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April 28, 2005

The Bush Social Security Clown Show Continues

Bush gives a press conference...

You will recall that there are four potential dealbreakers--four hurdles a Bush plan must surmount before it is worth supporting:

  1. Its private accounts must be a good deal for beneficiaries.
  2. The plan must increas national savings (which means not carve-out but add-on).
  3. The plan that preserves the defined-benefit component of Social Security in the long run.
  4. The plan must implemented by competent technocrats, not the deranged monkeys who have brought us such wonders as the current deficit, the steel tariff and the Iraqi nuclear program.

Bush may have made progress on (3)--or may not. I cannot tell. He certainly did not make progress on (1), (2), or (4).

FT.com / US - Bush shifts approach on Social Security reform: Edward Alden and Holly Yeager in Washington: President George W. Bush on Thursday night endorsed a controversial plan to ensure the scheme's solvency by cutting benefits sharply for better-off workers. In a rare prime-time news conference that also focused on rising petrol prices, Mr Bush said he wanted to reform the national pension scheme so that future benefits for low-wage workers would be preserved, while middle and upper-income workers would receive less than currently promised.... An ABC News-Washington Post poll this week found 64 per cent of Americans did not approve of the way Mr Bush was handling Social Security and 51 per cent did notsupport his plan for private accounts, down from 41 per cent in mid-March. While he reiterated his support for allowing younger workers to shift into private accounts some of the money they pay into Social Security.... Private accounts that divert funds from Social Security have faced united Democratic opposition, as well as criticism from some Republicans....

You know, when I look at my four requirements, it strikes me that three of them--(1), (2), and (4)--are primarily Republican issues, or issues that are of especial concern to those whom I once thought Republicans to be. They are supposed to worry about whether Bush's private accounts are structured to be a good deal for beneficiaries (they are not). They are supposed to be worried about raising national savings (the Bush plan doesn't, except through very indirect and improbable channels). They are supposed to be worried about competence in government.

So where are the grownup Republicans on this? I don't hear a peep.

Posted by DeLong at 08:38 PM | Comments (0)

Signs of the Times

David Altig writes:

macroblog: The GDP Report: We, Apparently, Are Not Pleased: I'm not sure I had ever contemplated what the day would look like when 3.1 percent growth was considered bad news, but now I know for sure...

So much have our estimates of the potential growth rate of the American economy increased in this, our age of technological revolutions.

Posted by DeLong at 08:37 PM | Comments (0)

What I'm Missing Today...

"No. Very few people from Berkeley make any of the seminars at the Federal Reserve Bank of San Francisco," says Chad Jones.

"That's easy to explain," says George Akerlof. "Consider the high quality of the marginal seminar you miss here at Berkeley."

Today's seminar that I'm missing is by Stanford's Bob Hall (I have to teach). Bob says: "I'm giving the 1023rd paper applying George's lemons model to the labor market. And yet there is still something new to say."

Q: Why are we justified in inferring that Bob Hall was once a computer programmer, and that his mind has been shaped by close encounters with a machine with a ten-digit register?

A: The number "1023." 1023 is as high as you can count in ten binary digits. The use of "1023" as a synonym for "a very large number" is a sign of having once spent a lot of time with a ten-digit register.

April 28, 2-4 p.m., 639 Evans MACROECONOMICS: Bob Hall (Stanford University), "The Amplification of Unemployment Fluctuations through Self-Selection": http://www.nber.org/papers/W11186.

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

First Quarter GDP Growth Slows

The Financial Times reports:

FT.com / US - US GDP growth slows to 3.1 per cent: By Christopher Swann in Washington: The US economy expanded at a slower-than-expected 3.1 per cent rate in the first quarter, its weakest performance in 2 years and below what most analysts consider its non-inflationary potential. The bloated trade deficit dragged the growth rate lower. But spiralling energy costs also appear to have stunted consumer and business spending....

More disappointing was a slowdown in business spending on equipment and software - which grew by 6.9 per cent annualised, compared to 18.4 per cent in the fourth quarter. Economists in the private sector and the Federal Reserve have been hoping that business investment would continue to power ahead as consumers started to rein in their spending. Data over the past few days has now cast that into doubt. ...

The core personal consumption expenditure index - the Federal Reserve's favoured measure of inflation - rose at 2.2 per cent - its fastest rate since the fourth quarter of 2001. In the previous quarter it was rising at a 1.7 per cent pace. "Overall the report is well below expectations," said Matthew Martin, an analyst at Economy.com...

Posted by DeLong at 08:33 PM | Comments (0) | TrackBack

April 27, 2005

The Future of Higher Education?

In comments, Ralph recommends The Teaching Company:

For the past five years, since retirement, I have been purchasing video lectures by prominent professors on a variety of subjects, put out by the Teaching Company. My interests have centered on Ancient and Modern European history. My expectations were exceeded by the quality of the lectures. They are really amazingly good. A recent example is a lecture on "the long 19th century: Europe from 1789 to 1917" by Prof Robert I Weiner of Lafayette College. There are 33 lectures about 45 minutes each. He covers topics like the French Revolution, the Napoleonic era, French history after Napoleon, Germany unification, Italian unification, diplomacy under Metternich, Bismarck, and post-Bismarck to WW I. Admittedly, this is one of the better products I have purchased and most were bought at sale prices. But as I have mentioned my expectations were exceeded.

They're not cheap. But I would recommend my friend Tim Taylor, who has done four very good lecture series for them:

Posted by DeLong at 08:48 PM

A Quote too Good to Linger in Obscurity

Mark Schonfeld, director of the SEC's Northeast Region, has a future in any industry that rewards the creation of vivid metaphors. A correspondent writes that we should check out Deborah Solomon, "Moving the Market: Deloitte Statement About Adelphia Raises SEC's Ire," Wall Street Journal 4/27/05 p. c3:

As Deloitte & Touche LLP sought to resolve charges that it failed to detect accounting fraud at Adelphia Communications Corp., the auditor found itself back in hot water with securities regulators over its depiction of the role it played in the fraud. Deloitte agreed yesterday to pay $50 million to settle Securities and Exchange Commission charges that it missed fraud at the country's fifth-largest cable company. The payment is the largest ever levied by the SEC against an accounting firm. However, Deloitte found itself again in the SEC's cross hairs after issuing a public statement that appeared to shift blame to Adelphia by saying the company and some executives "deliberately misled" Deloitte's auditors.

Under terms of the settlement agreement, Deloitte is required to neither admit nor deny the SEC's charges. SEC officials viewed the statement as denying liability and forced Deloitte to rescind it.

"Deloitte's characterization of the case is simply wrong. Deloitte was not deceived," said Mark K. Schonfeld, director of the SEC's Northeast Region. "They didn't just miss red flags, they pulled the flag over their head and then claimed they couldn't see."

Posted by DeLong at 08:38 PM | Comments (0)

Harry Kreiser's "Conversations with History"

Now that we are in the Broadband Age her on the Internets, this long-term project by Harry Kreisler, the Executive Director of Berkeley's Institute for International Studies, is an extremely valuable resource--largely because Harry is an interviewer genuinely interested in what his subjects have to say:

Harry Kreisler, "Conversations with History" http://globetrotter.berkeley.edu/conversations/

In these lively and unedited video interviews, distinguished men and women from all over the world talk about their lives and their work. Guests include diplomats, statesmen, and soldiers; economists and political analysts; scientists and historians; writers and foreign correspondents; actors and artists. The interviews span the globe and include discussion of political, economic, military, legal, cultural, and social issues shaping our world. At the heart of each interview is a focus on individuals and ideas that make a difference.

Harry Kreisler is executive producer and moderator of the series, which is produced at the Institute of International Studies at the University of California at Berkeley. Conceived in 1982 by Mr. Kreisler as a way to capture and preserve through conversation and technology the intellectual ferment of our times, "Conversations with History" includes over 300 interviews...

Harry's interviews are found not only on the Internets, but Friday evening at 6 and 9 Pacific Time on UCTV, found on the EchoStar DISH Network, Nationwide Channel 9412. Forthcoming TV broadcasts include:

April 29: Forensic Scientist William Haglund talks about digging up bodies in Bosnia, Central America, and Nigeria.
May 6: Steve Coll, author of Ghost Wars: The Secret History of the CIA, Afghanistan, and bin Laden.
May 20: Thomas Barnett, author of The Pentagon's New Maptalks about globalization, the world order, and what U.S. grand strategy should be.
May 27: Nobel Prize-winning economist Amartya Sen.

Posted by DeLong at 08:37 PM

The Greenspan Succession

Greg Ip writes:

WSJ.com - Finding Someone to Fill Greenspan's Shoes. By GREG IP, Staff Reporter of THE WALL STREET JOURNAL: Sometime in the next nine months, President Bush will make one of the most important appointments of his presidency, one that history suggests will affect the economy in the U.S. and abroad long past the end of his term: Selecting a successor to Federal Reserve Chairman Alan Greenspan... three front-runners, all with sterling academic pedigrees: Martin Feldstein... Glenn Hubbard... and Ben Bernanke, 51.... [T]he White House will likely seek a successor who reassures the markets while being philosophically attuned to Mr. Bush's overall economic agenda. The chief job of the Fed chairman is to set interest rates, but -- especially under Mr. Greenspan -- the Fed chairman also has emerged as the arbiter of sound fiscal policy, and Mr. Bush is likely to steer clear of someone he thinks would criticize his budget policies.... Mr. Feldstein may have the edge in economic stature and political experience.... In an interview, Mr. Feldstein says the deficit is much smaller today as a share of gross domestic product than it was in the early 1980s, and it will likely decline further even if the tax cuts are made permanent, provided the administration is "even reasonably successful" in controlling discretionary spending.... Mr. Hubbard, as chairman of Mr. Bush's Council of Economic Advisers from 2001 to 2003, won admiration for his discipline and work ethic on issues ranging from the West Coast dockworker lockout to the 2003 dividend-tax cut. He was known for getting his staff to quickly draft authoritative policy memos for White House decision makers. "He earned his way into the Oval Office," says a former administration official.... Mr. Bernanke conducted research on monetary policy at Princeton University before joining the Fed in 2002. Since then, his plain-speaking style, numerous speeches and copious research have made him second in prominence at the Fed only to Mr. Greenspan. He recently said the hardest part of moving to the Fed was having to wear a suit: "My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded."... There could be several dark-horse candidates. Donald Kohn, a longtime Fed staffer and now governor, is well placed to emulate Mr. Greenspan but he is a political independent. Consultant Lawrence Lindsey has close ties to the White House and was a Fed governor, but his record as Mr. Bush's first National Economic Council director was mixed. John Taylor is a prominent monetary-policy scholar but he didn't leave a big mark in the four years he just spent as Treasury's top international official...

My view is that Bernanke is the best qualified: monetary policy is and has been his thing for his whole career.

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

Zero-Sum Grand Strategy: Just Say No!

Robert Kaplan has annoyed the highly-intelligent Praktike:

Robert Kaplan is Afraid | Liberals Against Terrorism: I have to say that it would be deeply unfortunate and downright foolish if America and China backed themselves both into a 'second Cold War,' as Kaplan puts it. It could only be the result of a mutual miscalculation. There's no doubt that we should be prepared militarily, and we shouldn't be naive in scrutinizing Chinese intentions. I admit that I have my own inchoate concerns about Chinese nationalism, its drive for new energy supplies, and its rumblings over Taiwan. But there are obvious and important differences between the Soviet Union and China, just as there are differences between the late 19th Century balance of power that Kaplan so lovingly uses as an analogy (which, as every schoolboy knows, collapsed after Bismark departed the scene) and the current state of play in the Pacific region.

The Soviet Union was, notably, communist and autarkic. China, by contrast, is developing via an export and FDI-led strategy--meaning that it understands that wealth, power, and geostrategic influence are best created by means other than territorial aggrandizement. The (nominally) Communist Party's internal legitimacy rests upon its ability to improve the living standards of its people, and that economic development is therefore its first priority. And that's good for us, because we like to buy cheap and increasingly well-made Chinese products, and we hope that China's huge population will become a vital market for our own goods and services.

U.S. policy ought to be about finding ways to create a win-win situation in Asia rather than on blundering into a pointless new Cold War that can only make everyone poorer and stupider. We shouldn't be afraid of China, but rather we should be afraid that U.S. China policy will be determined by people who think in zero-sum terms.

People like Robert Kaplan.

Posted by DeLong at 08:33 PM | Comments (0)

Inflation Central: FRB Cleveland

William Polley directs us to:

Inflation :: FRB Cleveland: Inflation Central: Track inflation in the United States and across the world and put it all in perspective with our analysis and commentary.

Posted by DeLong at 08:31 PM | Comments (0)

Why Is Bush Holding Up Galveston, Matagorda, and Brazoria as Good Examples?

Everything I've seen says that their numbers are not so good.

Think Progress Reports:

The Texas Privatization Plan:: Sen. Barbara Boxer (D-CA) took the president up on the "Texas idea" suggestion. The senato's office has released a report looking at the 1981 Texas plan. In 1981, three Texas counties "decided to opt out of Social Security and instead to provide their public employees with a system of privatized accounts." The analysis done by Boxer's office and the nonpartisan Congressional Research Service "compares two sets of families in three different income brackets [and] shows what happens to their retirement in 2005 under Social Security and under the Texas plan." The conclusion: "By examining the actual system in place in Texas, this study shows that Americans are worse off with privatized accounts - not in theory, but in reality."

Posted by DeLong at 08:30 PM | Comments (0)

Fontana Labs Gives College Advice

My only quarrel is that it understates the importance of being energetic and aggressive (and tough-skinned) in making a success of one's time at a large state school (or a large private school, for that matter):

Unfogged: Fontana Labs' agony column: college edition: ... an interesting question about choosing colleges: go with a moderate name and a big loan, or Big Ten for free? This is something I think about a bit, since I spent time at Big State as a student and I teach at a moderately tony private college.

The case for a smaller private institution: interesting opportunities are easier to find, and faculty are there for you-- something that's not true at a large university, where faculty are there primarily for research and grad student training. Our undergraduates have tremendous access to faculty.... My colleagues think a lot about teaching, and people can get fired for doing it badly.... The case for Big Ten: a larger, more diverse faculty means that you can find someone who's an expert in whatever you're interested in studying. You can work with profs with more active research profiles. If you're dedicated to finding good teachers and mentors, you can take advantage of these tremendous resources and put together a great education (and you can get letters from people who are pretty well-known, though they won't know you as well as their counterparts at College). Plus, it's cheap, or, in L's case, free.

Verdict: I'd have to go with the Big Ten in this case. Disclaimers: a lot of this depends on what the student is like. Some people get lost in a sea of 30,000 undergraduates. If you're not savvy about course selection, researching your profs, and so on, you can end up with mediocre product. You have to BE! AGGRESSIVE! BE BE AGGRESSIVE!"

Posted by DeLong at 08:26 PM | Comments (0)

Offshoring Creeps Closer to the Professoriate!

Sujeet Bhatt sujeet.bhatt@gmail.com writes:

BBC News: British exam papers India bound: "Thousands of exam papers from England will be sent to India later this year as part of the marking process. Critics in England say the move is the latest example of cost-cutting by outsourcing, and will result in errors in exam marking and delays in results. The exam board behind the initiative, AQA, told the BBC that no marking would take place in India and that the move would make marking more efficient.

There has been no comment from the firm in Madras that handles the papers.

http://news.bbc.co.uk/2/hi/south_asia/4485517.stm

Posted by DeLong at 08:05 PM | Comments (0)

Gurk!

An unhappy durable goods number:

FT.com / International economy - US durable goods orders drop 2.8% By Christopher Swann in Washington: Orders for durable goods fell unexpectedly last month, adding to the mounting gloom in financial markets over the strength of the US economy. The 2.8 per cent fall - the largest monthly decline in more than 2 years - was relatively broadly based with ebbing orders for aircraft, cars and computers. Even excluding the volatile transport sector, bookings fell 1 per cent after a 0.2 per cent decline in February. The closely watched non-defence capital goods excluding aricraft component - seen as the best proxy for business equipment investment - slid 4.7 per cent after a 2.5 per cent decline in Febraury. ING Financial Markets said this may cause some analysts to nudge down their expectations for economic growth in the first quarter to 3 per cent from around 3.5 per cent. "Overall another disappointing figure that is likely to increase talk of a pause at some point by the Federal Reserve as it moves rates to neutral," ING said, in its research this morning.

Posted by DeLong at 08:02 PM | Comments (0)

Well, That's It...

I guess I've bought my last software product from--excuse me, paid my last license fee to--Microsoft:

Suburban Guerrilla: "WASHINGTON -- Microsoft Corp. is paying social conservative Ralph Reed $20,000 a month as a consultant, triggering complaints that the well-connected Republican with close ties to the White House and to evangelist Pat Robertson may have persuaded the company to oppose gay rights legislation...

Posted by DeLong at 08:00 PM | Comments (0)

It's Not Just About Politics

Robert Waldmann writes:

Robert's Stochastic thoughts: Brad DeLong has criticised Jonathan Weisman from time to time for excessive Bush friendliness. I expect that Brad is satisfied with this column. I personally have no complaints about the headline (for a change)...

Robert is wrong! Take a look at the leading paragraphs:

GOP May Be Splintering on Social Security: A badly divided Senate Finance Committee yesterday held the first hearing examining President Bush's efforts to restructure Social Security. While the Democrats remained united in their opposition, there were signs of cracks in the Republicans' support for the president.

After months of political positioning, the stakes were high as the committee took up Bush's signature domestic issue for his second term. The White House has framed the Social Security debate as a matter of political courage, challenging both parties to secure the program's long-term solvency while giving all Americans an ownership stake in their economy. But over the course of the president's Social Security tour, public support for Bush's proposal has fallen, and Democrats see the issue as their best chance to make political gains in Washington.

With that highly charged backdrop, Republican divisions at the hearing had added significance...

Democrats see the issue as one of stopping yet another destructive and badly-thought-out Bush proposal--like its entire security policy, like its budget deficits, like its corporate tax giveaways, like its farm bill, like its incredibly defective Medicare drug benefit. It's not just about politics.

After all, if it were just about politics, would the Republicans be splintering? Grassley, Thomas, and Snowe are not just playing the game of politics, they are trying to figure out what is best for the country--as are Conrad and others.

Weisman and Fletcher mislead their readers when they pretend that it is all about, and just about politics. But they don't know enough to write the story any other way.

So no, Robert, I am not satisfied.

Posted by DeLong at 07:57 PM | Comments (0)

Where's My Access to the Universal Online Library of Humanity?

It's heeerrrreee! Actually, it's not here yet. But it's coming:

Google Print Search: brad delong:

"Economic Puppetmasters: Lessons from the Halls of Power by Lawrence B. Lindsey - Page 18As Brad delong, former Clinton aide, now a professor at the University of California at Berkeley, said in a Wall Street ...[ More results from this book ]

Human Dignity and Contemporary Liberalism by Brad Stetson - Page 41On the loss of property rights specifically, see James V. delong, Property Matters (New York: The Free Press, 1997). 63. ...[ More results from this book ]

Money Changes Everything: How Global Prosperity Is Reshaping Our Needs, Values, and Lifestyles by Peter Marber - Page 24As economist Brad delong points out: Today the average American possesses a degree of material comfort that in many ways outstrips the reach of even the ...[ More results from this book ]

Explorations in Classical Sociological Theory: Seeing the Social World by Kenneth Allan - Page 100... .berkeley.edu/Economists/smith.html (Site maintained by Brad delong, Professor of Economics at the University of California, Berkeley; brief biography ...[ More results from this book ]

Death of Distance: How the Communications Revolution Will Change Our Lives by Frances Cairncross - Page 4... in the way mass production raised the efficiency and quality of manufacturing. As Brad delong, an economist at the University of California at Berkeley ...

Posted by DeLong at 07:46 PM

Duncan Black Tries to Teach Economics to the Wall Street Journal

Like teaching a pig to sing opera, it doesn't work. You waste your time, and it annoys the pig:

Remedial economics for the WSJ editorial board ... [Media Matters for America]: The Wall Street Journal editorial argued that 'the overall tax burden grew more progressive' in the last 25 years because upper income taxpayers pay a larger share of total taxes than they did in 1979... between 1979 and 1999, the share of total taxes paid by the richest 0.1 percent of taxpayers rose from 5.06 percent to 11.05 percent, and the share paid by the top 1 to 5 percent of earners rose from 14.69 percent to 17.75 percent. But over the same 20-year period, the share of total U.S. income that these two groups earned increased much faster than their share of the tax burden, as economists Thomas Piketty and Emmanuel Saez explained in an updated version of their paper 'Income Inequality in the United States, 1913-1998' (which now includes data up to the year 2000). In 1979, the top 0.1 percent of taxpayers earned 2.01 percent of total U.S. income; in 1999, they earned 6.63 percent. This group's share of total income more than tripled, while its share of federal taxes paid only increased by a little more than double.... The relative share of total taxes paid by various income groups -- which the Journal cites -- is [not] a... measure of... progressivity.... [A] tax system is 'more progressive' if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up... [as is explained in] the online supplement (PowerPoint exhibit for chapter 12, slide 35) to the third edition of his introductory economics textbook, Principles of Economics (Thomson South-Western, 2004), [by] N. Gregory Mankiw, who served as the chairman of President Bush's Council of Economic Advisers until late February 2005...

Well, maybe annoying the pig is worthwhile.

One of my most interesting moments in Washington was being seated at a luncheon table behind Charlie Stenholm and Judd Gregg, who began to spin more and more interesting and improbable theories about just why Dow-Jones let the Journal editorial page exist in its current form...

Posted by DeLong at 07:39 PM | Comments (0)

Grassley Tells Bush to Be Quiet

The Senate Finance Committee starts working. Dana Milbank reports:

Personal Accounts Are Not A Certainty: On the eve of the first congressional hearing on the restructuring of Social Security, Republicans on the Senate Finance Committee signaled that they will not insist that personal accounts be part of the legislation and that they will not seek further details from President Bush about his plans for the government-run retirement program. In a briefing arranged by Republican staff on the committee and given to 60 reporters yesterday, a committee official involved in the Social Security discussions also said the legislation will move through the committee in June or July. The briefing was given on the condition that the official, who is an aide to Finance Committee Chairman Charles E. Grassley (R-Iowa), would not be named and that his remarks would not be directly quoted.

The official's account, given in preparation for today's hearing on various Social Security proposals, appeared to soften many of the statements Grassley had previously made.... In yesterday's briefing, the committee official asserted that the contours of Bush's plan for Social Security are already well known and that the panel did not believe the release of further details of the plan would be helpful.

Posted by DeLong at 07:33 PM | Comments (0)

The Reaction to Greenspan's 2001 Testimony

Mark Thoma has done some digging and takes a look at press reaction to Greenspan's 2001 tax cut testimony:

Economist's View: "hat Did Greenspan Say and When Did He Say It?...

Mr. Greenspan told Mr. Sarbanes that the charge was 'frankly unfair' because it neglected the Fed chairman's unambiguous endorsement of 'trigger' mechanisms during the same testimony. 'I advocated tax cuts' in 2001, Mr. Greenspan acknowledged Thursday, 'but I also advocated triggers in the same testimony.' Did he advocate triggers?

While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.... Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections.... But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible. But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press.... However.... Consider the following quote:

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets.... I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise....

[W]hen the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest....

Here are the headlines [from January 2001]:

Greenspan Endorses Tax Cuts WASHINGTON, Jan 25, 2001 (AP Online via COMTEX) -- Federal Reserve Chairman Alan Greenspan gave a major boost Thursday to President Bush's plan for across-the-board cuts in taxes...
GOP Raves at Greenspan's Tax Views January 26th WASHINGTON (AP) - President Bush, in office less than a week, has scored an early triumph in his campaign for a $1.6 trillion tax cut, winning Federal Reserve Chairman Alan Greenspan's support for tax relief...
In Policy Change, Greenspan Backs A Broad Tax Cut RICHARD W. STEVENSON (NYT) January 27, 2001... it should not be so big that it would plunge government back into deficit if federal budget surplus fails to materialize as projected...
Greenspan eyes tax cuts January 25, 2001: 2:09 p.m. ET WASHINGTON (CNNfn) - Federal Reserve Chairman Alan Greenspan gave his broadest endorsement of tax cuts to date Thursday... Greenspan said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes. 'It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases,' the Fed chairman said...
Greenspan supports tax cut plan By Gerard Baker in Washington FT.com site; Jan 25, 2001 Alan Greenspan, chairman of the US Federal Reserve, on Thursday threw his weight behind proposals for a large tax cut, giving a powerful boost to the centerpiece of President George W. Bush's economic policy.... That created the real risk that, if budget surpluses continued, the US government would begin to acquire a growing portion of the nation's private financial assets - which would create serious inefficiencies...
Greenspan quick to move with times By Gerard Baker in Washington FT.com site; Jan 26, 2001 Alan Greenspan... found himself repeatedly echoing Keynes's defence...as he explained his remarkable U-turn...
LEX COLUMN Financial Times; Jan 26, 2001 Alan Greenspan's sudden endorsement of President George W. Bush's tax cutting plans looks like smart politics rather than sound economics.... Mr Greenspan worries that in six to seven years this debt will have been repaid and the government will be forced either to acquire private assets or go on a spending spree...
Greenspan Gets Mixed Reviews CBS News, WASHINGTON, Jan. 26, 2001 ...Greenspan urged caution, suggesting that Congress consider some type of trigger to trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated...
Greenspan on tax-cut bandwagon Chicago Tribune - US FT Abstracts; Jan 26, 2001 Federal Reserve chairman Alan Greenspan told the senate budget committee yesterday that... he is ready to support reduced tax rates. Greenspan backs tax cuts as way to trim surplus...
Los Angeles Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan gave his endorsement for President Bush's ambitious tax cut program yesterday, citing the expanding budget surplus as reason for lower taxes...
Editorial: Interpreting Mr. Greenspan The New York Times - US FT Abstracts; Jan 26, 2001 Alan Greenspan's approval of tax cuts in his Congressional testimony yesterday should not be misconstrued by Bush as an endorsement of his $1.6 trillion tax cut offer.... Congress should therefore move carefully toward tax cuts...
In policy change, Greenspan backs a broad tax cut The New York Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan has given his blessing for a substantial tax cut... but he did warn that any cut should not be so big that it plunged the government into deficit should the federal budget fail to materialize as projected...
Greenspan, in about-face, backs tax cuts The Wall Street Journal - US FT Abstracts; Jan 26, 2001 In a dramatic departure from a long-held view, Federal Reserve Chairman Alan Greenspan yesterday lent his support to the federal government's tax cut package...
Zeal and doubt follow tax-cut blessing The Boston Globe - US FT Abstracts; Jan 26, 2001 The Federal Reserve's Alan Greenspan lent his support to the Republican's plan for a tax-cutting initiative yesterday...
Economic Realities Drove Greenspan The Washington Post. Washington, D.C.: Jan 26, 2001. pg. A.4 [FROM ABSTRACT] Alas, said [Alan Greenspan], it's not that simple. The moment the target is reached and the government stops using its annual surpluses to pay down the national debt, it faces a problem... What to do with the extra cash piling up at the Treasury?...
Bush's Hand Greatly Strengthened Glenn Kessler. The Washington Post. Washington, D.C.: Jan 26, 2001 [FROM ABSTRACT] [Alan Greenspan] dispelled the notion that [Bush]'s plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged...

Posted by DeLong at 07:23 PM | Comments (0)

Mark Schmitt Agrees with Me...

Peter Orszag is a national treasure:

The Decembrist: Peter Orszag is a national treasure: I'm watching the Finance Committee hearing on Social Security. Peter Orszag of Brookings and the Center on Budget and Policy Priorities just had a wonderful metaphor to respond to the idea that private accounts are a 'sweetener' or 'dessert' to Social Security that will make it easier to swallow the tax increases or benefit cuts that would ensure solvency.

'That's like trying to convince your kid to eat spinach by offering him a turnip for desert.'

Perhaps the most bizarre thing is that I'm told that the White House has for months had numbers like Robert Shiller's and Goldman Sachs's thumbs-down assessments of the desirability of private accounts on the terms the administration has offered them. Yet they haven't bothered to change the terms, or even to make the argument that financing investments by borrowing from your Social Security defined-benefit account at 3% plus inflation is a good deal. Something very similar used to happen with Ira Magaziner and company: Marina Weiss--Bentsen's senior health care aide--would go in there and say, "Ira, we don't think this will work. Moreover, Robert Reischauer at CBO and Breaux's and Moynihan's people in the Senate think like us--they won't think this will work either. And you need Reischauer, Breaux, and Moynihan to be enthusiastic or this is going nowhere." And there would be no response.

Posted by DeLong at 07:20 PM | Comments (0)

In a Good World, Peter Orszag Would Be in the White House Running Social Security Reform

His testimony before the Senate Finance Committee this morning:

Social Security Reform

Peter R. Orszag
Joseph A. Pechman Senior Fellow in Economic Studies
The Brookings Institution

Senate Committee on Finance
April 26, 2005

Mr. Chairman and other members of the Committee, thank you for inviting me to testify before the Committee this morning. Social Security provides the foundation of retirement income, but must be combined with other saving to achieve full retirement security. Retirement income should thus be viewed in terms of tiers, with Social Security delivering a core tier of protection upon which additional retirement income must be built....

Both tiers of retirement security face challenges. In that context, my testimony makes four main points:

• Retirement security can be significantly enhanced by improving 401(k)s and IRAs through commonsense reforms that both sides of the Social Security debate should embrace. The individual accounts we already have -- in the form of 401(k)s and IRAs -- can be substantially improved and strengthened through a series of commonsense reforms that would make the pension system easier to navigate and more rewarding for American families. In the face of the difficult choices presented by the current system, many people simply procrastinate, which dramatically raises the likelihood that they will not save enough for retirement. Disarmingly simple concepts -- such as changing 401(k) plans so that workers are automatically enrolled unless they opt out, and making it easy to save part of an income tax refund -- have the potential to strengthen retirement security significantly. Both sides of the Social Security debate should agree on the straightforward steps necessary to improve 401(k)s and IRAs, and should come together to enact the changes immediately.

• Although improving the accounts we already have on top of Social Security makes sense, introducing accounts within Social Security does not. Under the Administration's proposal for accounts within Social Security, workers receive payroll revenue today, but pay the payroll revenue back, plus interest at a 3 percent real rate, at retirement through a reduction in traditional Social Security benefits. In effect, the individual accounts represent a "Social Security line of credit." Workers drawing upon that line of credit have payroll revenue deposited into their individual account today, but then owe the funds back, plus interest, once they retire. The system is thus similar to a loan from the government to workers. At best, assuming that all the loans carry the government's borrowing rate and are fully repaid, the accounts do nothing to improve solvency within Social Security over the long term -- as even the White House has acknowledged. A more likely scenario is that some of the loans will not be repaid in full, in which case the accounts harm solvency, even over an infinite horizon. And even if they are actuarially neutral over the long term, the accounts create a massive cash-flow problem in the meanwhile. Some argue that the accounts would facilitate other changes -- especially benefit reductions for higher earners -- that would help to restore long-term balance to Social Security. But it is hard to see why, unless they were subsidized, the loans should be particularly attractive, especially to higher earners. Indeed, a Goldman Sachs analysis recently concluded that, "In essence, the 3% real rate offset represents a loan from the federal government to the accountholder to fund the personal saving account. This is not an attractive proposition." Higher earners who typically already own a mix of stocks and bonds should find little or no value in unsubsidized loans from the government. And if the accounts were subsidized to make them more attractive to higher earners, their direct effect would be to expand the Social Security deficit. Increasing stock ownership among moderate and lower earners is desirable, but not by encouraging them to borrow against their future Social Security benefits. Instead, a better approach to increasing equity ownership and retirement saving for such households are the commonsense changes to 401(k)s and IRAs described above. Reducing traditional Social Security benefits to make room for individual accounts would also be unsound for society as a whole, since it would decrease the core tier of retirement income that is protected against financial market fluctuations, inflation, and the risk of outliving one's assets. Furthermore, whatever the initial rules for the accounts, there is likely to be considerable pressure over time for liberalizing pre-retirement access to the funds -- which is precisely what has occurred with 401(k)s and IRAs, along with the Thrift Savings Plan. Such access may make sense in the upper tier of retirement income, but not within the core tier because it undermines the preservation of funds for retirement.

• Failing to dedicate additional revenue to Social Security means that larger benefit cuts would be necessary to restore solvency. For example, dedicating the revenue from a reformed estate tax to Social Security could eliminate the need for more than $1 trillion in benefit reductions over the next 75 years. Every dollar of estate tax revenue dedicated to Social Security is a dollar less of benefit reductions or payroll tax increases necessary to address Social Security's projected deficit. Despite the claims of some advocates, the Administration's proposal for individual accounts makes brutally clear that such accounts do not directly help to restore solvency. Since accounts do not directly improve solvency and may well impair it, the only available policy options to restore solvency are reductions in benefits or increases in dedicated revenue. A fundamental tradeoff thus exists: Proposals that fail to dedicate additional revenue to Social Security will necessarily involve larger benefit reductions than plans that do dedicate additional revenue to the program. When push comes to shove, Americans seem to prefer relying on additional revenue -- or some combination of additional revenue and benefit reductions -- to mainly relying on benefit reductions. As just one example of the tradeoffs, taking the revenue from a reformed version of the estate tax and dedicating it to Social Security could close a substantial share of the projected deficit. For example, the revenue from an estate tax with a $3.5 million exemption per person ($7 million per couple) and a 45 percent tax rate on estates above that exemption would eliminate at least one-quarter of the projected 75-year deficit. That would obviate the need for more than $1 trillion in benefit reductions over the next 75 years. For a 20-year-old medium-earning worker today, it could mean avoiding $1,500 per year in benefit reductions. As a further illustration of the tradeoffs, retaining the same exemption level but reducing the tax rate on large estates to 15 percent would avoid only about $300 billion in benefit reductions over the next 75 years. In other words, with the revenue from a reformed estate tax dedicated to Social Security, reducing the tax rate to 15 percent would increase the benefit reductions required to address Social Security's deficit by $700 billion over the next 75 years. We as a society must decide whether this $700 billion is better used to provide larger after-tax inheritances to wealthy children or to reduce any benefit reductions necessary to restore solvency to Social Security. Every dollar of estate tax revenue dedicated to Social Security is a dollar less of benefit reductions or payroll tax increases necessary to eliminate Social Security's deficit.

• Recent "progressive price indexing" proposals are seriously flawed because they rely excessively on benefit reductions, cut benefits more if future productivity growth turns out to be faster than currently expected, and treat workers earning $900,000 or even $9 million a year the same as those earning $90,000. The recent "progressive price indexing" proposal involves surprisingly and excessively large benefit reductions for average workers. In addition, it reduces benefits more if productivity growth turns out to be higher than we currently expect, exactly the opposite of the appropriate response because the underlying 75-year actuarial deficit would be smaller with faster productivity growth. As the Congressional Research Service recently noted, "somewhat paradoxically, if real wages rise faster than projected, price indexing would result in deeper benefit cuts, even as Social Security's unfunded 75-year liability would be shrinking." Finally, the proposal treats someone earning $900,000 or even $9 million the same as someone earning $90,000; a sound reform plan would instead differentiate between the two. To be sure, imposing proportionately larger reductions in monthly benefits on higher earners compared to lower earners is sensible, in part because higher earners are increasingly living longer than others. "Progressive price indexing," however, is not the right way to accomplish that goal: It would make far more sense simply to adjust the current benefit formula directly to achieve the desired degree of protection for lower earners.

Why doesn't the White House care to find people of this caliber to staff its administration?

Posted by DeLong at 07:11 PM | Comments (0)

There's Something Very Wrong with the Republican Party

The Carpetbagger Report points out that there's something very wrong with a Republican Party whose senators think that Janice Rogers Brown belongs on the federal bench:

Janice Rogers Brown sees herself as part of religious "war": Part of being a qualified judicial nominee is an ability to show some judicial temperament and restraint. Janice Rogers Brown, clearly one of Bush's worst would-be judges, obviously doesn't understand that.

Just days after a bitterly divided Senate committee voted along party lines to approve her nomination as a federal appellate court judge, California Supreme Court Justice Janice Rogers Brown told an audience Sunday that people of faith were embroiled in a "war" against secular humanists who threatened to divorce America from its religious roots, according to a newspaper account of the speech.

