voiced strong objections.... [M]uch head-scratching ensued over the portion of th epress release concerning the debt-restructuring proposal.... "It was quite embarrassing for us," recalled Alberto Ramos.... "People were calling and asking, 'What is this for?' And I had to say, 'I don't know'."...

Glenn Hubbard is, of course, right. If you are the U.S. government and if you have confidence that the government of Argentina is committed and if you believe that it is worth supporting, then you count up Argentina's foreign debt--$95 billion. You authorize the Treasury or the Federal Reserve or both to buy up to $95 billion of Argentina's foreign debt as long as Argentina's government runs a month-to-month budget surplus, and not otherwise. If the problem is that you don't trust the Argentinean government to follow through, you change its institutions so you do trust it before you commit the money. Stand up and announce that Argentina's fiscal policy is sound, that its currency peg is secure, that its debt is undervalued, that the U.S. government has been buying bonds and will keep buying bonds until (a) prices rise to proper fundamental values or (b) the U.S. owns them all.

If you want to change market expectations, then change market expectations.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

Posted by DeLong at 05:57 PM | Comments (6) | TrackBack

The Economist on Paul Blustein

The Economist on Blustein

I don't think that this is a fair reading of Paul Blustein's book. More to come...

Economist.com | Argentina: IN THE 1990s, Argentina was held up as an exemplar of the ‘Washington consensus’ of free-market reforms. In December 2001, after three years of slump and amid political and financial chaos, it declared the biggest sovereign-debt default in history. Following a traumatic devaluation, its economy is now recovering, but income per head is still below its 1998 level. As Paul Blustein, a financial reporter with the Washington Post, notes in his new book, Argentina has become ‘Exhibit A’ for critics of globalisation and free markets.

Wrongly so. The author stresses that those chiefly to blame were Argentina's own politicians and officials, who pursued an insufficiently rigorous fiscal policy to sustain a fixed exchange rate. He also explores the extent to which they were abetted by outsiders. In addition to Argentine officials, Mr Blustein also interviewed officers at the International Monetary Fund and its political master, the United States' Treasury.

The result is an engrossing inside account of how, despite the best of intentions, the Fund's two loans to Argentina in 2001 ended up merely prolonging the country's agony and increasing its debt burden. Wall Street investment banks raked in fees for issuing yet more Argentine bonds even as some of their analysts were privately gloomy about the country. Although he goes as far as calling one of his chapters ‘Enronization’, the author does not believe that the investment banks' efforts amounted to fraud.

Mr Blustein rightly notes that the decisions facing policymakers were extremely difficult. The IMF was worried that it would be blamed for the recession that would follow if it withheld assistance. Argentines, who have a tendency to self-pity, duly blamed it both for doing this—and for not doing it earlier. The Fund has since admitted that it erred in its second 2001 loan (though the US Treasury continues to defend this) and, above all, in failing to be tougher on Argentina's fiscal laxity in the late 1990s...

Posted by DeLong at 05:56 PM | Comments (1) | TrackBack

The Place to See and Be Seen on the Internet

I am on page 104 of Paul Blustein's very good And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 1586482459). I learn on that page that Nouriel Roubini's is the place to be:

Born in Turkey to Iranian Jewish parents, raised in Italy, and educated at Bocconi University and Milan and at Harvard, Nouriel Roubini was something of a celebrity in the community of international financial-crisis experts.... [He] had created a website... where he posted important documents, news articles, and academic papers--and for people interested in the subject, the site became a cyberspace version of the place to see and be seen.

I guess I should put on a tie and mosey on over...

:-)

I'm told that Blustein's book has three heroes: Nouriel Roubini, Brad Setser, and Charlie Calomiris, all of whom played the role of Cassandra in the Argentine crisis. But I don't know when I'll have time to finish the book...

Posted by DeLong at 12:58 PM | Comments (4) | TrackBack

Do You Think My Methods Are Unsound?

I see no method at all, sir:

World Tribune.com -- Army report: U.S. lost control in Iraq three months after invasion: WASHINGTON – The U.S. military lost its dominance in Iraq shortly after its invasion in 2003, a study concluded.... "In the two to three months of ambiguous transition, U.S. forces slowly lost the momentum and the initiative gained over an off-balanced enemy," the report said. "The United States, its Army and its coalition of the willing have been playing catch-up ever since."

The report was authored by Maj. Isaiah Wilson, the official historian of the U.S. Army for the Iraq war. Wilson also served as a war planner for the army's 101st Airborne Division until March 2004, Middle East Newsline reported. His report, not yet endorsed as official army history, has been presented to several academic conferences.

In November 2003, the military drafted a formal plan for stability and post-combat operations, Wilson said. Termed Phase-4, the plan was meant to follow such stages as preparation for combat, initial operations and combat. "There was no Phase IV plan," the report said. "While there may have been plans at the national level, and even within various agencies within the war zone, none of these plans operationalized the problem beyond regime collapse. There was no adequate operational plan for stability operations and support operations."...

The report disclosed the lack of planning by the U.S. military for the occupation of Iraq. Over the last year, Defense Secretary Donald Rumsfeld and his aides have been blamed for lack of post-war planning based on their assessment that the military campaign in Iraq would be brief and quickly lead to a democratic and stable post-Saddam Hussein government.... Wilson said army planners failed to understand or accept the prospect that Iraqis would resist the U.S. forces after the fall of the Saddam regime. He deemed the military performance in Iraq mediocre and said the army could lose the war.

"U.S. war planners, practitioners and the civilian leadership conceived of the war far too narrowly," the report said. "This overly simplistic conception of the war led to a cascading undercutting of the war effort: too few troops, too little coordination with civilian and governmental/non-governmental agencies and too little allotted time to achieve success."

I did see Thomas Barnett yesterday at his luncheon talk. After listening to him, I came away with the following message: It is now clear that we have failed at post-lightning war stabilization and society-building--political society, civil society, and commercial society--efforts in Iraq, but that this is going to be the last such failure. The U.S. Army knows that it has failed, and doesn't like to fail in the same way twice.

He also has three great lines:

  • "Martin van Creveld is very good, but he generalizes immediately from the West Bank to the world as a whole. The world as a whole is not like the West Bank."
  • "Robert Kaplan is very good, but he generalizes immediately from West Africa to the world as a whole. The world as a whole is not like West Africa."
  • "Yes, as far as the Core is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons."

(Of course, you need to have read Martin van Creveld, Robert Kaplan, and Norman Angell to understand these).

Posted by DeLong at 12:06 PM | Comments (15) | TrackBack

Free Trade in Textiles

From Simon World:

Simon World :: Free trade working too well: "Ask someone if they prefer cheaper clothes prices for the same quality product and the answer is obvious. Likewise the manufacturer who can produce the clothes at a cheaper price but still turn a profit. Especially happy should be the Governments of the manufacturing nation (all those extras jobs) and the consuming nations (all those happy voters/consumers). Alas, not always.

On January 1st this year the world abolished quotas on textiles. China was expected to rapidly claim market share from other producers who had previously benefited from favourable quotas.... From January 2004 to January 2005 China's exports of cotton trousers to the USA increased by 1,332% and of cotton knit shirts by 1,836%. Over the same period to the EU exports of jerseys expanded by 735% and blouses by 301%. At the same time the average unit cost of those jerseys and blouses fell by 36%. People are buying more for less.... China is rightly petrified of protectionist action by the EU and America, with both domestic and international competitors wailing. The option exists for these countries to impose 'safe-guard actions' to protect their domestic industries, which will re-impose quotas....

China has responded by introducing a new licensing system... considering imposing minimum prices on textile exports and a crackdown on textile exporters' violations of labour law. This last action should happen regardless, but that's for another post.

It's a race to see who can impose the restrictions first: China or the EU/USA. So if you are wondering why your clothes were cheaper for a couple of months before they became more expensive again, this is the answer: because countries are competing over trade barriers, not on products and price.

Posted by DeLong at 11:39 AM | Comments (10) | TrackBack

March 08, 2005

Alan Greenspan as Seen by GQ

ABC's "The Note" writes:

[ABC News: The Note: 'Both Hopeful and Precarious':] GQ's Wil Hylton has written a non-loving profile of Fed Chairman Alan Greenspan in which he accuses the Chairman, with some evidence, of being, a, well, a political hack — but not necessarily a partisan one.

Tracing Greenspan's political career from obscure Randian disciple to Nixon economist to Ford political adviser (sort of) to mysterious, Andrea-Mitchell-loving, tennis-playing, naked-bathtub-loving Fed Chair, Hylton suggests that Greenspan's political instincts do not always lend themselves to the advancement of Republican causes.