Brown's remarks come as a partisan battle over judges has evolved into a national debate over the proper mix of God and government and as Senate Majority Leader Bill Frist (R-Tenn.) ponders changing the chamber%u2019s rules to prevent Democrats from using procedural moves to block confirmation of conservative jurists such as Brown.

Her comments to a gathering of Roman Catholic legal professionals in Darien, Conn., came on the same day as "Justice Sunday: Stop the Filibuster Against People of Faith," a program produced by evangelical leaders and simulcast on the Internet and in homes and churches around the country. It was designed to paint opponents of Bush's judicial nominees as intolerant of believers.

Apparently, Judge Brown was on quite a roll. She described these as "perilous times for people of faith" in the United States; she insisted the "idea of human freedom" is undermined when we move away from the nation's alleged religious underpinnings; and she condemned atheists for rejecting the "idea of freedom."... Her nomination sounds more like some kind of bizarre joke than a serious move to fill an appellate court vacancy. If the Republican Party still had any sense of decency left, Dems wouldn't have to filibuster Brown's nomination %u2014 GOP senators would have the sense to vote against her.

Posted by DeLong at 07:06 PM | Comments (0)

Charlene Huang Criticizes Dani Rodrik

My undergraduate thesis student Charlene Huang takes aim in her draft at Dani Rodrik's assertion that East Asia's "favorable initial conditions"--specifically, a high initial level of human capital--helped fuel its extraordinarily rapid post-WWII growth:

East Asia is generally characterized as having high initial levels of human capital (Rodrik 1994, 1997).... Primary school enrollment rates circa 1960 are usually employed in ascertaining the human capital levels... what Rodrik uses in his parsimonious regressions of growth in East Asia on the level human capital and the distribution of income circa 1960, which leads him to conclude that favorable initial conditions, that is, high initial levels of human capital and low income inequality, can explain 80% of South Korea and Taiwan’s rapid growth (Rodrik 1994).

However, a country’s primary school enrollment rate circa 1960 is less of an "initial condition" than an indicator of the competence and success of public policy. It serves better as a reflection of the post-colonial government's commitment to education and human capital development than as an indicator of initial levels of human capital. A more appropriate indicator of the stock of human capital, and hence circumstances before the period of growth being studied, would measure the educational level of the working age population in 1960, rather than the percentage of children enrolled in primary school in 1960.

Barro and Lee’s data on the percentage of the adults over 25 years of age in 1960 who completed primary school is such an indicator. Operating on the reasonable assumption that primary education was generally completed by 15 years of age, this measure would only include adults in 1960 who received their education by 1950.

As colonization of Taiwan and South Korea ended with Japan’s defeat in 1945, and Malaysia, Singapore, and Indonesia were decolonized by the British and the Dutch in the 1950s, this is a much closer approximation of the human capital with which the HPAEs were endowed, rather than policy choices of their post-colonial governments, or post-war governments in the case of Japan and Thailand. The percentage of adults who completed primary school during the time of colonization is a better indicator of colonial legacy than the percentage of children who are enrolled in primary school under a new non-colonial government.

A comparison of primary enrollment ratios in 1960 and the Barro-Lee data on the stock of human capital in 1960 clearly illustrates the difference between these two measures. For example, although Singapore and Korea both have about 100% primary enrollment in 1960, the percentage of the adults over 25 years of age in 1960 who completed primary school was 26.2% for Korea, but only 5.6% for Singapore. It seems that Singapore’s British colonizers were not as interested in educating the masses, as was Lee Kuan Yew’s government.

Primary enrollment ratios, especially under post-colonial governments, may thus paint a very misleading picture of true initial conditions. And the initial-condition levels of human capital in East Asia are not so favorable when this more appropriate measure is used...

Posted by DeLong at 07:03 PM | Comments (0)

Jeffrey Frankel on the Renminbi

Brad Setser directs us to Jeffrey Frankel's views on exchange rates:

Jeffrey Frankel (2005), "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate" (Cambridge: NBER Working Paper 11274).

Abstract: Fixed and flexible exchange rates each have advantages, and a country has the right to choose the regime suited to its circumstances. Nevertheless, several arguments support the view that the de facto dollar peg may now have outlived its usefulness for China. (1) China's economy is on the overheating side of internal balance, and appreciation would help easy inflationary pressure. (2) Although foreign exchange reserves are a useful shield against currency crises, by now China's current level is fully adequate, and US treasury securities do not pay a high return. (3) It becomes increasingly difficult to sterilize the inflow over time, exacerbating inflation. (4) Although external balance could be achieved by expenditure reduction, e.g., by raising interest rates, the existence of two policy goals (external balance and internal balance) in general requires the use of two independent policy instruments (e.g., the real exchange rate and the interest rate). (5) A large economy like China can achieve adjustment in the real exchange rate via flexibility in the nominal exchange rate more easily than via price flexibility. (6) The experience of other emerging markets points toward exiting from a peg when times are good and the currency is strong, rather than waiting until times are bad and the currency is under attack. (7) From a longer-run perspective, prices of goods and services in China are low -- not just low relative to the United States (.23), but also low by the standards of a Balassa-Samuelson relationship estimated across countries (which predicts .36). In this specific sense, the yuan was undervalued by approximately 35% in 2000, and is by at least as much today. The paper finds that, typically across countries, such gaps are corrected halfway, on average, over the subsequent decade. These seven arguments for increased exchange rate flexibility need not imply a free float. China is a good counter-example to the popular "corners hypothesis" prohibition on intermediate exchange rate regimes.

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

Moral Relativism

Matthew Yglesias writes:

Matthew Yglesias: Relativism and Beyond: David Vellemen's gone and written a useful primer on what 'moral relativism' is and isn't that people interested in the Pope's anti-relativist campaign ought to check out.... My best guess is that Benedict XVI is mostly concerned about moral authoritarianism rather than relativism and anti-relativism... thinking it very important to get all the Bishops on more-or-less the same doctrinal page.... The only kind of real relativism that I hear anyone seriously endorsing (as opposed to sloppily seeming to endorse when they're not really thinking through what they're trying to say) is agent-relativism about the past... a relaxed attitude to, say... Abraham Lincoln's racism on the grounds that they were 'men of their times.'... Probably the best interpretation of that practice is to steer it away from relativism and say it's an effort to try and avoid a wrongful self-righteousness... it would be pointless to get too up in arms about the fact that Lincoln reflected to a large extent the bad ideas that prevailed during his lifetime. But in an abstract sense, racism wasn't 'more okay' in the 1860s than it is today.

I find myself thinking that something like Alasdair Macintyre's argument in After Virtue is a relativist argument. Macintyre begins by saying that in modern society there is no agreed-upon set of virtues and hierarchy of goods to guide our moral decisions and to settle our moral arguments--and he says that our collective lack of a consensus moral framework is a very bad thing. It would be better, he seems to say, if we had a consensus moral framework--whether of not that consensus moral framework were in some sense the right one. Better to have a collective consensus moral compass that says that east is north than not to have a collective consensus moral compass at all...

At the end of After Virtue, after all, Macintyre appears to be praying for the Second Coming of Someone--but not to greatly care whether it is Nietzsche or Aristotle, Trotsky or St. Benedict who shows up. (Admittedly, in later work Macintyre revises his position and says that only St. Benedict--or is that Benedict XVI?--will do...)

Posted by DeLong at 06:56 PM | Comments (0)

April 25, 2005

Marginal Revolution Says It Will Stick Around for More than a Hand or Two

Tyler Cowen and Alex Tabarrok take off their coats, roll up their sleeves, sit down at the table, and admit that they are in the game for the long haul:

Marginal Revolution: Thanks to our readers: We are pleased to have reached two million hits sooner than we had expected. No, I don't know exactly what these figures mean, but I do know I wouldn't be happier if they were lower. When Alex and I started MarginalRevolution, we vowed to do it for two years, and then evaluate where we stood. Two years is not yet here (September 2005), but I am ready to sign for more. Thank you all for reading us, and also for sending your thoughts and suggestions for material. Special thanks to those who have supported our hosting costs, and our book and newspaper subscription costs, with donations.

Very nice to see. If they did not exist (or if they dropped out) we would have to create or recreate them, right Igor?

Posted by DeLong at 02:36 PM

Political Unreform in China

Philip Pan writes:

Hu Tightens Party's Grip On Power: More than two years after taking office amid uncertainty about his political views, Chinese President Hu Jintao is emerging as an unyielding leader determined to preserve the Communist Party's monopoly on power and willing to impose new limits on speech and other civil liberties to do it.... There is a growing consensus inside and outside the government, however, that the 62-year-old former engineer believes the party should strengthen its rule by improving its traditional mechanisms of governance, not by introducing democratic reforms. Hu has placed particular emphasis on tightening the party's control over public opinion, presiding over a crackdown to restore discipline to state media and intimidate dissident intellectuals. He has also gone further than his predecessor, Jiang Zemin, by adopting new measures to regulate discussions on university Internet sites and the activities of nongovernmental organizations....

'He is the ultimate product of the system,' said one party academic with access to the leadership who spoke on condition of anonymity. 'He never studied overseas or had much contact with the outside world. He was educated by the system, spent his entire career in the system, and his values are the same as the system's.' Hu sealed his reputation after taking control of the military at a meeting of the party's ruling elite in September, a final step in his long climb to power. On the last day of the conclave, in his first major address to the 300-plus member Central Committee as the nation's undisputed new leader, Hu warned that 'hostile forces' were trying to undermine the party by 'using the banner of political reform to promote Western bourgeois parliamentary democracy, human rights and freedom of the press,' according to a person given excerpts of the speech. Hu said China's enemies had not abandoned their 'strategic plot to Westernize and split China.' He blamed the fall of the Soviet Union on policies of 'openness and pluralism' and on the efforts of 'international monopoly capital with the United States as its leader.' And in blunt language that party veterans said recalled Mao Zedong's destructive Cultural Revolution, he urged the leadership to be alert to the danger of subversive thinking. 'Don't provide a channel for incorrect ideological points of view,' the person who had read some of the speech quoted Hu as saying. 'When one appears, strike at it, and gain the initiative by subduing the enemy.'...

In a recent comment often cited as a clue to his thinking, Hu wrote in an instruction to propaganda officials that though the economic policies of communist allies Cuba and North Korea were flawed, their political policies were correct, according to a person who saw the instruction and others briefed on it. The remark, first reported by the Hong Kong magazine Open, stunned many in the party who consider the two countries repressive and isolated from the rest of the world.... 'Looking back at the policies of Jiang Zemin now, it wasn't so bad,' said Mao Yushi, an economist who has had a book banned by the government and who runs a private research institute that has not been able to renew its permit. 'We survived for 10 years under Jiang, but with Hu Jintao the authorities are trying to shut us down.'... Hopes that Hu might pursue political reform peaked in 2003 when he and Premier Wen Jiabao took the lead in reversing the party's cover-up of the deadly SARS outbreak, pledging greater accountability and transparency in government. Later, many blamed Jiang's lingering influence for Hu's failure to act on proposals to strengthen the judiciary, expand media freedoms and hold limited elections for party posts....

Hu has focused economic policy on shifting resources to the country's poorer interior and promoting what he calls a 'scientific development concept,' which officials have described as an attempt to balance economic growth with concerns about the environment, the welfare of rural farmers and workers, and a widening income gap. State media have trumpeted these policies, reinforcing Hu's image as a leader who is more concerned about those left behind by the country's reforms than his predecessor. But the shift has caused grumbling among business interests and party officials who advocate faster market reforms, said a party scholar....

Posted by DeLong at 02:35 PM

Why Oh Why Are We Ruled by These Fools? (Yet Another Bush Budget Edition)

Howard Gleickman of Business Week watches the clown show:

Washington's Deficit Plan? Nada: By Howard Gleckman: Waiting for Washington to get the deficit under control? Pull up a chair and relax. It's going to be a while. Despite annual deficits that are approaching $400 billion -- and that will explode as the baby boomers begin to retire over the next decade -- Washington seems unwilling to take action. There are only two solutions: raising taxes or cutting spending. Lawmakers will do neither.

Despite their brave talk about the need to control the red ink, President George W. Bush and Congress are marching in the opposite direction. At Bush's urging, lawmakers are about to approve an additional $80 billion to fund the war in Iraq for 2005. The House has voted to repeal permanently the estate tax -- at a staggering 10-year cost of nearly $1 trillion. Congress is abandoning a White House request to trim farm subsidies, and lawmakers are balking at modest cuts in Medicaid.... You don't need a green eyeshade to understand the long-range problem. Today, as a percentage of the economy, federal tax revenues are at 50-year lows -- only about 16% of gross domestic product. But spending is humming along at 20% of national output.

And that's just the beginning of the problem. As the boomers age, three government programs -- Social Security, Medicare, and Medicaid -- will suck up a mind-boggling chunk of the income the nation produces. In just two decades, those programs alone will eat up every dollar of anticipated tax revenues.... Even Federal Reserve Chairman Alan Greenspan, who gave the green light to big deficits in early 2001 when he put his stamp of approval on Bush's tax cuts, told the Senate Budget Committee on Apr. 21 that the budget is "on an unsustainable path."

For a good description of the mess, as well as some solutions, take a look at a new Brookings Institution study called Restoring Fiscal Sanity 2005.... Medicare is off the table for now because both parties are leery of touching it. Social Security reform is explicitly exempted from the budget debate, and any overhaul Congress agrees on is likely to add to the deficit. That leaves Medicaid. The budget agreement has been stalled by a battle over how much to trim the joint state/federal health program for the poor. Bush and the House want to trim $20 billion from planned Medicaid spending over five years -- about a 2% reduction. But the Senate has balked. If lawmakers agree at all, they'll split the difference at roughly $10 billion. But that would be far from enough to reduce deficits... the House and Senate... [will] cut [taxes] by at least $70 billion over the next five years -- mostly by extending the 15% rate on capital gains and dividends through 2010. Plus, if they reach a deal on the estate tax -- which would be passed outside of the budget framework -- deficits will explode....

The biggest problem by far remains taxes. Earlier this year deficit hawks such as Senate Budget Committee Chairman Judd Gregg (R-N.H.) were willing to combine spending reductions with a freeze on new tax cuts. But they were overruled by the White House.... Democrats won't cut their favorite programs while seeing ever more tax cuts. Even GOP strategists concede that deficit reduction will go nowhere unless tax hikes are in the mix. Trying to eliminate deficits on the spending side alone is "completely insane," says Ron Haskins, a senior fellow at the Brookings Institution and former House GOP aide.... [T]here's no reason to believe serious deficit reduction will be on the table for the rest of the Bush Presidency.

Posted by DeLong at 02:34 PM

Why Oh Why Are We Ruled by These Fools (Martin Wolf Now Heads the Order of the Shrill Department)

The mild-mannered and very sensible Martin Wolf out-shrills Paul Krugman--and matches me, at least according to my own internal shrill-o-meter. And all he has to do to reach this pitch is to look around him:

FT.com / Home UK - America's deficits are more than just China's problem: John Snow, the US treasury secretary, insisted that China should embrace a looser exchange rate immediately. Mr Snow is not the organ-grinder of US economic policy but the monkey.... As Nouriel Roubini of New York University promptly responded, the US attack on one of its principal creditors is playing with fire. In the past two years, he argues, three quarters of the US fiscal deficit has been financed by foreign central banks, 100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks. Biting the hand that feeds one is folly.... [T]he US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present... the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of... the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks....

Prof Roubini is also right to note the economic disruption that would ensue if the flow of official international credit were cut off... a dollar collapse, higher domestic prices, a jump in interest rates, a fall in prices of housing, a steep rise in household bankruptcies and, not least, a sharp US recession. The bigger and swifter the adjustment in the external accounts, the more drastic those impacts would be. The landing would be hard.

Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities. However big the crisis if a sudden correction were to occur now, it would be nothing compared with what would happen after another decade of rising net liabilities. Better still, instead of choosing between a sudden correction now and a still more brutal sudden correction later, why not go for a smoother correction that starts now?... a reduction of spending... in the US and an increase in spending in its creditors. A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well....

[I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies.... The huge reserve accumulations of emerging market economies are by now senseless.... Hectoring China on the exchange rate alone is folly. But a serious discussion of policies to deliver a better global balance is not. That discussion must begin now.

But who is going to begin it with the Bushies in charge?

And it's not the most fiscally irresponsible U.S. administration since World War II. It's the most fiscally irresponsible U.S. administration since before Alexander Hamilton rammed Revolutionary War debt assumption through Congress.

Posted by DeLong at 02:29 PM

Why Oh Why Can't We Have a Better Press Corps? (National Review: "It Is Their Stupidity We Should Fear..." Edition)

John Stuart Mill said: "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 the rest of us as well as to itself. And we are informed that, yes, we have yet another example from National Review, as we watch PGL from Angry Bear engage in yet another battle of wits with one of National Review'smany unarmed man--one who, it seems, doesn't know the difference between annual and quarterly profit numbers:

Angry Bear: "Jerry Bowyer has produced some incredibly bizarre spin with his BuzzCharts rants with the latest being an attack on something Paul Krugman recently wrote (surprise).... [T]he latest chart seems to say something other than what Jerry wrote.... "Corporate profits per payroll job in 1998 were $14,928.90. Corporate profits per payroll job in 2004 were $21,593.51."... I looked at his numbers and thought that the 1998 after-tax profits per payroll job were quite high. BEA reports that after-tax corporate profits were $469.96 billion for 1998 and BLS reports payroll employment that averaged 125.924 million for 1998. So Jerry's number is four times what it should be. Did he take the quarterly flows (annualized) and sum them--rather than average them?

It sure looks like it. I can't match $21,593.51 for 2004. I can, however, get close: divide after-tax corporate profits for 2004 by non-agricultural payroll employment for 2004, and I get $5,447.22. Multiply that by four--as National Review might well do if it does not understand how the data are reported--and I get $21,788.87.

This, of course, leaves to one side the question of why in God's Holy Name National Review would want to divide corporate profits by payroll employment. A huge number of people who are on payrolls don't work for corporations: 21 million of them work for the government, and a host of others for partnerships and sole proprietorships. A bunch of people who are not on non-agricultural payrolls work for corporations as well. Moreover, you miss a good third of economy-wide profits by restricting yourself to corporate profits. Either (a) divide corporate profits by corporate employment, or (b) divide total profits by private employment. Corporate profits divided by a measures of private plus public employment is not sensible--even if you knew enough about the data to avoid accidently multiplying your result by four.

Isn't there anyone on National Review's masthead who cares enough to hire people who understand what they are writing about--who don't produce total dreck because they're too lazy to learn what the numbers they are throwing around are?

Posted by DeLong at 02:18 PM

Matt Miller: Why Are Republican Economists Averse to Raising National Savings?

Matt Miller--professional centrist Democrat--is an unhappy camper. He looks for fiscal policy hawks among Republican policy advisors, and is disappointed.

He writes:

The New York Times > Business > Your Money > Economic View: Private Accounts, and Priorities: If the White House and its allies think that private accounts are such a good idea, why don't they propose paying for the fiscal hole that the payroll tax diversion creates, rather than borrowing a fresh $200 billion or so each year for a few decades? Why isn't the idea of paying for the accounts - through spending trims elsewhere, or, more likely, through some new tax stream - even part of the debate?... It wasn't always this way. As privatization proposals kicked around in the 1990's... Edward M. Gramlich, the Federal Reserve governor who previously served on a presidential commission on Social Security, wanted to require individuals to pay for new accounts atop Social Security out of their own pockets. In President Bush's first term, Treasury Secretary Paul H. O'Neill lost his battle to preserve the budget surplus rather than use it for big tax cuts, so that it would have been available to pay for a potential Social Security transition. Today, Laurence J. Kotlikoff, an economics professor at Boston University, has a plan that would divert more of the payroll tax to private accounts than the president's plan would. But Professor Kotlikoff would finance this without new borrowing by enacting a 12 percent retail sales tax that phases out over several decades.

So why don't today's brand-name G.O.P. economists consider paying for these accounts? Recent conversations with Mr. Boskin and Mr. Mankiw suggest that they view this as an almost unintelligible question.

Their first answer is that we are 'paying for it' already, because the president's plan would reduce people's future Social Security benefits dollar for dollar with what they chose to put into private accounts today. As Mr. Mankiw, who recently stepped down as Mr. Bush's chief economic adviser, explains, this makes the plan a wash, or 'financially neutral to the government in a present-value sense. There's no reason why making an implicit liability explicit should change the path of taxes or of other spending behavior,' he said.

But one can acknowledge Mr. Mankiw's point and still think that it's a bad idea to soon add $200 billion or more a year to today's sky-high deficits. For one thing, it's not clear that financial markets will agree that huge deficits today are fine because our leaders have instructed their successors 50 years from now to cut benefits, and thus future deficits....

(A parenthetical remark: there are two reasons to think that spending behavior will change. The first is, as Matt Miller says, if participants in financial markets do not have full confidence that the plans set in motion today for what will happen in fifty years will be honored. That's one reason to think that the Bush proposal should change spending behavior. The second is that if account holders regard their private accounts as closer substitutes for their other savings than Social Security benefits are, then they will change their savings behavior.)

[W]ith deficits already topping $400 billion, the borrow-it-all approach essentially says that it is O.K. if we run $600 billion deficits before long. Does Mr. Boskin really want to make that assumption explicit? In response, he asserts that deficits above today's $400 billion range simply aren't in the cards. The Congressional Budget Office's forecast, he notes, shows deficits shrinking to a manageable 2 percent of gross domestic product, or in the low $200 billions, in the years ahead. But... the budget office's forecast also assumes that all of President Bush's tax cuts will expire, that doctors' fees paid by Medicare will be cut by 35 percent and that a host of other budget fantasies will come true.

Moreover, if the president's approach is enacted, it will mean that the energy and political capital absorbed by Social Security reform will come and go without seizing this moment to increase the paltry national savings rate - which we could do if we offset the gap created by the diversion of payroll taxes. That means we would be likely to squander the chance to enlarge the economic pie out of which all retirement needs must be met. Mr. Mankiw and Mr. Boskin say that they share this concern, but that it's a question we should address later....

A CYNIC would say that today's top Republican economists have found fancy ways of staying on message - which means not questioning the wisdom of making Mr. Bush's tax cuts permanent, and justifying the president's plan to Leave Huge Debts Behind.... [I]t's hard not to scratch your head when conservative Republican senators like Lindsey O. Graham of South Carolina and Charles E. Grassley of Iowa talk about finding new revenue for Social Security so we don't borrow fresh trillions, while the policy professionals trumpet the miracle of the free lunch. They don't call it 'political economy' for nothing.

Posted by DeLong at 02:13 PM

The Distribution of Income

Max Sawicky notes a little item in the Washington Post:

Detroit Spinning Out: Economic growth is above 4 percent, profits are strong, but pay is not keeping up with inflation. The government reported that hourly wages were up 2.4 percent in the year ended in March, below the 3.1 percent increase in consumer prices. One reason: Workers prefer to take more of their compensation in tax-free benefits, particularly health insurance. With benefits included, inflation-adjusted compensation was up about 0.5 percent, raising the question of who benefited from those 4 percent annual productivity gains...

There's a question? Doesn't the Washington Post have anyone who knows about profits?

Posted by DeLong at 01:46 PM | Comments (0) | TrackBack

It Is the Passover of the LORD

And Mark Kleiman preaches the lesson on Dvarim 24:17-18: Avodim hayyinu l'Pharoh b'Mitzrayim:

Last week in the faculty Torah study group at UCLA -- which has been fighting its way through Deuteronomy at the rate of about two verses a week for the past decade -- we were examining Deut. 24:17-18: "Thou shalt not pervert the justice due to the stranger, or to the fatherless; nor take the widow's raiment to pledge. But thou shalt remember that thou wast a bondman in Egypt, and the Lord thy God redeemed thee thence; therefore I command thee to do this thing." A quick check with a concordance showed that the formula: "Do X, because you were slaves in Egypt and the Lord redeemed you" occurs five times in Deuteronomy, in each case following a commandment about dealing fairly with the vulnerable...

Posted by DeLong at 01:43 PM | Comments (0) | TrackBack

The History of the "Nuclear Option"

Joshua Micah Marshall reports:

Talking Points Memo: by Joshua Micah Marshall: April 17, 2005 - April 23, 2005 Archives: I was pretty sure that it was the Republicans themselves who coined the phrase 'nuclear option', for the reasons I note above. But I wasn't sure of the details. But, in fact, as many of you have now written in, it seems that the guy who came up with this notorious Democratic smear was none other than its prime proponent, Sen. Trent Lott (R) of Mississippi. For more on this we listen in on Jeffrey Toobin's piece from March 7th issue of The New Yorker ...

Changing the Senate's rules on judicial filibustering was first addressed in 2003, during the successful Democratic filibuster against Miguel Estrada, whom Bush had nominated to the United States Court of Appeals for the District of Columbia Circuit. Ted Stevens, a Republican Senate veteran from Alaska, was complaining in the cloakroom that the Democratic tactic should simply be declared out of order, and, soon enough, a group of Republican aides began to talk about changing the rules. It was understood at once that such a change would be explosive; Senator Trent Lott, the former Majority Leader, came up with "nuclear option," and the term stuck.

You might have thought getting gamed on 'privatization' might have led some of these newshounds to a greater skepticism the next time those RNC operatives came calling. But it seems we have not yet plumbed the depths of the 'spank me, spank me' journalistic ethic.

Posted by DeLong at 11:43 AM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Yet Another Dive by the New York Times Department)

David Kirkpatrick of the New York Times is a liar:

The New York Times > Washington > Cheney Enters Filibuster Fight, Backing Change in Senate Rules: Current Senate rules require 60 votes to close debate on a confirmation, allowing Democrats to thwart the action by mustering 41 votes. Republicans want to lower the threshold for closing debate on all nominations to a simple majority. Democrats call this the nuclear option, while Republicans call this a constitutional option.

How many Republicans has David Kirkpatrick heard call it the "nuclear option"? 50? 100? More?

Posted by DeLong at 09:56 AM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Fools (Martin Wolf Now Heads the Order of the Shrill Department)

The mild-mannered and very sensible Martin Wolf out-shrills Paul Krugman--and matches me, at least according to my own internal shrill-o-meter. And all he has to do to reach this pitch is to look around him:

FT.com / Home UK - America's deficits are more than just China's problem: John Snow, the US treasury secretary, insisted that China should embrace a looser exchange rate immediately. Mr Snow is not the organ-grinder of US economic policy but the monkey.... As Nouriel Roubini of New York University promptly responded, the US attack on one of its principal creditors is playing with fire. In the past two years, he argues, three quarters of the US fiscal deficit has been financed by foreign central banks, 100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks. Biting the hand that feeds one is folly.... [T]he US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present... the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of... the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks....

Prof Roubini is also right to note the economic disruption that would ensue if the flow of official international credit were cut off... a dollar collapse, higher domestic prices, a jump in interest rates, a fall in prices of housing, a steep rise in household bankruptcies and, not least, a sharp US recession. The bigger and swifter the adjustment in the external accounts, the more drastic those impacts would be. The landing would be hard.

Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities. However big the crisis if a sudden correction were to occur now, it would be nothing compared with what would happen after another decade of rising net liabilities. Better still, instead of choosing between a sudden correction now and a still more brutal sudden correction later, why not go for a smoother correction that starts now?... a reduction of spending... in the US and an increase in spending in its creditors. A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well....

[I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies.... The huge reserve accumulations of emerging market economies are by now senseless.... Hectoring China on the exchange rate alone is folly. But a serious discussion of policies to deliver a better global balance is not. That discussion must begin now.

But who is going to begin it with the Bushies in charge?

And it's not the most fiscally irresponsible U.S. administration since World War II. It's the most fiscally irresponsible U.S. administration since before Alexander Hamilton rammed Revolutionary War debt assumption through Congress.

Posted by DeLong at 09:52 AM | Comments (0) | TrackBack

April 24, 2005

Web Clippings--20050422

What I would write about if time were infinite:

http://slacktivist.typepad.com/slacktivist/2004/11/who_made_steve.html:slacktivist: Who made Steve?: In the third grade at Timothy Christian School, we learned a variation of the children's catechism. I don't remember most of it any longer, but I've always treasured the first three questions. Recently, however, I've come to realize that these three questions do not accurately represent what it is that many American Christians believe. I have amended them to bring them into line with current practice and teaching:

Q: Who made you?
A: God made me.
Q: What else did God make?
A: God made me and all things -- except Steve.
Q: Why did God make all things except Steve?
A: God made all things except Steve for His own glory.

'Steve' has emerged as a central figure in American theology. He even played a significant role in the recent national elections. Yet despite his enormous influence, we know little about Steve aside from a single reference to him in our holy texts. This reference is, like the catechism, extra-canonical but considered authoritative: 'God made Adam and Eve, not Adam and Steve.' This oft-quoted text presents a mystery. If God did not make Steve, then where did this uncreature come from? How did Steve come to be? God did not make Steve, therefore we must also assume that Steve was never born. If Steve had been born, after all, then he would be 'begotten, not made.' Surely we are not meant to conclude that Steve is a little-known fourth member of the Trinity. Thus again we come to mystery. Steve was neither made nor begotten; yet Steve is. What can we do in the face of such mystery? It is beyond our ken. We cannot hope to understand, we can only drop to our knees to sing a bewildered hymn of praise to the Creator of all things except Steve. I have taken to doing exactly this whenever anyone recites this particular sacred text in my hearing.

http://ezraklein.typepad.com/blog/2005/04/point_counterpo.html: Ezra Klein: Point, Counterpoint:

Krauthammer writes: "Have that independence and supremacy been abused? Grossly. What other advanced democracy would radically legalize abortion by judicial decree rather than by democratic will expressed through legislatures or referendums? What sane democracy allows four unelected robed eminences in Massachusetts to revolutionize the very definition of marriage, the most ancient institution in society?"

Matt responds: "Obviously, no nation other than the United States would allow robed eminences in Massachusetts to make decisions about the legality of discrimination on the basis of sexual orientation in marriage, but provincial Supreme Courts in such far-off lands as Canada have likewise been ruling on such matters. And if you want to know what other advanced democracy would have judicial decrees legalizing abortion you, again, don't need to look further than Canada. All of which would merely demonstrate ignorance on Krauthammer's part were he not, well, Canadian."

http://www.bigbrassblog.com/2005/04/special-announcement-compleat.html: Big Brass Blog, in association with The Dark Wraith Forums, is proud to announce that the Bloggrrrlz Gallery slate of blogs has now been completed. That's right: the very best blogs by women can now be read at one meta-site portal where you can spend a minute, an hour, or an entire day working your way across the freshest, most dynamic, most interesting voices in the Blogosphere. If you haven't visited the Gallery yet, you have no idea what you've been missing. Creative coding architecture makes the Bloggrrrlz Gallery something unique on the Web. We think you'll agree.Although every effort has been made to include all of the best of the women bloggers, if you know of one we've missed, send Shakespeare's Sister an e-mail message...

http://www.nytimes.com/2005/04/22/opinion/22krugman.html?hp: Paul Krugman: Passing the Buck: Think about how crazy all of this is. At a rough guess, between two million and three million Americans are employed by insurers and health care providers not to deliver health care, but to pass the buck for that care to someone else. And the result of all their exertions is to make the nation poorer and sicker. Why do we put up with such an expensive, counterproductive health care system? Vested interests play an important role. But we also suffer from ideological blinders: decades of indoctrination in the virtues of market competition and the evils of big government have left many Americans unable to comprehend the idea that sometimes competition is the problem, not the solution.

http://www.athenaalliance.org/weblog/archives/2005/04/innovation_rese.html: Ken Jarboe: The Intangible Economy: Patents and innovation research: One of the most interesting papers is by Adam Jaffe of Brandeis University and Josh Lerner of Harvard University. The paper 'Innovation and its Discontents' is an extension of the 2004 book by the same title: Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What To Do About It. Their thesis is simple: "In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it." Some of their recommendation, especially concerning business methods, software and biotechnology patents, will likely generate debate. Others, such as pre-grant opposition and re-examinations of granted patents, seem to be part of the building consensus on patent reform...

http://crookedtimber.org/2005/04/21/i-am-in-awe/: I am in awe. Posted by Kieran Healy. It takes a long, long apprenticeship laboring the Augean stables of Globollocks to write a sentence like this: "The walls had fallen down and the Windows had opened, making the world much flatter than it had ever been--but the age of seamless global communication had not yet dawned." Amazing. Tom Friedman is a God. No, not a God so much as a moustachioed force of nature, pumped up on the steroids of globalization, a canary in the coalmine of an interconnected era whose tentacles are spreading over the face of a New Economy savannah where old lions are left standing at their waterholes, unaware that the young Turks--and Indians--have both hands on the wheel of fortune favors the brave face the music to their ears to the, uh, ground.

http://www.nytimes.com/2005/04/22/business/22cnd-wendys.html?ei=5088&en=aa9c2a1cbe86691c&ex=1271822400&partner=rssnyt&emc=rss&pagewanted=print&position: At CSI: Wendy's, Tracking a Gruesome Discovery. By MATT RICHTEL and ALEXEI BARRIONUEVO: Denny Lynch sat at a booth at a Wendy's restaurant, finishing bites of a chicken sandwich between cellphone calls. Mr. Lynch, a Wendy's executive, was one of only a few lunchtime patrons at the normally buzzing restaurant, where lately business is off by half. That's because, in the same booth where Mr. Lynch sat, a patron claimed on March 22 that she dipped into her cup of beef chili and found part of a human finger. Since then, Mr. Lynch, Wendy's senior vice president for communications, and the rest of Wendy's executive team have been on a ceaseless treadmill trying to manage a public relations crisis that has consumed and frustrated the company. Mr. Lynch still does not know whose finger it was or where it came from. But some of the many questions surrounding the incident may be resolved once the police receive the results of lab tests, possibly as early as Friday.... The troubles began for Mr. Lynch when the phone rang just after 11:30 p.m. on March 22. He had been sleeping at home in Dublin, Ohio, where Wendy's has its headquarters. The caller was Bob Bertini, the chain's media relations manager, explaining that Anna Ayala, a Las Vegas resident visiting family in San Jose, had bitten down on the finger in a spoonful of Wendy's chili. For the 52-year-old Mr. Lynch, there was no time to prepare a sophisticated plan of action. The news media, he was informed, knew about the gruesome discovery, and wanted a statement. He did not wake John T. Schuessler, Wendy's chairman and chief executive, that night, but sent him e-mail messages explaining the news and the steps he had taken...

http://www.bradblog.com/archives/00001345.htm: THE BRAD BLOG: AP: Republican Chairman of Voting Reform Panel Resigns!: Another intellectually-honest Republican is found! Just in from AP... "The first chairman of the federal voting agency created after the 2000 election dispute is resigning, saying the government has not shown enough of a commitment to reform. DeForest Soaries, a Baptist minister, said Friday that his resignation from the commission created by Congress would take effect next week .Soaries, 53, cited personal reasons... but he added the decision was prompted in part by a lack of support for the commission from Congress and the federal government. 'All four of us had to work without staff, without offices, without resources. I don't think our sense of personal obligation has been matched by a corresponding sense of commitment to real reform from the federal government,' Soaries told The Associated Press. Soaries is a Republican who was the White House's pick to join the Election Assistance Commission, which was created by the Help America Vote Act of 2002 to help states enact voting reforms...

http://www.cjrdaily.org/archives/001464.asp: CJR Daily: Amtrak executives have simply thrown up their hands as problems with their only profitable operation sent more than 10,000 regular commuters scrambling for alternative rail transportation this week. And for the slacker media's part, the whole event has been a yawner. Cover a press conference, rewrite the news releases, attend a Senate hearing, maybe dole out some data. But, for heaven's sake, don't ask any tough questions. On Wednesday, Amtrak officials announced that the Boston to Washington Acela Express trains... will be out of service at least until summer because of problems getting replacement brake parts.... Acela's manufacturer, a consortium of Montreal-based Bombardier and France's Alstom S.A., has only 80 replacement brake parts in stock because neither Amtrak nor the consortium expected them to wear out as quickly as they did, according to officials.... After testing some high-speed trains from Sweden and Germany in the early 1990s, Amtrak officials decided to design their own version and to have the equipment built by the consortium -- a $1.1 billion deal that was largely driven by financing the cash-strapped railroad received from a bank set up to promote Canada's exports.... Amtrak executives decided to move straight from design to production and to skip building a prototype.... Maybe it's time to go beyond the news releases and press briefings and do some reporting...