To wit: Greenspan's famous 'deal' with Bush 41. There's an amusing exchange in the article with Nicholas Brady, who seems to admit that Greenspan agreed to lower interest rates if 'the president would tackle fiscal policy . . . He just plain didn't do what he said he was going to do.' According to Hylton, Brady does a Class A Emergency Dial Back after those remarks.

Fans of the Chairman's will find Hylton's profile to be gosh-darned mean and will probably dispute his account of history, but the article is certain to be be widely e-mailed and widely referenced in the days ahead — after it is released in NY/LA on March 22.

Hylton's account is characterological and eschews an in-depth discussion of policy issues — and certainly doesn't even attempt to answer the question of whether the Chairman has done a good job.

You know, it really wouldn't take much to get us a better press corps--even a much better press corps. Alan Greenspan is not terribly interesting because of his appearance, or because he is a good husband, or for his dress sense, or for the amount of money he has paid. He is interesting because of the policy issues: he has sat in the monetary policy seat since 1987, and has, I would argue, done a superb job on monetary issues and made major missteps since 2000 on fiscal policy issues. To do a profile of Alan Greenspan without an "in-depth discussion of policy issues" as as stupid an enterprise as doing a profile of Martha Stewart without mentioning that she does interior design or doing a profile of Gwyneth Paltrow without mentioning that she acts in movies.

As for Nicholas Brady's belief that Greenspan promised that he would lower interest rates if the Bush I administration took action to curb the deficit and Brady's belief that Greenspan broke his promise.... I can almost see what happened.... Greenspan is extremely unlikely to have ever told anyone that he would lower interest rates below what he thought was appropriate under any circumstances. But Greenspan is very likely to have told all and sundry that action to reduce the deficit--tax increases, entitlement cuts, and discretionary spending caps--would (or was highly likely to) produce an appropriate path for the interest rate that would be lower than if the deficit were left unchecked.

Greenspan would thus have said that the path of interest rates he would be able to choose would be lower if action was taken to reduce the deficit. And Brady would have garbled it and remembered it as the level of interest rates would be lower.

Posted by DeLong at 06:17 PM | Comments (24) | TrackBack

Not Your Father's Sixth Grade Math Class

The Eleven-Year-Old's math homework involves rotation matrices. I don't think I even saw a rotation matrix until tenth grade.

What was my sixth grade math class like? Ah, now I remember. I didn't have one. We had an open classroom. We spent our time constructing "rabbits" with artificial genomes and tracing Mendelian inheritance down the generations, and playing a lot of Conway's "Life" on the classroom's Go board. That and listening to Mr. Karman read Arthur C. Clarke's "Rescue Party"--those were the highlights.

Posted by DeLong at 03:51 PM | Comments (35) | TrackBack

Personal Bankruptcy and Private Accounts

Max Sawicky asks an excellent question:

MaxSpeak, You Listen!: [Would] the private accounts and annuities under Bush's... Social Security privatization plan would be vulnerable to attachment by creditors, thereby opening up a new source of equity to the credit card industry, after they have sucked out all your blood?

I think the answer is "Yes"--either immediately in the plan itself as it moves through the House of Representatives, or in five years as the next wave of credit-card industry lobbyists hit the beaches of Capitol Hill.

Posted by DeLong at 11:28 AM | Comments (34) | TrackBack

March 07, 2005

Advice on Paper Writing

What is the one piece of advice on paper writing that I should give to these Berkeley undergraduates?

The ones coming in for advice aren't the ones who really need it. The ones coming in to talk to me about their papers are, broadly, in the top quarter of the papers we received. And these were very short papers: three pages on the role of economic grievances in the American Revolution.

The typical easy-to-correct mistakes that the students who come to see me are making seem to be two:

  1. Nobody ever told them--or they have forgotten, or they are too stressed for time--to revise. They are handing in first drafts.

  2. Nobody ever told them that if you are going to hand in a first draft, an easy way to significantly improve it is to, when you are finished, cut the last paragraph from the paper and paste it at the beginning. Your final sum-up paragraph--written at the end, as you have by trying to write down what you think discovered what you really do think--is almost always going to make a better first paragraph than the first paragraph that you wrote.

Posted by DeLong at 10:44 PM | Comments (69) | TrackBack

Arrow's Impossibility Theorem

In the lounge, graduate students are arguing over Ken Arrow's voting impossibility theorem--what does it mean?

I throw in my two cents:

It means that pairwise voting between alternatives is a really thin information channel--much too thin to be useful for much. But thicker information channels are easy to game: problems of truthful revelation of preferences soon become insuperable.

Posted by DeLong at 10:39 PM | Comments (29) | TrackBack

Perfectly Done...

From the Washington Post, via Atrios:

Posted by DeLong at 07:30 PM | Comments (22) | TrackBack

March 06, 2005

The Three Faces of Alan Greenspan

Kash of Angry Bear is pleased to see various denunciations of Alan Greenspan:

Angry Bear: This story by Rex Nutting of MarketWatch warmed the cockles of my heart, for two reasons. First, because at least one member of the regular business press seems to be catching on to Greenspan:

Greenspan did President Bush two big favors this past week, endorsing the president's calls for fundamental reforms in Social Security and tax policy. Greenspan said the U.S. economy could 'stagnate' if Congress raised taxes or borrowed more money to pay for all the promises Washington has made to the elderly and those soon to be. Like it or not, Greenspan said, government spending must be slashed. Reid, the combative Nevada Democrat, said Greenspan was acting like a partisan 'hack.'

The Federal Reserve may consider itself above politics, but its chairman definitely isn't.

...What really got Reid's hackles up was Greenspan's denial of his own role in fostering the fiscal problems he was decrying. Greenspan endorsed the Bush tax cut of 2001 because, without them he said, the surplus could become dangerously large.

How wrong that forecast was! Instead, the projected surplus is now become an endless deficit, and Greenspan's logic has undergone a similar U-turn. Now, he says, it would be folly to roll back the tax cuts that led to the deficits, because higher taxes would cripple the economy. And yet the U.S. economy enjoyed one of its greatest growth periods ever under those higher tax rates.

The second reason I enjoyed reading this story was because it notes that Reid's reaction was vigorous, entirely appropriate, and out of character for Democrats in Washington:

Reid's rude assessment of Greenspan was a bit of a shock, mostly because Washington is used to having Greenspan walk all over Congress, especially the Democrats. A Democratic leader with a spine is something we'll have to get used to.

By calling Greenspan on his partisan testimony this week, Reid also sent a message to Bush that the Democrats won't roll over if he nominates a full-time partisan hack as Fed chairman when Greenspan's term is up next January.

It's refreshing to see the Democratic leadership in Washington treat Greenspan the way he deserves... and to see that at least some of the press agrees.

Let me agree that since 2000, Alan Greenspan's public interventions in U.S. fiscal policy have been, from my point of view, destructive as measured by headlines, lead paragraphs, and summaries of his positions. (Speeches and testimonies themselves are more nuanced in the details, but the press pay no attention to details.) But let me point out that within Republican councils Greenspan has been one of the few relatively grownup voices: pointing out dangers, and asking for Plan Bs--his support for triggers to reverse the 2001 tax cuts back when they were proposed, and his recent call for caution in changes to Social Security which may have destructive effects on national savings, to give two examples.

But let me say that I am not terribly surprised that Greenspan has not been helpful--according to my lights of helpful--on fiscal policy. For Alan Greenspan is three-faced. He is:

  1. The superb monetary policy technocrat
  2. The Randite--the long-time disciple of Ayn Rand--who believes that in a good society government spending would be less than 5% of GDP.
  3. The Republican team player.

The Greenspan we saw for the most part in the 1990s was the superb monetary technocrat--the person who maintained low inflation and yet nudged the U.S. economy closer to full employment than I would ever have believed possible, and the person who was desperate for a balanced budget because persistent unbalanced budgets generate enormous pressure on central banks to allow inflation.

But there's also the Greenspan who believes that the social insurance state is fundamentally illegimate: an offense to human dignity and a long-run policy disaster. He wants a balanced budget, but he wants spending cuts much more than tax increases. In 1993--with a Democratic president and a Democratic congress--he would settle for tax hikes as a means to balanced budgets. But that was never his preference.

And there's also the guy who is fundamentally on the Republican team.

Don't expect him to be just the non-partisan monetary policy technocrat. That's not who he is. That never was who he was.