Posted by DeLong at 10:04 PM | Comments (0) | TrackBack

Rick Santorum's Price: $7,750

Angelica Oung argues that Senator Rick Santorum's price is only $7,750:

Ezra Klein: Cheap as well as nasty: By now we've all heard about Rick Santorum's bill seeking to prevent the National Weather Service from actually sharing weather forecasts with Americans. You see, that 'socialized weather' business has got to stop. It's taking the bread right out of the mouths of private web-based forecast providers who work so hard to make a profit by repackaging that information the NWS just want to give away for free. One such firm is Accuweather, which just so happens to be based in Pennsylvania, just like the good senator. Fancy that.

[T]hroughout 2003 and 2004, both Joel and Barry Myers have donated nearly $2,750 to Santorum's 2006 re-election efforts. Public records also showed that since 1999, the Senator received nearly $5,000 in contributions from AccuWeather executives, raising questions of whether the company attempted to court favor with the Senator through campaign contributions.

Count it up...$2,750+$5,000=$7,750. For a blatant gimme bill introduced in congress? That's what I call value!

The Republicans should be able to find a senate candidate in Pennsylvania whose price is at least $100,000! Where are standards these days?

Posted by DeLong at 08:11 PM | Comments (0) | TrackBack

April 22, 2005

The DeLong Excel Quadratic Equation Solver

For when you want your children to check their own answers to math problems of the form:

ax2 + bx + c = 0

The DeLong Excel Quadratic Equation Solver: Quadratic_Solver.xls

Posted by DeLong at 07:33 PM | Comments (0) | TrackBack

The U.S. Government Kicks in for the United Airlines Bankruptcy

From Caroline Daniel of the Financial Times:

FT.com / Transport / Airlines - US to assume pension plans at United : United Airlines has reached an agreement with the federal agency that insures defined benefit pension plans to transfer $6.6bn in pension liabilities, marking the biggest pension transfer to the government.... The agreement with the Pension Benefit Guarantee Corporation comes after United reached an impasse with some unions over its need to terminate pension plans.... According to the PBGC, United's pension plans are underfunded by $9.8bn. Of this, the government will assume $6.6bn in liabilities, with the shortfall representing the loss in promised pension benefits for employees. The PBGC's largest previous claim was in 2002, when Bethlehem Steel terminated its defined benefit plans, at a cost of $3.6bn.... The agreement, which needs approval from the bankruptcy judge, would make the PBGC the trustee of four separate defined benefit plans at United. Further details which could include the PBGC being granted an equity stake in United will be released next week, ahead of a court hearing on May 4...

Posted by DeLong at 07:31 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Fools?

Ah. Economic policymaking in the Bush administration. From the Financial Times's Andrew Balls:

FT.com / Home UK - Treasury feels White House heat on policy. By Andrew Balls: [T]he US Treasury suddenly called for China to move immediately to a flexible currency. Two senior administration officials said the call to change tactics on China was a political decision made at the White House. The Treasury's policy - widely supported by China experts who say Beijing is less likely to move in the face of public hectoring - was overturned because of White House concern at rising protectionist pressure in Congress. The sharp change was the clearest sign yet that economic policy in President George W. Bush's second term is going to be led firmly from the White House.

A tight team of close associates of the president is calling the shots, say current and former administration officials. This group consists of Dick Cheney, vice-president, Andrew Card, the president's chief of staff, Joshua Bolten, director of the Office of Management and Budget, and Karl Rove, the president's political adviser who has assumed a broader co-ordinating role, including overseeing economic policy....

[O]verruling the department on foreign exchange matters, traditionally the Treasury's domain, marked a new departure. It is not clear exactly who made the call on China.... Richard Medley, head of Medley Global Advisors, tells clients that there is no one dominant voice on economic policy.Messrs Cheney, Card, Bolten and Rove, the key decision-makers, take the lead on different economic policy issues.... The White House inner circle is widely acknowledged to consist of very smart people, but they are not economists and do not have financial market backgrounds. Some current and former administration officials worry that when the decisions are taken, there is often no economist in the room...

Posted by DeLong at 07:30 PM | Comments (0) | TrackBack

Grownup Democrat Watch

From the Carpetbagger Report:

Carpetbagger Report: Chuck Grassley... told the New York Times, "I'm going to put together a Republican-only bill as a first step to getting bipartisan support because I can%u2019t lose time waiting for the Democrats to come to the table." The funny thing is, Dems have come to the table; they just don't like what they've found... quietly sat down with White House officials recently to see what kind of Bush-backed plan they can support: "'There isn't anything to be on board with--there's no plan,' said Sen. Ben Nelson (D-Neb.).... 'I have not yet heard an idea that I can vote for,' said Sen. Mark Pryor (D-Ark.), who noted that he met with Bush administration officials to discuss Social Security two weeks ago." After months of disarray and embarrassments, the Bush gang is finally dealing with Dems who are prepared to bolt from their otherwise unified caucus--and even under these circumstances, the White House has nothing to offer.

Posted by DeLong at 07:28 PM | Comments (0) | TrackBack

Fareed Zakaria Reviews the Bush Cheerleaders' Clown Show

He watches John Bolton, David Brooks, and William Kristol put on the floppy shoes and the red plastic noses:

Conservative Contradictions by Fareed Zakaria: 'Senator Frist should schedule a floor debate without time limits,' William Kristol argued in The Weekly Standard. If Democrats want this debate, Kristol wrote, 'let Republicans make them pay a price' for it. David Brooks... agreed, explaining that Bolton's disdain for 'global governance' has... support in the country. 'We'll never accept it... because it's undemocratic.... Multilateral organizations look like meetings of unelected elites, of technocrats, who make decisions in secret.... [W]e will never allow transnational organizations to overrule our own laws, regulations, and precedents.'

Perhaps the debate should center on the globe's most powerful international body, the World Trade Organization.... Its rulings on disputes between nations are binding. It is undemocratic and filled with technocrats. And it was an American creation that conservatives supported wholeheartedly.... It's strange. Most of our debates about multilateral bodies seem to involve those organizations that are really talking shops.... The ones that have real clout are almost all in the economic realm. And they surely are the most significant .... [Y]ou don't hear John Bolton or his defenders objecting to any of this....

I think the WTO has been hugely beneficial to Americans--and the rest of the world. It has expanded trade, opened markets and made our economy far more productive.... The WTO was America's idea, a way to make other countries open their markets and increase trade. We agree to bind ourselves to these rules because it means that everyone plays by them as well. The organization has forced change in all its member countries.... American firms understand that sovereignty has been breached anyway. Capital, goods and services move freely across borders... manage this process in a way that benefits all. That usually means some system of (gasp) global rules....

[T]here is increasingly the reality of a world in which other countries want their interests taken into account. That means that for many issues... the only durable solutions will be ones that involve some rules that everyone agrees to... 'global governance.'... The United States wanted to punish the perpetrators of the horrific atrocities in Darfur. But to do so, it had to find some system by which such judgments could be made. It could not be a purely American process.... So Washington reluctantly (and quietly) agreed to refer Darfur to the International Criminal Court, which we have been actively trying to kill and that exists despite strenuous American objections...

Posted by DeLong at 07:26 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Bill O'Reilly Edition)

Oliver Willis reports:

Cashin' In On O'Reilly | Oliver Willis: Looks like Mr. Falafel himself got taken to the cleaners: "Andrea Mackris, the former associate producer for Fox News Channel who made headlines by suing talking head Bill O'Reilly for sexual harassment, recently purchased an Upper West Side condo for $809,500, according to deed-transfer records."

Posted by DeLong at 07:25 PM | Comments (0) | TrackBack

Grownup Republican Watch: Alan Greenspan

Ah. Nice to see:

washingtonpost.com: Greenspan Says He Expects Tax Increases: "Federal Reserve Chairman Alan Greenspan said yesterday, for the first time explicitly, that he expects tax increases to be part of any eventual agreement to reduce the federal budget deficit. Greenspan... also acknowledged that his support for tax cuts in early 2001... led to policies that helped swing the federal budget from surplus to deficits.... Greenspan reminded lawmakers that government economists at the time predicted budget surpluses 'as far as the eye can see.' Yet Greenspan had warned then in congressional testimony that the forecasts might be wrong, and he recommended some 'trigger' mechanism that would limit the tax cuts if certain budget targets were not met. Greenspan said he thinks 'it's frankly unfair' for critics to blame him now for the fact that Congress chose to 'read half [his] testimony and discard the rest.'

Sen. Paul S. Sarbanes (D-Md.) said he believed it was 'fair to consider how your message would be taken' and that lawmakers saw Greenspan's 2001 remarks as 'providing a green light' for tax cuts, which were enacted without triggers.

'I plead guilty to that,' Greenspan said. 'If indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way.'... 'The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years,' Greenspan said in his prepared testimony yesterday.... The Fed chief called for 'major deficit-reducing actions' and proposed several procedural steps Congress could implement to restrain the deficit's growth. Greenspan has frequently said he would prefer the deficit be shrunk as much as possible through spending cuts.... But he also implied that reaching a bipartisan agreement to reduce the deficit will require some compromises, saying, 'We can raise taxes, and I don't deny we probably at the end of the day will do them [tax increases] in order to get an ultimate resolution of this.'

Posted by DeLong at 07:09 PM | Comments (0) | TrackBack

Jackie Calmes on Chuck Blahous

Jackie Calmes on Charles Blahous, from the Wall Street Journal:

WSJ.com - Architect of Social Security Plan Perseveres: Blahous, Who Convinced Bush of Need for Benefit Cuts, Works Behind Scenes to Sway Skeptics. By JACKIE CALMES Staff Reporter of THE WALL STREET JOURNAL: With a never-used Ph.D. in chemistry, Mr. Blahous has instead made a career of trying to shore up and partially privatize the government's most popular program.... He also helped persuade the president to reject the arguments of some conservatives who say that creating private accounts alone can fix Social Security, without more painful changes in benefits and taxes.... While higher-ranking advisers spend more time with the president, they use Mr. Blahous's talking points. "He's our ongoing rabbi," says chief White House strategist Karl Rove.... Mr. Blahous has an instinct for bipartisanship that is rare among Bush officials and sorely needed.... After the November election, he helped pave the way for an opinion piece in a national newspaper by Republican Sen. Lindsey Graham of South Carolina and Democratic Sen. Kent Conrad of North Dakota calling for cooperation on Social Security. More recently, he pressed White House advisers to urge antitax group Club for Growth to withdraw television ads denouncing Sen. Graham for proposing a payroll-tax increase on upper-income workers as part of a potential compromise. The group declined to pull them....

When Mr. Simpson retired, Mr. Blahous was snatched up by Sen. Judd Gregg.... Once in the White House, Mr. Bush hired Mr. Blahous for his National Economic Council staff.... By the time Mr. Bush returned to Social Security last year, Mr. Blahous's side had won a crucial internal battle. Years ago, past advisers say, Mr. Bush leaned toward the "free lunch" view -- that personal accounts were the answer to Social Security's looming woes, with hard choices on benefits and taxes unnecessary. Mr. Blahous helped persuade the president that there is no free lunch.... That approach is reflected in the president's current view, which holds that personal accounts are "the dessert" to make palatable the "spinach" of benefit reductions. He argues that younger workers will be better off thanks to investment earnings.... Mr. Blahous also has been influential on potential changes to benefits and payroll taxes... lately, Mr. Bush has indicated he could support raising the wage cap, now at $90,000.

Several months ago, other administration officials were espousing an across-the-board change to the formula for workers' initial retirement benefits, which would greatly reduce future retirees' income. Mr. Pozen by 2004 had crafted a variant of the idea, called "progressive indexing," that would keep the current formula for the bottom third of workers, apply the less generous change for those at the top, and blend the two for retirees in the middle. "This is really an interesting approach," Mr. Blahous told Mr. Pozen in a phone call late last year...

From my perspective, Blahous has made at least three big mistakes if he wants to pull people like me in to support his plan:

  1. The proposal for the price-indexation of the bend points ultimately reduces the "defined benefit" Social Security check to zero. That cannot be the right policy.
  2. The private-accounts plan he has proposed--with the clawback of the defined-benefit part set at a 3% real interest rate, as opposed to floating with the Treasury borrowing rate--makes his private accounts a lousy deal for the non-rich.
  3. Nothing in Blahous's plan increases national savings, save for a hope that after his Social Security plan is passed Republican High Politicians will have a "Road to Damascus" moment and become advocates of fiscal sanity.

It's a good bet that on the first and second of these, Blahous is the only truly senior person inside the White House who understands these issues. And the third should be a deal breaker for taking the job: it's not worth it for anyone serious to be caught advocating a program that does not raise national savings.

A Social Security reform plan that does not preserve a defined benefit component, does not offer a good deal to the non-rich choosing private accounts, and does not boost national savings is not a Social Security reform plan worth proposing. There are no reasons for anybody to support this thing.

Posted by DeLong at 07:08 PM | Comments (0) | TrackBack

Grownup Republican Watch: Colin Powell

Colin Powell joins the shrill, and adds his blunt opinion of the Bush administation clown show to the chorus as he says exactly what he thinks of Bush acolyte John Bolton:

Joshua Micah Marshall Reports:

Talking Points Memo: by Joshua Micah Marshall: April 17, 2005 - April 23, 2005 Archives: [T]he former Secretary of State (and Bolton's boss in the first administration) has been doing what amounts to behind-the-scenes lobbying against Bolton's nomination.... Powell is very much not the only Republican foreign policy heavyweight working in private to scuttle Bolton's nomination. But the degree to which he's going public is sort of extraordinary.... Powell did authorize his spokesperson to confirm on the record that he has had recent phone conversations with Sens. Chafee and Hagel about Bolton while quite pointedly giving no reason to think much of anything he said was positive.... The foothold Bolton's supporters have in this fight is their contention that the only reason Bolton's in trouble is that Democrats are trying to take him down to score political points. Indeed, President Bush made that argument just yesterday. But Powells now-public lobbying knocks that argument right out of the park. Republican senators looking to deny the White House this nomination need some partisan cover; and Powell just gave it to them.

Posted by DeLong at 07:00 PM | Comments (0) | TrackBack

Senator Santorum Should Resign Right Now

In the tank for the mighty and numerous private weather forecast lobby? Talk about a parody of a legislature.

Joshua Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: April 17, 2005 - April 23, 2005 Archives: This page right here is the one I go to to check the weather. It's put out by the National Weather Service. It's a lot like some commercial ones, only it has more information, costs nothing and contains no ads. But as the Carpetbagger Report notes... Santorum (R) of Pennsylvania has introduced a bill that would ban the federal government's meteorologists from making this information available for free since that creates a problem for outfits like The Weather Channel and AccuWeather, which want to sell it.... You paid for the data. Your tax dollars fund a massive apparatus of meteorological data collection for reasons ranging from agriculture to disaster safety to keeping airplanes in the air -- everything under the sun. You pay for it and this is just the feds making it available to you on a website. The cost of letting you access it must be minuscule compared to that of collecting it. Indeed, most of the data these other guys sell is stuff they get from the feds or fed-subsidized data collection. So they're in the business of selling to you the information that your tax dollars already went into collecting. And apparently they add so little added value that they can't handle the competition when the National Weather Service just gives it away. Santorum wants to make these guys into some sort of information age tax farmers. This article in the Palm Beach Post goes into greater detail on the bill. And you can see from its proponents feeble justifications just what a con this is. They note, for instance, that the bill would not prevent the National Weather Service from alerting the public to imminent disasters, which is awfully generous of them.

Can't the Republican Party find a less corrupt and more public-spirited candidate to run for the Senate from Pennsylvania?

Posted by DeLong at 06:58 PM | Comments (0) | TrackBack

Godwin's Law Violation at National Review Online

Think Progress is amazed:

: National Review Online has taken things a few steps further...

In this regard, the consumerism and relativism of the West can be just as dangerous as the totalitarianism of the East: It's just as easy to forget about God while dancing to an iPod as while marching in a Hitler Youth rally. There's a difference, to be sure, but hardly anyone would contest the observation that in elite Western society, as in totalitarian Germany, the moral vocabulary has been purged of the idea of sin. And if there's no sense of sin, then there's no need for a Redeemer, or for the Church...

Not only is this a violation of Godwin's Law, it's also completely false. In elite Western society there is an enormously powerful idea of sin. It is a grave sin, for example, for National Review to tell people that God hates for them to use condoms, and thus--for those gullible enough to believe National Review--increase the chances of their dying of AIDS. That sin is unforgivable.

Posted by DeLong at 06:56 PM | Comments (0) | TrackBack

John Kenneth Galbraith's Legacy--and Lessons for Today

Why my office hours today have been moved to 10:30 to 12, instead of 12-2:

UC Berkeley Journalism / Event: John Kenneth Galbraith's Legacy--and His Lessons for Today: "John Kenneth Galbraith's Legacy--and His Lessons for Today: A Panel Discussion

When: April 22, 2005, 12:00 pm -- 1:30 pm
Where: North Gate Library, Hearst at Euclid Avenue, Berkeley
Tickets: This is a free event.

Brad DeLong is a professor of economics at U.C. Berkeley, chair of the Political Economy of Industrial Societies major, and a research associate of the National Bureau of Economic Research. From 1993-1995 he was a deputy assistant secretary of the U.S. Treasury.

Richard Parker is an Oxford-trained economist teaching at Harvard's John F. Kennedy School of Government. He is a Senior Fellow at the School's Shorenstein Center on the Press, Politics, and Public Policy, a cofounder of Mother Jones, and on the editorial board of The Nation.

Orville Schell is the Dean of U.C. Berkeley's Graduate School of Journalism, author of 14 books, board member for Human Rights Watch, the Social Science Research Council and recipient of numerous awards such as the Overseas Press Club Award for the best Foreign Story and the Harvard/Stanford Shorenstein Award for Reporting on Asia.

Robert B. Reich is University Professor of Social and Economic Policy at Brandeis University, and visiting professor here this term at the Goldman School of Public Policy, has served under three presidents, most recently as Secretary of Labor under Bill Clinton. He is the author of ten books, including 'The Work of Nations,' which has been translated into 23 languages, is co-founder of The American Prospect Magazine, and his commentaries can be heard weekly on public radio. In 2003, Secretary Reich won the Vaclev Havel Prize, awarded annually by the former Czech president, for his work on social and economic thought.

Posted by DeLong at 06:54 PM | Comments (0) | TrackBack

April 21, 2005

David Altig on "Hard Landings"

From his lair in the Cleveland Fed, David Altig moves the ball forward on the question of how should the Fed watch out for and avoid a "hard landing" whenever Asian central bank dollar-denominated reserve accumulation ceases:

http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a.html
http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a_1.html
http://macroblog.typepad.com/macroblog/2005/04/landings_hard_a_2.html

The last is mostly excerpts from a very nice speech by his boss, President Sandra Pianalto of the Cleveland Fed.

Posted by DeLong at 12:55 PM | Comments (0) | TrackBack

Alan Greenspan Brings Plenty of Refreshments

Alan Greenspan shows up for the sane-fiscal-policy party and brings plenty of refreshments, as he calls for the reinstatement of and the strengthening of the 1990 Budget Enforcement Act's PAYGO provisions:

FRB: Testimony, Greenspan--Budget process reforms--April 21, 2005: [T]he unified budget ran a deficit equal to about 3-1/2 percent of gross domestic product in fiscal 2004, and federal debt held by the public as a percent of GDP has risen noticeably since it bottomed out in 2001.... [A]s the latest projections from the Administration and the Congressional Budget Office suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken.

In my judgment, the necessary choices will be especially difficult to implement without the restoration of a set of procedural restraints on the budget-making process. For about a decade, the rules laid out in the Budget Enforcement Act of 1990 and in the later modifications and extensions of the act provided a framework that helped the Congress establish a better fiscal balance.... Many of the provisions that helped restrain budgetary decisionmaking in the 1990s--in particular, the limits on discretionary spending and the PAYGO requirements--were violated ever more frequently; finally, in 2002, they were allowed to expire.

Reinstating a structure like the one provided by the Budget Enforcement Act would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process. Such a step would be even more meaningful if it were coupled with the adoption of a set of provisions for dealing with unanticipated budgetary outcomes over time.... [A] well-designed set of mechanisms that facilitate midcourse corrections would ease the task of bringing the budget back into line when it goes off track.... Measures that automatically take effect when costs for a particular spending program or tax provision exceed a specified threshold may prove useful as well. The original design of the Budget Enforcement Act could also be enhanced by addressing how the strictures might evolve if and when reasonable fiscal balance came into view.

I do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of rules. The fundamental fiscal issue is the need to make difficult choices among budget priorities.... [F]uture Congresses and Presidents will, over time, have to weigh the benefits of continued access, on current terms, to advances in medical technology against other spending priorities as well as against tax initiatives that foster increases in economic growth and the revenue base.... [W]e have been in a demographic lull. But this state of relative stability will soon end.... The combination of an aging population and the soaring costs of its medical care is certain to place enormous demands on our nation's resources and to exert pressure on the budget that economic growth alone is unlikely to eliminate...

Left unsaid--but very clear in everyone's mind--is that nobody can think of a single legislative proposal of the Bush administration or a single budget passed by the Republican Congress that has been in accord with the spirit of PAYGO. Greenspan is letting the Republican congressional leadership know that in his view it has done an absolutely horrible job at fiscal policy.

Posted by DeLong at 12:23 PM | Comments (0) | TrackBack

April 20, 2005

Bruce Bartlett Is Also Worrying About "Hard Landings"

He writes:

Bruce Bartlett: Steering clear of a recession: The place where the greatest danger lies is with Fannie Mae and Freddie Mac... even the tiniest mistake by them could roil markets... the impending retirement of Alan Greenspan as chairman of the Fed.... Lastly... [h]uge budget and current account deficits mean that vast amounts of capital flows are necessary to keep them funded. So far, this has gone well... the Chinese have been so accommodating about financing the.... But now the U.S. is strongly pressuring China to stop doing this in order to allow its currency to rise against the dollar. It is hoped that this will reduce China’s production advantage in dollar terms and bring down the bilateral trade deficit. However, the cost to the U.S. economy if this happens could be greater than the potential gain. At least in the short run, any scale-back in China’s buying of Treasury securities might cause interest rates to spike very quickly. This could prick the housing bubble and bring down home prices, eroding personal wealth and putting a squeeze on those with floating rate mortgages. Hopefully, this can all be managed smoothly and without either a recession or a market break. But it will take great skill and a lot of luck to avoid both.

Posted by DeLong at 09:40 PM | Comments (0) | TrackBack

Foreign Affairs - Sisyphus as Social Democrat - J. Bradford DeLong

J. Bradford DeLong (2005), "Sisyphus as Social Democrat: A review of John Kenneth Galbraith: His Life, His Politics, His Economics, by Richard Parker," Foreign Affairs May/June 2005.

Posted by DeLong at 09:28 PM | Comments (0) | TrackBack

Hard Landings II...

When I look at the galleys of the new edition of my Macroeconomics textbook, I am struck by a sense of disappointment. Don't get me wrong--I do think that it is better than every other macro textbook out there, being clearer (though less comprehensive) than Abel-Bernanke, more comprehensive (at the cost of only a little bit of additional difficulty) than Mankiw, and much more approachable (though not as theoretically sophisticated) than Blanchard. But I wish that people who read through or take a course based on the book could then have the tools needed to analyze things like, say, the current debate over the dangers to the U.S. economy from a "hard landing" of the international monetary system.

And the textbook doesn't quite get you there. The amount of material needed to bring students truly up-to-speed on the major issues of the day seems to be a little bit more than I can dare demand.

If I were teaching intermediate macro right now, I would be very tempted to push the envelope and try to get the students to that spot right now. So here are my thoughts on the possibility of a "hard landing," crafted so that they can make sense to students who are only 3/4 of the way through intermediate macroeconomics.

Anyone who feels like making use of this, please feel free to do so--and, most important, tell me if it works.

Posted by DeLong at 09:27 PM | Comments (0) | TrackBack

Web Clippings--20050420

What I would write about if time were infinite:

http://www.comicon.com/thebeat/archives/2005/04/the_fed_goes_co.html: The Fed goes comics. Look out Marvel. Fire in the hole, DC. Guard the family jewels, Viz and Tokyopop -- there's a new comics publisher on the scene, and they've got the financials down to a science. The Federal Reserve has revamped their website, and introduced a number of educational materials to help us understand just why Alan Greenspan is one of the world's most powerful men. For those of you even more fiscally ignorant than The Beat The Federal Reserve is America's bank, and sets interest rates, and watches over much of the world's money supply. Among the items available to educators are some comics which explore what our money does and and where it came from. Here's the exciting line-up:

  1. Wishes and Rainbows: Uses a children's story to illustrate the economic problem of scarce resources and society's reactions to such problems.
  2. The Story of Money: Describes the barter system, the advantages and properties of money, various types of money, problems of too much money (inflation), and the tools of the Fed to influence the growth of the money supply.
  3. A Penny Saved: Describes what would happen if people did not save, why and how we save, why we put our savings into banks, simple and compound interest, stocks and bonds, why savings is important for the national economy.
  4. Once Upon A Dime: The barter system, invention of money, minting and printing, banks, checking accounts, inflation, central banks.
  5. Too Much, Too Little: Drawbacks of the barter system, dangers of using commodities as money, money problems during the colonial and revolutionary eras, creating a national monetary system, finding the right balance between too much and too little money, growth of state-chartered banks, use of Greenbacks during the Civil War, emergence of Populist and Greenback political parties, the banking panic of 1907, creation of the Federal Reserve System, 1913.

http://ezraklein.typepad.com/blog/2005/04/reasons_this_co.html: Ezra Klein: Reasons This Country is Going to Need to Fix Its Health Care System and Fast: From the LA Times: "General Motors Corp. on Tuesday posted a first-quarter net loss of $1.1 billion, its worst quarter in 13 years, due to disappointing sales in the crucial North American automotive market and soaring healthcare costs. ... Other analysts, though, said GM could be holding back as part of its negotiations on healthcare costs with the United Auto Workers.... GM has warned that its U.S. healthcare costs could grow to $5.8 billion this year. Making things look as bleak as possible would help GM persuade the union to pass on some of the company's healthcare costs to its hourly workers, analysts said...

http://www.thewashingtonnote.com/Steve Clemons: White House Wants to Battle On for Bolton: Counselor to the President Dan Bartlett has reported that the White House intends to power on and doesn't consider Voinovich's stand a 'no vote' yet.... I think that we actually do need more time to consolidate the case against John Bolton, to bring out the other stories which are now developing, and to have a conversation with Senators and the American public about three questions:

  1. Should 'Serial Abuse' of subordinates be not only tolerated in government, but rewarded?
  2. Should ideologically driven public servants have the ability to play it to the edge, and even over the edge, in generating their own intelligence, trying to predetermined intelligence outcomes, and have the latitude to undermine delicate Bush administration national security initiatives?
  3. Should senior level Bush administration officials be able to access the nation's most secret secrets so as to spy on colleagues, their conversations, and their comments about him? (this is what some suspect the infamous NSA intercepts may show)
  4. Should a senior Bush administration official be able to get away with such 'flagrant lying' about these issues to Congress?

There is a long list that can be added -- but let's stop there. Just a note to my friends in the White House, this is not a partisan game. Many, many Americans -- Republicans, Democrats, and Independents -- DO NOT THINK THAT WE SHOULD BE SENDING SOMEONE TO THE U.N. OF WHOM WE DO NOT FEEL PROUD...

http://www.prospect.org/weblog/archives/2005/04/index.html: TAPPED: April 2005 Archives: CONSTITUTION IN EXILE.... I'd be remiss not to direct you to Jeffrey Rosen's excellent article on the 'Constitution in Exile' movement.... There isn't... a group of people who self-identify in this way and are marching in lockstep to impose a uniform view of the Constitution.... [But] "there is clearly a group of scholars and judges who hold the view that judges should give far greater deference to what they view as core economic liberties in reviewing legislative decisions... a group whose viewpoint differs on the one hand from Scalia's federalism and originalism, and... from the tradition that largely defers to Congress on matters of economic regulation."... Given the near-total collapse of the small government program as a legislative agenda, the judicial sphere becomes the last place in which an actual shrinkage of the state might be achieved. And -- appallingly -- it's something that risks happening essentially in the dark.... [T]he overwhelming majority of people seem to have no idea that the GOP may put judges on the bench who would strike down statutes that no Republican presidential candidate would ever dare advocate repealing in public...

http://www.wonkette.com/politics/republicans/gop-activists-turn-on-their-own-040335.php: Wonkette - GOP Activists Turn On Their Own: Our condolences to new Democrat George Voinovich (R - OH). Just hours after the Ohio senator asked the Senate Foreign Relations Committee to 'take a little bit more time' before voting on John Bolton, Move America Forward had an attack ad ready to go. 'WIFE: Did you hear how disloyal Senator Voinovich was to Republicans and President Bush? Voinovich stood with the Democrats and refused to vote for John Bolton, the man President Bush has chosen to fight for the United States at the UN...he missed most of the Bolton confirmation hearings, but then shows up at the last minute and stabs the President and Republicans right in the back...Shame on Senator Voinovich.' HUBBY: 'It seems like Senator Voinovich has become a traitor to the Republican Party.' Want to help Move America Forward remind Republican legislators they're all George's bitches now? Then send them a few bucks...

http://www.thismodernworld.com/: This Modern World: Terrifying. This really does not bode well: Rachael Herron's new condo will ensure her financial salvation -- unless it provokes her ruin. Herron put no money down for her tidy one-bedroom, borrowing the entire purchase price of $211,000. To keep her monthly payments as low as possible, she got an adjustable-rate mortgage that won't require her to pay any principal for three years. Thanks to her 'interest-only' loan, the 911 police dispatcher was able to afford, barely, her first home. She now has a stake in California's sizzling real estate market. As her home increases in value, she plans to use some of that equity to pay down her credit cards. But Herron is also setting herself up for a day of reckoning: Nov. 1, 2007. That's when she has to start paying off her loan principal. If interest rates are higher than when she bought her home last fall -- something many economists consider probable if not inevitable -- her monthly payment will increase by as much as a third. 'I don't know what I'll do,' said Herron, 32. 'I'm already working overtime to pay my bills.' Confronted with soaring home prices, Californians are adopting a 'buy now, pay later' strategy on a massive scale. The boom in interest-only loans -- nearly half the state's home buyers used them last year, up from virtually none in 2001 -- is the engine behind California's surging home prices...

http://www.liberalsagainstterrorism.com/drupal/?q=node/867: Losing Our Voice | Liberals Against Terrorism: "This devotion to propaganda and manipulation of the media is counterproductive and futile. By pushing too pro-Bush an agenda, the credibility of these voices are tarnished beyond repair, and without credibility, they are nothing but shouting into a void. The irony is, though, that even presenting an unbiased accounting of the news warts and all in many parts of the world, such as the Middle East, would be, and has been, a big time net positive for the US. These regions are generally beset by media interests that are highly biased against the US and infused with locally themed propaganda. As such, if we can merely discuss the issues in an open way, we can establish a credibility and show the process and rationale for our policies and actions. In many ways we can sell ourselves in such a manner, more organically, without hitting the listener over the head with a litany of pro-US slogans that illicit resistance where rapport is sought. This would, at the very least, go a certain distance toward convincing people that our policies are not the product of a 'vast, masterfully orchestrated conspiracy with some master planner sitting in the AIPAC basement.' But to do this, we must be believed and to be believed we must be honest. It's not the end game, but it is a start...

Posted by DeLong at 09:23 PM | Comments (0) | TrackBack

Hard Landings...

Three Views on Hard Landings

Mark Thoma channels Paul Krugman:

Economist's View: Krugman: No Good Monetary Policy Options in a Hard Landing: In his most recent column, Paul Krugman asks the... question:

In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment. Can it happen again?... We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong...

Thus, in a hard landing, Krugman says "there will be no good options." But the Fed will need to do something. What should the Fed do in a hard landing? Raise rates? Lower rates? I believe a recession will put the brakes on inflation, and if underlying real factors are the cause of inflation, aggregate demand policy isn't an effective tool for overcoming such shocks. Thus, I would lower rates in response to a slowdown if that were possible. But that is predicated upon the output slowdown counterbalancing inflationary pressure from other sources, and the possibility of lowering interest rates enough to stimulate the economy.

All of these questions would be much easier if both monetary and fiscal policy hadn't already been used to such an extent. With deficits as high as they are, using fiscal policy to stimulate the economy is politically and economically infeasible, and with interest rates this low it's hard to get much stimulation from driving them even lower. They can't go much lower in any case, though interest rates could be raised if the Fed decides to tighten in reponse to a stagflationary episode. Thus, the result of recent monetary and fiscal policy may be increased vulnerability to negative output shocks and a stagflationary episode.

William Polley flies airplanes:

William J. Polley: April 2005 Archives: I don't think I've defined what I think of as a hard/soft landing yet, so here goes. I am a licensed (but currently inactive) pilot.... When a new pilot makes a hard landing, it's usually because he or she thought the runway was about a foot higher than it really was.... Do it a few more feet up an you might bend the landing gear.... The another kind of hard landing is coming in too fast and slamming into the ground.... As long as you correct for it before you hit the runway, you might save the upholstery, but probably not your pride.... Last but not least is the hard landing that just happens. Everything is perfect and then the wind changes. It's like someone suddenly dropped you towards the ground....

What's my point? I remember when the term soft landing started to be used to describe what the Fed did in 1994-95. I liked the term because it seemed to describe in familiar aviation style terms what was happening. The changes in interest rates in 1994-95 were like the corrections that a pilot makes when coming in to land.... When things change at the last minute, things can indeed get dicey for both pilots and central bankers. You don't want to use all of your ability to control the situation until you really are safe on the ground. That is Mark's point, and it is a correct one--for pilots and central bankers.... A soft landing is stable inflation and unemployment at sustainable levels in the maturing phase of an expansion. You'll know it when you feel it (or don't feel it, as the case may be)...

And Brad Setser:

Brad Setser's Web Log: Martin Wolf, Korea's Central Bank, and Collateralized Debt Obligations: As Martin Wolf notes, Asia's current account surplus (savings surplus) shows up in the phenomenal growth in Asian central bank reserves.... Martin Wolf's excellent essay takes a lot of themes that we have discussed here, and pulls them together into a coherent picture. In my view (no doubt biased, since he cites Roubini), Wolf gets all nuances right.... It is vitally important to move over time to more balanced and healthy economic relationship. Yet extricating the US and East Asia from their current unhealthy and unbalanced embrace will require a rather delicate touch -- something the Bush Administration is not noted for.... The best evidence that the current situation is unsustainable? The current flow of private capital. To sustain current account deficits of its current magnitude, all of the world's surplus savings (the global current account surplus) needs to flow to the US. Yet private investors are putting a lot of their money in emerging Asia, not to the US.... Wolf correctly notes 'the private sector has been trying to push emerging market economies into current account deficit.' Asian central banks, however, are getting in the way. They are taking the funds flowing into Asia, along with Asia's own excess savings, and investing them in the US, making it possible for the US to get away with next-to-no household savings and a structural budget deficit....

Look at the Wall Street Journal's examination of the dilemmas facing Korea's central bank on Tuesday (p. C1). There are two reasons why Korea is less comfortable adding to its already substantial reserves than China. First... if the central bank is borrowing in won to invest in depreciating dollars, it has to explain itself. Second, Korea has to pay more to 'sterilize' its reserve inflows... on a cash flow basis, the Bank of Korea paid more in interest on its sterilization bonds than it earned on its reserves.... Losing money on every dollar of reserves makes you think twice about adding to your reserves....

We are in uncharted territory ... if a crisis hits, we think the market will absorb shocks smoothly -- but the truth is no one knows. I don't necessarily take comfort in the fact that 'real money' types are buying the safe parts of the CDOs, while hedge funds and other leveraged types are buying the risky parts. I worry that already leveraged hedge funds are buying instruments that themselves sometimes have a lot of embedded leverage. It may be that the hedge funds really do know how to hedge their risks, and thus are not as exposed as it would seem. But big risks are sometimes taken by investors looking for high returns to justify high fees in an environment where there is less and less easy money to be made....