Posted by DeLong at 04:17 PM | Comments (59) | TrackBack

Why Oh Why Are We Ruled by These Fools? (Budget Department)

Fiscal irresponsibility watch, from Alan Fram of AP:

Bush's Budget Would Keep Annual Deficits Over $200 Billion for Next Decade, Analyst Says: WASHINGTON (AP) - President Bush's budget would keep federal deficits over $200 billion annually over the next decade, Congress' top budget analyst said Friday in a report raising doubts about White House efforts to contain the shortfalls. The analysis by the nonpartisan Congressional Budget Office said Bush's plans for spending and taxes would yield deficits through the decade ending in 2015 totaling $2.58 trillion... $1.6 trillion worse than they would be if none of the president's fiscal plans become law... cumulative deficits over the next decade will be $125 billion worse than it estimated only last January. That is largely because it has added $70 billion to its projected 10-year costs of Medicare spending....

Last Wednesday, Federal Reserve Chairman Alan Greenspan warned Congress that federal deficits had become 'unsustainable' and warned lawmakers to act quickly to staunch the red ink....

Friday's numbers also raised new doubts about Bush's goal of halving federal deficits in five years by projecting a 2009 deficit of $246 billion... not be close to cutting last year's actual $412 billion deficit in half.... Over the next decade, deficits would get no lower than $229 billion in 2010, the congressional office estimated. It also projected that Bush's fiscal plans would yield deficits of $394 billion next year and $332 billion in 2006....

The congressional analyst noted that Bush's budget omitted the costs of overhauling Social Security, which some analysts expect to exceed $1 trillion for the first decade. Bush's budget also omits any new funds for U.S. military and reconstruction operations in Iraq and Afghanistan for 2006. The congressional analyst said keeping next year's military operations at this year's levels would probably add about $40 billion to the 2006 shortfall, pushing it to perhaps $375 billion.

Posted by DeLong at 01:49 PM | Comments (23) | TrackBack

Robert Waldmann's Thoughts on Social Security and National Saving

Robert Waldmann resorts to the neoclassical theory of savings, and says that the Bush Social Security reform will reduce national savings unless Bush and company are lying:

Robert Waldmann: I think that Brad may be right that private accounts are likely to be a wash as far as national savings go, but... only... because you assume that Bush, the Cato institute and the CEA are full of it. They all claim that private savings accounts are a better deal than traditional social security. They even claim that young people will be better off with the reform.... [And that is the equivalent of] claim[ing] that the reform will reduce national savings....

If the reform means that people are better off, then the reform should make people consume more and save less. Under standard assumptions that means national savings decline.... [C]onservatives like to go on and on about how offering a better return on savings will cause increased savings due to the substitution effect.... In the case of social security reform, there is no substitution effect. The proposal is to replace one form of forced savings with another.... [I]f, as claimed by Bush and the Cs, private accounts are a better deal, then there should be an income effect causing increased consumption....

National savings = GNP - C [Consumption] - G [Government Purchases].... One might hope that private accounts will, in some way, scare the state into spending less [reducing G] because the huge deficits involved will scare people... [but Bush and] the CEA say those deficits aren't deficits, and are nothing to be scared about (not to mention that they don't seem ever to have been scared about deficits, and why should we listen to their ideas about how to starve the beast: they are the beast).... So I assume that G is fixed.... [I]n standard analyses of national savings, Keynesian effects are assumed to be temporary.... End of story. Give social security participants a better deal and national savings should decline....

To argue that social security reform will increase national savings one must argue that it will make participants poorer or will make the accumulation of national debt more terrifying. The President is effectively saying -- "Trust me, don't worry, I'm obviously lying."

Robert is, broadly, right. The name of the game is increasing national savings, which means--absent fiscal responsibility on the part of Republican leadership--reducing C. In the neoclassical framework, reducing C means either (a) scaring people into thinking that they are poorer over their lifetimes or (b) tax increases. If the plan reassures people, then--in the neoclassical framework--national savings falls.

Now the argument that there will be a demonstration effect--that once the non-rich see their private Social Security account balances grow, they will want to open parallel accounts with their spare cash--is not completely stupid. It is, however, almost completely stupid. Banks and mutual funds and brokerages have spent a lot of money talking about the benefits of saving and ownership of financial assets. And our private savings rate is still very low.

The argument that it is all about habits and defaults (make the default to direct $1000 of your tax refund to top off your Social Security private account in addition to your diverted payroll contributions, and provide a partial match to the extra $1000 out of uncapping FICA, unless you send in an extra form to the IRS) is relatively smart--but there is no sign the administration is thinking along these lines. And this is too bad: I wish it were.

There is yet another argument, which Robert refers to in his discussion of the level of government spending. The argument is that diverting payroll taxes into private accounts will shock the Republican congressional leadership and Bush into fiscal responsibility--an argument Alan Greenspan has made relatively frequently--seems to me to be a forlorn hope: since 1980, after all, nothing has shocked the Republican Party into fiscal responsibility. It is a replay--this time as both tragedy and farce--of the Reagan first term fiscal policy which was conducted by, as Greg Mankiw says, charlatans and cranks. According to David Stockman (see The Triumph of Politics: Why the Reagan Revolution Failed and The Education of David Stockman) the idea was to:

  1. Allow the charlatans and cranks to make outrageous claims about how tax cuts would not create deficits.
  2. Get the tax cuts passed.
  3. Point out to Congress that the outrageous claims had been false, and that in order to balance the budget large spending cuts were needed.
  4. Pass the spending cuts.

Of course, Congress reacted badly to this bait-and-switch: Congress's response to the Reagan administration was "you caused this f--- up, you fix it."

If there is actually a plan to try to use the diversion of payroll taxes into private accounts to shock the Republican leadership into fiscal responsibility, I think it is highly likely to fail as miserably as did David Stockman and company. Congress will react in the same ay to another bait-and-switch: the Bush administration's acolytes may say now that the projected larger cash-flow government deficits don't matter and plan to say five years from now that the cash-flow deficits are horrendous and need to be closed immediately, but Congress has a memory and is very unlikely to buy it.

Posted by DeLong at 12:00 PM | Comments (18) | TrackBack

Matthew Yglesias Protests That He Is Not a "Realist"

Matthew Yglesias attempts to unconfuse Oxblog:

Matthew Yglesias: What Realist Where?: David Adesnik is but the latest in a long string of hawks to slam me for my belief that promoting democracy in Lebanon doesn't have much to do with American interests. Allegedly this makes me 'stuck in some sort of Kissingerian realist mode.' But no! Suppose I believed that promoting democracy in Lebanon didn't have much to do with American interests and therfore we shouldn't do it. That, I think, would be a Kissingerian line. Alternatively, suppose I believed that promoting democracy in Lebanon would be great for American interests and therefore we should do it. That would be consistent with Kissingerism (or whatever), along with all kinds of other views.

Now what I've been saying about Lebanon, however, is that since the means the Bush administration has been using to promote democracy in Lebanon are of very little cost to the United States, they're well-worth using even though it doesn't have much to do with American interests. That's closer to the reverse of a Kissinger-style view. Since the rest of the post is about 75 percent tired slurs and cheap, ill-informed psychoanalysis of myself and others, I won't try to rebut the rest... but I've seen this confusion about a billion times, I thought I would clear it up.

I have other worries, which are neither realist nor non-realist but more reality-based: What are we doing in Lebanon? Is expelling the Syrians from Lebanon best understood as promoting Lebanese democracy or as setting the stage for the accession to power of Hezbollah? I would really like somebody who knows something about Lebanon to tell me which it is.

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

March 05, 2005

National Savings and Social Security

I seem to have confused a dead parrot--which, when you think about it, really is quite an unusual accomplishment.

It writes:

The Dead Parrot Society: Savings and Social Security: "The 'conservative' position on Social Security and its effect on national savings seems reasonably clear. If the government issues bonds to allow people to buy stocks with Social Security taxes, the private sector will have to buy bonds and sell stocks. In net, these effects likely offset dollar for dollar. This is the position of Barro, Becker, and apparently Mankiw and Swagel who describe private accounts as neither a panacea nor threat.

Overall, conservatives hope that national savings will increase in the long-run, however, because (a) this will encourage everyone to become an investor and (b) this is the first step toward moving from a mostly pay-as-you-go system to a fully funded system.... To the extent that raising payroll taxes would simply lead to increased government spending, this might raise the implicit debt obligations of the future; therefore, putting Social Security surpluses into the market might also lower government spending and future borrowing. These reasons all tend to appeal to conservatives, thus they tend to view private accounts as attractive and the effect on national saving as either zero or positive.

I have never pretended to fully understand the 'liberal' position, and Brad DeLong's post today reinforces my confusion. He takes great exception to the above characterization: 'Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know ...' [T]his... I believe, makes Brad DeLong the first economist to go on record arguing that privatization will actually reduce national saving....