Posted by DeLong at 09:18 PM | Comments (0) | TrackBack

Battlepanda's Teaching Economics Manifesto

Very much worth reading:

battlepanda: Neither Dismal nor a Science (Or, how the way we conceptualize the discipline of Economics have hobbled actual education in economics. But that's a slightly less snappy title):

Those of you who have been reading this blog knows that my friend RJ is a economics skeptic. Especially of macroeconomics, which he regards as little better than astrology -- relevent insofar as it's widely believed, but with bullshit where the underlying concepts should be. I identify with RJ because we went to the same college and took the same intro to Econ class, Econ 11, that left us with the same impression of economics as an unempirical science, blind to its own inherent ideological bent. A misguided attempt to distill human behavior into laughably simple graphs. Consisting entirely of arguments standing on assumptions so broad and unwarrented that the conclusions reached have no meaning. Basically, a pseudo-science so divorced from reality and rife with fudge factors that it should be dismissed out of hand for being intellectually inelegant, if nothing else. And don't think that RJ and I just didn't 'get it'. We both recieved good grades in Econ 11 for very little work, and if nothing else that only added to our contempt for the subject, especially for RJ, who is very mathematically inclined.

I'm assuming that if you've read this far you actually agree with me that RJ is dead wrong and that economics is actually an essential area of study.... So let us discuss where the way we teach economics went so wrong and what we can do to make it right....

  1. Economics is not like the other sciences. Acknowledge that. There is no giant econ lab where we can hold all other variables constant and vary the money supply or tax rate.... By necessity, the study of economics often have to work backwards from real-world occurances, occurances so mired in culture, history and politics that it's often difficult just to deduce what factors are significant.... Why not embrace this need for all kinds of intellectual skills instead of retreating into the kind of defensiveness I hear so much of: 'Yuh-huh! We are soooo a science. Like physics. And biology. Just as good. Look, we use graphs and shit.'
  2. Always think to yourself: Would this sound crazy to the proverbial man-on-the-street?... We make broad stroke assumptions such as 'each individual will act to maximize his utility' or 'if the price is driven down to zero, demand is infinite' not because we are intellectually lazy, but because making those assumptions allow us to simplify a real-life situation to the point where we can apply logic.... Imagine a theoretical physics class in which you are told to memorize the twin paradox and be prepared to regurgitate a schematic drawing of Schroedinger's Cat's without being walked through exactly how those counterintuitive outcomes came about? It's what Econ students are being told to do every day -- to accept what's in front of them at face value and memorize which little square to color in as the consumer surplus. Is it no wonder that students who are intelligent often wind up insulted rather than educated?
  3. Separate the normative from the positive. It is notoriously hard to keep one's politics out of one's economics. But it is important to strive to be as objective as possible because when ideology trumps reality, economics becomes as dangerous as a faulty chart of a rocky shoal.... A corollary: Problem sets are not a good place for editorializingLook graph 78a on page 234. The government has put a ceiling on the rent of properties in Jenny's town. Is Jenny better off? Do you even need to look at the graph? That would be a bit of a waste of time, wouldn't it, since this is blatently a 'government-actions-have-unintended-consequences-that-end up-hurting-the-very-people-they-are-trying-to-help' question.
  4. Economics is all around us. The way economics is taught is very compartmentized.... I think economics would be much more compelling if professors really hammer home its most fundamental definition -- the study of the distribution of scarce resources. You pay 28 extra cents for a box of brand-name flakes rather than generic after seeing $500,000 worth of commercials. That's economics. Your parents were able to buy the house they always wanted after interest rates dropped below 6%. That's economics too. This is why I am so psyched about Freakonomics -- it's economics as a tool that cuts away the noise and reveal the fascinating underlying patterns in everyday life rather than the abstract and rarified realm of widgets.
  5. 'Humans aren't Billiard Balls.' But sometimes we have to treat them as if they are.... [I]f you're not willing to pay $500 for a safety device in your car that will have a 1/10,000 chance of saving your life. Multiply $500 by 10,000 and hey presto, your life as valued by you is worth five million bucks. Nifty? I didn't think so at the time. There is something that is very off-putting about the way economics reduces humanity to numbers, from our motivation, to our values, even our lives. Again, I think the way to get over this aversion is to hammer home the whys and wherefores of economics -- without quantification we cannot see patterns in the aggregate, and without seeing the patterns we cannot use economics to make our lives better....

Heck, this post is already too long. So I'll just end with an exhortation to everyone teaching Econ out there.... Try and tell your students why economics is important in our lives. Leave widgetland behind.... Praise the free market, but also show its limitations. Teach the history of economics, how Adam Smith's invisible hand is a reaction to the overbearing government of the day, and how Keynes is in turn a reaction to Smith. Don't forget to note the hubris of the economists who thought they had recessions licked in the 60s. I'll let commenter Colin Danby, fellow ex-econ-skeptic and now turned econ teacher have the last word: "When I teach this stuff now, I try to build in student research projects that help them learn to use real-world data, so that at least I can show them by the end of the class that the world is more transparent. But I'd never talk about 'believing in' economics -- it's not a religion, it's a social science and still a rather inadequate one."

Posted by DeLong at 09:16 PM | Comments (0) | TrackBack

Fafblog on Pig Diets

Fafblog truly is a national treasure. The New Republic should consider going all-Fafblog all the time:

Fafblog! the whole worlds only source for Fafblog.: Juan Cole: Killjoy: Giblets is proud of his beloved pet pig and has decided to reward it with a delicious treat. A treat like dynamite!'You really shouldn't feed dynamite to your pig,' says Juan Cole, mideast expert and professor of pig studies. 'Dynamite has never been a safe feed for pigs and has only resulted in disaster for pigs and the pig community.'

Oh what do you know Juan Cole! Your expertise in the fields of pig history and pig theory just means you have swallowed the standard academic dogma regarding the pig-dynamite dynamic! Giblets has reason to believe his pig will receive fantastic dynapig powers, but Cole has been too heavily indoctrinated by pigs and Arabists to see the truth. 'Dynamite is explosive,' says Juan Cole. 'If you feed it to your pig, your pig will explode.' Now that's just crazy talk motivated by Cole's gloomy dynamite-bashing. If you'll just step aside, Giblets has a pig to feed.

Posted by DeLong at 09:14 PM | Comments (0) | TrackBack

Stupidest Woman in the World

Laura Rozen finds AEI Vice President Danielle Pletka uttering another piece of AEI-quality thought:

War and Piece: : Quote of the Day: "This is a disgrace, the idea that temperament is suddenly important. There are legions who have gone before John, as well as members of Congress, who have behaved appallingly." Danielle Pletka, Vice President of AEI, on Bolton's nomination setback, from the New York Sun.

So she says that it's a real disgrace that people are appalled by John Bolton's appalling behavor?

Posted by DeLong at 09:13 PM | Comments (0) | TrackBack

Gurk!

Not good:

FT.com / World / International economy - US inflation rising faster than expected: By Christopher Swann and Andrew Balls in Washington: US inflation rose at twice the pace economists had been expecting in March, further reducing the chances that there will be any respite this year from rising interest rates. The headline consumer price index climbed 0.6 per cent - boosted by a 4 per cent rise in energy prices. Over the past year consumer prices have increased 3.1 per cent. But it was the rise in underlying inflation that most alarmed analysts. Core inflation - excluding food and energy - climbed by 0.4 per cent, double the increase economists had been forecasting. The data comes a week after weak retail sales and consumer confidence figures, raising the prospect that the Federal Reserve may be sandwiched between rising inflation and weaker consumption...

Posted by DeLong at 09:11 PM | Comments (0) | TrackBack

Double Plus Ungood in Iraq

Juan Cole reports:

Informed Comment: A tearful member of the Iraqi parliament, Fattah al-Shaikh, stood up before other MPs and told the story of how he was attacked and detained by US troops when he attempted to enter the Green Zone, the heavily fortified area near downtown Baghdad where parliament is held and the US embassy is situated. Wire services report that he said, 'I don't speak English and so I said to the Iraqi translator with them, "Tell them that I am a member of parliament", and he replied, "To hell with you, we are Americans".'

Hearts and minds. Hearts and minds. Not enough translators. Not enough troops.

Posted by DeLong at 09:10 PM | Comments (0) | TrackBack

April 19, 2005

Web Clippings--20050419

Sigh What I would write about if time were infinite:

http://www.foreignaffairs.org/20030701faessay15403/jessica-stern/the-protean-enemy.html: Foreign Affairs - The Protean Enemy - Jessica Stern. From Foreign Affairs, July/August 2003: Summary: Despite the setbacks al Qaeda has suffered over the last two years, it is far from finished, as its recent bomb attacks testify. How has the group managed to survive an unprecedented American onslaught? By shifting shape and forging new, sometimes improbable, alliances. These tactics have made al Qaeda more dangerous than ever, and Western governments must show similar flexibility in fighting the group...

http://www.newsday.com/business/nationworld/wire/sns-ap-adobe-macromedia,0,2202302.story?coll=sns-ap-business-headlinesNewsday.com: Adobe Buys Macromedia in $3.4B Stock Deal: SAN JOSE, Calif. -- Combining two of the largest makers of software for creating and delivering digital content, Adobe Systems Inc. said Monday it will acquire Macromedia Inc. in an all-stock transaction valued at approximately $3.4 billion. Shares of Macromedia, known for its Dreamweaver Web-design program and Flash, which animates and adds interactivity to Web pages, rose more than 8 percent in early trading, while Adobe shares sank 11 percent...

http://www.liberalsagainstterrorism.com/drupal/?q=node/852: Bad And Worse | Liberals Against Terrorism. Submitted by Eric Martin on April 18, 2005 - 6:05pm: A story on the BBC's website (via Juan Cole) recounts statements by Iraq's new president, Jalal Talabani, regarding the use of Kurdish and Shia militias to put down the insurgency: "Iraq's new president has said the insurgency could be ended immediately if the authorities made use of Kurdish, Shia Muslim and other militias. Jalal Talabani said this would be more effective than waiting for Iraqi forces to take over from the US-led coalition.... The Kurds have in the past offered the use of their estimated 80,000 Peshmerga guerrillas for security tasks but have been turned down. So, too, has the Iranian-influenced Supreme Council for the Islamic Revolution in Iraq (Sciri) and its Badr brigade, another well-trained fighting force. 'We cannot wait for years and years of terrorist activity because we haven't enough government forces,' the president said." This dilemma represents the 1,092nd example of a Catch-22 encountered in the Iraq campaign. Talabani might be correct that these Iraqi militias would be better suited to ferret out insurgents, having a knowledge of the language, customs, peoples, etc. Unfortunately, such an ethnically polarized military campaign would bring Iraq to the brink of full-fledged civil war - and given the long standing grievances of the Shia and Kurds simmering just under the surface, it is probable that passions will lead to atrocities and brutalities that further exacerbate the situation...

http://www.livejournal.com/users/jmhm/1291005.html: Sisyphus Shrugged - Mr. Kinsley gets it exactly wrong again: I sometimes wonder if Mr. Kinsley reads what Mr. Kinsley writes.... Work with me, Mr. Kinsley. Ms. Kirkpatrick thought we should prop up the oligarchs (many of whom we hand-picked and foisted on the people to begin with) and let the people fend for themselves. The current crop, as a response to a wave of democratization, thinks we should foist hand-picked oligarchs on the people (by force of arms, if necessary) and then prop them up. Where in this you see a switch in actual practice rather than in figleaf rhetoric (swooning over ideas indeed. 'Carter sucks' is not an ideology. Nor is 'It sucks if Carter does it') eludes me. It's all neo realpolitik, and what neo realpolitik meant then and means now is that Republicans make up grand, lofty lies about their goals to get elected so they can do pretty much what they want to do with no reference to all the pretty rhetoric.Perhaps I dine with the wrong people...

http://highclearing.com/index.php/archives/2005/04/18/4152: Defining Apocalypse Down. ustin Logan catches quite the example of definitional slippage from a New York prosecutor: "Q: Regarding that phrase 'weapons of mass destruction,' in sort of the political discussion, that term has come to mean chemical and radiological and biological -- and I realize it might be different in legal -- is there any implication in the use of that term that there was a biological or a chemical or a radiological element to the plan? MR. COMEY: We have not alleged that. But as you alluded to, a weapon of mass destruction in our world goes beyond that and includes improvised explosive devices." Oy. I guess that makes Dick Cheney sort of right (if you squint), when he says that we continue to find weapons of mass destruction in Iraq. Dear neolibertarians and alleged conservatives (if any of you are still out there): the government is still the government. War doesn't make it less like it used to be. If anything it makes it moreso...

http://thinkprogress.org/index.php?p=667: Democracy Hypocrisy: An Election Mess In Mexico: As the Bush administration continues to tout its efforts to promote democracy in such places as Afghanistan and Iraq, it has overlooked a serious challenge to democracy in Mexico. With 15 months left until the 2006 presidential election, Mexico City9s left-leaning, 51-year-old populist mayor, Andres Manuel Lopez Obrador, may be forced out of the race due to a highly undemocratic Mexican law..... Rival political parties PRI and President Fox%u2019s own PAN are uniting against the popular mayor, who currently leads in the polls. Their effort (despite the fact that many Mexicans feel the case to be a minor infraction) attempts to strip Lopez Obrador of the immunity from prosecution he maintains as a public official. Taking away Lopez Obrador's immunity would bar him from running for further office, since Mexican law states that politicians cannot run for office if under indictment...

http://ezraklein.typepad.com/blog/2005/04/health_care_fra.htmlEzra Klein: Health Care: France: Da' basics: France has a basic system of public health insurance that, as of January 2000, covers everybody in the nation. Before then, portions of the population lacked insurance. The reimbursement rates are wholly uniform, despite the fact that there are actually three health care funds, a main one covering most workers, and then one for the self-employed and one for agricultural workers. As that hints, the health care is occupationally based. It's paid for through employer and employee contributions (much like Social Security), in addition to personal income taxes. The latter have been increasing in recent years. The funds are private entities under the joint control of employers and unions, which are in turn supervised by the state. As might be expected, that doesn't work particularly smoothly, and there's a constant battle for authority and control. Creative tension, one might kindly call it. The funds are mandatory, no one may opt-out, and they're not allowed to compete with each other nor micromanage care. The public system covers around 75% of total costs. Half of the rest is paid out-of-pocket and the remaining is made up by supplementary insurance companies. About 85% of the French have some form of private insurance...

http://economistsview.blogspot.com/2005/04/daily-standard-bernanke-now-top-pick.html: Economist's View: The Daily Standard: Bernanke Now Top Pick to Replace Greenspan: Irwin M. Stelzer believes Martin Feldstein's association with the troubled American International Group (AIG), and the likelihood that Robert Rubin will be asked to be the new CEO elevates Ben Bernanke as the top candidate to replace Greenspan as chair of the Fed, and that this will bring about "replacement of Greenspan's flexible, intuitive approach to monetary management with specific inflation targeting..."

http://ragout.blogspot.com/2005/04/squid-strategy.html: When you're wrong, and someone points it out, the squid strategy is a good one. Fill the water with black ink to confuse the issue, and hope that observers will through up their hands and decide that it's all too complicated, and too much trouble to judge who's right. This kind of thing is pretty common in politics, but via Brad DeLong, I learn how Harvard Economist Caroline Minter Hoxby is doing the same thing. Hoxby wrote a well-known paper arguing that competition, in the form of numerous school districts, improves school productivity and student outcomes. In fact, relatively simple statistical methods find no such relationship, but Hoxby argues that there might be an omitted variable or reverse causation problem. For example, maybe good school districts get bigger, reducing competition. This doesn't seem like such a serious statistical problem to me, but Hoxby famously proposed to solve it using rivers as a "natural experiment." Her idea is that metropolitan areas with more rivers will have more school districts, because in the olden days, it was hard to cross rivers to go to school. To simplify a little, Hoxby shows that metro areas with more rivers have higher student achievement, and so concludes that competition is a good thing. Recently, the tenured Hoxby has been criticized by the untenured Jesse Rothstein of Princeton, who says he found numerous errors in her study...

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http://www.washingtonpost.com/ac2/wp-dyn/A64409-2005Apr18?language=printer: Army intelligence officials in Iraq developed and circulated 'wish lists' of harsh interrogation techniques they hoped to use on detainees in August 2003, including tactics such as low-voltage electrocution, blows with phone books and using dogs and snakes -- suggestions that some soldiers believed spawned abuse and illegal interrogations. The discussions, which took place in e-mail messages between interrogators and Army officials in Baghdad, were used in part to develop the interrogation rules of engagement approved by Lt. Gen. Ricardo S. Sanchez, then commander of U.S. troops in Iraq. Two specific cases of abuse in Iraq occurred soon after. Army investigative documents released yesterday, as well as court records and files, suggest that the tactics were used on two detainees: One died during an interrogation in November 2003 while stuffed into a sleeping bag, and another was badly beaten by inexperienced interrogators using a police baton in September 2003. The documents indicate confusion over what tactics were legal in Iraq, a belief that most detainees were not covered by Geneva Conventions protections and alleged abuse by interrogators who had tacit approval to 'turn it up a notch.' In both incidents, a previously disclosed Aug. 14, 2003, e-mail from the joint task force headquarters in Baghdad to top U.S. human-intelligence gatherers in Iraq is cited as a potential catalyst...

http://www.tnr.com/arch/hs/: The New Republic Archives: Historical Society: Welcome to The New Republic Archives: 90 years of articles, editorials, and reviews. The TNR Archives includes every issue since our first in 1914, so here are some tips to help you get started: Join the TNR Historical Society. Your membership includes access to weekly archive features such as This Month in History, Historical Perspective, and Editor's Choice. As a member, you'll receive 10 handpicked articles each month. Click here to sign up or for more information. Search the full archives for free. The search function in the upper right corner allows you to find articles by topic, subject, and author. Scroll to the bottom of the page or click here for advanced search options. All summaries are free, but there is a cost to download the full article. Click here for pricing information. Find content with TNR Recommends. These are our most popular archive subjects. Click on the subjects in the right-hand column to bring up their full search results...

http://www.stat.columbia.edu/~cook/movabletype/archives/2005/04/loss_aversion_e.html: Statistical Modeling, Causal Inference, and Social Science: Loss aversion etc: If a person is indifferent between [x+$10] and [55% chance of x+$20, 45% chance of x], for any x, then this attitude cannot reasonably be explained by expected utility maximization. The required utility function for money would curve so sharply as to be nonsensical (for example, U($2000)-U($1000) would have to be less than U($1000)-U($950)). This result is shown in a specific case as a classroom demonstration in Section 5 of a paper of mine in the American Statistician in 1998 and, more generally, as a mathematical theorem in a paper by my old economics classmate Matthew Rabin in Econometrica in 2000...

Posted by DeLong at 09:36 PM | Comments (0) | TrackBack

I Guess I'm Not Going to Be Reading the New Republic Anymore...

Well, well, well:

The New Republic Online: Dear Diary: [Juan] Cole may express offense at the Protocols [of the Elders of Zion], but their obsession with the supposed international influence of 'world Zionism' resonates powerfully in his own writings...

I don't think that Juan Cole's comments are always the most informed comments, and I think his view of Middle Eastern populism is much too rose-colored, but he has done nothing to deserve this. Shame on the New Republic.

Posted by DeLong at 09:34 PM | Comments (0) | TrackBack

Bush's Credibility Gap

From AP:

HoustonChronicle.com - 'Credibility' gap dogs Social Security plans: By NEDRA PICKLER Associated Press: COLUMBIA, S.C. - President Bush on Monday pitched for his Social Security overhaul in this Republican-friendly state, yet a Republican congressman made clear that Bush still faces resistance within his party.... Rep. Gil Gutknecht, R-Minn., said during an editorial board meeting with the (Rochester) Post-Bulletin that Bush must overcome a 'credibility problem' to revamp Social Security. The congressman said many people think the president underestimated the cost of the Iraqi war, then overestimated the benefits of Medicare's prescription drug plan. 'And now, all the sudden, they wonder why people are a bit skeptical of their ... plan on Social Security,' he said. 'It's partly a credibility problem.' Gutknecht also rejected the Bush contention that Social Security is in 'crisis.' 'If I use the word 'bankrupt,' you know, kick me, because I don't think that's a fair term to say about Social Security,' the congressman said. 'It is not in crisis today. I don't use the word 'crisis.' '

Bush was greeted by a letter on the front page of The Columbia State, welcoming him to the state that he won handily last November but warning him that his Social Security proposal is 'going to be a hard sell, even in conservative South Carolina.' The state's senior senator, Lindsey Graham, has urged the president to switch his focus to the retirement program's looming insolvency and how to fix it. He also has broken with Republican orthodoxy to suggest that part of the solution will involve raising taxes. South Carolina's junior senator, Republican Jim DeMint, said Bush had told him that 'if it takes the last day of his presidency, he's going to work on this issue.'

After returning to the White House, Bush told CNBC that private retirement accounts are a good idea even though the stock market is slipping as investors worry about rising gas prices and the strength of the U.S. economy. 'Most people will tell you that if you hold money over a long term, the rate of return on a conservative mix of bonds and stocks clearly is greater than that which the government earns on your behalf,' he said. 'There are ways to design plans that take the risk out of a plan.'...

It's certainly true that there are ways to greatly reduce the risk to those Social Security beneficiaries who elect private accounts. But Bush's plan does not do them.

I wonder if anybody has told him that?

Posted by DeLong at 09:32 PM | Comments (0) | TrackBack

The Intangible Economy: Patents and innovation research

Ken Jarboe

The Intangible Economy: Patents and innovation research: This morning, the National Bureau of Economic Research (NBER) is holding a conclave of economists who study innovation. (For those of you who don't know it, NBER is the premier economic research organization -- it is an NBER committee that determines when recessions officially began and ended). While the conclave is by-invitation-only, unlike the Papal conclave we don't have to watch the color of the smoke to know what is happening. The papers are posted on the NBER website at NATIONAL BUREAU OF ECONOMIC RESEARCH, INC One of the most interesting papers is by Adam Jaffe of Brandeis University and Josh Lerner of Harvard University. The paper 'Innovation and its Discontents' is an extension of the 2004 book by the same title: Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What To Do About It. Their thesis is simple: "In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it." Some of their recommendation, especially concerning business methods, software and biotechnology patents, will likely generate debate. Others, such as pre-grant opposition and re-examinations of granted patents, seem to be part of the building consensus on patent reform.

Posted by DeLong at 09:29 PM | Comments (0) | TrackBack

Does General Motors Have Three Years to Live?

This is not good:

FT.com / Industries / Autos - GM abandons profit forecast after $1.1bn loss: General Motors on Tuesday abandoned its profit prediction for the year as the world's biggest carmaker reported a quarterly loss of $1.1bn, its worst in more than a decade.... GM said uncertainty about efforts to deal with its "healthcare cost crisis" and other key parts of its business meant it could not provide any guidance for profits this year.... The withdrawal of the forecast came as the automotive business reported a first quarter operating cash outflow of $3bn, more than the $2bn revised target the company had previously set for the full year.... The cashflow has been closely watched as investors anticipate a downgrade of GM's credit rating to junk bond status, a move which would force many investment-grade bond funds to sell their holdings in one of the world%u2019s top five borrowers.

Rick Wagoner, chairman and chief executive, said the problems lay with the north American business, which he took direct control of last month. GM has been hammered in the US by rising healthcare costs and cuts to production in order to reduce stocks of unsold cars at dealerships.... This is the worst figure since accounting changes in 1992, when GM was on the verge of bankruptcy, led to a quarterly loss of $21bn.... GM said its cash and easily realisable investments stood at $19.8bn at the end of March, down from $23.3bn at the start of the year.

Posted by DeLong at 09:27 PM | Comments (0) | TrackBack

Martin Wolf on "Global Imbalances"

He writes:

FT.com / Comment & analysis / Columnists - US deficits aren't just China's problem : If creditors face an endless stream of additional borrowing and a good chance of default at the end of it, they should refuse to throw good money after bad. They will then impose huge costs on the debtor. This balance of financial terror, as it has been called, characterises the current huge flows of finance to the US. Carefully thought through economic policy is needed if the world is to extricate itself from this predicament. Alas, we can rely on the administration of George W. Bush not to provide it.

So it proved at this weekend's meeting of the Group of Seven leading industrial countries. The communiqué remarked that "we emphasise that more flexibility in exchange rates is desirable for major countries and areas that lack such flexibility".... Mr Snow is not the organ-grinder of US economic policy but the monkey.... As Nouriel Roubini of New York University promptly responded, the US attack on one of its principal creditors is playing with fire. In the past two years, he argues, three quarters of the US fiscal deficit has been financed by foreign central banks, 100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks. Biting the hand that feeds one is folly.

According to the International Monetary Fund, the US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present, therefore, the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of what is arguably the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks rather than indulge in complaints....

Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities... instead of choosing between a sudden correction now and a still more brutal sudden correction later, why not go for a smoother correction that starts now? The requirements for such a correction are clear.... A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well, to facilitate adjustment.... [I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies. These are the world's natural deficit countries.... The huge reserve accumulations of emerging market economies are by now senseless. These are not only wasteful investments but also prevent the global adjustment that the private sector rightly wishes to make. Emerging market economies should run current account deficits equal to inward FDI. Hectoring China on the exchange rate alone is folly. But a serious discussion of policies to deliver a better global balance is not. That discussion must begin now.

Posted by DeLong at 09:26 PM | Comments (0) | TrackBack

No One Expects the Holy Inquisition!

"Our two weapons are fear, surprise, and ruthless efficiency!"

How long since the Chief of the Holy Inquisition has been named Pope?

Posted by DeLong at 09:25 PM | Comments (0) | TrackBack

Yes, Rich Clarida Would Make a Very Good Fed Governor

And he seems to be gaining ground...

FT.com / World / US - Clarida is leading candidate for Fed governor: By Andrew Balls in Washington Published: April 19 2005 22:32: Richard Clarida, a Columbia university professor and former official in the George W. Bush administration, is the leading candidate to replace Ben Bernanke as a Federal Reserve governor. Mr Clarida spent a year at the US Treasury during President Bush's first term, serving as an assistant secretary and as chief economist. He is seen as an orthodox economist with experience in international policymaking. "It is far from a done deal, Ben [Bernanke] has not even resigned from the Federal Reserve yet," a person familiar with the process said. "But Rich would be a good fit and he would love the job." The White House has nominated Mr Bernanke to take over as chairman of the president's Council of Economic Advisers. While he awaits Senate confirmation, Mr Bernanke has divested himself of his monetary policy responsibilities at the Fed.... Mr Clarida is not the only economist the White House is considering, but the list of potential candidates is small, the person familiar with the White House's thinking said...

Posted by DeLong at 09:24 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (The New York Times Editorial Board Is a Clown Show Department)

Outsourced to Ezra Klein:

Ezra Klein: Heavens to Betsy!: The New York Times has a tidy little editorial on the train wreck that is the House Energy Bill. Read it. But midway through, the piece gives in to the sort of fresh-faced naivete that makes you wonder who put a newborn in charge of writing opinions for the nation's preeminent paper. Witness:

The House is moving quickly and with sad predictability toward approval of yet another energy bill heavily weighted in favor of the oil, gas and coal industries. In due course the Senate may give the country something better. But unless Mr. Bush rapidly elevates the discussion, any bill that emerges from Congress is almost certain to fall short of the creative strategies needed to confront the two great energy-related issues of the age: the country's increasing dependency on imported oil, and global warming, which is caused chiefly by the very fuels the bill so generously subsidizes.

...Watching the Times scratch the dandruff from their hair and wonder why the Republican-led House is pushing such a myopic snarl of industry giveaways and poor policy is bad enough, reading their pleas for Bush to sweep in and save the day is unforgivable. This bill may as well be authored by the President himself. He's not going to dive in and save it, hell, he probably thinks the environmentalists got too much out of the deal... for them to ask the heavens why Bush isn't demanding a bill that better addresses those issues is frankly insane.... I don't expect anything better from George. What I do expect is that the New York Time... won't pretend Bush has an enlightened view of the environment...

Posted by DeLong at 09:18 PM | Comments (0) | TrackBack

"Personal Accounts" Are Dead! Long Live "Social Security Modernization"!

The Carpetbagger Report has the goods:

Carpetbagger Report: First "privatization" was a good word; then the White House declared it off limits to everyone. Likewise, "private accounts" were a standard part of the Social Security discussion, right up until polls showed people didn't like it. The language police in the Bush White House have come to yet another realization about a word that, as Dan Froomkin noted today, we're likely to hear a lot more of in the months to come. Here's Karl Rove on CNN yesterday. See if you can spot the new poll-approved word.

[Bush] went to South Carolina today where the two United States Senators and the governor are in favor of Social Security modernization.... We do believe the cause of Social Security modernization is well-served by having a forthright debate about the pluses and minuses of any proposals laid out there.

Notice it? Here's Bush in South Carolina yesterday, offering another clue.

By giving younger workers an option to set up a personal savings account, we have an opportunity to modernize and strengthen a great American program.... See, telling younger workers they have to save money in a 1930s retirement system is like telling them that they have to use a cell phone with a rotary dial.

The Republicans were tinkering with this theme a month ago--comparing Social Security to a 1935 Ford, which House Republicans said they wouldn't want to be "caught dead in"--but it didn't take. Left with limited rhetorical options, it seems the White House is trying to bring it back.

Is "modernization" really the new word or has Bush been saying it all along? It%u2019s been mentioned here and there on occasion, but Bush was didn't use the word (or any similar word) at recent Social Security events in Ohio, New Mexico, Arizona, Colorado, and Florida, compared to Karl Rove using it twice in a brief CNN interview. Sounds like this one's a recent addition to the rhetorical quiver. Be prepared for the onslaught.

Posted by DeLong at 09:16 PM | Comments (0) | TrackBack

20050414: Economics 113: Problem Set 4

Problem Set 4 is now out. It is due at lecture on Tuesday April 26, 2005.

Posted by DeLong at 10:24 AM | Comments (0) | TrackBack

April 18, 2005

Web Clippings--20050418

Web Clippings--20050418

What I would write about if time were infinite:

http://www.harrisinteractive.com/harris_poll/index.asp?PID=557: President's Job Ratings Fall to Lowest Point of His Presidency. Social Security seen as the top issue to address by U.S. adults. The last month has not been a good one for President Bush and the Republicans. Most people have opposed the President's proposals for reforming Social Security and most were unhappy with the positions taken by Republicans in the Terri Schiavo case. The result is that the president's job ratings have fallen to 44 percent positive, 56 percent negative, the worst numbers of his presidency, and a drop from 48 percent positive, 51 percent negative in February (and 50% positive, 49% negative last November). This is one of the results of a new Harris Poll of 1,010 U.S. adults surveyed by telephone by Harris Interactive® between April 5 and 10, 2005.... While Secretary of State Condoleezza Rice is not nearly as popular as her predecessor, Colin Powell, she is the only cabinet member currently enjoying positive ratings – by 54 to 39 percent...

http://www.washingtonmonthly.com/archives/individual/2005_04/006142.php: HEALTHCARE IN AMERICA.... This paper includes some survey data about how satisfied people are with their country's healthcare system (see Exhibit 1). The United States rates pretty low on this scale (14th out of 17 countries), but it turns out the survey includes something even more interesting: separate satisfaction ratings for the poor and the elderly (see Exhibit 3). It takes a bit of interpolation to extract all the numbers, but that's not hard to do. So with that in mind, here are the percentages of Americans who say they are "fairly or very satisfied" with their own health system: Poor: 45% Elderly: 61% Everyone else: 34%. This is pretty remarkable. First, the elderly in America, who are covered by a state-run national healthcare system (Medicare and Medicaid) are way more satisfied with their healthcare than everyone else. As it happens, the elderly in other countries also tend to report higher satisfaction levels than other people, but usually by just a few percentage points. In America, where the elderly are covered by a national system and others aren't, the elderly are more satisfied by a whopping 27 percentage points. Second, even the poor are more satisfied with their healthcare than the rest of us. The poor generally rely on a combination of Medicaid, emergency rooms, and free clinics for their healthcare, a system that's hard to beat for sheer inefficiency and appalling service. But even at that, the rest of us, who are mostly covered by employer-provided health insurance, are less satisfied than the poor....

http://ezraklein.typepad.com/blog/2005/04/keep_the_govern.html: Kevin does some digging and finds that the poor and the elderly -- the two groups that rely primarily on government-run program for their health care -- are way more satisfied than the rest of us. He finds this confusing, puzzling even. I think it's somewhat explained by an anecdote from The Choice. The authors are walking through an airport with John Breaux when an old woman runs up to him and says: "Senator, don't you dare let the government get its hands on my Medicare!" Without missing a beat, Breaux replies: "Don't worry madam, I won't." I think that about explains it. We've so fully demonized government-run health care that we won't even believe it can work when it already is. The totality of propaganda's triumph over not just the facts, but our subjective interpretation of the facts (i.e, how satisfied we are with our health care) is truly stunning. Ugh...

http://www.thecarpetbaggerreport.com/archives/3988.html: Martinez's Schiavo memo — the fallout. I was more or less prepared to move past the subject altogether, but Roll Call had an item today on Sen. Mel Martinez (R-Fla.) and the now-infamous Terri “great political issue” Schiavo memo. Most of the piece dealt with the fact that Martinez is facing some pressure from campaign advisors who are urging the freshman senator to make sweeping staff changes in the wake of the controversy. But the more interesting point dealt with just how isolated the Darling incident really was. Martinez's press secretary, Kerry Feehery, continues to insist that that Schiavo memo was written “unilaterally” by one aide. However, a Republican source close to the situation said the claim is “preposterous.” The source told [Roll Call] that he knows “for certain” that two other senior Martinez staffers helped Darling write the memo and circulate it to other Republican Senators. “Those three were really working it,” the source said. This seems far more realistic, in light of everything that's been reported, and suggests Martinez couldn't have handled this fiasco much worse. Indeed, his staff scapegoating never really made a lot of sense — a senator's point man on a national controversy prepared talking points and gave them to the lawmaker, who in turn shared them with another lawmaker. Several Senate offices later confirmed they received copies as well. And yet, Martinez insists Darling was some rogue memo-writer, writing up talking points without input or collaboration, and that no one but Darling even read the memo in advance? Moreover, the fact that a “Republican source close to the situation” is talking to Roll Call about this suggests there's some lingering anger towards Martinez for his role in making this mess happen. All, it appears, is not yet forgiven on the GOP side of the aisle....

http://economistsview.blogspot.com/2005/04/krugman-no-good-monetary-policy.html: Krugman: No Good Monetary Policy Options in a Hard Landing. I've been asking how the Fed should respond in a hard landing in recent posts and the first part of my answer to what the Fed should do in a hard landing is here. In his most recent column, Paul Krugman asks the same question: "In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options.... We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong...." Thus, in a hard landing, Krugman says “there will be no good options.” But the Fed will need to do something. What should the Fed do in a hard landing? Raise rates? Lower rates? I believe a recession will put the brakes on inflation, and if underlying real factors are the cause of inflation, aggregate demand policy isn't an effective tool for overcoming such shocks. Thus, I would lower rates in response to a slowdown if that were possible...

http://news.ft.com/cms/s/8ed600c4-afe1-11d9-ab98-00000e2511c8,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html: Global equities slide on growth and earnings fears. By Neil Dennis. Fears of slowing economic growth and first-quarter earnings falling shy of forecasts, drove global stocks sharply lower on Monday, with technology stocks and carmakers among the worst hit. In Asian trade, Tokyo's Nikkei 225 Average tumbled 3.8 per cent to 10,938.44, with steelmakers and consumer electronics groups leading the way lower on fears that exports to China may suffer from a slowdown there. Elsewhere in the region, Taiwan's Taiex index fell 2.9 per cent as chipmakers lost ground, and Seoul's Kospi shed 2.4 per cent. In Europe, as in Asia, stocks were taking the lead from Wall Street's performance last week, as the major US stock indicators ended at lows for the year. The Dow Jones Industrial Average shed 3.6 per cent over last week to end Friday at 10,087.51, falling a further 0.4 per cent to 10,052.56 in opening trade on Monday...

http://www.latimes.com/news/nationworld/nation/la-na-bolton16apr16,0,3939442.story?coll=la-home-nation: Republican Sen. Chuck Hagel of Nebraska signaled Friday that his support for the nomination of John R. Bolton as U.N. ambassador was wavering after new reports that Bolton ordered an intelligence analyst removed from his job. The analyst, a State Department employee who now works on Hagel's Senate staff, is the third intelligence analyst reported to have been threatened or intimidated by Bolton, who has served since 2001 as undersecretary of State for arms control and international security...