Let's say that private investors today put away $K in their 401K's, all in stocks for simplicity. This amount coupled with their Social Security benefits ($B) will add up to some future wealth value, say $W. You can think of all these amounts as present-values.

Now, let's chop $B down, dollar for dollar and put the money instead into a new private account, $P, so that we now have $B-$P in Social Security wealth. The conservative argument is that people will sell some of their $K worth of stocks, rebalancing their private 401K to contain $P worth of bonds and $K-$P worth of stocks. In net, therefore, we are back where we started: $K of stocks ($K-$P of it in your 401K, $P of it in your private account). You would have $B-$P worth of traditional social security benefits, but you also $P worth of bonds in your 401K, so it all adds up to $W in the end. No direct effect of private accounts on national saving or wealth.

Brad DeLong is essentially arguing that privatization will make you sell even more than $P worth of stocks from your 401K. In such a world, we would have less than $K worth of stocks in total, we'd have $B-$P in Social Security wealth, and $P in bonds. Overall, therefore, we'd have less than $W for tomorrow. This means that privatizing Social Security would actually reduce future consumption below $W....

Let me first take exception to having my position called "liberal." My position on this is the same as Alan Greenspan's, who says:

Alan Greenspan: First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back. If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector'. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

What Greenspan is saying--what I am saying--is that the Dead Parrot might be right--it might be the case that you wind up with "no direct effect of private accounts on national saving or wealth." But it might not be right. And if it is not right, then, as Greenspan says:

[I]t would be creating more difficulties than I would imagine. So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way.... I do say, as I said previously, that I would be very careful about very large increases in the [government's] debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'

My position is that we really don't know what the impact of having the Treasury sell $4.5 trillion more of government bonds and then having individuals invest that $4.5 trillion in their private Social Security accounts will be. I would bet that there's at least a 50-50 chance that it will be a wash as far as national savings is concerned. I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings.

What I object to are assertions that people know that the effect on national saving will be a wash. They don't know this. What I object to are assertions that worriers--like me and Alan Greenspan--should "stop railing about the budget impact [of the Bush Social Security plan]. The... increase in the budget deficit won't place a new burden on future generations." There's reason to hope that this is the case, and I think it is better than a 50-50 bet. But as Uncle Alan said, it's important to go slowly: if it is a big mistake, we need to find that out in time to stop it.

There's nothing "conservative" about plans for large social and economic transformation based not on evidence but on hopes about what is the case. Nothing conservative at all.

Posted by DeLong at 05:22 PM | Comments (54) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Joshua Micah Marshall Gets Shrill Department)

Today his screeds of unbalanced shrillness are directed against George W. Bush, and against Anne Kornblut and Sam Roberts of the New York Times:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: "The more he sinks the more he lies. In fact, I'm not even sure 'lying' quite does it justice. He just makes it up as he goes along now.... [T]here's been a debate... over private accounts carved out of Social Security [vs] 'add-on' accounts... in addition to Social Security. The add-on terminology has become close to universal in large part because it accurately describes what is being discussed.

Indeed, as recently as yesterday, Secretary Snow said that while the president greatly preferred [carve-out] private accounts as part of Social Security... he was willing to put add-ons on the table if Democrats would negotiate.... On the same day, the Post helpfully pointed out that though Snow was sent out to signal willingness to compromise, the president was only doing this to lure Democrats to the table ...

Snow told reporters that Bush also has not ruled out embracing a plan backed by many Democrats to create government-subsidized personal savings accounts outside the existing system. White House officials are privately telling Republicans that Bush is opposed to the idea but does not want to say so because it would appear he is not willing to compromise.

But that was yesterday. Now, realizing that the add-on terminology is less toxic than his Social Security privatization policy, the president has decided that privatization really is an add-on after all....

This is a retirement account we're talking about.... See, personal accounts is an add-on to that which the government is going to pay you. It doesn't replace the Social Security system....

Now we would be remiss if we did not note that the Times article covering the day's events adopted what can only be called a singularly generous approach to the president's word games....

Bush did not retreat from his plan to divert some payroll taxes into individual accounts... he shifted his language... describing the popular program as a 'safety net' and borrowing a term for the types of accounts some Democrats have favored, 'add-on' accounts outside the Social Security benefit system, to now describe his version of private accounts.

Where to start? In a case where A and B are fundamentally different and you take the term for A and apply it to B, that is not usually known as 'borrowing'. I'm not sure whether 'lying' or 'deceiving' or something else altogether is a better term for it. But this isn't borrowing. It's simply an effort to mislead....

Posted by DeLong at 08:45 AM | Comments (24) | TrackBack

Benefits of Taking Freshman Biology

"Hey!" says the Fourteen-Year-Old.

"Yes?"

"You know those books I read a couple of years ago? The Double Helix [James Watson's account of the Crick-Franklin-Watson figuring out of the structure of DNA] and The Science of Jurassic Park?"

"Yes."

"I fully understand them now."

Posted by DeLong at 08:34 AM | Comments (6) | TrackBack

March 04, 2005

The *Real* Elephants in Bush's Living Room

Morgan Stanley's Richard Berner talks about some of America's real fiscal problems--the one's that the Bush administration's "focus on Social Security" allows it to avoid talking about. He's mostly right, I think. However, I think he overestimates the importance of reforming the PBGC and underestimates the importance of figuring out what to do in the long run with Medicare:

Morgan Stanley: President Bush has pushed Social Security and tax reform to the top of the policy agenda.... In my view, however, there are three more pressing needs: securing the long-term stability of the defined-benefit (DB) pension system, taking first steps toward Medicaid reform, and returning to meaningful fiscal restraint.... America’s long-term challenges — including the broader healthcare and retirement saving conundrums, as well as those involving education and energy — all cry out for systematic and timely policy change... crafting solutions for those problems that are slightly less immediate will be far easier if policymakers can demonstrate the stewardship and resolve to fix the leakiest boats first.... [B]eginning to deal with pensions, Medicaid, and the budget effectively now could pave the way for other needed changes....

The hard truth is that real Social Security reform will reduce future benefits and/or raise receipts to pay for them.  More broadly, real reform of the retirement saving infrastructure must aim at increasing national saving, not just boosting personal saving at the expense of Federal deficits.... Fed Chairman Greenspan and Fed Governor Gramlich both strongly agree that increasing national saving is a critical ingredient for Social Security reform....

America’s defined-benefit pension system faces more immediate risks than other legs of the retirement saving stool.... Years of underfunding and overly optimistic assumptions about mortality and retirement have created economic mismatches.... [P]olicy should reduce the moral hazard in the pension safety net (represented by the Pension Benefit Guarantee Corporation for private plans) by requiring appropriate risk management.... DB plans are a key element in America’s system of retirement saving.  They offer economies of scale in management and administration, the ability to mutualize risks across generations of employees, and the investment discipline that most individuals lack....

Likewise, there is some urgency to slow the rapid growth in Medicaid outlays.... States share Medicaid expenses with the Federal government... The program has few incentives to economize.... With the Administration proposing to cut Medicaid spending by switching to block grants, state officials will either have to make up the difference or cut spending.  Medicaid outlays account for 20–25% of state budgets, and many states’ fiscal health is highly exposed to further outsized gains....

But the most urgent need is to prepare fiscal policy for the future.... [P]rudence dictates increasingly proactive policies to increase national saving.... [P]olicy should focus on getting the Federal budget back to balance in the next few years.... Most fundamentally, it would help restore the balance between domestic saving and investment that the U.S. will need as global rebalancing helps wean it from the saving it now imports from abroad.  In my view, there is no quicker way to increase national saving than to aim at lower deficits, and both cuts in spending growth and tax increases should be on the table...

Posted by DeLong at 05:29 PM | Comments (44)

Economizing on the Wrong Margin

A correspondent at another university, which shall be Nameless, writes:

Please use gmail: they truncate my university mail account and delete incoming messages at random...

And lo and behold, here's an example of such a policy at yet another (and different) Nameless University:

Electronic mail is both useful and fun. However, it can be abused. The entire system spool for incoming mail is only 100 megabytes. It serves the entire user base of about 500 accounts, more or less. We therefore restrict individual user spools to 200K bytes or less.

You can use the command "emchk" at the % prompt to check up on your mailspool. If you notice that the size of your spool is growing large, please clean it up. You can delete mail you don't need, or move it to a disk file. In any case, read your mail and do something with it other than leave it lying around in your spool.

The system mailspool is checked frequently, and anyone over the 200K limit automatically has their mailspool truncated. We truncate oldest messages first, and place the old message in a disk file in your home directory that is clearly identifiable...

It is a definite mercy that at this Nameless University they don't delete your mail, they just save it to a file in your home directory.