http://inteldump.powerblogs.com/posts/1113839905.shtml: Judging Gitmo Richard Serrano reports in the L.A. Times on a new report published by the Pentagon which is intended to rebut some of the criticism aimed at the 3-year-old U.S. military detention facility. In general, the criticism has taken on 3 tacks: 1) the facility there is unlawful as a matter of U.S. and international law; 2) the interrogators at Gitmo have committed myriad acts of abuse; and 3) Gitmo is undermining the war on terrorism by producing a lot of useless information and by inflaming Arab (and global) sentiment against the U.S. Mr. Serrano reports that the Pentagon wants to change at least one of these impressions — and argue that Gitmo has produced results: "The new report appears to buttress the military's claim that it should be allowed to run Camp Delta without outside intervention because the camp has become "the single best repository of Al Qaeda information." The declassified summary cites more than 4,000 interrogation reports and says that some indicated Al Qaeda operatives were pursuing chemical, biological and nuclear weapons. The summary does not elaborate on what that information is or how close the terrorist organization might be to getting such weapons..."

http://nationaljournal.com/: Stan Collender: April 15th is not just about income taxes; it is also an important deadline for the federal budget. This is the statutory deadline for the House and Senate to agree to the conference report on the congressional budget resolution. It is, therefore, the date by which the vast majority of big budget decisions are supposed to be made. The weeks after April 15 are for implementing the decisions the budget resolution embodies. That's not the case this year. Both houses of Congress have passed their own budget resolutions and negotiations between the two on a compromise version are continuing. But as it is currently being discussed, the fiscal 2006 budget resolution conference report is far more likely to be an agreement to disagree than a series of decisions the House and Senate are committed to abiding by for the rest of the year. And even that will be the case only if the House and Senate actually agree on something. Weeks after the negotiations began, even a fig-leaf deal is proving to be elusive.

http://www.markarkleiman.com/archives/microeconomics_and_policy_analysis_/2005/04/matt_yglesias_paris_hilton_the_spirit_of_76_and_section_6166_of_the_internal_revenue_code.php: Matt Yglesias is entirely right to prefer inheritance taxes to estate taxes. Conceptually, an inheritance tax puts the focus on the recipient of money he or she didn't earn, rather than on the decedent, who having faced one inevitability arguably shouldn't be faced with another. "Paris Hilton" or no, there's a strong, and perhaps politically potent, argument to be made that it's just plain wrong for people to be taxed on the money they earn but not on the money that's given to them. Practically, an inheritance tax has two big advantages: It encourages breaking up huge fortunes, thus reducing the problem of hereditary plutocracy, and it treats those who inherit as part of large families equitably compared to those who inherit equal amounts as part of small families. But Matt is wrong, it seems to me, to scoff at the small business/family farm issue. An economist may view ownership of an enterprise as merely a form of wealth like any other, but someone whose family has owned the local hardware store or newspaper for four generations may have an attachment to the business, and the people who work in it, that isn't at all the same thing as just being rich. That attachment may even have some social value. But Matt is even more wrong to argue about whether it's all right for the estate tax to orce the breakup of family businesses and farms, when in fact it does no such thing. As Stuart Levine explains, Section 6166 of the Internal Revenue Code allows estate taxes on closely-held businesses to be spread out over fourteen years at very generous rates of interest: currently under 3%, which is much lower than the rate on student loans, for example. So the "family business" question is a mere red herring, which a better-trained newshound than Matt would not have allowed to lead him away from the trail. The repeal of the estate tax, unless it's replaced by an inheritance tax, is a profoundly anti-democratic and anti-meritocratic move, taking us one step closer to reproducing the regime of inherited status against which the generation of 1776 fought and won a revolution. Being wealthy and important because of your ancestors is European; making it on your own is American...

http://www.latimes.com/news/printedition/front/la-na-bush16apr16,1,6276858.story?coll=la-headlines-frontpage&ctrack=2&cset=true: President Bush came to Ohio on Friday to highlight a state retirement savings system that he said showed that Americans would be better off handling their own old-age investments through personal accounts than relying on traditional Social Security. But that state's version of personal accounts has attracted few takers among the people eligible — Ohio's 750,000 public employees. And records show that the most widely chosen version of the state-offered accounts has racked up a five-year earning record of 1.86%, about the same return that the president says Social Security produces. "Boy, does he have a hard sell ahead of him in using Ohio as his example," said Keith Brainard, research director of the National Assn. of State Retirement Directors, which represents virtually all of the nation's public employee pension plans...

http://www.washingtonpost.com/ac2/wp-dyn/A57535-2005Apr15?language=printer: Jonathan Weisman: In the same week that the House voted to permanently repeal the estate tax, 44 House Republicans broke with their leaders to demand that as much as $20 billion in Medicaid savings be stricken from the budget. The twin moves raise new questions about Congress's willingness to tackle the budget deficit. And they came just as the World Bank and the International Monetary Fund are to convene their annual meetings this weekend. The Bush administration was to use the meetings to tell the world's finance ministers and central bankers that Washington is serious about its red ink. "There was a lot of talk at the beginning of this year that the switch to big-budget conservatism was finally over," said Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget. "But it looks like Congress may not have the stomach."..

http://angrybear.blogspot.com/2005/04/health-care-in-us-and-world-part-ii.html: Health Care in The U.S. And The World, Part II: What do we spend the money on?. In Part I of this series, I showed that the US spends a lot more money on health care – now over 50% more as a percent of GDP than France and the other industrialized nations. Additionally, the U.S. is the only country in my data for which less than half of health care spending is publicly financed, with the balance coming primarily from employers and out-of-pocket. But what do we spend the extra 5% of GDP? It's apparently not doctors. While the number of doctors in the US has increased steadily, we still rank low in terms of doctors per capita...

http://ideas.repec.org/a/bla/kyklos/v51y1998i3p379-97.html: Who Benefits from Progress? Tabarrok, Alexander Cowen, Tyler: Progress is better for some consumers than for others. The authors analyze the factors governing how much a consumer gains from progress, defined as price declines and the introduction of new and improved products, and they show how these factors vary systematically across consumer groups. Recent economic developments have brought increasing disagreement about the performance of the American and European economies. Economists typically try to account for these dual and contrasting perspectives by citing the increasing gap between the wages of skilled and unskilled labor. The authors examine differential consumer gains as another factor which may account for the contrasting perspectives...

http://www.washingtonmonthly.com/archives/individual/2005_04/006140.php: THE BOY WHO CRIED MARTIN WOLF....I'm enjoying Martin Wolf's Why Globalization Works, and I recommend that all good Americans read the book. Most Democrats and Republicans will find much to agree or disagree with because Wolf's policy preferences don't map well to the American political scene: he's an old-school British liberal internationalist.... Let me cherry-pick this part of the book: "Nineteenth-century nationalism coincided with a resurgence, in the last three decades of that century, of pre-modern imperialistic and protectionist ideas. The aim of countries became to create a protected sphere of their own. From the point of view of promoting prosperity, these shifts were an error. This is particularly true of the late nineteenth-century scramble for new empires in Africa. But, worse than that, the emergence of protectionism and imperialism changes the calculus of international relations: suddenly, being small and weak begins to look rather a bad choice, because one might be locked out of opportunities for peaceful exchange and prosperity. In a protectionist world, countries will try to become parts of trading blocs or create empires. Imperialism and protectionism are, for this reason, self-fulfilling prophecies--they create the dog-eat-dog world their proponents believe justifies them. It is for this reason that, in recreating the liberal world order, the Americans, led by Franklin Delano Roosevelt's long-serving secretary of state Cordell Hull, placed great weight on the principle of non-discrimination, alongside that of liberalization. This was an attempt to leave behind the world of hostile trading blocs. It is an understanding that the United States now seems to have lost."...

http://battlepanda.blogspot.com/2005/04/why-are-our-intro-to-econ-classes.html: But this conversation haunted me. How is it possible for a guy like RJ to, for all intents and purposes, not believe in economics? He certainly is intelligent, and more importantly intellectually curious. He was even curious enough about economics at one point to take an intro to Econ class at college. Amherst College, which is among the best schools in this country, if I may say so myself. Yet despite the fact that he's a bright guy ready and willing to learn more about economics in one of the country's elite institutions, the class did not nurture his nascent interest. In fact, this introduction turned him against the whole subject so decisively that his has closed his mind. Yet I really shouldn't have been so surprised, I took the same class and it wasn't so very long ago when I was every bit as skeptical about the science of economics as RJ, if not quite as virulently so. The ironic thing is, this class, Econ 11, was tailored precisely to function as a freestanding introductions to economics...

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/04/the_equity_prem.html: One of the nicest puzzles in economics is the equity premium puzzle (pdf). This is that economic theory says that shares should out-perform bonds by less than half a percentage point a year, whilst in fact they've out-performed by 4.6 per cent a year in the US since 1900. There have been lots of attempts to explain this. Some say its because investors are irrational and under-estimate the long-term safety of equities. Others say  the US simply got lucky (pdf), and that true returns on all equities are in fact much lower than US data suggests. And others say that it's because we are creatures of habit (pdf), and so fear even small falls in their spending. All good efforts. But now there's another theory - women don't fancy blokes who take risks. This should create a high excess return on equities, simply by increasing the penalty attached to risk-seeking behaviour. Even this guy didn't think of that one...

http://ezraklein.typepad.com/blog/2005/04/always_low_wage.html: Always Low Wages. Always. Saying Wal-Mart is antiunion is slightly less shocking than calling Tom DeLay unethical, or noting that I have an elbow*. Nothing could be better known. But I think most are confused, like I was for a long time, over how Wal-Mart can actually stop the unions. So one day, I called up an organizer buddy of mine and asked. The answer was so simple that it barely qualified as an answer at all. If workers unionize, or threaten to unionize, or feint at unionizing, or think about unionizing, or see a union hall on their way to work one day, Wal-Mart shuts down the store...

http://ezraklein.typepad.com/blog/2005/04/the_meansbased_.html: The Means-Based President. While reading some post-mortems of the just passed Screw The Poor Bankruptcy Bill, I came across this sneaky little stat: "With 90% of bankruptcies attributable to job loss, divorce or excessive medical bills, it is clear that better economic policies, social services and affordable healthcare is the way to reduce bankruptcy," said Rep. Lynn Woolsey (D-Petaluma). Most of us already knew that about half of bankruptcies are precipitated by crushing medical emergency, though I'd no idea such innocuous and understandable trials as job loss and divorce made up for the rest. But isn't it weird that the answer to bankruptcy from medical bills and job loss was to make it, well, harder to declare bankruptcy? If the Bush administration had wanted to end bankruptcies, they could have offered federal reinsurance for catastrophic medical costs. You would've ended half the bankruptcies right there...

http://www.tompaine.com/articles/the_late_great_income_tax.php?dateid=20050415: The cornerstone of the U.S. system is the taxation of income and estates. Income is the broadest conceivable base for taxation, permitting the lowest possible rate for a given amount of revenue. (Estate taxation is an indirect means of taxing income that has never been taxed.) The high point of income tax reform was the base-broadening achieved under the Tax Reform Act of 1986. Since then, of course we have seen backsliding, in the form of a blizzard of new deductions, credits and exclusions. As we speak, the Estate and Gift Tax is under assault in Congress. The most infamous of the post-'86 reforms is the increasing favor afforded to income received by the wealthiest Americans—capital gains and dividends. Legislation to this effect was signed by Bill Clinton in 1997, and later by George W. Bush, seemingly once a month. This trend marks the evolution of the income tax into a wage tax, shifting, as John Edwards says, the federal tax burden from wealth to work. Even so, the income tax is still progressive, just not as much as it used to be. The average effective rate of the tax is 8.6 percent, according to the Brookings/Urban Institute Tax Policy Center but the rates vary enormously by income class.... the bottom 40 percent of the population, the average rate of the individual income tax is negative—taxpayers get more back from refundable credits than they pay in. For the middle 20 percent, the rate is just 3.3 percent, and for the fourth quintile it's 6.3 percent. Pity the poor Republicans—it's the top quintile that pays 86 percent of the income tax (at an average rate of 12.2 percent of income)...

http://www.economist.com/research/articlesBySubject/PrinterFriendly.cfm?Story_ID=3861190&subjectID=348918: The flat-tax revolution. Fine in theory, but it will never happen. Oh really? THE more complicated a country's tax system becomes, the easier it is for governments to make it more complicated still, in an accelerating process of proliferating insanity—until, perhaps, a limit of madness is reached and a spasm of radical simplification is demanded. In 2005, many of the world's rich countries seem far along this curve. The United States, which last simplified its tax code in 1986, and which spent the next two decades feverishly unsimplifying it, may soon be coming to a point of renewed fiscal catharsis. Other rich countries, with a tolerance for tax-code sclerosis even greater than America's, may not be so far behind. Revenue must be raised, of course. But is there no realistic alternative to tax codes which, as they discharge that sad but necessary function, squander resources on an epic scale and grind the spirit of the helpless taxpayer as well? The answer is yes: there is indeed an alternative, and experience is proving that it is an eminently realistic one. The experiment started in a small way in 1994, when Estonia became the first country in Europe to introduce a “flat tax” on personal and corporate income. Income is taxed at a single uniform rate of 26%: no schedule of rates, no deductions. The economy has flourished. Others followed: first, Latvia and Lithuania, Estonia's Baltic neighbours; later Russia (with a rate of 13% on personal income), then Slovakia (19% on personal and corporate income). One of Poland's centre-right opposition parties is campaigning for a similar code (with a rate of 15%). So far eight countries have followed Estonia's example (see article). An old idea that for decades elicited the response, “Fine in theory, just not practical in the real world,” seems to be working as well in practice as it does on the blackboard....

http://www.marxists.org/archive/lenin/works/1918/may/18b.htm: V. I. Lenin, "Report To The All-Russia Congress Of Representatives Of Financial Departments Of Soviets," May 18, 1918: The country's financial situation is critical, The problem of transforming the country on socialist lines offers many difficulties that al times appear insurmountable, but no matter how arduous the work that at every step meets with the resistance of the petty-bourgeoisie, the profiteers and propertied classes, I think we shall have to carry it out.... We must effect sound financial reforms at all costs, and we must remember that any radical reforms will he doomed to failure unless our financial policy is successful.... The second task confronting us is the correct organisation of a progressive income and property tax. You know that all socialists are against indirect taxation because the only correct tax from the socialist point of view is the progressive income and property tax.... We assume that we shall have to go over to the monthly collection of the income tax. The section of the population receiving its income from the state treasury is increasing, and measures must be taken to collect the income tax from these people by stopping it out of their wages. All income and earnings, without exception, must be subject to income tax; the work of the printing press that has so far been practiced may be justified as a temporary measure, but it must give place to a progressive income and property tax that is collected at very frequent intervals...

http://www.washingtonmonthly.com/archives/individual/2005_04/006143.php: REVIEWING THE ECONOMIST....John Holbo reviews the Economist: "Every major story has either the 'there are dark clouds on the horizon but there's a silver lining' structure; or 'it looks like a golden age, but there are dark clouds of the horizon' structure. It's comforting to know that, however bad it gets, there will always only be those two major stories...." He's right, but it's actually worse than he thinks. Business speakers (and others, I assume) learn early that the proper structure for a presentation is "bad news first, then good." The idea is that you want your audience to leave the room filled with determination and optimism. The Economist does the same thing. But here's the catch: what counts as good news and what counts as bad? In a business presentation, that's pretty easy (revenues down = bad, new product launching soon = good). For the Economist, though, good news is whatever ideological position they prefer. So while it may look like they publish two different kinds of stores, they actually publish only one: bad news followed by good. If you want to know the editorial line on any particular issue, just read the second half of a story dedicated to it. That's where you'll find it...

Posted by DeLong at 10:20 PM | Comments (0) | TrackBack

James Robinson: "Land and Power: Theory and Evidence from Chile"

James Robinson, who we lost to Harvard last year, comes to the Economic History Seminar on his brief tour of Berkeley:

Jean-Marie Baland and James Robinson (2005), "Land and Power: Theory and Evidence from Chile" (Cambridge: Harvard): With the introduction of the secret "Australian" ballot in Chile in 1958, land prices fall sharply. Baland and Robinson interpret this as evidence that landlords were 'buying' the votes of their inquilinos at less than the market price of votes. Inquilinos, you see, are relatively well-off in the context of the Chilean countryside: they value their place in the hacienda and know how much better off they are then the casual laborers without attachment to the hacienda. With the introduction of the secret ballot, landlords still have to provide their inquilinos with the same "efficiency wage" premium over casual labor in order to elicit high work effort, but they no longer get to control who their inquilinos vote for. To the extent that a big part of the value of being a landlord is the status and power within right-wing politics that you get by being a large landlord who can deliver the votes of many inquilinos, you would expect to see land prices fall (and the right-wing rural vote share drop) significantly with the introduction of the secret ballot.

George Akerlof and I attacked Jim's position. We thought it was likely that becoming a landlord gained you status within the right-wing parties not because you were (crassly) viewed as a source of votes but because everyone working in the right-wing party secretariats in Santiago had bought into a landlordist ideology. We thought that the right-wing commitment to this ideology was indirectly supported and generated by landlords' ability to deliver agricultural dependents' votes, but was not directly linked to it. And we thought that the inquilinos had, to some degree at least, likely bought into the paternalist landloard ideology as well. We expected Baland and Robinson to find not a big impact effect of the introduction of the secret ballot, but a slow decline over years or decades.

George and I were wrong. It's not a Gramscian process at all. Jim Robinson, tenured political scientist, with his crass reductionist view of the market-for-votes as a process of market-like exchange, beats George Akerlof and Brad DeLong, tenured economists, with their more Gramscian view that a process of ideological consciousness formation intervenes between the material base of land tenure and the superstructure of political behavior.

The irony is entertaining...

Abstract: In this paper we investigate the effect of the absence of a secret ballot on electoral outcomes and resource allocation. When voting behavior is observable, votes can be bought and sold in a 'market for votes'. We distinguish between direct vote buying, where individuals sell their own votes to political parties, and indirect vote buying, where people also sell the votes of others; and we characterize the circumstances in which vote buying changes the electoral outcome. we then provide a microfoundation for indirect vote buying, which usually takes the form of employers sellign the votes of their employees. This can occur when the employment relationship involves [labor] rents, since employers can use the threat of withdrawal of these rents to control the political behavior of their dependents. This [effect] increases the demand for labor and generates an added incentive to own land increasing the price of land. We test the predictions of this model by examining in detail the effects of the introduction of the secret ballot in Chile in 1958. We show that this chagne in political insitutions had implications for voting behavior and land prices which are consistent with the predictions of our model.


"It is a cruel mockery to tell a man he may vote for A or B, when you know that he is so much under the influence of A... that his voting for B would be attended with... destruction.... It is not he who has the vote... but the landlord, for it is for his benefit and interest that it is exercised in the present system." --David Ricardo (1824)

"When any man attempted to estimate the probable result of a county election in England, it was ascertained by calculating the number of the great landed proprietors in the county and weighing the number of occupiers under them." -- Lord Stanley (1841)

"If that law [without the secret ballot] did not exist, instead of there being 9 Socialist senators there would be 18, and you would be reduced to 2 or 3.... [Y]ou laugh, but the truth is that there would be not 2 Conservative senators from O'Higgins and Colchagua, which corresponds exactly to the number of inquilinos in the fundos which belong to the Conservative hacendados in that region. Conservaties would have only one or perhaps none." -- Senator Martone (1958)

Posted by DeLong at 03:23 PM | Comments (0) | TrackBack

Does the U.S. Want the Renminbi to Rise Now?

Daniel Drezner wrote:

danieldrezner.com :: Daniel W. Drezner :: The Bush administration gets says it's getting serious about the dollar: Looks like the Bush administration is shifting from passive-aggressive to aggressive in trying to get the Chinese to revalue their currency. Andrew Balls and Edward Alden have the story in the Financial Times:

The US administration is calling for China to move immediately to introduce a flexible currency, a marked shift in tactics after several years of patient diplomacy aimed at nudging China towards allowing the renminbi to float. A senior US administration official told the Financial Times on Friday: 'Action is needed now. This is a co-ordinated effort to get the message across.' The decision to demand prompt action by Beijing comes in the face of growing pressure from Congress over the burgeoning US trade deficit with China. Officials acknowledge they were shocked by a 67-33 Senate vote earlier this month to allow consideration of a bill championed by Democratic senator Charles Schumer that would impose a 27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months.... The message is being delivered to China at all levels in advance of this weekend's Group of Seven meeting in Washington. China, which has been a guest at the past two G7 meetings, is not sending its finance minister and central bank governor to this weekend's gathering...

That last bit suggests to me that this pressure won't have an appreciable effect anytime soon. This will irritate the Bush administration but really irritate the European members of the G-7, who blame the United States and the Pacific Rim for the magnitude of current global imbalances.


Brad Setser wonders if the U.S. really wants the renminbi to go up by a lot, right now: a fall in China's (and other central banks') purchases of dollar-denominated assets reduces the value of the dollar and so boosts demand for U.S. firms in export and import-competing industries, and raises dollar interest rates, reducing investment. In our simplest finger-exercise models--teh ones I will teach next year in Econ 101b--the first effect dominates. But that is small comfort, for the score that the international monetary system appears to be playing off of these days bears little resemblance to finger exercises and much more resemblance to something like "Night on Bald Mountain."

Brad Setser's Web Log: First the President tells China that it is holding a bunch of worthless IOUs ...: And now he tells China it really should revalue, in far stronger language than the US (or the G-7) has used before. It seems like Tim Adams, the incoming Treasury Under Secretary for International Affairs, plans to get tough on China. Adams reportedly thinks that China has not rewarded Bush for keeping the rhetorical heat on China down during the campaign....

If I were part of the Bush Administration's economic high command, though, I would worry that China might take the hint. If China revalued (really revalued) and its reserve accumulation slowed, the US might find it a bit harder to find buyers for all the IOUs the Treasury is churning out, even as US 'soft patch' could widen the US deficit. And there might not be quite so much demand for Agency debt/ mortgage backed securities either....

[T]here seems to be pretty good evidence that the value of the renminbi does have an impact on China's export growth. Consider this: From 1996 to 2001, China's real exchange rate rose from 86 to 101, and its exports almost doubled, going from $174 billion to $301 billion. From 2001 to 2004, China's real exchange rate fell from 101 to around 90. China's export growth accelerated: China's export grew by 35% in 2003, 35% in 2004, and, according to the latest (March) data, are increasing by 33% y/y in 2005. China's exports are on track to more than triple between 2001 and 2006: rising from $310 billion to $1030 billion (China's end 2004 exports were around $740 billion). That's a much bigger increase than the increase in the five years that preceded 2001, when the renminbi generally was appreciating along with the dollar.... The fall in the dollar has not done wonders for US export growth, but it sure has had an impact on China.

A very large hedge fund (oops -- a well-respected investment bank) used more formal econometric techniques to arrive at the same conclusion. A recent Goldman study indicates that even a 10% rise in the renminbi's real value would cut the growth in China's exports by 15%. That has to happen at some stage: China is too big for its exports to keep growing at a 30% plus annual rate. And if a Chinese move made it a bit harder for the US to finance its deficits at current rates, that just might provide some of the impetus the US needs to start putting its own house in order...


Nouriel Roubini has a much stronger view that he expresses, um, frankly: for the U.S. to push for China to revalue the renminbi by 20% is for the U.S. government to shoot itself in the head:

Nouriel Roubini's Global Economics Blog: April 2005 Archives: [I]s the US really serious about demanding that China revalue its currency or is the US outright clueless and masochistic? The first rule of good manners - and finance as well - is that you should not bite the hand that feeds you. In the case of the US, for the last two years about three quarters of the US fiscal deficit has been financed by foreign central banks (mostly China and Asia), 100% of the US fiscal deficit has been financed from abroad (as US residents have not increased by a penny their net holdings of US Treasuries) and about 80% of the US current account deficit has been financed by foreign central banks (again mostly China and Asia). Last year China accumulated $200 billion of forex reserves, mostly in US dollar assets, and it is still accumulating them at the same rate this year.... [R]educed supply of financing of the US twin deficits from China/Asia would lead... to a sharp increase in the US long term interest rate, thus leading to a fall in housing prices, in equity values and in the price of a wide range of other risky assets such as high yield bonds, i.e. a hard landing.

How much would US long term rates increase...? [W]e argued at least 200 basis points... two anecdotes are more powerful.... Recently, when an obscure Korean government document sent to its congress had a line about diversification... the DJ index fell 1.6%, the US bond market tanked with the 10yr yield up 15bps and the dollar fell sharply.... [W]hen the Japanese PM Koizume spoke - or mispoke? - about diversifying the Japanese forex reserves a similar shock wave affected US stocks, bonds and the dollar....

[W]hat would happen on the day when China - followed on cue by the rest of Asia as what prevents Asians from moving their effective dollar pegs is the Chinese peg - were to announce that it will... reduce its accumulation of dollar reserves? The answer is simple... financial Armageddon.... Thus... [do] the US authorities really... really mean what they say or are they clueless?... There are at least three interpretations....

  1. Talk is cheap and the posturing is aimed at containing protectionist pressures in the US....
  2. The US authorities are really clueless or masochistic....
  3. Wishful thinking that a Chinese revaluation alone would solve the US current account problems....

There is a view out there... folks at the Fed... fall of the US dollar... would have little effect on US interest rates and that the beneficial effects by themselves of such a dollar fall on US demand and net exports would have a positive effect on US economic growth (see the Greenspan February speech and the more recent one by Bernanke).... A variant of this... is that... a reduction of the US fiscal deficit is... likely... moderate Republican senators will not vote for making the US tax cuts permanent... the AMT... [is] a stealth tax increase and... Social Security privatization is already bust....

But such wishful optimism... has little basis in the data or... Washington. The US current account has worsened rather than improved since it started to fall in 2002 ; and this is not due just to J-curve effects (that last 6-12 months, not 28 months) and is not just due to high oil prices (as non-oil imports are still growing at a very fast rate).... [T]he moderate Republicans in Congress voted for a 2006 budget that was even more loaded with new budget busting tax breaks.... Reducing the deficit by half by 2009 by freezing non-defense discretionary spending to 2005 levels for 5 years is something that not even a single Republican congressman - 'conservative' in theory but more piggish in practice when it comes to pork barrel spending - would vote for....

So, which interpretation is the correct one?... a combination... the Administration knows that its talk is cheap and it is trying to stop Congress from slapping tariffs on China... the administration... must also be really clueless and playing with fire by pushing so hard China to revalue early... there is also plenty of delusional wishful thinking that a Chinese move alone, together with miracoulous deficit reduction - falling like manna from the sky with no policy action on taxes - would reduce the US twin deficit....

Maybe unconsciously - and this may be the fourth freudian interpretation - the administration really wishes to be woken up from its own delusional dreams and rejoin the 'reality-based community' where most the world resides...

Now a fall in the dollar could have little effect on U.S. interest rates if a dollar fall was accompanied by a Federal Reserve declaration that it was focusing on internal balance, and the Federal Reserve adopted a definition of "internal balance" that was to peg the nominal yield on the Ten-Year Treasury at five percent per year.

The life of a central bank governor would then become very exciting indeed.

It would become especially interesting if it is indeed the case, as Brad Setser reports, that this is taking place because "Tim Adams reportedly thinks that China has not rewarded Bush for keeping the rhetorical heat on China down during the campaign." In order for the U.S. to attain a soft landing U.S. national savings needs to rise relatively swiftly and the dollar has to decline slowly and gradually--so that nobody ever thinks it is about to collapse--a half-step behind the change in the exchange rate. The U.S. doesn't need anything that decreases the chances of a soft landing. Yet the word is that Treasury Undersecretary for International Affairs to be Tim Adams doesn't get this: that he is treating pressure for the revaluation of the renminbi as a move in the political game--as a way of punishing China's government for not being grateful enough to George W. Bush--rather than as the economic equivalent of pouring gasoline on a powder keg.

Posted by DeLong at 02:16 PM | Comments (0) | TrackBack

The Budget Clown Show Moves to the Republican Congressional Leadership...

Could the Post be making a joke? I mean, there is no doubt--no doubt at all--about the Republican Congressional leadership's willingness to tackle the deficit. It has no willingness to tackle the deficit at all. None. Zero. It has never had any. What "doubt" about this could there possibly be?

washingtonpost.com: Congress's Willingness To Tackle Deficit in Doubt. By Jonathan Weisman: In the same week that the House voted to permanently repeal the estate tax, 44 House Republicans broke with their leaders to demand that as much as $20 billion in Medicaid savings be stricken from the budget. The twin moves raise new questions about Congress's willingness to tackle the budget deficit. And they came just as the World Bank and the International Monetary Fund are to convene their annual meetings this weekend. The Bush administration was to use the meetings to tell the world's finance ministers and central bankers that Washington is serious about its red ink....

President Bush and congressional Republicans have vowed to cut the deficit in half over the next four years, but new data indicate that little progress has been made. Halfway through fiscal 2005, the federal government recorded a deficit of $291 billion, the Congressional Budget Office reported this month. That is just $10 billion less than last year's figure when the government was on its way to a record $412 billion deficit. Tax receipts -- buoyed by economic growth -- have risen over last year's levels, but spending increases have nearly kept pace. And Congress will soon approve an emergency spending package for the wars in Iraq and Afghanistan amounting to $80 billion, which will exacerbate the problem.

Stanley E. Collender, a longtime federal budget expert at Financial Dynamics Business Communications, said the deficit this year could exceed the White House's $427 billion forecast, and may reach $450 billion. 'Clearly, the deficit is not anyone's concern,' he said. 'They're just barreling ahead.' Going forward, Congress has not given budget analysts reason for optimism. The House's vote for a full repeal of the estate tax beyond 2010 would cost the Treasury $290 billion over the next 10 years and as much as $70 billion a year once fully implemented. In the Senate, Republicans and Democrats have launched serious negotiations over a deep and permanent estate-tax cut that can pass this year, even if it falls short of a full repeal.

Republicans have long maintained that the deficit should be controlled by curbing government spending, not raising taxes. But, this week, significant numbers of Republicans appeared to give up on Bush's planned cuts on Medicaid, agriculture subsidies and student loans. Those cuts -- especially the Medicaid savings -- were supposed to be a test run for deeper cuts to come. 'The federal government has unfunded promises of $43 trillion on the books,' said Senate Budget Committee spokesman Gayle Osterberg. 'So the uproar over skimming even 1 percent off the growth of one program is disheartening.' On Wednesday, 44 House Republicans penned a letter urging House Budget Committee Chairman Jim Nussle (R-Iowa) to strip as much as $20 billion in Medicaid savings from the House budget resolution, one of the largest pieces of spending cuts under consideration. Senate budget writers had included about $14 billion in Medicaid reductions in their version of the budget, but last month, the full Senate voted to strike those cuts and instead empanel a commission to study changes in the Medicaid system that would determine how much in savings is feasible. Now, dozens of House members who initially agreed to the cuts say House negotiators should accede to the Senate's position.

'This is a program that is in significant need of reform, and we believe the policy should drive the budget, not the other way around,' said Rep. Heather A. Wilson (R-N.M.), who is leading the effort. Of the 44 Republican signatories, 43 had voted for the estate-tax repeal. Rep. Frank R. Wolf (R-Va.), one of the 43, said he sees no contradiction in his stands. 'Poor people need health care, and this is an important program,' he said of Medicaid. The estate tax 'is a tax issue,' he added. 'In my area, a lot of farms are being broken up because when the farmer dies, the family has to sell out. It's really about growth.' 'We should do everything we can to deal with [the deficit],' Wolf concluded. 'I think the Congress is very serious.'

The tough spending targets set by the House and Senate budget committees could still emerge relatively intact when a final budget deal is reached, perhaps by the end of the month....

One piece of evidence that the Post is not making a joke--is simply clueless about the budget--is its description of $20 billion in cuts in Medicaid spending over five years as "tough spending targets." Medicaid is not the first, or the second, or the tenth place I would look for savings in order to reduce the deficit. But $20 billion over five years is 0.2% of the total budget. It is tough on some Medicaid beneficiaries. It is not part of a tough overall spending target.

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

Max Sawicky Cheers for the Income Tax!

He writes:

TomPaine.com - The Late, Great Income TaxMax B. Sawicky. April 15, 2005:Let us count our blessings. The cornerstone of the U.S. system is the taxation of income and estates. Income is the broadest conceivable base for taxation, permitting the lowest possible rate for a given amount of revenue. (Estate taxation is an indirect means of taxing income that has never been taxed.) The high point of income tax reform was the base-broadening achieved under the Tax Reform Act of 1986. Since then, of course we have seen backsliding, in the form of a blizzard of new deductions, credits and exclusions. As we speak, the Estate and Gift Tax is under assault in Congress. The most infamous of the post-'86 reforms is the increasing favor afforded to income received by the wealthiest Americans—capital gains and dividends. Legislation to this effect was signed by Bill Clinton in 1997, and later by George W. Bush, seemingly once a month. This trend marks the evolution of the income tax into a wage tax, shifting, as John Edwards says, the federal tax burden from wealth to work.

Even so, the income tax is still progressive, just not as much as it used to be. The average effective rate of the tax is 8.6 percent, according to the Brookings/Urban Institute Tax Policy Center but the rates vary enormously by income class.... For the bottom 40 percent of the population, the average rate of the individual income tax is negative—taxpayers get more back from refundable credits than they pay in. For the middle 20 percent, the rate is just 3.3 percent, and for the fourth quintile it's 6.3 percent.... It's the top quintile that pays 86 percent of the income tax (at an average rate of 12.2 percent of income).

Insofar as there is genuine popular animus towards the income tax, surely it has as much to do with where Americans would like to be, rather than where they are now economically. The tax that tolls for most people is not the income tax, but the payroll tax. Should this upset us? I would say no. The payroll tax finances our vital Social Security and Medicare programs. Gene Steuerle and Adam Carasso have estimated that the lifetime benefits of these programs are huge. Converting the projected streams of benefits into lump sums, they find that for a married couple with average wages and life expectancy reaching age 65 in 2030, Social Security's value will be the $470,000, and Medicare's $490,000. What a country.... [P]resent-day workers are not contributing for the sake of receiving benefits at current levels. They can look forward to higher real benefits commensurate with their wages at retirement time, as long as privatizers don't succeed in carving up the program....

One common notion is to transition towards a consumption tax. The hope is that savings and economic growth would get a boost. The fact is that for many people, the income tax is already a consumption tax. Anyone who has unused opportunities to contribute to a deductible pension or IRA—and there are many such people—does not face income taxation on the margin. If they put a dollar in a tax-preferred savings vehicle, the returns to their saving would go untaxed. If they instead spend that dollar on consumption, it is subject to tax. So the existing income tax—really a hybrid income-consumption tax—already provides savings subsidies. These could be extended for lower-income persons, but that is a reform that is completely feasible under the current tax system. Since we are talking about low-income people, however, it would not promise much for national saving.

Greater savings subsidies aimed at the higher-income end of the population run the risk of simply offering new channels for savings already in the pipeline, not net increases. If you are really determined to do something about national saving, the logical place to begin is the Federal budget deficit.

Isn't the income tax too complicated? Sure. How to simplify it? One way is to tax all income under the same rates, rather than favoring wealth over work, as above. Another is to consolidate deductions and credits... my pet project is to merge the Earned Income Tax credit, the Child Tax Credit and the dependent exemption into a Simplified Family Credit....

So weep not for the income tax. Rather, be wary of those who have been fixing it. If they keep on, we will end up with a tax system focused like a laser beam on moderate and low-income working families, providing grossly inadequate revenues.

As Justice Holmes said, with taxes we buy civilization. Let's avoid the bargain-basement version.

Posted by DeLong at 01:51 PM | Comments (0) | TrackBack

Gosselin and Chen on Bush's Strange Trip to Ohio

Particularly strange is Trent Duffy's hiding from his telephone--and the fact that Trent Duffy appears to be the only person who knows more than what was in Bush's excessively-skimpy talking points.

They write, in the LA Times:

Bush Points to a Retirement System With Mixed Results. By Peter G. Gosselin and Edwin Chen, Times Staff Writers: KIRTLAND, Ohio — President Bush came to Ohio on Friday to highlight a state retirement savings system that he said showed that Americans would be better off handling their own old-age investments through personal accounts than relying on traditional Social Security. But that state's version of personal accounts has attracted few takers among the people eligible — Ohio's 750,000 public employees. And records show that the most widely chosen version of the state-offered accounts has racked up a five-year earning record of 1.86%, about the same return that the president says Social Security produces.

"Boy, does he have a hard sell ahead of him in using Ohio as his example," said Keith Brainard, research director of the National Assn. of State Retirement Directors, which represents virtually all of the nation's public employee pension plans. "Ohio's individual account programs are only a few years old, and in the short time they've been around, investment returns have been relatively weak." Brainard said. Coming two weeks before the end of his "60 Stops in 60 Days" campaign to convince the nation that Social Security needs to be reshaped, Bush's Ohio appearance illustrated the difficulty the president faced in promoting his plan to a nation edgy about a still-uncertain economic recovery and a stock market that had taken a steep dive in recent days. Bush has proposed allowing workers under 55 to divert a portion of their Social Security taxes into private stock and bond accounts. In return, they would agree to a cut in their traditional Social Security benefit.

The president has said the private accounts should be part of a broader plan to shore up the shaky finances of the Social Security system. That broader, still-undefined plan might include further benefit cuts or tax increases. But several recent polls show the president's proposal losing ground amid concerns that private accounts would require Americans to shoulder more economic risk for the possibility of a greater reward....

Part of any Social Security fix, the president told his audience, should be "to trust people with their own money, to devise a system that would work similar to the state of Ohio, that would say, 'We're going to let you earn a better rate of return for your money.' " But in the biggest of Ohio's several state retirement programs, the popularity of the private accounts and the returns they produce are relatively low. Ohio is one of half a dozen states that have begun to offer 401(k)-like retirement accounts through which eligible employees can invest in a handful of state-screened mutual funds or other portfolios.... The state began offering the private accounts to state college faculties in 1998, and extended them to other workers early in this decade. Ohio has five major retirement systems for teachers, police, firefighters and other public employees.

It was unclear from the president's remarks and from an administration-issued news release which of the five plans Bush was discussing in his appearance Friday, or what option he was focusing on. The White House referred calls to spokesman Trent Duffy, who could not be reached. But in the biggest of the state's plans — the 522,000-member Ohio Public Employees Retirement System, or OPERS — the personal account option has not proven particularly popular among state workers, or delivered a particularly good rate of return. About 10,000 of those eligible for personal accounts — less than 5% — have signed up for the accounts since they became available at the start of 2003, according to Laurie Fiori Hacking, OPERS' executive director...

Posted by DeLong at 01:50 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Economist Continues Its Dive Edition)

Outsourced to Kevin Drum, who writes:

The Washington Monthly: And speaking of the Economist, could this week's lead editorial be any lamer? It's a paean to the flat tax, and like legions of politicians and bloggers before them, they confuse flat (as in getting rid of deductions) with flat (as in taxing everyone at the same rate). These have exactly nothing to do with each other. It's one thing for people who don't know better (or who are trying to get elected) to say stuff like this, but the Economist certainly can't plead ignorance. So why the egregious dishonesty about it?

Posted by DeLong at 01:48 PM | Comments (0) | TrackBack

The Lowest Deep on Hoxby-Rothstein

I don't have a dog in this fight. I'm not qualified to judge this fight:

The Lowest Deep: Does Competition Among Economists Benefit Junior Faculty?: There is a ridiculous battle in ivory tower economics: Jesse Rothstein, assistant professor at Princeton, wrote two comments over the last couple years criticising Caroline Hoxby's well-known and influential paper 'Does Competition Among Public Schools Benefit Students and Taxpayers?' (AER, 2000; NBER WP Version), suggesting that her results are overstated.... Hoxby finally had enough and posted a vitriolic and bruising response on the NBER website.... Hoxby found that students in cities with many competing school districts perform better on standardized tests than those where there were fewer school districts to choose from; competition improves outcomes. Rothstein, as part of a grad student assignment, attempted to replicate the results but couldn't and asked Hoxby for help. What happened next is fuzzy.... Rothstein embarked on a multi-year mission to disprove Hoxby's results....

My personal opinion is that 90 percent of Rothstein's points are technically correct but irrelevant in practice; they just don't affect the results much. [Who cares if Hoxby is using the 'cluster' command instead of Moulton's standard errors?] On the more substantive points the results are initially startling but hinge on judgment calls where I think Hoxby has it right (e.g. the 1st stage should be run at the MSA level, not the individual level). After reading both, it's hard for me not to conclude that Rothstein's 'preferred' estimates are 'preferred' largely because they differ from Hoxby's and to wonder why the editors of the AER thought it fit to crowd their scarce pages with their back-and-forth.

While the merits of the debate are of some academic interest, the papers are worth checking out just because they're so antagonistic. It's like a nerdy Celebrity Death Match....

I do remember Richard Freeman laying down the three laws for econometrics you can trust:

  1. It had better be there in the ordinary-least-squares regression.
  2. It had better still be there in the econometrically-sophisticated high-tech instrument procedures.
  3. It had better still be there for small technical tweaks to the econometrically-sophisticated procedures.

Rothstein makes a convincing case that Hoxby doesn't satisfy (3), if his definition of "small tweaks" is correct--and I'm not qualified to judge whether he is right.

On the other hand, Caroline Hoxby has, in my view, the advantage of theory on her side: it would be very surprising if competition for students did not have an effect on school quality, and if school quality did not have some effect on outcomes.

The public middle school my children go to--Stanley School, in Lafayette, California--is truly excellent (even if massively underfunded by any objective standard, as all California public schools these days are). It's principal, Fred Brill, is extremely highly regarded. Nevertheless, if there had been another equivalent school that we and other parents could have voted-with-our-feet to send our children to, there is no way in the world that Fred Brill would have dared put the teacher he did in charge of my son's sixth-grade core class. No way at all.

Posted by DeLong at 01:45 PM | Comments (0) | TrackBack

Time to Shut Down the Heritage Foundation?

There is a very large and important difference between having an ideological position and seeking funding from those for whom that position is materially convenient on the one hand, and changing one's ideology to suit one's funding sources on the other. Heritage appears to have crossed that line. Judd Legum reports:

Think Progress: Heritage Sells Out: There is a revealing article in today's Washington Post on the Heritage Foundation. For years, the right-wing think tank was highly critical of former Malaysian prime minister Mahathir Mohamad. Then, in the summer of 2001, a consulting firm co-founded by Heritage President Edwin J. Feulner, Belle Haven, signed a lucrative contract to represent Malaysian business interests. (Belle Haven employs Feulner's wife and the COO at Belle Haven, Ken Sheffer, is the former head of Heritage's Asia division and is still on the payroll as a consultant, earning 75K a year for his services.) All of a sudden, Heritage changed its assessment of the Southeast Asian nation.

I went to the Heritage website to get more details. A search of their website presents a disturbing picture.

For example, on 10/16/03 Mahathir gave a speech alleging "Jews control the world and that Israel and the Jews are the enemy of 1.3 billion downtrodden Muslims." Mahathir said Muslims need "guns and rockets, bombs and warplanes, tanks and warships for our defense." Heritage scholar Dana R. Dillon wrote three weeks later:

The U.S. Congress... went too far in its efforts to punish Mahathir by passing an amendment to cut off military aid to Malaysia. Congress could have protested Mahathir's remarks, without harming U.S.-Malaysian relations, by passing a congressional resolution condemning Mahathir's speech. To contain the long-term damage to U.S.-Malaysian relations, the U.S. Department of State should inform Members of Congress of Malaysia'9s tolerance of religious freedom and its importance to American national security interests as soon as possible.

Dillon helped justify his position with the following argument:

Judging Malaysian tolerance for people of the Jewish faith is more difficult because Malaysia has no discernible Jewish community.

Compare that piece to a 11/16/98 essay by Heritage scholar John T. Dori:

Prime Minister Mahathir Mohamed instituted anti-free market currency controls and jailed U.S. friend and pro-market reformer Anwar Ibrahim, his former deputy prime minister and minister of finance. To protest these actions, President Bill Clinton should have sought a change in venue for the upcoming Asia-Pacific Economic Cooperation (APEC) forum Leaders' Meeting to be held in Kuala Lumpur, Malaysia%u2019s capital. The next-best option would have been to boycott the meeting.

To fend off its critics, Heritage claims the switch was due to 9/11. However, the switch occurred before the attacks:

Heritage financed an Aug. 30-Sept. 4, 2001, trip to Malaysia for three House members and their spouses. Heritage put on briefings for the congressional delegation titled "Malaysia: Standing Up for Democracy" and "U.S. and Malaysia: Ways to Cooperate in Order to Influence Peace and Stability in Southeast Asia."

Posted by DeLong at 01:42 PM | Comments (0) | TrackBack

April 17, 2005

Marginal Revolution Proposes a New Cheeseburger Recipe

I think this is illegal in the state of California:

Marginal Revolution: New cheeseburger recipe: New to me, that is. Make your patty boxier than usual. Stuff it with maytag blue cheese, and some high-quality butter as well. Then cook it. You can add other touches as well, but that is the basic idea.

Why not just deep-fry it as well?

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

Tyler Cowen Speaks Sense on Global Warming

Tyler Cowen speaks sense on global warming. Unfortunately, he thinks that he is the "right." I wish he were. It would be a much better world we would live in if the right thought like Tyler Cowen:

Marginal Revolution: The Right speaks sense on global warming: "The scientific debate over global warming is not so much over whether anthropogenic emissions will affect the climate. Rather it is over the nature and magnitude of the likely effects. Even the most ardent global warming skeptics within the scientific community believe that the increased accumulation of greenhouse gases in the atmosphere will have some effect. The policy question, then, is what (if any) measures are justified to prevent or mitigate such effects.

Most on the 'right' argue that the best response is to do little or nothing. Whlie some advocate various 'no regrets' policies to improve the efficiency of energy markets (and perhaps pave the way for alternative fuels) -- as I did here -- few conservatives, libertarians, or other free-market advocates believe the most reliable climate forecasts justify drastic measures to suppress the use of carbon-based fuels. The costs of such measures, many argue, are likely to swamp the costs of climate change, and more direct measures to address global ills that could be exacerbated by climate change (disease, flooding, weather extremes, etc.) would be far more cost-effective than reducing greenhouse gas emissions.

As an analytical matter, these assessments are probably correct -- it is hard to justify one Kyoto on ecoomic grounds, let alone the dozen or so that would be necessary to stabilize greenhouse gas concentrations in the atmosphere -- but that does not mean the proper 'free market' climate policy is to 'do nothing.'

If property rights lie at the heart of free market environmentalism, than FME advocates should think seriously about the normative implications of human-enhanced climate changes that could disproportionately harm those portions of the world that have (at least thus far) contributed least to the problem. Even if a modest warming were, on balance, beneficial, the impacts would not be uniform. It may well be, as some argue, that increases in crop productivity and reduced energy costs in temperate regions will be greater than the costs to tropical regions, but this does not address the property rights concern absent some system whereby industrialized nations would compensate or indemnify less-developed nations. No such system exists -- nor is it likely that existing international institutions could implement such a system -- but that does not mean it would not be the first-best approach to climate change from an FME perspective.

Posted by DeLong at 01:02 PM | Comments (0) | TrackBack

The Bush Administration Budget Clown Show Continues

We need PAYGO. We need super-PAYGO with standby tax increases and spending sequesters. We need it now.

Alex Tabarrok has intelligent things to say:

Marginal Revolution: No surprise: In February I wrote, "My prediction is that it will be easier to add $540 billion in Medicare spending than it will be to cut $5 billion in farm subsidies."

Today, the Washington Post reports:

Farm Subsidies May Not Face Limits...The Bush administration has signaled that it will not pressure Congress to enact limits on government payments to big farmers this year...The subsidy cuts and other proposed changes in the farm program were hailed by budget cutters, environmentalists and foreign governments when they were included in the administration's budget proposals in February. They have run into heavy resistance in some parts of the Farm Belt. Southern cotton and rice growers in the GOP's political base would be hit particularly hard.

And how is this for a laugh?

Reducing agricultural spending by $5.4 billion is [was? AT] a key part of the administration's plan to cut the federal defict in half. So far, however, the the Senate Budget Committee has agree to cuts amounting to just $2.8 billion.

The Federal deficit is currently over 400 billion.

Last fall people who then worked for the Bush administration grew quite snarky when I opined that only the foolish or those economical with the truth credited Bush promises to cut the deficit in half...

Posted by DeLong at 01:00 PM | Comments (0) | TrackBack

Rich Man, Poor Man; Rich State, Poor State,,,

Marginal Revolution Continues to Bat 1000% This Weekend

Marginal Revolution: Rich Man, Poor Man; Rich State, Poor State: "Statistical Modeling, Causal Inference, and Social Science" is one of my favorite new blogs. It is primarily written by Andrew Gelman, a professor in the Departments of Statistics and Political Science at Columbia University.

A recent post looks at the difference between red and blue states and red and blue individuals. We all know that in the recent election poorer states tended to vote Republican while richer states tended to vote Democrat. On the basis of the famous maps many people jumped to the conclusion that poorer individuals were voting Republican (Nascar Republicans) while richer individuals were voting Democrat (trust fund Democrats). But the inference is a fallacy, the ecological fallacy. In fact, high-income individuals, as opposed to high-income states, vote Republican with greater likelihood than low-income individuals (the effect is not huge and it may be declining but it is significant).

It's even true that rich counties tend to vote Republican with greater likelihood than poorer counties. Gelman links to this graph which nicely illustrates the ecological fallacy. The three lines show that within each state higher-income counties are more likely to vote Republican but when you look between states the correlation between income and voting Republican is negative. (Click to enlarge)...

Posted by DeLong at 12:33 PM | Comments (0) | TrackBack

Matthew Yglesias Is Puzzled About What "Getting Serious" Means

Matthew Yglesias writes:

Matthew Yglesias: Getting Serious: Dan Drezner's got a post entitled 'The Bush administration gets serious about the dollar'. It's hard to detect much seriousness there. Rather than addressing, say, the massive budget deficits that are leading to the unusual currency situation, or trying to do something that would reduce American oil consumption, they're getting serious by asking the government of China to float their currency. They've got no leverage they can use to make China do this. They're just asking. But seriously. This is, admittedly, a more serious approach than Senator Schumer's bill 'that would impose a 27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months,' which is apparently gaining traction in the Senate. And what if this approach worked?

If I were part of the Bush Administration's economic high command, though, I would worry that China might take the hint. If China revalued (really revalued) and its reserve accumulation slowed, the US might find it a bit harder to find buyers for all the IOUs the Treasury is churning out, even as US 'soft patch' could widen the US deficit. And there might not be quite so much demand for Agency debt/ mortgage backed securities either.

There seem to be good arguments in favor of a revaluation of Chinese currency, but they're mostly arguments that this would make China better off. From the American perspective, revaluation isn't a substitute for real policy measures aimed at bringing our financial system back toward sustainability, it's just something that would force action on us.

This is more evidence that Matthew Yglesias's transformation into an economist is advancing rapidly. To a political scientist, you "get serious" about an issue like the currency by sending an ambassador to have an unpleasant conversation with a foreign government. Call this "get serious(ps)." To an economist, you "get serious" about an issue like the currency by changing your government's policies in such a way as to change the balance of returns and risks facing those buying and selling in foreign exchange markets. Call this "get serious(e)." Matthew is complaining that Dan is talking like a political scientist.

Soon he will grow his invisible hand...

Posted by DeLong at 12:30 PM

Iraq Today

Matt Festa asks why I haven't written more about Iraq recently. The answer is that it has been too depressing, and I don't have the energy. There's no more talk about more schools being built or women being educated or more oil being pumped or more electricity being delivered, is there? Instead, I would have to talk about things like:

Iraq forces raid village in hostage crisis : BAGHDAD, Iraq -- Iraqi security forces raided a town in central Iraq on Sunday where Sunni militants were holding dozens of Shiite Muslims hostage and threatening to kill them unless all Shiites left the area, an Iraqi official said.... In Madain, where the Sunni-Shiite hostage situation was occurring, security forces that had surrounded the town began raiding sites Saturday in search of the hostages, said Qassim Dawoud, the minister in charge of national security.

Early Sunday, Iraqi forces freed about 15 Shiite families, said Haidar Khayon, an official at the Defense Ministry in Baghdad. He said five hostage-takers were captured in a skirmish with light gunfire, but no casualties were reported. It was not immediately clear how many hostages were still being held. Security forces continued to comb through the town of about 1,000 families, which is located 14 miles southeast of Baghdad, Khayon said. Other retaliatory kidnappings by Sunni and Shiite groups have occurred in the violent area, but the abductions appeared to be the first attempt by militants since the U.S.-led invasion of Iraq to forcibly evacuate a town along sectarian lines.

In Baghdad, lawmakers in Iraq's new parliament met Sunday morning and agreed that a five-member committee, including Dawoud, will look into the crisis and make recommendations. In a speech to the assembly, Dawoud said: 'We have to acknowledge the truth that there is an attempt to draw the country into a sectarian war.'

A new Cabinet had been expected to be announced in parliament Sunday. But Prime Minister-designate Ibrahim al-Jaafari, a Shiite leader, said Saturday he needed more time to discuss the allocation of portfolios, including how to bring in members of the Sunni minority, many of whom boycotted Iraq's Jan. 30 national elections or stayed home for fear of attacks at the polls...

And:

Whiskey Bar: Apocalypse Now and Then:

From Baghdad, [Zoellick] traveled to the Army base on the outskirts of Falluja aboard a Black Hawk helicopter that flew fast, and so low that it almost clipped the trees.Before climbing into the Humvee here, a military briefer noted that a small-scale insurgency was still going on, and that there had been activity by snipers. Whatever happens, do not get out of the car, Mr. Zoellick's party was warned.

New York Times
Closer Look at Falluja Finds Rebuilding Is Slow
April 14, 2005

It has been two years...

Posted by DeLong at 12:28 PM | Comments (0) | TrackBack

April 16, 2005

The Bush Clown Show Continues

Matthew Yglesias reports:

Matthew Yglesias: New Depths Discovered:

The State Department decided to stop publishing an annual report on international terrorism after the government's top terrorism center concluded that there were more terrorist attacks in 2004 than in any year since 1985, the first year the publication covered.

That's Jonathan Landay reporting for Knight-Ridder. And it really does seem to be as simple as that. According to Landay's sources, the administration only wants reports showing that terrorism is going down, and if the State Department's methods don't produce that result, then their report just won't be done. Lovely.

Posted by DeLong at 12:21 PM | Comments (0) | TrackBack

Program of the Week: OmniGraffle

Highly recommended:

The Omni Group - Applications - OmniGraffle: Visualize and communicate graphically - even if you can't draw. A well-designed chart or diagram communicates information far better than words. A graphical drawing is incredibly powerful when you need a clear understanding of how tasks, activities, and processes are carried out. Diagrams are basic to the way people think, and we create them all the time without even realizing it. Whatever your profession or interests, chances are you’ve occasionally sketched out some ideas on a piece of graph paper or the back of a napkin. OmniGraffle is the tool to help you organize your thoughts visually, document them beautifully, and communicate them to the world.

With OmniGraffle, it's as easy as dragging and dropping to create flow charts, org charts, network diagrams, family trees, project processes, office layouts - anything you can think of that can be represented by symbols and lines. OmniGraffle knows what makes a diagram different from a drawing, so it knows how to help you make superior documents quickly: it keeps lines connected to shapes even when they're moved, it provides palettes full of objects for you to drag and drop, and it can magically organize diagrams with just one click...

Posted by DeLong at 12:20 PM | Comments (0) | TrackBack

Jason Furman Defends Mike Allen

In email from New York University, Jason Furman writes:

...Mike Allen is a great reporter and a very smart guy. If anything, he's more willing to "make the call" than a lot of other reporters. For years I've been frustrated when budget reporters write "pox on your houses" stories. [Allen is] one of the rare exceptions:

The Washington Post
September 14, 2004 Tuesday
Final Edition
SECTION: A Section; A01
LENGTH: 1449 words

HEADLINE: $3 Trillion Price Tag Left Out As Bush Details His Agenda

BYLINE: Mike Allen, Washington Post Staff Writer

The expansive agenda President Bush laid out at the Republican National Convention was missing a price tag, but administration figures show the total is likely to be well in excess of $3 trillion over a decade.

A staple of Bush's stump speech is his claim that his Democratic challenger, John F. Kerry, has proposed $2 trillion in long-term spending, a figure the Massachusetts senator's campaign calls exaggerated. But the cost of the new tax breaks and spending outlined by Bush at the GOP convention far eclipses that of the Kerry plan.

Bush's pledge to make permanent his tax cuts, which are set to expire at the end of 2010 or before, would reduce government revenue by about $1 trillion over 10 years, according to administration estimates. His proposed changes in Social Security to allow younger workers to invest part of their payroll taxes in stocks and bonds could cost the government $2 trillion over the coming decade, according to the calculations of independent domestic policy experts.

And Bush's agenda has many costs the administration has not publicly estimated. For instance, Bush said in his speech that he would continue to try to stabilize Iraq and wage war on terrorism. The war in Iraq alone costs $4 billion a month, but the president's annual budget does not reflect that cost.

Bush's platform highlights the challenge for both presidential candidates in trying to lure voters with attractive government initiatives at a time of mounting budget deficits. This year's federal budget deficit will reach a record $422 billion, and the government is expected to accumulate $2.3 trillion in new debt over the next 10 years, the nonpartisan Congressional Budget Office reported last week.

The president has had little to say about the deficit as he barnstorms across the country, which has prompted Democrats and some conservative groups to say Bush refuses to admit there will not be enough money in government coffers to pay for many of his plans.

Although a majority of voters say they are concerned about the deficit, most view Kerry as only marginally better able to deal with it than Bush, according to polls. And Bush often invokes the Sept. 11, 2001, terrorist attacks in justifying the mounting governmental red ink. The president's aides, ever cognizant of his father's failure to articulate a convincing vision, said it was crucial for Bush to offer an ambitious new plan for the coming four years, despite the surge in government borrowing.

Bush-Cheney campaign spokesman Steve Schmidt said the new proposals "are affordable, and the president remains committed to cutting the budget deficit in half over the next five years," although last week's CBO report indicates that goal may not be attainable.

The White House has declined to provide a full and detailed accounting of the cost of the new agenda. The administration last week provided a partial listing of the previously unannounced proposals, including "opportunity zones," that totaled $74 billion in spending over the next 10 years. But there was no mention of the cost of additional tax cuts and the creation of Social Security private accounts. Discussing his agenda during an "Ask the President" campaign forum in Portsmouth, Ohio, Bush said Friday that he has "explained how we're going to pay for it, and my opponent can't explain it because he doesn't want to tell you he's going to have to tax you."

Some fiscal conservatives who are dismayed by the return of budget deficits found little to cheer in the president's convention speech. Stephen Moore, president of the conservative Club for Growth, said that Bush's Social Security plan was money well spent by saving the system in the long run, but he added that Bush "has banked his presidency on the idea that people don't really care about the deficit, and he may be right."

"He's a big-government Republican, and there's no longer even the pretense that he's for smaller government," Moore said.

Kerry cited the deficit figures as fresh evidence that Bush's tax cuts were reckless and that he is taking the country in "the wrong direction."

The administration has been secretive about the cost of the war and the likely impact that the bulging defense budget and continuing cost of tax cuts will have on domestic spending next year. The White House put government agencies on notice this month that if Bush is reelected, his budget for 2006 may include $2.3 billion in spending cuts from virtually all domestic programs not mandated by law, including education, homeland security and others central to Bush's campaign.

But Bush has had little to say about belt-tightening and sacrifice on the campaign trail. Nor has he explained how he would reconcile all his new spending plans with the mounting deficit.

Jason Furman, Kerry's economic policy director, said that Bush "wants to hide the true costs of his plan" and that taxpayers "would be shocked" to find out what he was really advocating.

"The Bush team has gotten a lot of traction with the point that the Kerry numbers and rhetoric don't add up," said Kevin A. Hassett, director of economic policy studies at the conservative American Enterprise Institute. "It behooves them now to demonstrate that theirs do."

In his acceptance speech in Madison Square Garden on Sept. 2, the president called for the expansion of health savings accounts, which provide tax breaks for families and small businesses; creation of new tax-preferred retirement savings accounts; and creation of lifetime savings accounts, which allow tax-free savings for tuition, retirement or even everyday expenses.

The "Agenda for America" also includes increasing testing and accountability measures for high schools and opportunity zones to cut regulations and steer federal grants, loans and other aid to counties that have lost manufacturing and textile jobs -- a clear appeal to swing states such as Michigan, Ohio, Pennsylvania and West Virginia.

Bush has also promised to "ensure every poor county in America has a community or rural health center" and "double the number of people served by our principal job training program and increase funding for our community colleges."

A number of Bush's initiatives could have a big price tag. An estimate from the Social Security actuary's office, included in the 2001 report of a Social Security commission appointed by Bush, put the cost of adding private accounts to the government retirement program at $1.5 trillion over 10 years. With inflation, the figure would now be about $2 trillion. Much of the expense comes from continuing to pay most retirees at current benefit levels, at the same time that some payroll taxes are being diverted to the stock and bond market.

Although advocates of partial privatization contend that the transition can be financed without cutting benefits or raising taxes, the estimates mean the president's agenda could cost even more than the Bush projections of Kerry's proposal. Hassett, the AEI economist, said private accounts would lower the long-term cost of Social Security. "If you pay a few trillion in transition costs over a decade, then maybe the system doesn't go bankrupt," he said.

Bush also called for making permanent his tax cuts, which the administration has estimated at $936.2 billion to $989.75 billion over 10 years. The tax cuts include elimination of the inheritance tax, reductions in the top four income tax rates, an increase in the child tax credit, reduction in the marriage penalty, and cuts to the capital gains and dividend tax rates.

Robert Greenstein of the liberal Center on Budget and Policy Priorities put the figure for extending the tax cuts at $2 trillion over 10 years and said other tax breaks Bush mentioned in his speech -- mostly related to health care -- would likely cost $50 billion to $100 billion over the next decade.

Another expensive part of Bush's agenda is the expansion of health savings accounts and creation of lifetime and retirement savings accounts. The new accounts are designed to have minimal cost in the first 10 years but have very large costs in the long run because they provide tax breaks when the money is withdrawn rather than up front.

The Congressional Research Service has estimated those two types of accounts would eventually cost $30 billion to $50 billion a year.

Peter R. Orszag, a senior fellow in economic policy at the Brookings Institution, said a conservative estimate for the cost of Bush's permanent tax cuts and Social Security accounts would be about $4 trillion over 10 years. But Bush's agenda was vague and did not include details of how he would add Social Security accounts.

"It's hard to cost out rhetoric," Orszag said.

Posted by DeLong at 12:14 PM | Comments (0) | TrackBack

When Spellcheckers Attack!

In comments, jjb writes:

With spell-checkers, typos take on a whole new dimension.

In one draft of my atmospheric science dissertation, the very fuzzy logic of the FrameMaker spell-checker (and a heavy hand on the REPLACE button) changed "wavetrains" to "lavatories", as in "lavatories emanating from the Tropics...", and replaced a misspelling of "neighboring" with, I'm not kidding, "antibourgeois".

My adviser caught the errors but was certain I had done it intentionally to tweak him.

Posted by DeLong at 12:10 PM | Comments (0) | TrackBack

Craig Thomas, Senator from Wyoming, Should Resign Today

Craig Thomas, Senator from Wyoming, should resign today. He's a real embarrassment. Max Sawicky reports:

MaxSpeak, You Listen!: MAXSPEAK
AT THE DOOR
: At Senate Finance Committee hearing this morning, Senator Craig Thomas (R-WY) distinguished himself as the dumbest ass I have ever had the misfortune to observe at a Congressional hearing. The witness was David Walker, Comptroller-General of the Governmental Accountability Office. Thomas started criticizing the GAO for failing to solve the 'tax gap,' evidently unaware that this was the task of a little thing called the Internal Revenue Service, and ultimately of Congress and the Senate Finance Committee itself. At one point, Thomas said, 'The GAO is part of the Executive Branch, isn't it?' People of Wyoming! You are being represented by a fool! Save yourselves before it is too late!...

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

Viditorials

Very funny:

:: dnext ::: dNeXT is a next generation public affairs news & opinion web site - democracy in 60 seconds or less. At a time of ever-expanding, text-driven political sites, dNeXT.com was launched in 2005, as the world's first portal to short, intriguing and entertaining 'viditorials' (video editorials) on a wide range of subjects in the news. The primary content on dNeXT.com consists of issue-focused, opinion & parody content created by both staff and outside contributors. While you may agree or disagree with the content that fills the pages of dNeXT, we hope you will find our videos, pictures and commentary thought-provoking enough to keep coming back to dNeXT.com...

Posted by DeLong at 11:59 AM | Comments (0) | TrackBack

April 15, 2005

"Asset Returns and Economic Growth": The Econ 1 Version

Another note on "Asset Returns and Economic Growth": this is the Econ 1 version.

Posted by DeLong at 08:42 PM | Comments (0) | TrackBack

David Wessel Writes About the Estate Tax

He strongly, strongly recommends Michael Graetz and Ian Shapiro's Death by a Thousand Cuts:

WSJ.com - Capital: "When we last left the estate tax -- or, if you prefer, the death tax -- Congress had slaughtered it. Well, not exactly. President Bush signed a bill that reduces the estate tax gradually until it vanishes altogether in 2010. But the tax will be resurrected in its pre-Bush glory in 2011 unless Congress acts before then....

Before another round in this debate begins, pause to consider the facts -- and the unusual politics that have made a populist issue out of repealing a tax that hits only the best-off Americans... fall[s] on those who leave assets of more than $1.5 million. That is about 18,800 of the 2.5 million people expected to die this year.... The tax will bring in about $18 billion this year, enough to fund the National Aeronautics and Space Administration, with a few billion dollars left over.

All this has Michael Graetz, a Yale Law School professor and the top Treasury tax official in the first Bush administration, wondering: 'How could a tax that applies only to the richest 2% of the American public become anathema to 70% of the population and be repealed by bipartisan votes in both the House and the Senate?' In a new book, 'Death by a Thousand Cuts,' that tries to unravel the mystery, Mr. Graetz and Yale political scientist Ian Shapiro show how defenders of the tax underestimated the tenacity and shrewdness of the other side and mistakenly thought reciting facts would keep public opinion on their side.

Advocates of repeal steered the issue away from facts to morality, declaring the estate tax an unfair levy on success. They also put faces on it -- U.S. farmers and small-business owners, never rich fellows who wanted to bequeath mansions or portfolios. One of the most prominent belonged to Chester Thigpen, a tree farmer from Mississippi, who testified in favor of repeal at age 83 in 1995. 'It turns out,' Mr. Graetz reports, 'that Thigpen's estate was too small to be affected by the estate tax, but that was just a detail.'... With hindsight, Mr. Graetz says estate-tax defenders (of whom he is one) should have focused on the children who were lucky to be born to wealthy people. 'We could have called it the Paris Hilton Benefit Act,' he says....

The ability of estate-tax foes to hold onto the 'fairness' argument is a remarkable milestone. The modern estate tax dates to Teddy Roosevelt, who famously declared that the 'man of great wealth owes a particular obligation to the state because he derives special advantage from the mere existence of government.'...

As both sides realize, the stakes in this year's estate-tax debate are larger than the small number of people it hits. It is part of a debate about how much to use the tax code to arrest the widening gap between rich and poor.

I think David mistypes. On the Republican side, repealing the estate tax is part of a project to use the tax code to increase the widening gap between rich and poor.


Meanwhile, from Oliver Willis:

Posted by DeLong at 08:41 PM | Comments (0) | TrackBack

This Should Be in the Onion, or Fafblog...

Patrick Nielsen Hayden's jaw drops as he contemplates the fact that ex-General Tommy Franks--he of the "I have no plan for Phase IV"--is giving seminars on "Strategies That Get Results." This is a problem with both the Onion and Fafblog: when reality outstrips your craziest imaginings, how can you compete?

Electrolite: What conservatism is.: "What conservatism is. Fred Clark of Slacktivist is impressed by the news that Gen. Tommy Franks has been going from city to city, delivering a talk to ‘motivational’ business seminars entitled ‘From the Battlefield to the Business World: Strategies that Get Results.’ Apparently, there’s a market for this.

Local business leaders have apparently been sitting around in their chambers of commerce wondering, ‘How can I make my business more of an insoluble quagmire?’ Or ‘In today’s competitive marketplace, how can our company create a situation in which we can never win and never leave?’ Or ‘My employees’ morale is at an all-time low after I lied to them into order to launch a massive campaign they now recognize as meaningless—can I force them to stay and pretend they’re happy with some kind of private-sector variation on ‘stop-loss’?’ Or ‘Our company controls only a tiny sliver of market share, we’re completely reactive and we can’t even safely step outside our fortress-like headquarters, what’s the best way to pretend we’re actually in charge and in control?’

It’s almost too obvious to comment on, but the plain fact is that for millions of people, the idea of Gen. Franks delivering a talk on ‘Strategies that Get Results’ doesn’t in fact produce boggled astonishment. Gen. Franks is a gruff-talking American military man; of course he’s an expert on ‘getting results’, no matter what kind of results he has or hasn’t actually got...

Posted by DeLong at 08:39 PM | Comments (0) | TrackBack

Fafblog! the whole worlds only source for Fafblog.

Fafblog is a priceless national treasure, and is also the only source for Fafblog:

Fafblog! the whole worlds only source for Fafblog.: The Medium Lobster is gladdened to see the House move towards permanently repealing the estate tax. The estate tax isn't just a wanton infliction of state violence upon Paris Hilton's God-given right to a tax-free mountain of money; it does not merely desecrate the solemnity of a loved one's stock portfolio; it is a dangerous regulation of the cosmic forces of Life and Death - and one that can only end in apocalyptic destruction.

As all bodhisattvas of the supply side understand, progressive income tax is an assault against entrepreneurship, taxing the wealthy at higher rates than the poor and therefore providing a disincentive to be rich. Indeed, we all remember the day Bill Gates and Warren Buffet, slouching in their tattered jeans and stained wife-beaters, announced their decision to quit their jobs and wallow in poverty rather than pay the terrible price of living in opulence. Even now America's homeless shelters are filled to bursting with dispirited, out-of-work billionaires - a humanitarian tragedy that the Democrats choose to overlook in their slavish subservience to Big Poor.

How much more dangerous, then, is the estate tax: a tax on death itself? For if income tax dissuades the living rich from being rich, then the death tax can only dissuade the dead rich from dying. Indeed, the more the government taxes our nation's most resourceful robber barons' estates upon their deaths, the greater incentive they have to not die at all - or worse, to rise from their graves and feast on the flesh of the living. Wandering the earth in endless, gnawing hunger, scattering brains and severing limbs, mindlessly devouring everything in their path: this is hardly a fate America can want for the most enterprising of the business elite. What, after all, would be left for their children to feed on?

Posted by DeLong at 08:38 PM | Comments (0) | TrackBack

The Onion on Tom Delay

The Onion is a priceless national treasure:

The Onion | What Do You Think?: In recent weeks, House Majority Leader Tom DeLay has come under increasing fire from a number of important media and political figures. What do you think?

Colleen Bowers, Systems Analyst: 'I heard Tom DeLay's blood was in the water and the sharks were circling him, but unfortunately, it turned out to be a metaphor.'

Don Figueroa, Tile Setter: 'There's a big difference between the letter of the law and the spirit of the law. Sure, he broke both, but there's a big difference.'

Andre Carson, Teller: 'Enough is enough. DeLay should do the honorable thing: take all the money he's cheated out of the American people, buy himself a nice mansion, and retire.'

James Henson, Graphic Designer: 'Tom DeLay is an inspiration. His example has given me hope that my ethics violations will go ignored for years, as well.'

Zachary Hardin, Therapist: 'Oh, come on. Like nobody in Congress has ever built a career out of borderline-illegal financial impropriety before. Grow up.'

Tanya Wilkinson, Lab Assistant: 'I'm telling you, if Tom DeLay would come out and say, 'Screw it, I'm just in it for the cash and the bitches,' his popularity would skyrocket. At the very least, he'd be in a Kid Rock video.'

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

Why Oh Why Can't We Have a Better Press Corps? (I've Got to Stop Saying "National Review Has Reached Its Nadir" Department)

Wow!

I've got to stop saying, "National Review has reached its nadir." This is worse than anything I've seen before, worse than I had imagined possible.

Do I thank or curse Mark Thoma for flagging it?

National Review Online (http://www.nationalreview.com): Voodoo Volckernomics: The former Fed chair gets trade deficits all wrong. By John Tamny: [F]ormer Federal Reserve chairman Paul Volcker weighed in with a Washington Post editorial that mixed myth and contradiction to bolster his contention that the trade and budget deficits have our economy ‘skating on increasingly thin ice.’.. ‘disturbing trends, huge imbalances, disequilibria, [and] risks’ that weigh it down....