The puzzle is that hard disk space now costs less than a dollar a gigabyte. That's 0.02 cents spent on one's mailspool disk quota.

Surely there are more important margins on which to economize than this one?

Posted by DeLong at 02:16 PM | Comments (24) | TrackBack

Can We Please Start Being the Good Guys Again?

Prarie Weather channels Eric Alterman:

Prairie Weather: Torture next door: Eric Alterman digs back in the New York Daily News and comes up with an account of torture right here in our neighborhood.

It documents the abuse ‘tantamount to torture’of 79 Muslims andfive Israeli Jewish! ‘terrorist suspects;’ not in  Guantanamo or Iraq, but in a federal prison in Brooklyn, a stone’s throw from the D’ train and within sight of the Statue of Liberty. This one brings the issue of torture home, here in America, for the first time. The mistreatment included sexual abuse, sleep deprivation, exposure to freezing temperatures for extended periods, and frequent unprovoked beatings. Many of the abuses were recorded on video tape. None of the suspects were ultimately found to have any relation to terrorism. Yet, despite the video tapes, the Justice Department has decided no one will be prosecuted. A separate administrative investigation by the Bureau of Prisons appears to be a sham. Of 12 prisoners I interviewed, none had been interviewed by Justice Department prosecutors or Bureau of Prison investigators...

Alterman writes that our image overseas is less about the spread of democracy than about the spread of prisoner abuse.

Can we please start acting like the good guys again? It's not just the right thing to do, it's also good politics. The United States is much more powerful and effective in international affairs when we are and are seen to be the good guys.

Posted by DeLong at 08:24 AM | Comments (33) | TrackBack

March 03, 2005

Wow...

The FT reports:

FT.com / World / US - Dollar rises on strong productivity report: US productivity grew much faster than first estimated at the end of last year, easing worries that inflation may accelerate but also reducing the pressure on firms to step up hiring. The initial estimate for fourth quarter productivity growth showed a rise of only 0.8 per cent annualised the slowest increase in nearly four years. On Thursday this was revised up to 2.1 per cent. Unit labour costs, meanwhile, rose by only 1.3 per cent in the last three months of the year rather than the 2.3 per cent initially reported. As a result, unit labour costs were up only 0.4 per cent during the year. Despite an upward revision to the unit labour costs for the third quarter, this suggests that employment conditions are still too weak to start pushing up prices.... Between 1973 and 1995 annual productivity growth averaged 1.4 per cent. It accelerated to 2.5 per cent between 1995 and 2001. Since then it has averaged 4.3 per cent a year. The latest burst of speed has been widely attributed to the delayed effects of the high-tech investment of the late 1990s which took companies some time to integrate into their business processes...

Posted by DeLong at 12:47 PM | Comments (65) | TrackBack

Nouriel Roubini Adds to My Book Pile

Yet another book to read:

Nouriel Roubini's Global Economics Blog: March 2005 Archives: Paul Blustein of the Washington Post [has] published a fascinating book - 'AND THE MONEY KEPT ROLLING IN (AND OUT: Wall Street, the IMF, and the Bankrupting of Argentina' - that provides an excellent post-mortem of the Argentine crisis even if it does not cover the debt restructuring deal. This is a first rate, very well researched and gripping account of the causes of the Argentine crisis and the events and background that led to the default and collapse of the currency board. Thus, a very good follow-up to Blustein's The Chastening, his earlier book and tale of the Asian crisis.

With the default behind it - we will get back to the issue of the remaining holdouts soon - what are the lessons one can learn from this episode? Some worry that the behavior of Argentina means that now defaulting and getting large haircut has become much easier. This argument has no merit. Is default easy or costless? Argentina had do go through a most severe crisis with output falling by over 25%. Even today after two years of high 8% growth, the real GDP of Argentina is barely back to the 1999 level (and still much lower in dollar terms) that it had before the recession that preceded the eventual crisis started. Argentina lost 6 years of growth, had massive social and economic pain with poverty and unemployment rates through the roof. And all this would mean that default is costless and that other countries will rush to default like Argentina did? Utter non-sense. Lula, as soon as he was elected, looked across its border and saw what default - even an unavoidable one like Argentina's - causes as his by-product, i.e. massive crisis and pain. And he rightly decided to do even more fiscal adjustment and try to avoid default.

The lesson of Argentina is that crisis and default are very costly and painful, not that they are costless.

Posted by DeLong at 10:40 AM | Comments (8) | TrackBack

Drat! I'm Going to Miss Tom Barnett Next Week!

Author of The Pentagon's New Map. Well worth hearing:

Thomas P.M. Barnett :: Weblog: Tom speaking in SF Bay Area: March 9 and 10, Admiral Nimitz Lectures, UC Berkeley. Wednesday March 9th, 'The Pentagon's New Map' 7 PM-145 Dwinelle Hall. Thursday March 10th, 'A Future Worth Creating' 7 PM-145 Dwinelle Hall.

Posted by DeLong at 10:36 AM | Comments (5) | TrackBack

Albertine Disparue (Thanks Sonny Bono Department)

Not only Albertine but also La Prisonnière and Le Temps Retrouvé--at least in their new English translations, at least for those of us in the United States.

Boing-Boing reports on what we owe to Sonny Bono:

Boing Boing: Sonny Bono vs. Marcel Proust: Slate.com's Aaron Matz reports that the Sonny Bono copyright act is preventing a the final volumes of a new translation of Proust from appearing in the US:

Only the first four volumes of the new translation—from Swann's Way through Sodom and Gomorrah—are available here. For this we have Sonny Bono to blame. Just before he died in 1998, the congressman sponsored a bill to extend the term of copyright by 20 years: According to the Sonny Bono Copyright Act, passed later that year, rights would expire 95, rather than 75, years after an artist's death. Since Proust died in 1922, only those four volumes first published during his lifetime had passed into the American public domain by the time the Bono Act became law. It will therefore be at least 2018 before readers in the United States can find the final three installments of the new translation (The Prisoner, The Fugitive, and Time Regained) in their local bookstores.

Posted by DeLong at 10:31 AM | Comments (18)

*Sigh* Greg Mankiw

UPDATE: One correspondent asks if Mankiw's:

WSJ.com - Free Advice for Democrats: Take your heads out of the sand.... [Y]ou look like idiots. President Clinton talked about the 'crisis' in Social Security long before President Bush did. Sure, you can make a plausible argument that Social Security's unfunded liabilities are not a 'crisis' but only a 'major problem.' But even if you win that argument, you lose. You look like you're more interested in word games than good policy...

is really directed against Alan Greenspan:

Latest News and Financial Information | Reuters.com: While embracing the concept of private accounts, Greenspan did not specifically endorse Bush's approach and steered clear of calling the funding problem a crisis, as Bush has done. 'I would not use the word crisis,' he said. 'Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change. That is not going to happen.'

SECOND UPDATE: Another correspondent, Paul Krugman, points out that Alan Greenspan has (rightly) major, major problems with Mankiw's claim that the transition deficits are just "an acknowledgment of promises that were made long ago":

Greenspan Likes Social Security Private Accounts, But Urges Caution : 'The issue with respect to the financing is a difficult one to answer, because there are things we don't know.... First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back.

'If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

'So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way, and recognize that there is yet another problem involved, which is this: Unlike almost all of the other programs with which we deal, moving to a forced-savings account technically does not materially affect net national savings. It merely moves savings from a government account to a private account.... I do say, as I said previously, that I would be very careful about very large increases in debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'


This morning Greg Mankiw writes (with Phil Swagel), giving free advice to Democrats like me:

Mankiw and Swagel: Stop railing about the budget impact [of the Bush Social Security plan]. The introduction of personal accounts will involve some transition financing, but this increase in the budget deficit won't place a new burden on future generations. These deficits are just an acknowledgment of promises that were made long ago. And if you think that complaining about budget deficits will advance your career, just ask President Mondale.

Back in 1998 he wrote:

...the most basic lesson about budget deficits follows directly from their effects on the supply and demand for loanable funds: When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate. (N. Gregory Mankiw (1998), Principles of Economics (New York: The Dryden Press/Harcourt Brace), p. 557.

We worry about the budget impact and effect on national saving of the Bush Social Security plan because there is a chance that it will significantly diminish national saving and lower economic growth. If holders of defined-contribution private accounts regard them as close substitutes for their other assets in a way that promised defined-benefit standard Social Security was not, then the Bush plan will be yet another budget-busting shift of the tax burden that will slow economic growth.

Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know that private account-holders won't regard their private accounts as closer substitutes for 401(k) wealth than Social Security wealth is: the claim that the transition financing will not reduce national saving might be true, but it might no be true. And Mankiw damned well does know the connection between national saving and economic growth.