Unless Volcker possesses more wisdom than the infinite collective insights that comprise the marketplace, he’s got things backward. That money flows into the U.S. so plentifully at such low rates is a pretty unambiguous sign that ‘disturbing trends’ and ‘risks’ exist everywhere but in the U.S....

Alas! The money that is flowing into the United States is--as Tamny does not know--money from foreign central banks interested in putting off the dollar's fall, not money from private foreign sources that think the U.S. is a good place to invest.

Later in the editorial Volcker offered up his contention that ‘personal savings in the United States have practically disappeared.’ Leaving aside the fact that the government statistic Volcker cited cannot reliably track the myriad ways Americans save, his assertion is belied by a recent Bear Stearns report on savings. In it David Malpass (NRO financial writer and Bear Stearns chief economist) shows per capita assets in the U.S. of $89,800 that make us the top saving country in the world....

Alas! Tamny does not seem to know that the savings rate that Volcker is talking about is not the level of Americans' savings but the change in their savings, adjusted for asset valuation effects and measured as a share of GDP.

Volcker argued for a ‘combination of measures’ from the government that would reduce the U.S.’s ‘import demand.’ But as classical economists from Adam Smith to Robert Mundell have reminded us, ‘any decision to reduce imports involves a corresponding decision to reduce exports.’

Alas! Tamny does not seem to know that Adam Smith, Robert Mundell, and the other classical economists assumed that international capital flows were stable at their equilibirum levels. If they aren't--as they are not today--the principle does not hold.

Lastly, Volcker falls into the trap that many do in attempting to distinguish between foreign and domestic capital inflows.... In truth, there is no difference. Capital knows no color or country; it only knows relative safety and returns....

Alas! Tamny does not seem to know about the enormous "home bias" in international investment positions: American-owned capital greatly prefers to be in America; Japanese-owned capital greatly prefers to be in Japan; European-owned capital greatly prefers to be in Europe. If you want to analyze international capital flows, "home bias"--the fact that today capital very definitely knows its country--is one of the places from which you have to start.

But the point isn't to provide or critique economic analysis, is it? The point isn't to inform the readers of National Review, is it? The point is that Paul Volcker--chosen by Republican Richard Nixon's staff to be Undersecretary of the Treasury for Monetary Affairs, chosen by Republican Arthur Burns to be President of the Federal Reserve Bank of New York, chosen by Republican Ronald Reagan's staff to be Chairman of the Federal Reserve Board--has written something inconvenient for the Bushies inside the White House. And so National Review undertakes the mission of trying to murk the waters with clouds of ink.

And in this squid-like task, actual knowledge of the economy or of economics is a positive hindrance. The less the writer knows, the better.

Enter John Tamny. Even more pathetic than the others.

Posted by DeLong at 03:23 PM | Comments (0) | TrackBack

Unnatural Hybrids

In his "Off Message" column slot, William Powers writes a nice piece about chimeras: half-newspaper, half-weblog:

Off Message (04/15/2005): If you've been following the media wars, you know that two armies are facing each other across a great divide. On one side are the dry, withered old media, most often represented by the plodding big-city newspapers and the increasingly beside-the-point network news operations. On the other is a ragtag band of independent bloggers, those bold warriors who fight with just their keyboards.

Something real is happening in the middle ground between blog and establishment, and quality is emerging in places.

Typically, the two are presented as discrete, mutually exclusive options. Follow the coverage, and you get the feeling that one of these days, we're all going to have to choose. ''Old' Media, Bloggers Square Off at Conference,' said a recent headline in the Chicago Tribune. Which side are you on, establishment or renegade? Are you hip to the future, or hopelessly stuck in the past?

Weirdly missing from this discussion is the fact that there are outlets with a foot in each camp, establishment news operations that are giving the blogging form a whirl, alongside their traditional content. These experiments are overlooked, partly because they give off the unmistakable odor of Me-Too. Indeed, to blogging purists, it's not possible for an establishment outlet like a newspaper to have an authentic blog. It's like Marie Antoinette playing the noble peasant in her fake-rustic cottage. Those old-media monarchists can frolic all they want with their petite blogs, but they can't hide their real selves: The truth is written all over their business cards.

The other reason the establishment's move into blogging is not much discussed is that it doesn't play into the dramatic story line of the hour, the David-Goliath intramedia narrative that gives the blog story its edge. If you hear that insolent blogs and starchy mainstreamers are 'squaring off,' that's pretty exciting. It's not half as thrilling to discover that they are converging, though that could be the deeper truth.

In fact, it's too soon to call it a convergence. But something real is happening in the middle ground between blog and establishment, and quality is emerging in places. I see it every time I go to The Washington Post's Web site, which has been tending a little side garden of bloggish columns for several years. The Post's unusually robust lineup now includes Dan Froomkin's White House Briefing, Howard Kurtz's Media Notes, Robert MacMillan's Random Access about technology news, Jefferson Morley's World Opinion Roundup, various sports blogs, and, recently, a new blog by Post writer Joel Achenbach, called Achenblog.

Beyond the fact that this is all coming from a powerful mainstream outlet, there are other ways in which much of this fare doesn't meet the strict definition of blogging. I asked Froomkin, who has worked in online journalism for years, whether his column, a daily rundown of what's happening in news coverage of the White House, qualifies as a blog. He noted that the column fails to meet several criteria: 1) It is edited, while 'real' blogs come straight from the minds of their creators. 2) He files once a day, while blogs are updated continuously. 3) His items do not appear in reverse chronological order, as blog postings do, and are not independent of each other -- White House Briefing has a beginning, a middle, and an end. 4) Unlike a true blog, Froomkin's column isn't highly personal.

Still, as Froomkin points out, his column has a lot of bloggishness. It has a voice; it's all about linking to other sites; and it has a palpable connection with its readers, often including their responses to the content (readers can't post comments, although other Post blogs run with this feature).

According to Froomkin, the model for his column was Romenesko, a blog-style Web site about media news that's become in recent years an online watering hole for journalists, the place where you go to hear the latest dope. Froomkin says that it was Post Chairman Donald E. Graham who wanted to create something similar for White House coverage: 'Don Graham had long been agitating for us to do for the White House what Romenesko had been doing for media.'

Maybe I'm just being an insular mainstream journalist here. I used to work at The Post, and have many friends (including Achenbach) at the paper. Froomkin's column and Romenesko have both linked to this column. With those caveats, I have to say that when I look at the paper's online-only content -- including its live discussions with readers -- I see a traditional outlet adopting some of the better qualities of the blogosphere, and in true blog fashion, even openly struggling with the transition. In his blog, Achenbach has made fun of his own ignorance about the craft. Last week, he mentioned that the blog would soon allow reader interaction: 'We're taking this blog out of its 1995-level format and giving it more of a 1998 feel. I guess the idea is that a blog shouldn't be merely my solipsistic musings, that it should include reader reaction. I fear that's a slippery slope.'

The joke works because it's based on a real question that's hanging out there in the culture: Can mainstreamers do the blog thing? In the end, I think that the point isn't whether a piece of writing has been sanctified by the church of blogging. The point is whether it's good. Jim Brady, the executive editor of Washingtonpost.com, told me: 'There are a lot of people who feel that professional journalists can't blog, because it's a totally different thing. I consider blogs a format more than a content type.... It's all about what you put in it.'

Posted by DeLong at 03:20 PM | Comments (0) | TrackBack

And Here's Dan Gillmor...

Two places to the left at the table, Dan Gillmor is weblogging the conference rather than musing about past conferences he didn't attend:

Dan Gillmor on Grassroots Journalism, Etc.: At the 'Changing Economics of News gathering in Berkeley, we're getting down to some fairly core issues. Rather than try to summarize what's happening, I'll just note key observations by panel members:

  1. 'I don't think today we know the magnitude of the market failure' in the loss of what's often called 'hard news' reporting, says James Hamilton, professor of economics and public policy at Duke University. (His new book, All the News That's Fit to Sell', should be required reading in the industry.)
  2. Are we returning to the economics of the 19th Century, when circulation (as opposed to advertising) provided the bulk of the revenues? Perhaps, says Albert Scardino of the Guardian.
  3. News is becoming a service, not a product, says GBN's Katherine Fulton. Maybe we're heading for a world where great journalism needs patrons as opposed to traditional customers.
  4. Craig Newmark says, 'The effects we're having on the classified (advertising) market are pretty overstated.' But he says the news business has lost trust. He's cautious about predictions, having predicted 'lunar colonies.'
  5. Brad DeLong asks: Why is Bloomberg (which hired the Washington Post's excellent Federal Reserve reporter) more interested in covering the Fed correctly than the Post?
  6. The New York Times' John Markoff says a discussion like this in five years will derive from near-universal access to high-speed data connections -- that the medium will determine a lot of the economics.
  7. Sandy Close of Pacific News Service notes the explosion of ethnic media, a 'hunger to be visible' in a world where mass media have failed to reflect society's realities. Small businesses are the advertising base.
  8. Zephyr Teachout says we must create an architecture for civic involvement, including journalism -- but we need to combine real world activity with online work.
  9. Reaching the new America is an enormous opportunity for emergent media, says Sandy Close. She urges multi-lingual jobs classifieds for craigslist, as an example of what's needed.

Dan Gillmore himself should be added to the list. His best line, about his own attempt to create a new form of journalism with his grassroots journalism project, talks about leaving the San Jose Mercury News: "Maybe I'm just insane. The question is, 'Why did I jump off the cliff, and am I going to be able to assemble a hang glider before I reach the bottom?' I think so."

Posted by DeLong at 11:37 AM | Comments (0) | TrackBack

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

I'm sitting here high above Berkeley in the Lipman Room of Barrows Hall, at a conference on "The Changing Economics of News: Why Will Pay for Excellent Journalism in the Future?" And I'm thinking about another conference report from last month, here Matthew Yglesias reported on a panel in Virginia Beach that he was on along with the Washington Post's Mike Allen--a man who could be a truly great reporter, if only he could understand what the job of a reporter is.

Matthew Yglesias: He Said / She Said: Somebody from the audience asked a question which seemed to take as its premise that there was a strict dichotomy between 'factual' writing, which is what you see on news pages.... I took some issue with that characterization. News pages, I said, aren't so much giving a 'just the facts, ma'am' approach to reporting. Rather, they're trying to act as neutral arbiters between contending parties. Oftentimes this means there will be political controversy about a basically factual subject ('what's the effect of X on the deficit?') that goes unresolved by a news writer. Instead of giving us the facts, the news writer gives us a set of meta-facts -- 'Joe says 'X' but Same says 'Y.''... [Mike] Allen took issue with that characterization of what news writers are doing. He said that news writers are trying to present both sides' points-of-view, hence the 'he said, she said' quality to it, but that they're trying to present these points-of-view in such a way so that a discerning reader can tell who's right based on reading the story.

This is, when you think about it, an astonishing admission. Allen says that if you are a careful reader, that if you read past the fold to the end of the story, that if you are already sufficiently familiar with the issue to have the relevant background knowledge, then you can tell which of the "he saids" in the first four paragraphs on page 1 before the jump is a lie.

If not, not. If you read only what's before the jump, you get the political-entertainment cage match, and you get the political-entertainment cage match only. As Jay Hamilton--out here from Duke for this conference with a brand-new very-good book, All the News That's Fit to Sell: How the Market Transforms Information into News--said, Mike Allen's interpretation of the job is very convenient for White House Communications, and it also allows him to defend himself against criticism--"you know what I really meant, and I do have to maintain my access," he can say.

Allen's interpretation is very a convenient interpretation for him. It is, however, a lousy way to be a journalist: journalists owe profound obligations to those of their readers who don't read past the jump, don't read carefully, and don't have a lot of background knowledge. Telling an exoteric lie to the many and the esoteric truth to only a few doesn't cut it.

Jay has depressed me about the prospects for organizations like the Post. One of his main points is that organizations like the Post are by-and-large not in the information-for-citizenship business but in the entertainment business: the important thing for the Post's editors is that they print lively political-entertainment cage matches. It's only those organizations that are in the business of selling producer information to those who will then use that information and need it to be accurate--the Financial Times, the news pages of the Wall Street Journal, the National Journal (for political and lobbying news: not economics, finance, or business coverage)--that can sustain a culture in which getting the story right before the jump is an important institutional value.

Posted by DeLong at 11:35 AM | Comments (0) | TrackBack

April 14, 2005

A Note: Returns, Growth, and Financing Social Insurance

There is a joke about a professor who says "it is obvious that..." is interrupted by a student who asks "But is it really obvious?..." and then covers the blackboard with equations for thirty minutes in silence before finally announcing "Yes, it is obvious."

That's what I feel like with the claim that Dean Baker, Paul Krugman, and I made in our "Asset Returns and Economic Growth" that higher rates of return on assets made one look more favorably on prefunding and that higher rates of economic growth made one look more favorably on pay-as-you-go systems. I thought it was obvious. But it seemed that my intuition was not general.

Here's a sketch of the argument:

J. Bradford DeLong (2005), "A Note on Returns, Growth, and the Funding of Social Insurance" (Berkeley: U.C. Berkeley).

Posted by DeLong at 05:34 PM | Comments (0) | TrackBack

Why Oh Why Aren't I a Better Proofreader?

Why oh why is it only after I have sent somebody off to make 200 copies of a document that I become a competent proofreader?

My father believes that one should leave typos in one's galleys uncorrected. It is a law of nature that when one opens the printed version the first thing one will see will be a mistake. If you leave the typos alone, the first thing one will see will be a typo. If you correct the typos, the first thing one will see will be a truly horrible and inexcusable substantive error...

Posted by DeLong at 05:33 PM | Comments (0) | TrackBack

20050414: Economics 113: Problem Set 4

Problem Set 4 is now out. It is due at lecture on Tuesday April 26, 2005.

Posted by DeLong at 10:40 AM | Comments (0) | TrackBack

April 13, 2005

"IMF Takes Rich Nations to Task," Andrew Balls, _Financial Times_

"IMF Takes Rich Nations to Task," Andrew Balls, Financial Times

http://news.ft.com/cms/s/b64d1dda-ac36-11d9-bb67-00000e2511c8.html

The [IMF] forecasts that the US current account deficit will grow slightly to 5.8 per cent of gross domestic product this year, with little improvement thereafter. Germany and Japan are both forecast to have surpluses close to 31/2 per cent of GDP. “The US external deficit has so far been financed relatively easily, aided by continued financial globalisation,” the report said. “However, the demand for US assets is not unlimited... a continuing sharp rise in US net external liabilities will carry increasing risks.” As well as the possibility of a disorderly decline in the dollar, the fund identifed the possibility that inflation pressures lead to a spike in US interest rates, and the high and volatile oil price as key risks to the global outlook. The Bush administration's pledge to halve the US fiscal deficit is not credible, owing to a number of items left out of the budget arithmetic, and “insufficiently ambitious” in any case, the report said....

Posted by DeLong at 08:33 PM | Comments (0) | TrackBack

"China's dollar dilemma," by Andrew Balls and Richard McGregor, Financial Times

"China's dollar dilemma," by Andrew Balls and Richard McGregor, Financial Times

http://news.ft.com/cms/s/d341511e-ac4e-11d9-bb67-00000e2511c8,_i_rssPage=6e6e833c-cbff-11d7-81c6-0820abe49a01.html

China's leaders are preparing their people for an end to the policy of pegging the renminbi at Rmb8.28 to the US dollar, the bedrock of economic policy for a decade. Changing the currency regime would have big implications for China's economic management and, some in Beijing think, forits development strategy predicated on foreign direct investment inflows and export-led growth. China's exchange rate is also central to the growing debate over whether the current imbalances in the global economy - whereby the US has a large current account deficit while other countries accumulate dollar assets - can be sustained (see chart below). Pressure on China to alter its exchange rate is particularly strong from Washington...

Posted by DeLong at 08:31 PM | Comments (0) | TrackBack

Max Sawicky Finds Himself Out of Ammunition...

He writes http://maxspeak.org/mt/archives/001314.html:

THE ECONOMIC THOUGHT OF BEN BERNANKE, II: Actually it's pretty good. I was leafing through his textbook, co-authored with Robert Frank, looking for bloopers, and I was at a loss for material. The book is very non-committal about budget deficits, the number one fun topic for whomever takes over the Council of Economic Advisers, but at the moment I'm out of ammunition. No grist for humor from BB. We'll have to wait for the contortions he goes through defending Bushismo when he appears before the Congress

Posted by DeLong at 02:39 PM | Comments (0) | TrackBack

Macro Lunch: "Asset Returns and Economic Growth"

Show up late to the Wednesday Macro Lunch, and get signed up to present at it next week:

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.

Posted by DeLong at 12:45 PM | Comments (0) | TrackBack

Our Twin Financial Puzzles: The Long Run May Come Like a Thief in the Night

The fact that nobody inside the administration is paying attention to the current drift of the economic ship of state closer to the shoals is one big reason that we need a really strong Treasury Department and a really strong Federal Reserve:

Brad Setser http://www.roubiniglobal.com/setser/archives/2005/04/economy_strong.html: Economy strong (for now), fiscal deficit not falling (by much): I have always thought the argument that attributed the widening trade deficit to the absence of growth abroad was a bit deceptive... growth abroad has been quite strong.... Europe and Japan have lagged, but much of the rest of the world -- including China -- has been growing like gangbusters. The problem... is... the composition of the growth -- strongly driven by exports. This global growth has been strong enough... to generate extremely good times for any exporter of natural resources....

The same argument holds for the US fiscal deficit. The US economy continues to grow at a nice clip. A strong economy usually leads tax revenues to grow.... Revenues, according to the CBO, are up 10.3% y/y.... Spending, though, is also rising: it is up 6.7% y/y. The CBO estimates the six month fiscal deficit for FY 05 to be $291 billion, $10 billion below the FY 2004 deficit. Remember, we spend more than we collect in taxes, to tax revenues have to increase much more than spending (in percentage terms) to reduce the deficit....

The Bush Administration now likes to talk about its intention to reduce the budget deficit, particularly at international meetings. But I still don't see any evidence that they are willing to do more than talk about reducing the budget deficit. Expect more rhetorical commitments from the Bush Administration around this weekend's G-7 meetings, but no greater willingness to act.

The optimists--inside the administration and out--about the current financial situation have only one economic argument: long-term interest rates are relatively low, and are not pricing the dollar-collapse and the U.S.-interest-rates-spike scenarios as having any substantial probability at all.

The pessimists on Wall Street are puzzled at why this economic argument is supposed to have force. From their perspective, demand for long-duration dollar-denominated securities is high because the Asian central banks are buying as if there were no tomorrow in order to keep the value of their currencies down, the U.S. Treasury is borrowing short (it is not issuing that many long-duration securities), and U.S. companies are cautious and are not undertaking the kinds of investments that would lead them to issue lots of long-duration bonds.

We economists respond by saying that for every market mispricing there is an open profit opportunity: if long-term interest rates are indeed too low--if long-term bonds are indeed priced too high--there is money to be made by shorting long-term U.S. bonds, parking the money in some other investment vehicle that is not underpriced, waiting for bond prices to return to fundamentals, and then covering your short position. People will try to profit from trades like this, and in so doing they will push prices close to fundamentals today.

But the Wall Street types have a counterargument: For any one financial institution to make the international bet--to bet on the decline of the dollar against the yuan over the next five years in a very serious, leveraged way is to put its survival at risk should the trades somehow go wrong. And trades do go wrong: remember the collapse of LTCM. The riskiness of the bets is magnified by the existence of very large actors in the financial markets that are not in the business of maximizing their profits: if the Bank of China and the Federal Reserve decided that they wanted to teach speculators a lesson and push the value of the dollar relative to the yuan up for 20 percent for a month and see how many financial institutions with speculative positions that would bankrupt, they could do so. Similarly, for any one financial institution to make the domestic bet--to bet on a serious rise in long-term interest rates over the next five years in a very serious, leveraged way is also to put its survival at risk. For where do you park your money? Real estate rental yields and stock market payout yields are very low, and real estate and stock prices may well fall as much as or more than bond prices if interest rates spike. The only organizations that can make the domestic bet that interest rates will rise are businesses that can borrow long-term now, lock in a low real interest rate, and invest in expanding their capacity. But America's businesses see enough real risk in the future that they do not want to build up their capacity by any more than they are currently doing.

We economists believe that market forces drive prices to fundamentals. But we are not careful enough to distinguish situations in which equilibrium-restoring forces are strong from those in which equilibrium-restoring forces are weak. At the moment those forces are weak. And this adds an additional danger: at any moment those forces may become strong.

The long run in which the dollar falls and U.S. long-term interest rates rise may come like a thief in the night as a very sudden shock. If it comes as a sudden shock rather than as a long, slow, gradual realization, it will come on that day when the gestalt of the players on Wall Street and elsewhere changes, and when they collectively regard holding dollars as the more risky rather than the less risky strategy in the short run, when they collectivley regard being long long-term U.S. Treasuries as the more risky rather than the less risky strategy in the short run. On that day the long run future will be, as football coach George Allen used to say, now.

When will that day come? Tomorrow? Next month? Next year? On January 21, 2009? A decade from now? We macroeconomists who believe in financial market equilibrium have, today, a certain similarity to Millenniarists: our models of when The Day will dawn are not much better than the models of those who base theirs on a rule that transforms HILLLARY RODHAM CLINTONN into the number 666.

Should that day come, keeping a financial crisis from becoming a major disaster may well require swift and rapid action by a Federal Reserve and a Treasury Department that have powerful and unconditional White House and Congressional support. Mexico in 1995 had a recession that only reduced Mexican GDP by six percent. That "only" is the result of Bill Clinton's backing his economic policy team when they said that supporting Mexico was the thing to do--even though others in the room were making sure that he was well aware that money loaned to Mexico in the crisis might well not come back. That "only" was a near-run thing: Senator Dole let Senator D'Amato slip his leash, and D'Amato came remarkably close to doing major damage both to Mexico in 1995-1996 and to East Asia in 1997-1998.

Remember that Alan Greenspan is supposed to retire next January. What is the scenario by which competent technocrats--in the Treasury or the Federal Reserve--manage to climb to a position in which this White House and this congressional leadership of Bush, Frist, Hastert, and Delay will give them the baton to handle as they think best whatever financial crisis may appear in the next several years?

Posted by DeLong at 11:51 AM | Comments (0) | TrackBack

Why Aren't Real Wages Rising?

Matthew Yglesias asks a good question http://yglesias.typepad.com/matthew/2005/04/why_low_wages.html:

Why Low Wages? I'm a little puzzled by Steven Greenhouse's inquiry into the falling wages problem. The bulk of the hypotheses and so forth mooted about seem to suggest that wages are being held down by something or other, with possibilities such as foreign competitition, WalMart's low wages, the possibility of substituting technology for labor, etc. being canvassed. That seems to suggest that, in the past, wages went up when productivity went up because bosses were nice and realized that with productivity on the rise they could afford to raise wages. Now thanks to foreign competition, WalMart, and other low wage sources they "can't afford" pay raises. But that's not how the economy works, now or ever. If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers.

As people do that, wages should start to go up, until it no longer becomes profitable to add new workers, at which point wages will start levelling off. Wages and productivity can't become de-linked because today's businessmen are greedy or because WalMart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up. So what's going on nowadays? None of the stuff discussed in the article seems relevant to the issue at hand. Professor DeLong is quoted in the article but doesn't have any further comments. I'd be interested to know.

Well, there are three hypotheses:

  1. Improvements in firms' ability to squash unions, and thus shift wage bargains toward employers (the Wal-Mart hypothesis).
  2. A slack labor market--much more labor-market slack than the level of the unemployment rate would lead one to expect--in which firms find it easy to hire workers and workers find it hazardous to ask for higher wages.
  3. Changes in the international economy that boost the wages of the skilled and educated (whose products can be sold abroad for more) and put downward presure on the wages of the less-skilled and less-educated (who now face much stronger competition from abroad).

I believe that (3) is likely to be a very important factor over the next two generations. But this wage-growth slowdown we have seen since 2000 has hit too rapidly and has been too large to be credibly attributed to "offshoring" or other long-run international factors. (1) is surel a factor, but (1) wouldn't work unless (2) were exerting a powerful downward force on wages. (2) has many causes--a relatively high value of the dollar that switches demand from home to abroad is one of them.

I expect things to turn around as employment expands and as (2) loses its force--unless the Federal Reserve decides that it needs to fight inflation now.

Why hasn't (2) lost its force already? Why, with rapid productivity growth and stagnant wages and cheap money that is easy for firms to borrow, isn't firm demand for workers already through the roof? Well, how much would you like to expand capacity if you knew the country had a large budget deficit, and that either big tax increases or a burst of inflation were likely in the future? When Paul Volcker and Bob Rubin say that a serious financial crisis may well be on the horizon? Wages and productivity can't become de-linked because today's businessmen are greedy or because WalMart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up.

Posted by DeLong at 11:46 AM | Comments (0) | TrackBack

Inflation Pressures without Wage Growth

William Polley http://www.williampolley.com/blog/archives/2005/04/index.html#000276 talks bout the FOMC minutes:

The minutes of the March meeting are out. As is often the case, the really good stuff is towards the end. Here are some highlights.

Meeting participants... They noted with some concern the recent elevated readings on inflation in prices of core personal consumption expenditures, the producer price index, and indicators of prices at earlier stages of production, as well as the sizable further increase in energy prices. Nonetheless, many participants stated that they expected total inflation to diminish and any rise in core consumer inflation to be limited. One source of upward pressure on inflation had been the rise in energy prices.... Unit labor costs were still being held down by moderate wage growth and rising productivity.... [T]he markup of prices over costs in nonfarm businesses remained quite high, and firms would likely be pressed by competition to absorb a portion of any step-up in the growth of unit labor costs.... [I]n the past commodity prices had demonstrated little predictive content for broad inflation rates.... [M]onetary policy would be aimed at preserving price stability.

Still, many participants indicated that their uncertainty about the intensity of inflation pressures had risen in response to recent developments.... Moreover, the recent rebound in spot crude oil prices, and especially the substantial advance in prices of crude oil futures contracts for delivery well into the future, suggested that a significant unwinding of higher energy costs might not be in prospect. Several participants indicated that, in current circumstances, they viewed an upside surprise to inflation as potentially more harmful than an equivalent downside surprise, partly because such an outcome could well impart additional upward momentum to inflation expectations....

Polley has a bunch more to talk about as well.

Posted by DeLong at 11:44 AM | Comments (0) | TrackBack

Memo to Self: Re: Social Changes

Memo to Self:

I've *got* to stop saying, "What a darling grandchild!" It's causing no end of embarrassment...

But what to say instead?

Posted by DeLong at 11:43 AM | Comments (0) | TrackBack

The Unreasonable Effectiveness of Mathematics in the Natural Sciences

Chad Orzel provides the pointer to Helge Kraghe, who writes in Physics Web http://physicsweb.org/articles/world/13/12/8 about how quantum theory existed in the equations of physics half a decade before the human brain of any physicist understood it:

It was 100 years ago when Max Planck published a paper that gave birth to quantum mechanics - or so the story goes.... According to the standard story... quantum theory emerged when it was realized that classical physics predicts an energy distribution for black-body radiation that disagrees violently with that found experimentally. In the late 1890s, so the story continues, the German physicist Wilhelm Wien developed an expression that corresponded reasonably well with experiment - but had no theoretical foundation. When Lord Rayleigh and James Jeans then analysed black-body radiation from the perspective of classical physics, the resulting spectrum differed drastically from both experiment and the Wien law. Faced with this grave anomaly, Max Planck looked for a solution, during the course of which he was forced to introduce the notion of "energy quanta". With the quantum hypothesis, a perfect match between theory and experiment was obtained. Voila! Quantum theory was born.

The story is a myth, closer to a fairytale than to historical truth...

The study of black-body radiation had begun in 1859, when Robert Kirchhoff, Planck's predecessor as professor of physics in Berlin, argued that such radiation was of a fundamental nature.... [I]n 1896... Wien found a radiation law that was in convincing agreement with the precise measurements being performed at the Physikalisch-Technische Reichsanstalt in Berlin... the spectral density, u, - the radiation energy density per unit frequency - depended on the frequency, f, and temperature, T.... Planck was... interested in... establishing a rigorous derivation of it.... To secure a more fundamental derivation he... reinterpreted Boltzmann's theory in his own non-probabilistic way. It was during this period that he stated for the first time what has since become known as the "Boltzmann equation" S = k log W, which relates the entropy, S, to the molecular disorder, W.

To find W, Planck had to be able to count the number of ways a given energy can be distributed among a set of oscillators. It was in order to find this counting procedure that Planck, inspired by Boltzmann, introduced what he called "energy elements", namely the assumption that the total energy of the black-body oscillators, E, is divided into finite portions of energy, epsilon, via a process known as "quantization". In his seminal paper published in late 1900 and presented to the German Physical Society on 14 December... Planck regarded the energy "as made up of a completely determinate number of finite equal parts, and for this purpose I use the constant of nature h = 6.55 x 10-27 (erg sec)"....

Quantum theory was born. Or was it? Surely Planck's constant had appeared, with the same symbol and roughly the same value as used today. But... [Planck] explained in a letter written in 1931, the introduction of energy quanta in 1900 was "a purely formal assumption and I really did not give it much thought except that no matter what the cost, I must bring about a positive result."... Far more interesting [to Max Planck] than the quantum discontinuity (whatever it meant) was the impressive accuracy of the new radiation law and the constants of nature that appeared in it.

If a revolution occurred in physics in December 1900, nobody seemed to notice it.... Very few physicists expressed any interest in the justification of Planck's formula, and during the first few years of the 20th century no one considered his results to conflict with the foundations of classical physics.... As to the quantum discontinuity - the crucial feature that the energy does not vary continuously, but in "jumps" - [Planck] believed for a long time that it was a kind of mathematical hypothesis, an artefact that did not refer to real energy exchanges between matter and radiation....

[N]owhere in his papers of 1900 and 1901 did Planck clearly write that the energy of a single oscillator can only attain discrete energies.... If this is what he meant, why didn't he say so? And if he realized that he had introduced energy quantization - a strange, non-classical concept - why did he remain silent for more than four years?...

[I]t was Einstein who first recognized the essence of quantum theory. Einstein's remarkable contributions to the early phase of quantum theory are well known and beyond dispute. Most famous is his 1905 theory of light quanta (or photons), but he also made important contributions in 1907... Einstein's 1907 theory of specific heats was an important element in the process that established quantum theory as a major field of physics. The changed status of quantum theory was recognized institutionally with the first Solvay conference of 1911, on "radiation theory and the quanta", an event that heralded the take-off phase of quantum theory...

Max Planck comes up with an equation that works. In order to do so he has to make a "purely formal assumption." And it is only half a decade later that Einstein realizes that the little h that appears in Max Planck's equation is not a formal assumption or an "artefact" but instead tells us what is perhaps the most important thing about the guts of the universe.

For half a decade the first equation of quantum theory was there. But nobody knew how to read it.

It is this "what if we took this equation seriously?" factor that is, to my mind at least, the spookiest thing about the unreasonable effectiveness of mathematics in physics. Take the h in Max Planck's equation seriously, and you have the quantum principle--something that was not in Planck's brain when he wrote the equation down. Take seriously the symmetry in Maxwell's equations between the force generated when you move a magnet near a wire and the force and the force generated when you move a wire near a magnet, and you have Special Relativity--something that was not in Maxwell's brain when he wrote down the equation. Take Newton's gravitational force law's equivalence between inertial and gravitational mass seriously and you have General Relativity--something never in Newton's mind. And take the mathematical pathology at r = 2M in the Schwarzchild metric for the space-time metric around a point mass seriously, and you have black holes and event horizons.

Posted by DeLong at 11:42 AM | Comments (0) | TrackBack

April 12, 2005

20050408: Economics 113 Final Paper Assignment

Economics 113—Spring 2005—Final Paper Assignment
Due Wednesday, May 18, Evans 601, 4 PM

2500 words (approximately 10 pages). Answer one of the following four questions, explicitly using and citing to concepts and readings covered in this course:

1. America has had only one Great Depression. Should we fear a repeat of that horrible experience? Did in the past—those living on the eve of and before the Great Depression—have any good reason to fear that such a thing would happen?

2. The United States today is still the world’s most productive and technologically dynamic economy. What, in your view, are the principle factors that have made the U.S. such an economic growth success over the past two centuries?

3. The United States has an image of itself as a land of equality of opportunity. How has the culture, the sociology, and the politics of America lived up to and not lived up to this self-image over the past two centuries?

4. If you were in charge of teaching this course next year, and had a free hand to redesign it, what would you do? What sections would you elevate and stress? What topics would you demote or eliminate? And why?

pdf version

Posted by DeLong at 04:28 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (The Washington Post Editorial Board Clown Show Department)

Well, well, well. Washington Post editorial board, be ashamed of yourselves. Remember that your jobs are not to be complaisant and compliant shills for the Bush administration, or quit and go find honest jobs.

Dean Baker and David Rosnick have been making the completely obvious and unexceptionable point that Social Security ranks, at best, third in urgency and severity among America's fiscal problems. The most urgent and severe problem is the fallout from Bush's 2001 and 2003 tax cuts that once again destabilized the financing of the American government. The second most urgent and most severe problem is the medium- and long-run financing of the government's health-care programs: Medicare and Medicaid.

Dean and David make the obvious and unexceptionable point that a government that cared at all about making good fiscal policy would be tacking the big and urgent problems that threaten to cause significant economic damage in the next two decades. It makes no sense to focus on Social Security when there are bigger and more urgent fish to fry. They point out that one aim of the Bush focus on Social Security is to keep there from being serious discussion of--or attempts at solutions to--the bigger and more urgent problems.

Now everybody who is even half-informed knows that this is the case: their points are obvious and unexceptionable. When Treasury Secretary John Snow goes to Wall Street, people there ask him why the government isn't tackling the important stuff: the current deficit and health care. Snow has no answer: his only response is that Social Security is Bush's priority, and so that is what the government is going to focus on.

But the Washington Post editorial board is upset at Dean Baker and David Rosnick. They defend Bush's focus on Social Security because... because... because...

http://www.washingtonpost.com/ac2/wp-dyn/A40584-2005Apr9?language=printer [Y]es, this President Bush can be criticized for hyping the "crisis" in Social Security.... Dean Baker and David Rosnick of the Center for Economic and Policy Research make [the] argument [that the government should focus on the more urgent and substantial fiscal policy problems].... "Politicians and commentators who claim to be concerned about the living standards of future generations of workers seem to be misdirecting their energy by focusing on the comparatively minor problem of Social Security.... Clearly the inefficiency of the U.S. health care system poses a far larger and more immediate danger to the living standards of our children and grandchildren."

Perhaps so. But... [d]oes anyone who's watched the Social Security debate this year imagine that figuring out what to do about health care or Medicare would go just swimmingly?... Sadly, the Social Security debate so far has served chiefly to underline the difficulty, in a political environment dominated by dogma and short-term self-interest.... This is irresponsible, on both sides.

But so, too, would be dropping the subject. If they can't solve this "comparatively minor problem" now, politicians are unlikely to be brave enough, or rash enough, to return to it anytime soon. And we hate to think how they'd face up to a comparatively major challenge.

Dropping a less important issue to deal with a more important issue is "irresponsible"? In what quadrant could that possibly be true?

What the Post editorial board does not say is that America's Republican politicians do face a major fiscal policy challenge--two major fiscal policy challenges, in fact. What the Post editorial board does not say is that America's Republican politicians are already not facing up to the major challenges--there's no need to speculate on what the editorial board "hate[s] to think" about. What the Post editorial board does not say is that it has taken on the mission of helping the senior Republican politicians in their corrupt and incompetent irresponsibility by attacking people who actually have a clear view of America's relative fiscal policy challenges.

Shame on you, Washington Post editorial board, minor apprentices in the clown show that is Bush administration economic policy: Fred Hiatt, Colbert I. King, Jackson Diehl, Ken Ikenberry, Anne Applebaum, Robert Asher, Sebastian Mallaby, Ruth Marcus, Benjamin Wittes.

Posted by DeLong at 01:44 PM | Comments (0) | TrackBack

Bruce Bartlett Is Badly Disturbed

He's worried about the state of the Treasury Department:

http://www.realclearpolitics.com/Commentary/com-4_12_05_BB.html: Treasury has always been the premier economic agency of the government. Generally speaking, the Treasury secretary is the administration's principal economic spokesman, and the department attracts the best and brightest of those with an economic bent who wish to serve in government. This was especially the case during the Clinton administration, which had an extremely high level of talent at Treasury.