When people are working for an administration--under message discipline--you try to cut them some slack. Their external positions are ways of gaining credibility in an internal policy debate, and whatever degradation of the quality of the external debate happens is, you hope, more than counterbalanced by the greater weight the voices of (relative) reason gain in internal policy debates.

But after people have left the administration--once they are identified as professors at Harvard (or resident fellows at AEI)--they have no business making claims that they don't know to be true or false.

As you can tell, I'm really cranky this morning.

The main reason that I'm really cranky is that I just got off the phone after spending an hour with a reporter who read Mankiw, Forbes, and Rosen (2005), "Three Questions About Social Security" (Washington: CEA), and took it seriously, particularly this paragraph:

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. 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...

So I had to walk him through the issue. I had to point out that the implied claim that there is no connection between economic growth and asset returns is true only for small open economies with fixed exchange rates whose products and assets are close substitutes for those of other countries--and that the U.S. economy is neither small, nor completely open, nor has a fixed exchange rate, nor makes goods and issues assets that are perfect substitutes for those of other countries.

I had to point out to the reporter that while Mankiw, Forbes, and Rosen imply that slower growth is unconnected with lower returns by stating that they are determined by different factors, total growth is made up of productivity growth and population growth, and that Mankiw, Forbes, and Rosen are--deliberately--silent on the issue of whether slower productivity growth is likely to bring with it lower asset returns (it is). All they dare say explicitly is that slower population growth does not bring with it lower asset returns. And I had to further point out that even that smaller claim is true only in a restricted class of growth models--representative agent models with perfect familial altruism, in which you treat other family members past and present as you would treat yourself.

I had to spend my time bringing the reporter's knowledge of the debate back up to the level it was at before Mankiw's misinformation had dragged it down. And I like my time. I have things to do with it. I don't like having to spend it in this particular way cleaning up after elephants--especially elephants who can no longer claim that they are doing lots of good in the "inside" debate within the White House.

I am cranky, and annoyed. And I am not asking for very much. All I want is:

  • No more claims that we know that carving-out Social Security revenues to fund private accounts will have no damaging effect on national saving. It might work. It might not.
  • No more claims that the U.S. is a small open economy. It isn't.
  • No more claims that there is no reason to think that slower economic growth will carry lower asset returns with it. There are good reasons to fear this.
  • No more claims that the household employment survey is as good a guide to short-term labor market trends as the establishment survey. It isn't.
  • No more claims that an honest forecast of what George W. Bush's policies are sees the deficit cut in half by the end of this decade. It doesn't.

I want attempts to raise the level of the debate, not attempts to lower it still further.

Posted by DeLong at 09:07 AM | Comments (84) | TrackBack

Underrepresentation of Republicans in Academia

Belle Waring finds Aaron Swartz making this definitive comment on the issue:

John & Belle Have A Blog: Discrimination!: This is a really funny post on discrimination in academia:

A shocking recent study has discovered that only 13% of Stanford professors are Republicans. The authors compare this to the 51% of 2004 voters who selected a Republican for President and argue this is ‘evidence of discrimination’ and that ‘academic Republicans are being eradicated by academic Democrats’.

Scary as this is, my preliminary research has discovered some even more shocking facts. I have found that only 1% of Stanford professors believe in telepathy (defined as ‘communication between minds without using the traditional five senses’), compared with 36% of the general population. And less than half a percent believe ‘people on this earth are sometimes possessed by the devil’, compared with 49% of those outside the ivory tower. And while 25% of Americans believe in astrology (‘the position of the stars and planets can affect people’s lives’), I could only find one Stanford professor who would agree. (All numbers are from mainstream polls, as reported by Sokal.)

This dreadful lack of intellectual diversity is a serious threat to our nation’s youth, who are quietly being propagandized by anti-astrology radicals instead of educated with different points of view. Were I to discover that there were no blacks on the Stanford faculty, the Politically Correct community would be all up in arms. But they have no problem squeezing out prospective faculty members whose views they disagree with.

Man, they're just afraid that if people learned the truth about homeopathy, the near-total lock leftists have over our nation's institutions would be broken.

Posted by DeLong at 07:30 AM | Comments (27)

March 02, 2005

Why Oh Why Are We Ruled by These Liars? (Special John Snow Edition)

If John Snow had an ounce of self-respect, he would resign and blast the White House: after all, they are calling him a liar--and he is sitting and taking it:

washingtonpost.com: Bush Rejects Delay, Prepares Escalated Social Security Push: Snow told reporters that Bush also has not ruled out embracing a plan backed by many Democrats to create government-subsidized personal savings accounts outside the existing system. White House officials are privately telling Republicans that Bush is opposed to the idea but does not want to say so because it would appear he is not willing to compromise....

Of course, if John Snow had an ounce of self-respect he would have quit and blasted the White House quite some time ago.

Posted by DeLong at 08:29 PM | Comments (29) | TrackBack

Longtemps, Je Me Suis Couché de Bonne Heure...

We are eating madeleines from the Sugar Bowl Bakery in San Francisco. Delicious.

Posted by DeLong at 07:48 PM | Comments (10) | TrackBack

When Email Spam Filters Attack!

Back! Back! Damn you! Back!

For some inexplicable reason, while I wasn't looking Eudora's spam filter decided that all emails from theatlantic.com and cox.net were spam...

This makes communicating with people like James Fallows and Kevin Drum... hazardous...

It has been punished, and is now well behaved. But I have a feeling that when I turn my back...

Posted by DeLong at 03:51 PM | Comments (13) | TrackBack

The Revenge of Lochner v. New York

The Revenge of Lochner v. New York

The high-water mark of right-wing judicial activism back in 1905: restricting the hours of bakers a day to 10 harms workers by infringing upon their freedom of contract:

Lochner v. New York: MR. JUSTICE PECKHAM, making the statement of the facts, then delivering the opinion of the court:

The general right to make a contract in relation to his business is part of the liberty protected by the Fourteenth Amendment, and this includes the right to purchase and sell labor, except as controlled by the State in the legitimate exercise of its police power.

Liberty of contract relating to labor includes both parties to it; the one has as much right to purchase as the other to sell labor.

There is no reasonable ground, on the score of health, for interfering with the liberty of the person or the right of free contract, by determining the hours of labor, in the occupation of a baker. Nor can a law limiting such hours be justified as a health law to safeguard the public health, or the health of the individuals following that occupation.

Section 110 of the labor law of the State of New York, providing that no employes shall be required or permitted to work in bakeries more than sixty hours in a week, or ten hours a day, is not a legitimate exercise of the police power of the State, but an unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract, in relation to labor, and as such it is in conflict with, and void under, the Federal Constitution.

Now Lance Knobel and Tyler Cowen point us to a story from last June, in which migrant workers from China's interior are irate when what Justice Peckham calls their "liberty of the person" was infringed by a Nike Corporation desperate to avoid being charged with purchasing from a sweatshop:

Asian Labour News: China: Workers riot for the right to work overtime: I'm quite interested to find that this story hasn't seen the light of day in the English-language press so far.... The following is a summary of the main points from the Ming Pao article on 07 June 2004....

Taiwanese factories in Dongguan [a city between Hong Kong and Guangzhou and a major centre of manufacturing] are facing a problem. According to a news report in the United Daily in Taiwan, over a thousand workers at a factory, which produces goods for big brand names such as Nike, demonstrated for two days and damaged equipment and factory cars. 500 armed police arrived and quashed the riot. Several leaders were arrested.

The main cause for the riot was the limitation on working hours at the factory. The shorter hours have been requested by US companies so as to avoid criticism from various groups on long working hours. However, the mainly migrant workforce want to work longer hours so they can earn more. Consensus had been reached by the US companies, the Taiwanese-invested factory and local government that the maximum working hours per week should be set at 60 hours [which is still a breach of Chinese Labour Law, but less than other manufacturing plants]. However, this reduction in hours was unsatisfactory for the workers and the resulting riot was serious....

Source: 'Dongguan taiqi qian gongren fengchan chaoche jiaban shouru jianshao rebuman 500 jing zhenya [1,000 workers in a Taiwanese enterprise in Dongguan dissastisfied with overtime reductions shut down factory and burn cars, 500 police put down demonstration],' Ming Pao, 07 June 2004.

Posted by DeLong at 03:10 PM | Comments (15) | TrackBack

The Basic Neoclassical Growth Theory References

The most basic neoclassical growth theory references and links:

  1. David Cass (1965), "Optimum Growth in an Aggregative Model of Capital Accumulation," Review of Economic Studies 32 (July), pp. 233-40.
  2. Peter Diamond (1965), "National Debt in a Neoclassical Growth Model," American Economic Review 55:6 (December), pp. 1126-50.
  3. Tjalling Koopmans (1965), "On the Concept of Optimal Economic Growth," in The Economic Approach to Development Planning (Amsterdam: Elsevier).
  4. David Romer (2001), Advanced Macroeconomics 2nd ed. (New York: McGraw-Hill).
  5. Robert Solow (1956), "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics 70:1 (February), pp. 65-94.

Hmmm. My guess is that Koopmans's days are numbered. There aren't that many copies of The Economic Approach to Development Planning in the world, and it doesn't seem to be on Jstor.

Posted by DeLong at 02:52 PM | Comments (4) | TrackBack

Rick Perlstein's Thoughts About Goldwater and "Liberalism"

Rick Perlstein's Thoughts

Kevin Drum posts them:

The Washington Monthly: Rick Perlstein emails some thoughts about Barry Goldwater, the birth of modern conservatism, and the transformation of modern liberalism — all inspired by the blog discussion that's been going on over the past week about his [excellent] book Before the Storm: Barry Goldwater and the Unmaking of the American Consensus. Previous discussion from DeLong, Drum, Yglesias, Waldman, Yglesias again, Schmitt, and Kilgore. Here is Rick's email:

I've finally figured out a way to elegantly get at what is missing from the discussion of my Goldwater book, speaking now as a historian — without getting bogged down in the complexities of the story I'll be telling in the sequel, which I hope to finish this fall, for publication in 2006.

It comes down to this: In the period I was writing about, 'liberalism' was synonymous with the expansion of liberalism's vision and influence, the creation of new programs that no one had even thought of yet. The word had nothing much to do with 'preserving' New Deal programs, or even improving and/or strengthening them. If it wasn't about expanding its frontiers to new social realms, it wasn't called 'liberalism.' And if you weren't into expanding the New Deal's domain, you weren't called a 'liberal.' Expansion was central to the concept.

Now, right here and now, you may or may not yourself believe that the kind of things the New Deal did should be expanded to new frontiers. But the crucial point to grasp — the historical shift — is that if you don't believe that the New Deal project should be expanded, you aren't a 'liberal' in the sense the word meant before the forces Goldwater represented began flexing their muscles in the mid 1960s. Though you may still call yourself a liberal. Which may mean that the word itself, 'liberal,' has changed meaning, and the thing it refers to is not as far to the left as the thing it used to refer to.

This is a bedrock shift in the geological narrative I'm laying out, slowly, slowly — but this point is one of its foundations, and one's understanding of this point (if not one's opinion about the lessons for Democrats today, which the book leaves intentionally vague) should definitely come out in the text.

—Rick Perlstein

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

Meanwhile, in the Alternative Universe Where William the Bastard Got an Arrow in the Eye at Hastings...

Teresa Nielsen Hayden posts selections from our literature in Anglo-Saxon:

Making Light: AS bonbons: On frym?e wæs Word, and ?æt Word wæs mid Gode.... For hwi is ?eos niht ungelic eallum o?rum nihtum?.... Hwæt! ær ?issum dæge seofon wintra and hundeahtig...

My favorite:

mcmxii Eastermona? xv d: Her ?æt greate scip Titanic sloh isbeorg on sæ ?enden hit fór of Englalande to Niw-Eoforwice ond hit sanc ond .mm. folca aswulton ond hit wæs his fyrmest sæ-farung...

Posted by DeLong at 01:00 PM | Comments (5) | TrackBack

Best Headline of the Day

From Boing Boing:

Boing Boing: Gehry fries pedestrians, eggs with solar death ray:

Sunlight reflected from the Walt Disney Concert Hall in downtown Los Angeles has 'roasted the sidewalk to 140 degrees Fahrenheit, enough to melt plastic and cause serious sunburn to people standing on the street'. The fix: dull the building's highly reflective surface. Or -- meep-meep! Paging mister Christo! Need some orange curtains over here....

Update: BB reader Athelind sez: "This image is the Disney Concert Hall. This image is the Odeillo Solar Furnace in France, which can produce power densities of 12 megawatts per square centimeter. Notice any similarities? My comments on the story can be found here. Have a bright, sunny day!"

Update: BB reader Anthony Rue says: "The Gehry opera house is not Frank's most dangerous design. The Case Western Reserve administrative building in Cleveland has been threatening passersby with ice and snow fall for three years now"

Posted by DeLong at 12:36 PM | Comments (11) | TrackBack

An Add On, Not a Carve Up

Joshua Micah Marshall finds something interesting:

CQ.com: "New: White House Shifts Social Security Policy, Says Diverting Payroll Taxes Not Required: Treasury Secretary John W. Snow indicated Wednesday that the White House would accept a Social Security overhaul that does not divert the program’s payroll taxes into personal retirement accounts, a major shift in the administration’s position...

Posted by DeLong at 12:32 PM | Comments (9) | TrackBack

Orwellian Once Again

And we hand the mike to Atrios:

Eschaton: "There is Plan and No Plan":Cute trick.

The AARP, which claims 35 million members age 50 and over, is 'against a solution that hasn't been written yet,' said House Majority Leader Tom DeLay after a closed-door meeting with the GOP rank and file.

...

Younger Americans would be allowed to invest a portion of their payroll taxes on their own. In exchange they would receive a lower government benefit than they are now guaranteed, on the assumption that the proceeds of their investments would make up the difference. In addition, though, even younger voters who choose not to establish personal accounts would receive a reduced government benefit under Bush's plan, according to GOP congressional officials who have been briefed on the plan.

I'll stop calling the Bush administration "Orwellian" when they stop using 1984 as an operations manual.

Posted by DeLong at 12:28 PM | Comments (4) | TrackBack

Notes on Blanchard, Giavazzi, and Sa, "The U.S. Current Account and the Dollar"

Olivier Blanchard, Francesco Giavazzi, and Filipa Sa (2005), "The U.S. Current Account and the Dollar" (NBER: Working Paper 11137).

Blanchard, Giavazzi, and Sa model the current behavior of Asian central banks in pegging their currencies to the dollar as a continuous outward shift in the Asian demand curve for dollar-denominated assets that keeps the exchange rate stable: as the U.S. current-account deficit increases the supply of dollar-denominated assets that must be held by foreigners, the outward shift in the Asian demand curve keeps the price of dollar-denominated assets--the exchange rate--from depreciating.

They then model the (future) collapse of the peg as a refusal to shift the Asian demand curve out any further. The (unexpected) collapse of the peg thus leads to:

But isn't it more likely that when the peg collapses Asian central banks' desires to hold dollar assets will be severely diminished, and that the foreign demand curve for dollar-denominated assets will move back to its original un-shifted-out position? In that case we have:

  1. Foreigners look around, decide that they are holding many too many dollars, and decide to pull money out of the United States
  2. Not a decline but a collapse of the dollar to generate the U.S. trade surplus that is the flip side of the capital outflow.
  3. Over time, an appreciation of the dollar as foreign holdings drop, the desired capital outflow diminishes, and trade moves into balance.
  4. In short, the Roubini-Setser disaster scenario.

What principally distinguishes the Blanchard-Giavazzi-Sa model from the Roubini-Setser disaster scenario is not the interesting dynamics and modelling details added by the masters of imperfect substitutibility and the dynamic saddle path, but the implicit assumption that Asian central banks hold on to their current holdings of dollar-denominated assets even after the reason for acquiring those assets--maintaining social peace through high exports from Shanghai--is gone.

Is that a realistic and likely assumption?

(There is another difference as well: in BGS the collapse of the peg is unexpected. The decline in the value of the dollar carries with it a huge decline in the foreign-currency value of dollar-denominated assets with no compensating increase in contemporaneous returns or fall in desired dollar-denominated asset holdings valued in foreign currency. I need to wander down the hall and ask Pierre-Olivier Gourinchas how large these valuation effects are, both now and a year and a half from now.)


Details and Quotes

Abstract: There are two main forces behind the large U.S. current account deficits. First, an increase in U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. assets. Both forces have contributed to steadily-increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies: the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpet the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.

"The model builds on two old (largely and unjustly forgotten) papers, by Henderson and Rogoff (1982), and, especially, Kouri (1983)..."

BGS: This may be the place to make a point sometimes overlooked.... To reduce the trade deficit while maintaining stable output, the depreciation must come with other measures that increase domestic saving, such as a decrease in budget deficits.... These other meausures, however, have to come in addition to the depreciation. The statement that a reduction in budget deficits reduces or eliminates the need for depreciation is obviously incorrect...

(Yep)

BGS: If the purpose is to limit the eventual dollar depreciation, then the right monetary policy is... to decrease interest rates... have a larger depreciation in the short run, and a smaller depreciation in the long run.... [S]uch a policy must be accompanied by a reduction of the budget deficit so as to maintain output at its natural level...

(Yep)

BGS: The longer the Chinese wait to abandon the peg, the larger the eventual appreciation of the renminbi

(Yep)

BGS: It is often asserted that the recent appreciation of the euro against the dollar is (at least in part) the side-effect of the Chinese peg.... We think this argument is simply wrong

(I agree with BGS here too)

And, last, it's our currency but their problem:

BGS: A large fall in the dollar is not by itself a catastrophe for the United States.... It offers the opportunity to reduce budget deficits without triggering a recession. The danger is much more serous for Japan and western Europe... [T]heir room for macroeconomic maneuver is very limited...


  1. D. Henderson and K. Rogoff (1982), "Negative Net Foreign Asset Positions and Stability in a World Portfolio Balance Model," Journal of International Economics 13: pp. 85-194.
  2. Pentti Kouri (1983), "Balance of Payments and the Foreign Exchange Market: A Dynamic Partial Equilibrium Model, in J. Bhandari and B. Putnam, eds. (1983), Economic Interdependence and Flexible Exchange Rates (Cambridge: MIT Press).
  3. P.-O. Gourinchas and H. Rey (2004), "International Financial Adjustment" (Berkeley: U.C. Berkeley xerox).
  4. M. Obstfeld and K. Rogoff (2004), "The Unsustainable U.S. Current Account Revisited" (Cambridge: NBER).

Posted by DeLong at 12:09 PM | Comments (25)

March 01, 2005

20050301 Econ 113 Lecture: Great Depression: Building Tools

20050301 Econ 113 Lecture: Great Depression: Building Tools

1929: The stock market crash

1929-1933: The slide into the Great Depression

1933-1940: The New Deal

1941-1945: Rearmament and World War II

The Magnitude of the Great Depression

One of the problems with this course: people come from everywhere...

So today will be a "tools" lecture--a macroeconomic refresher course...

Closed Economy--international trade does not matter for the U.S. Great Depression (debate over this ranging down the southern hall of the sixth floor of Evans)

Basic Macro:

C + I + G = Y

C = C0 + Cy(Y-T)

I = I0 - Irr

C0 + Cy(Y-T) + I0 - Irr + G = Y

Y = (C0 + I0 + (G - CyT)/(1-Cy)

Talk about parameter values...

On to the monetary side:

MV = PY gets us to P = (V/Y)M = (V/Y)mH: Two things can put downward pressure on the price level:

Four stories about the Great Depression:

  1. FALSE--Hayek--I0 falls because of a previous capital glut: do nothing to fight the Depression
  2. HALF-TRUE--Friedman--the Great Depression came about because of a monetary contraction: the Fed allowed M to fall. But the fall in M comes about because of a fall in m, not in H. What triggers the fall in m? (Reformulate Friedman: without extraordinarily stimulative monetary policy, the system is unstable.
  3. MOSTLY-TRUE--debt-deflation triggered by the stock market crash.... But immense structural weaknesses...

Big problem with (3): why didn't something like the Great Depression happen earlier? Why was there only one Great Depression?


Next time: we'll consider six factors:

Driven by two initial impetuses:

Posted by DeLong at 01:07 PM | Comments (20) | TrackBack

20050224 Econ 113 Lecture: Gilded Age and Progressive Era

20050224 Econ 113 Lecture: Gilded Age and Progressive Era

Two parts to this lecture:


What was Populism? Three things:

Was populism left or right? Neither. It was for the little guy, and against coastal elites. It could swing either left or right...

Populism ran out of steam and was superseded by Progressivism, which sold itself as a pragmatic movement that tried to tackle the problems of the Gilded Age.

Problem 1: Rural poverty, especially in the South (what seemed a good rural standard of living in 1840 no longer seemed good in 1900, when output per capita was at least four times higher). Solution: education and uplift; public health. Rockefeller and hookworm.

Problem 2: Urban poverty. Public health (The Jungle by Upton Sinclair). Wages and working conditions (Triangle Shirtwaist fire). Unionization--America's bloody labor history. Immigration and acculturation. Solution: Good government and regulation.

Problem 3: Large corporations. Not us, but them. Malefactors of great wealth. Monopoly prices. Quality of output. Solution: Good government and regulation.

Progressive-Era responses to these problems:

In general, the exaltation of technocrats (and sometimes direct democracy) over politicians.

Not a welfare state, not a social-insurance state, but a regulatory-commission state.

Progressivism "worked": there was no socialism in the United States

Progressiism was a minority current: Theodore Roosevelt's creation, first as president and then as spoiler-ally of the Democrats allowing Woodrow Wilson to gain the presidency.


American Industrial Supremacy

Three "competitors" for "industrial supremacy" around 1900: Germany, Britain, U.S. Britain in 1860 is the world's industrial superpower. You would think that the world's industrial superpower has an enormous advantage in being the icebreaker for new technologies. But Britain wasn't.

The high tech industries of the late-nineteenth century went elsewhere:

German edges:

British deficiencies:

American additional edges, beyond resources and scale"

Leon Trotsky in 1917: the U.S. is the furnace where the future is being forged.

Posted by DeLong at 12:11 PM | Comments (14) | TrackBack

20050301: Marc Gersen's Writing Handout

Marc Gersen has volunteered to take some of the workload off of Richard Halkett and Marit Rehavi by doing a bunch of our grading. Here are his thoughts after reading the first round of papers.

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

The Bull Moose Misses the Point

The Bull Moose Misses the Point

He writes:

Bull Moose: The admirable passion of activists should certainly be channeled to oppose the dastardly policies of the Bush Administration. But thought should also be given to innovative alternative proposals to the Bushies. Yes, we oppose privatization - but how will we promote retirement prosperity for older Americans? Social security, alone, is an insufficient solution. 'No!' is not an alternative program.

But there is an alternative plan on Social Security that is a near-consensus position for Democrats. It has three parts:

  1. Social Security should be preserved--not phased out, as the Bush plan's "price indexation" formula does.
  2. Social Security's long-run funding hole should not be closed by benefit cuts alone, but by a mixture of steps that reduce costs and increase revenues.
  3. Private accounts to make it easier for America's non-rich to build their retirement savings are a wonderful idea if properly implemented and if proposed as an add on to rather than a carve out from Social Security.

And there are also two observations on the Bush administration:

  1. You can't negotiate with the Bush administration: its word is not good.
  2. You can't rely on the Bush administration: its track record tells us that even good ideas will be implemented very badly if they are left in its hands.

I'm tired of tendentious claims that Democrats have no alternative proposals on Social Security. They are simply not true.

Posted by DeLong at 08:24 AM | Comments (57) | TrackBack

March 1, 2005

Jeebus! It's March 1.

How did *that* happen?

Posted by DeLong at 06:01 AM | Comments (17)

The Volokh Conspiracy Has a Quality Control Problem

Yep. Quality control problems.

Kevin Drum writes:

The Washington Monthly: ON CLICKING THE LINK....Here is why you should always click the link. Today, Todd Zywicki, writing about a controversy over speech codes at the University of Alabama, says:

[T]his is not the first time that Alabama's students have stood up to bullying by their Administrators, who once tried to prohibit the display of American flags on campus.

Wha...? They tried to prohibit the display of American flags? At the University of Alabama? That didn't compute. So I clicked:

This is, after all, the school that banned the American flag from dorm windows.

Hmmm. Dorm windows. But that still sounds peculiar. Click again:

After months of experimenting with different methods of restricting speech, the administration of the University of Alabama (UA) has 'indefinitely' tabled a policy outlawing all window displays in student dormitories. The policy was issued after a student was ordered to remove a confederate flag from the door of his dorm room. Other students, aware of the threat to their liberty posed by this regulation, subsequently displayed American flags to challenge administrators to enforce the ban.

Ah. So what they actually banned was dorm room window displays of all types, and they did it in reaction to the display of a Confederate flag. That's still a misguided policy, but hardly the same as 'prohibit[ing] the display of American flags on campus,' is it?

Posted by DeLong at 06:00 AM | Comments (17) | TrackBack

Pandagon Praises Lindsay Beyerstein

Pandagon Praises Lindsay Beyerstein

This is how it is done:

Pandagon: The Next Episode: ...Lindsay Beyerstein from Majikthise, who in addition to being seven kinds of smart, is also an eighth, previously considered theoretical kind of smart that was thought unsustainable outside of sealed laboratory conditions...

Use this example as a model for your own praise of others.

That is all.

Posted by DeLong at 05:59 AM | Comments (4) | TrackBack