The department's expertise has been sorely missed during the Social Security reform debate. It is now clear that the White House put insufficient resources into developing its proposal -- such as it is, with no detailed plan yet on the table. As chairman of the board of trustees of the Social Security system, the Treasury secretary ought to have been at the forefront of developing this plan. Instead, he has been used only as a salesman....

The first secretary of the Bush administration, Paul O'Neill, was summarily fired for reasons that are still unclear. The current secretary, John Snow, was publicly humiliated when the White House let it be known that it was searching for a replacement last year. Snow was retained only because the White House apparently couldn't find who it was looking for. Now, most of the key sub-Cabinet positions are vacant, and it appears that the administration is having great difficulty filling these positions. Among those currently vacant are the deputy secretary, two of the three under secretaries, five assistant secretaries and a number of other key positions.... This is really quite amazing, because normally Treasury has no trouble attracting very high quality people for its senior positions. Those I worked with were very impressive, and many went on to greater things. But now, it seems that the prospect of working there has become significantly less attractive. There are several possible reasons:

  1. All power is centralized in the White House, and the department really has no control over the issues that are its responsibility. According to the new issue of International Economy magazine, White House Chief of Staff Andrew Card, Deputy Chief of Staff Karl Rove, and Office of Management and Budget Director Joshua Bolten make all economic policy decisions. The Treasury secretary is not involved.
  2. People are reluctant to work for a secretary who appears to have lost the president's confidence and may be a short-timer.
  3. They don't want to waste their time giving speeches to high school classes in North Dakota or local businessmen in Montana, as Snow has been doing. He should be using his limited time more effectively on things like tax compliance, stabilizing the dollar, fighting protectionism, and financing the huge budget and current account deficits.

In other words, people want to work at Treasury to do what the department historically does -- develop tax and financial policy, manage exchange rates and other international economic issues, and be the administration's principal liaison to Wall Street. Giving speeches to high school students and being forced to implement policies that Treasury had little say in developing just isn't as interesting.... The problem is that we have a Treasury Department for a reason. It fulfills a necessary governmental function even in a minimalist state. One of these days, we may have some sort of financial crisis that will demand the full use of Treasury's expertise. I just hope there is someone there to answer the phone when that day comes.

Posted by DeLong at 01:20 PM | Comments (0) | TrackBack

Warren Buffett, Hank Greenberg, and Eliot Spitzer

Ellen Kelleher of the Financial Times reports:

http://news.ft.com/cms/s/6aabc3da-aac5-11d9-98d7-00000e2511c8,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html: Buffett knew of Greenberg’s reserves concerns. By Ellen Kelleher in New York: Warren Buffett on Monday admitted to regulators that he knew Maurice "Hank" Greenberg was upset about AIG's reserves around the time that Mr Greenberg arranged a controversial reinsurance contract with General Re, a subsidiary of Berkshire Hathaway. The contract inflated AIG's reserves by $500m in the last quarter of 2000 and the first quarter of 2001.

Mr Buffett displayed a down-to-earth demeanour while testifying on Monday at the offices of the Securities and Exchange Commission about the deal, which is at the centre of the widening inquiry into the misuse of finite reinsurance. Mr Buffett is considered a witness, not a suspect in the investigation by US regulators. The famed investor told regulators he knew few details about the transaction, which Mr Greenberg arranged by placing a call to Ronald Ferguson, the former chief executive of General Re in late 2000. Last month, AIG admitted the transaction was improper.

Mr Buffett's testimony came as news emerged that Mr Greenberg would remain silent about AIG's accounting methods. In a last-minute decision, Mr Greenberg will invoke his fifth amendment rights...

What responsibility does a financial institution have if a counterparty suggests a trade that the counterparty wants to use to defraud or mislead its own shareholders? If you knew or should have known that the transaction was a step in a plan by your counterparty to violate the securities laws of the United States, what are your obligations?

A decade or two ago--before Adelphia, before WorldCom, before Enron, before AIG--the overwhelming point of view on Wall Street would have been that this provides you with an opportunity to put the squeeze on your counterparty and get better terms: after all, the management wouldn't be trying to mislead their shareholders unless they were really in a tight place. In the 1980s, when John Gutfreund of Salomon Brothers asked Warren Buffett to help him keep control of Salomon and scare off predators who wanted to buy it out (and in the process give Salomon's shareholders lots of money), Buffett was eager to help for a very handsome price that Gutfreund willingly paid. (However in the end Buffett had to do a lot of real work to keep form losing his money: Salomon imploded when its attempts to manipulate the Treasury bond market were revealed.) It was the responsibility of Salomon's shareholders to watch what their CEO was doing--and organize to fire him if they did not like it. It was the responsibility of AIG's shareholders to take steps to ensure that Hank Greenberg was giving them the straight accounting dope.

Now Eliot Spitzer has a different idea about corporate responsibility to the shareholders of your counterparties: you are not supposed to be an enabler.

Posted by DeLong at 01:19 PM | Comments (0) | TrackBack

We Have a *Huge* Problem Here

The New York City police department lies, routinely, under oath. We need to fix this. We need to fix this badly:

Videos Challenge Accounts of Convention Unrest By JIM DWYER: Dennis Kyne put up such a fight at a political protest last summer, the arresting officer recalled, it took four police officers to haul him down the steps of the New York Public Library and across Fifth Avenue. "We picked him up and we carried him while he squirmed and screamed," the officer, Matthew Wohl, testified in December. "I had one of his legs because he was kicking and refusing to walk on his own." Accused of inciting a riot and resisting arrest, Mr. Kyne was the first of the 1,806 people arrested in New York last summer during the Republican National Convention to take his case to a jury. But one day after Officer Wohl testified, and before the defense called a single witness, the prosecutor abruptly dropped all charges.

During a recess, the defense had brought new information to the prosecutor. A videotape shot by a documentary filmmaker showed Mr. Kyne agitated but plainly walking under his own power down the library steps, contradicting the vivid account of Officer Wohl, who was nowhere to be seen in the pictures. Nor was the officer seen taking part in the arrests of four other people at the library against whom he signed complaints. A sprawling body of visual evidence, made possible by inexpensive, lightweight cameras in the hands of private citizens, volunteer observers and the police themselves, has shifted the debate over precisely what happened on the streets during the week of the convention. For Mr. Kyne and 400 others arrested that week, video recordings provided evidence that they had not committed a crime....

Among them was Alexander Dunlop, who said he was arrested while going to pick up sushi. Last week, he discovered that there were two versions of the same police tape: the one that was to be used as evidence in his trial had been edited at two spots, removing images that showed Mr. Dunlop behaving peacefully. When a volunteer film archivist found a more complete version of the tape and gave it to Mr. Dunlop's lawyer, prosecutors immediately dropped the charges and said that a technician had cut the material by mistake....

Paul J. Browne, a police spokesman, said that videotapes often do not show the full sequence of events, and that the public should not rush to criticize officers simply because their recollections of events are not consistent with a single videotape. The Manhattan district attorney's office is reviewing the testimony of Officer Wohl at the request of Lewis B. Oliver Jr., the lawyer who represented Mr. Kyne in his arrest at the library....

In the bulk of the 400 cases that were dismissed based on videotapes, most involved arrests at three places - 16th Street near Union Square, 17th Street near Union Square and on Fulton Street - where police officers and civilians taped the gatherings, said Martin R. Stolar, the president of the New York City chapter of the National Lawyers Guild. Those tapes showed that the demonstrators had followed the instructions of senior officers to walk down those streets, only to have another official order their arrests....

Posted by DeLong at 12:03 PM | Comments (0) | TrackBack

What If Bush's Justice Department Hadn't Taken a Dive...

Even with the Bush Justice Department's taking a dive in the case, the payouts that Microsoft is making to settle the claims produced by its antitrust law violations aren't chicken feed:

http://news.ft.com/cms/s/3146e1a8-aa8c-11d9-98d7-00000e2511c8,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html Financial Times: Microsoft to pay Gateway $150m: Payments by Microsoft to escape its antitrust morass are expected to top $4.5bn. This follows news on Monday that the software group will pay $150m to Gateway, the PC maker, and set aside another $550m against other legal claims... a $43m charge for a settlement last month with Burst.com... in a pre-tax charge to earnings in the latest quarter of more than $700m, Microsoft indicated. The Gateway settlement takes to six the number of companies in the industry with which Microsoft has reached private agreements, at a combined cost of more than $2.2bn. It has also incurred costs of more than $1.2bn to settle state-level anti-trust suits in the US and paid a fine of about $600m to the European Commission. In addition, Microsoft has paid more than $2bn to settle patent disputes in the past year....

The new provision against future costs suggests other big payments still lie ahead.... Among the biggest are a private case brought by RealNetworks.... Like Novell, a technology company which received $536m in a settlement last year, Gateway has never filed a suit against Microsoft.... Gateway has agreed to forgo any legal claim in return for $150m over four years, the two sides said...

Posted by DeLong at 12:00 PM | Comments (0) | TrackBack

What If Bush's Justice Department Hadn't Taken a Dive...

Even with the Bush Justice Department's taking a dive in the case, the payouts that Microsoft is making to settle the claims produced by its antitrust law violations aren't chicken feed:

http://news.ft.com/cms/s/3146e1a8-aa8c-11d9-98d7-00000e2511c8,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html Financial Times: Microsoft to pay Gateway $150m: Payments by Microsoft to escape its antitrust morass are expected to top $4.5bn. This follows news on Monday that the software group will pay $150m to Gateway, the PC maker, and set aside another $550m against other legal claims... a $43m charge for a settlement last month with Burst.com... in a pre-tax charge to earnings in the latest quarter of more than $700m, Microsoft indicated. The Gateway settlement takes to six the number of companies in the industry with which Microsoft has reached private agreements, at a combined cost of more than $2.2bn. It has also incurred costs of more than $1.2bn to settle state-level anti-trust suits in the US and paid a fine of about $600m to the European Commission. In addition, Microsoft has paid more than $2bn to settle patent disputes in the past year....

The new provision against future costs suggests other big payments still lie ahead.... Among the biggest are a private case brought by RealNetworks.... Like Novell, a technology company which received $536m in a settlement last year, Gateway has never filed a suit against Microsoft.... Gateway has agreed to forgo any legal claim in return for $150m over four years, the two sides said...

Posted by DeLong at 11:59 AM | Comments (0) | TrackBack

Double Gurk!!

Steven Greenhouse reports on falling real wages in 2004. Why oh why are we still so far from full employment?

The New York Times > Business > Falling Fortunes of Wage Earners: Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans. But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come. Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade....

The problem is not with the jobs themselves. Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off. 'We're in for a long period where inflation-adjusted wages will be under acute pressure,' said Stephen S. Roach of Morgan Stanley. 'That's a most unusual development in a period of high productivity growth. Normally, real wages track productivity.'

But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market. 'What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase,' said Allan H. Meltzer, an economist at Carnegie Mellon University. 'I think the long-term trend will be that wages will right themselves and look like productivity growth on average.'... At a Sprint call center in North Carolina, 180 customer service representatives are well aware of how such forces are squeezing them. Their jobs have not migrated overseas, but the employees just concluded their most bruising battle ever over wages.... [M]any economists, liberal and conservative, are perplexed by two unusual trends. Wage growth has trailed far behind productivity growth over the last four years, and the share of national income going to employee compensation is low by historic standards.... The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more....

J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations. 'You'd think that with the unemployment rate near 5 percent and productivity growth so strong, employers would be anxious to raise payrolls and would have plenty of headroom to raise wages,' he said. 'But they're not.' Since 2001, when the recovery began, productivity growth has averaged 4.1 percent a year; overall compensation - wages and benefits - has risen about one-third as fast, by 1.5 percent a year on average. By contrast, over the previous seven business cycles, productivity rose by 2.5 percent a year on average while compensation rose roughly three-fourths as fast, by 1.8 percent a year.

'The question is not whether corporations are seeking higher profits; the question is how come they're getting them to such a degree at the expense of compensation,' said Jared Bernstein, an economist with the Economic Policy Institute. 'I'm struck at how successful they've been at restraining labor costs.' Labor unions' declining bargaining power has given corporations a stronger hand to hold down wages, he argued, but more recent trends, including the emergence of Wal-Mart Stores as a central force in the economy, now play crucial roles, too.... Last year's double-digit rise in health costs helped squeeze wages as well; many companies also required employees to cover more of the premiums out of their own pay....

While agreeing that these factors are important, Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages. 'Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected,' he said....

From 1996 to 2001, wages grew strongly again because of an unusually low jobless rate, caused in part by the high-technology boom. In the late 1990's, the tight labor market pressured companies to give sizable raises to attract and retain workers even as a surge in productivity helped business afford them without substantially cutting into profits. Thomas A. Kochan, an economist at the Massachusetts Institute of Technology, said wages could once again rise, but only if there was especially robust economic growth. 'To produce real wage gains now, it takes sustaining a very tight labor market,' he said. 'Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages.'

Posted by DeLong at 11:59 AM | Comments (0) | TrackBack

Double Gurk!!

Steven Greenhouse reports on falling real wages in 2004. Why oh why are we still so far from full employment?

The New York Times > Business > Falling Fortunes of Wage Earners: Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans. But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come. Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade....

The problem is not with the jobs themselves. Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off. 'We're in for a long period where inflation-adjusted wages will be under acute pressure,' said Stephen S. Roach of Morgan Stanley. 'That's a most unusual development in a period of high productivity growth. Normally, real wages track productivity.'

But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market. 'What we're seeing now is not atypical; employers can't pay the wage bill to keep up with the oil price increase,' said Allan H. Meltzer, an economist at Carnegie Mellon University. 'I think the long-term trend will be that wages will right themselves and look like productivity growth on average.'... At a Sprint call center in North Carolina, 180 customer service representatives are well aware of how such forces are squeezing them. Their jobs have not migrated overseas, but the employees just concluded their most bruising battle ever over wages.... [M]any economists, liberal and conservative, are perplexed by two unusual trends. Wage growth has trailed far behind productivity growth over the last four years, and the share of national income going to employee compensation is low by historic standards.... The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more....

J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations. 'You'd think that with the unemployment rate near 5 percent and productivity growth so strong, employers would be anxious to raise payrolls and would have plenty of headroom to raise wages,' he said. 'But they're not.' Since 2001, when the recovery began, productivity growth has averaged 4.1 percent a year; overall compensation - wages and benefits - has risen about one-third as fast, by 1.5 percent a year on average. By contrast, over the previous seven business cycles, productivity rose by 2.5 percent a year on average while compensation rose roughly three-fourths as fast, by 1.8 percent a year.

'The question is not whether corporations are seeking higher profits; the question is how come they're getting them to such a degree at the expense of compensation,' said Jared Bernstein, an economist with the Economic Policy Institute. 'I'm struck at how successful they've been at restraining labor costs.' Labor unions' declining bargaining power has given corporations a stronger hand to hold down wages, he argued, but more recent trends, including the emergence of Wal-Mart Stores as a central force in the economy, now play crucial roles, too.... Last year's double-digit rise in health costs helped squeeze wages as well; many companies also required employees to cover more of the premiums out of their own pay....

While agreeing that these factors are important, Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages. 'Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected,' he said....

From 1996 to 2001, wages grew strongly again because of an unusually low jobless rate, caused in part by the high-technology boom. In the late 1990's, the tight labor market pressured companies to give sizable raises to attract and retain workers even as a surge in productivity helped business afford them without substantially cutting into profits. Thomas A. Kochan, an economist at the Massachusetts Institute of Technology, said wages could once again rise, but only if there was especially robust economic growth. 'To produce real wage gains now, it takes sustaining a very tight labor market,' he said. 'Without that, we're going to continue to see what we're seeing now: abysmal growth in real wages.'

Posted by DeLong at 11:58 AM | Comments (0) | TrackBack

Gurk!

The AP reports on the February trade deficit. Where is my J-curve?

The New York Times > AP > Business > Trade Deficit Reaches All-Time High in February: WASHINGTON (AP) -- The U.S. trade deficit, exacerbated by surging imports of oil and textiles, soared to an all-time high of $61.04 billion in February. The Commerce Department said Tuesday that the February imbalance was up 4.3 percent from a $58.5 billion trade gap in January as a small $50 million rise in U.S. exports of goods and services was swamped by a $2.58 billion increase in imports.... For the first two months of this year, the trade deficit is running at an annual rate of $717.2 billion, a full $100 billion above the record imbalance of $617.1 billion set for all of 2004.

Trade deficits of this magnitude have raised worries among economists about America's ability to continue to attract the foreign financing needed to cover the shortfall between exports and imports. If foreigners decided to hold fewer dollar-denominated investments such as stocks and bonds, it could trigger steep declines in U.S. stock prices and a sharp increase in interest rates.... The Bush administration argues that the deficit primarily reflects the fact that the U.S. economy has been growing at a much faster pace than the economies of its major trading partners, pushing up imports while dampening demand for U.S. exports. Treasury Secretary John Snow was expected to use a Saturday meeting of finance officials from the Group of Seven major industrial countries to once again lobby for Europe and Japan to pursue more growth-oriented policies.

The U.S. dollar has been declining for three years, a fact that should help narrow the trade deficit by making imports more expensive to American consumers while making U.S. exports cheaper. However, economists say the dollar needs to fall further to deal with the widening trade deficit, and they are predicting a further increase in the trade gap this year.... Demand for foreign petroleum products shot up 10.3 percent to $18.2 billion, the second highest level on record, surpassed only by $19.6 billion in imports of petroleum last November....

Posted by DeLong at 11:50 AM | Comments (0) | TrackBack

April 11, 2005

The Economics of Microfinance

Professor: Oh woe!

Grad Student 1: Woe?

Professor: MIT Press has sent me galleys of Beatriz Armendariz de Aghion and Jonathan Morduch (2005), The Economics of Microfinance (Cambridge: MIT Press). It's certain to be excellent--these are very good people.

Grad Student 1: So why is this a problem?

Professor: I'll put it on my bookshelf, and look at it, and think that I ought to write about it, and that these are very good people who are doing important work that ought to be broadly read and thought about, and that I'm not helping.

Grad Student 1: So why not read and think about it?

Professor: Where will I find the time? I'm not a brand. I'm not a distributed anthology intelligence. I know myself. It won't happen.

Grad Student 1: So what are you going to do?

Professor: Find someone else to give it to--if they promise to give it back in four months, when I think I'll have time to read it.

Grad Student 2 (walking by): Did I hear you say that you are giving away copies of the galleys of The Economics of Microfinance?

Professor: Yes. Do you have need of it?

Grad Student 2: I'm taking my orals in the economics of microfinance. I'll give it back when I'm done...

Posted by DeLong at 05:35 PM | Comments (0) | TrackBack

Praktike recommends "The New American Militarism"

Praktike strongly recommends Andrew Bacevich's The New American Militarism:

Bacevich | Liberals Against Terrorism: I was expecting that it would be similar to other books I've read in this vein... but I've pleasantly surprised (and disturbed at times) so far with the pattern that he outlines.... Bacevich doesn't like the neconservatives, but he's not at all fond of the New Left that the former group arose to decry, either, nor does he have much for liberal internationalists. He slams Colin Powell and the military brass around him for what he says was inventing a rationale for a continued American global military presence at the end of the Cold War, which, ironically, proved handy when interventionists repeatedly cast aside the Weinberger-Powell Doctrine throughout the 90s. He slams Wesley Clark for Kosovo. He explains how conservative evangelical Christians came to align themselves with the military in reaction to Vietnam (for an example of how this gets expressed artistically, see this video that Atrios linked to the other day), and how Christian Zionists have played a leading role in U.S. policy towards Israel, despite the fact that most American Jews actually oppose the settlement policy and that many Christian Zionists believe that when the Rapture comes, the Jews will either have to convert to Christianity or die en masse.

The best chapter in the book so far is 'Left, Right, Left,' in which Bacevich traces the journey of the neoconservatives, which he divides into an old (Norman Podhoretz and Commentary) and new group (Kristol, Kagan, and the Weekly Standard). Bacevich seems to have squirreled away nearly every embarrassingly triumphalistic neocon quote ever written and packed into one chapter. The most troubling feature of neoconservatism (which he calls a persuasion more than a coherent ideology) that he identifies is the tendency among neoconservative commentators to stridently reject the idea that there are any alternatives to American militarism and that to ponder otherwise is inherently dangerous.

Bacevich writes:

Particulars might change, but for neoconservatives crisis is a permanent condition. The situation is always urgent, the alternatives stark, the need for action compelling, and the implications of delay or inaction certain to be severe. On the one hand--if the nation disregards the neoconservative call to action--there is the abyss. On the other hand--if the nation heeds that call--the possibility of salvation exists.

Bacevich seems to have reserved particular disdain for Norman Podhoretz, whom he quotes shortly before the inward collapse of the Soviet Union (in 1986) expressing alarm and dismay that Ronald Reagan was embarking on 'a strategy of helping the Soviet Union stabilize its empire.' Oops. There's plenty more silliness from Charles Krauthammer as well...

Posted by DeLong at 01:52 PM | Comments (0) | TrackBack

Return to Herbert Hoover--Not!

Matthew Yglesias says that the Republicans do not want to turn the clock back to Herbert Hoover--they want to do something worse:

Matthew Yglesias: Turn Back The Clock: I'm watching a Hillary Clinton speech she gave yesterday in Minnesota, and at one point she was saying something about how George W. Bush doesn't only want to unmake the gains of the Clinton administration, but wants to go back to the past before Franklin Roosevelt and even before Teddy Roosevelt. This Bush-as-McKinley song is something one hears now and again, and if it's effective political rhetoric I'm willing to listen to more of it, but it's pretty massively inaccurate. What they're trying to do doesn't really resemble that at all. Now, as I say, if it works, then it works, and I'll live with it. Senator Clinton's not a historian. I worry, though, that it doesn't work very well and that reliance on this sort of 'turn back the clock' rhetoric prevents the development of a new rhetoric that would critique what's really going on here.

Bush's policies have very little to do with laissez-faire (just ask the Cato guys) or any actual moment in the American past. Instead, it has everything to do with corruption and funneling money to friendly corporations and religious groups. It's a kind of christian democrat vision, but more along the lines of tangentopoli than Germany. I think this is important, because it's become obvious that many Democrats now have high hopes that the investigations into Tom DeLay's dealings will provide a major political payoff. It's my opinion that it only will if Democrats manage to actually tie this stuff in to a broader critique of Republican policies. They're not free marketers who happen to take bribes on occassion. The policymaking is fully continuous with the corruption.

Posted by DeLong at 01:51 PM | Comments (0) | TrackBack

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

Matthew Yglesias points out that David Brooks simply doesn't know what he's talking about--that all the dead white European men are very much alive and very well:

Matthew Yglesias: Dead White Men: Alive and Well: David Brooks' assert[s] that we have 'a generation of students who are educated in a way that doesn't bring them into contact with the European canon.... One hears a lot of this sort of thing from conservatives, and I wonder if they read any syllabi.... I believe I took a grand total of four classes that didn't feature at least one reading by a European author. One was a physics class, one was on American social policy, one was a class on American literature, and one was about the history of Japan. This idea that the traditional western canon has vanished from the educational system is absurd. I took one class on a non-western subject (along with two science classes and several philosophy classes that had no discernable cultural 'location'), the minimum I was allowed to get away with, which I think was fairly typical behavior. It hardly would have killed me to have taken two or even three.

UPDATE: Which is all to say who, exactly, does Brooks think I've been missing out on? Tragically, there are many more books worth reading than actual time to read them, but I think I've done pretty well on the whole. If I'd actually followed orders and read Democracy in America I'd be in better shape Great Brooks-wise, but I did read his book about France.

Posted by DeLong at 01:50 PM | Comments (0) | TrackBack

The Taliban Wing of the Republican Party

The Carpetbagger Report says:

The Carpetbagger Report » The kind of appearance that demands an explanation: I’ve never much cared for the phrase “Taliban wing of the Republican Party” because it’s too frequently misused and applied to conservatives who don’t deserve it. But those in attendance for this weekend’s conference on “Confronting the Judicial War on Faith” deserve the “Taliban-wing” label — they’ve worked hard to earn it. These folks aren’t just conservative, and aren’t simply fringe right-wingers, they literally want to follow in the Taliban’s footsteps and replace American law with their interpretation of Scripture. It’s genuinely scary.

Dana Milbank had an item over the weekend, for example, reporting on the conference. He explained that lunatics like Phyllis Schlafly believe Supreme Court Justice Anthony Kennedy’s ruling forbidding capital punishment for juveniles “is a good ground of impeachment.” Similarly, lawyer-author Edwin Vieira said he draws inspiration from Joseph Stalin: “He had a slogan, and it worked very well for him, whenever he ran into difficulty: ‘no man, no problem,’ ” Vieira said.

I protest! This is grossly unfair to the Taliban! The Taliban studied their Holy Writ assiduously, and strove for theological consistency! Phyllis Schlafly and Edwin Vieira, by contrast, do not know The Gospel According to John:

Jesus went unto the mount of Olives. And early in the morning he came again into the temple, and all the people came unto him; and he sat down, and taught them. And the scribes and Pharisees brought unto him a woman taken in adultery; and when they had set her in the midst, they say unto him, "Master, this woman was taken in adultery, in the very act. Now Moses in the law commanded us, that such should be stoned: but what sayest thou?" This they said, tempting him, that they might have to accuse him.

But Jesus stooped down, and with his finger wrote on the ground, as though he heard them not. So when they continued asking him, he lifted up himself, and said unto them, "He that is without sin among you, let him first cast a stone at her." And again he stooped down, and wrote on the ground. And they which heard it, being convicted by their own conscience, went out one by one, beginning at the eldest, even unto the last: and Jesus was left alone, and the woman standing in the midst.

When Jesus had lifted up himself, and saw none but the woman, he said unto her, "Woman, where are those thine accusers? hath no man condemned thee?"

She said, "No man, Lord."

And Jesus said unto her, "Neither do I condemn thee: go, and sin no more."

Posted by DeLong at 01:48 PM | Comments (0) | TrackBack

Another Good Personnel Decision from the Bush Administration?!?!

There's a rumor that Rich Clarida will fill Ben Bernanke's seat on the Federal Reserve Board. Good idea.

Posted by DeLong at 01:47 PM | Comments (0) | TrackBack

Maureen Dowd Acquires Seisin Over Talking Points Memo

Joshua Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: April 03, 2005 - April 09, 2005 Archives: I'm willing to do homage to Maureen Dowd for these three peerless sentences: 'Before, Republicans just scared other people. Now, they're starting to scare themselves. When Dick Cheney tells you you've gone too far, you know you're way over the edge.'

Posted by DeLong at 01:46 PM | Comments (0) | TrackBack

J. Bradford DeLong

Professor of Economics, 601 Evans Hall
University of California at Berkeley
Berkeley, CA 94720-3880

phone: (510) 643-4027
fax: (510) 642-6615
<delong@econ.berkeley.edu>
<http://www.j-bradford-delong.net>

Academic C.V.:
html pdf

Pictures...

Posted by DeLong at 01:45 PM | Comments (0) | TrackBack

A Very Welcome Return

Angelica Oung--Battlepanda (the Battlepanda?)--is back: http://battlepanda.com:

Maybe, just maybe, despite all the junk we have in our collective consciousness, a synapse will fire. Cookie...no...longer...in...cookie...jar......WHO TAKE?!

The cookie analogy continues:

Alan Greenspan in '83: Let me put this cookie away for you so you can have it for dessert later instead of ruining your dinner.

Al Gore in 2000: I wouldn't keep the cookie jar right out in plain sight if I were you.

George Bush in 2005: Oh uh! Somebody ate your cookies! Or perhaps your cookies never existed in the first place.

American people: Why preznit hand in cookie jar?

GB: To make sure this terrible terrible thing never happens again, next time we're going to keep the cookies in a jar with your name on it!

American people: (...)

Posted by DeLong at 01:44 PM | Comments (0) | TrackBack

Economics in One Lesson

Tyler Cowen tells us that Henry Hazlitt's Economics in One Lesson is now online.

It's an excellent book to read if one already knows a significant amount of economics. It's an excellent book because it brilliantly and coherently restates the Classical view. It is a limited book because at least half its pages hint that the works of John Maynard Keynes are an abomination without ever grappling with the Keynesian argument.

We all know that the market system is an amazing decentralized social planning and allocation mechanism if externalities are small, if returns to scale are in general diminishing, if we are happy with the distribution of wealth and the concommitant distribution of economic power it gives rise to, and if Say's Law holds--if supply does indeed create its own demand, and we don't have to worry about large-scale unemployment and deep depressions.

Hazlitt doesn't recognize any of these ifs. And that is what makes his book very dangerous indeed to a beginner in economics, because the ifs are, all of them, important qualifications and caveats. I gather that Tyler read it relatively early, and I am amazed that he has escaped with so little permanent neurological and ideological damage.

I find it astonishing that Haslitt doesn't recognize any of these ifs. I find it especially astonishing that he doesn't recognize the last of them. The 1930s were the era of the Great Depression--the time when Say's Law was most irrelevant. Hazlitt lived through them. Yet the Great Depression years seem to have had no impact on Hazlitt whatsoever.

There is one other big problem with Hazlitt--a problem that he shares with many of his successors on the Wall Street Journal op-ed page, on the Weekly Standard, and on the National Review. His quotes cannot be counted on to be in context. His summaries cannot be counted on to be honest.

For example, Hazlitt on Keynes in Economics in One Lesson:

p. 4: There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

What Keynes actually wrote in his Tract on Monetary Reform:

Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Misrepresentations like this do Hazlitt no credit at all.

Posted by DeLong at 01:42 PM | Comments (0) | TrackBack

Brendan Nyhan Bangs His Head Against the Wall

He finds Glenn Hubbard saying something sensible on Marketplace--but wishes it did not come accompanied by a certain form of amnesia:

http://www.brendan-nyhan.com/blog/2005/03/what_is_r_glenn.html: What is R. Glenn Hubbard talking about?

During a "Marketplace" commentary yesterday, R. Glenn Hubbard, the head of President Bush's Council of Economic Advisers from 2001-2003, said the following:

"[The late Princeton economist David Bradford's tax reform] proposal would repeal the dreaded alternative minimum tax. The AMT was meant to tax the wealthy but is affecting more and more middle-income families than Congress ever intended."

From Hubbard's description, you would think he and the Bush administration had nothing to do with the AMT problem, but the reality is that the 2001 and 2003 tax cuts, which Hubbard supported, dramatically exacerbated it by lowering rates without corresponding permanent fixes to the AMT. After leaving the administration in 2003, Hubbard specifically argued for the dividend tax cut in place of AMT relief, saying that the AMT should be addressed in the context of a larger discussion about tax reform.

The decision to not permanently fix the AMT was at least partially strategic. The administration and Republicans in Congress were able to push through much larger tax cuts than would otherwise have been possible because of the AMT, using revenue that would be generated by its explosion in future years to mask the true long-term cost of the proposals. The White House has also continually omitted funds for fixing the AMT from its budgets. Both tactics make future deficits look far smaller than they actually will be. The administration claims that the AMT will be fixed in the context of the President's tax reform agenda, but this seems unlikely given the lack of funds available to pay for it.

(See this 2004 Center on Budget and Policy Priorities article and a February 2005 CNN/Money article for background on these issues.)

Of course, Hubbard is aware of all this, but in his commentary he plays dumb and blames the problem on Congress. Thanks Glenn! Good luck cleaning up your reputation among economists!

To be fair, during the late Clinton administration the tax guys would come forward with proposals to fix the AMT, and the High Politicians would always say that the Republicans wanted it fixed much more than the Democrats, and so we should wait until the Republicans brought it up before dealing with the issue. So there is some strategery on both sides here.

Posted by DeLong at 01:40 PM | Comments (0) | TrackBack

Another Interpretation of Charles Blahous

In comments, P. O'Neill notes that Dan Froomkin had provided another correct interpretation of Charles Blahous's:

'The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts,' Blahous wrote. 'These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away.'

O'Neill's gloss:

Remember during the campaign when we made fun of Al Gore for saying that the Social Security surplus needed to be put in a lockbox? We did a bad, bad thing. It does need to be put in a lockbox. We want to fix the damage we did, we really do!

Or, as Dan Froomkin put it, "Think of it as millions of little lock-boxes."

P. O'Neill adds:

It's time to start putting together a list of pundits who ridiculed Al Gore for his emphasis on the lockbox in 2000. Howard Kurtz was still at it in November 2003: "But at least the candidates would be arguing about something important, as opposed to all that '00 prattle about a lockbox that now seems totally irrelevant in an era of huge budget deficits.

Posted by DeLong at 01:39 PM | Comments (0) | TrackBack

Tim Geithner Is Nervous...

He gives a short talk at Princeton:

Remarks by Timothy F. Geithner before Princeton University's Center for Economic Policy Studies - Federal Reserve Bank of New York: Timothy F. Geithner, President and Chief Executive Officer: I am glad to be here at Princeton's Center for Economic Policy Studies to have this conversation with Alan Blinder and to address some of the key questions regarding monetary policy today. I am particularly pleased to be in front of such a distinguished audience, including colleagues from the Federal Reserve who will be talking about some of the same questions at tomorrow's meeting.

I would like to start with a few propositions about the state of U.S. monetary policy and the Fed today.

The achievements in inflation outcomes of the past decade or so—low inflation, less volatility in inflation, more moderate long term inflation expectations, and less volatility in those expectations, achievements that are impressive relative to past U.S. experience as well as to the gains of other mature central banks—suggest we are close to the frontier of monetary policy credibility. These gains came alongside a significant reduction in the volatility of U.S. output. And they are impressive in light of the speed and force with which the Fed acted in several instances of systemic financial distress.

The major economic policy challenges facing the nation today—pick your favorites among the usual suspects of low public and household savings, concerns about educational quality and achievement, high and rising income inequality, the large imbalances between our social insurance commitments and resources—are not about monetary policy. Poor monetary policy choices would make these problems harder to address, but monetary policy itself can't do much to fix them.

The issues about monetary policy regimes we spend most of the time debating these days—such as those involving communications and disclosure and variants on inflation targeting—are high class problems to have. Even if they were resolved in the direction of what seems to be the broad academic consensus, they would still leave us with all the hard questions in monetary policy. The color of truth in monetary policy (apologies to McGeorge Bundy) is often grey, not black or white, and moving further along the spectrum toward greater transparency or more explicit rules, will not make easier the hard choices of what to do in the face of the normal fog that surrounds the forecast.

In thinking about the durability of these gains in monetary policy delivered under Volcker and Greenspan, there are a few aspects of our history and about the world today that deserve note.

The actions of individual chairmen have been very important in the history of the Fed. The considerable strengths of the institutional framework of the Fed—full de jure independence, the depth of technical talent, a committee designed to bring a diversity of independent perspectives to the monetary policy decision making process—have not been strong enough to deliver consistently good monetary policy decisions over time.

The constituency for price stability in the United States today seems broad and strong and reasonably bipartisan, but it's been a generation since we've had high inflation and had to face the costs of bringing it down. It seems like a long time since monetary policy has been the subject of major political or popular attention. And the extent of deference the Fed now enjoys—the extent of de facto autonomy—is a relatively recent, surprisingly recent phenomenon, and substantially due to the competence demonstrated by the past two chairmen.

Monetary policy has been the beneficiary of a long period of good fortune in the form of smaller and less adverse external shocks, a sustained and very large acceleration in productivity, the disinflationary forces produced by global economic integration, greater flexibility in the U.S. economy and improved financial sector resilience, and the effects of these factors and technological change in reducing macroeconomic volatility. We don't know much about the probabilities surrounding the future path of most of these variables.

We face a number of transitions ahead that will have important implications for U.S. monetary policy. Among these are:

  • The transition from a long period of exceptionally low short-term nominal and real interest rates in the major economies and in many emerging market economies as well. Real short-term interest rates in much of the world, as in the United States, are still some distance below the band of estimates of equilibrium.
  • The approaching demographic pressures on fiscal resources, which will hit most major economies at a time when underlying fiscal positions are still likely to be in substantial deficit.
  • The inevitable evolution in the exchange rate regimes of China, and the substantial number of countries that have been actively targeting their nominal exchange rate against the dollar, to a system where there is more variability in their bilateral and real effective exchange rates.
  • The disposition of the global imbalances reflected most conspicuously in the U.S. current account deficit.

These are all types of disequilibria. They can be sustained for a time, but not indefinitely. They could be diffused gradually and smoothly. But the transitions to a more sustainable equilibrium could also bring a risk of greater volatility in asset prices, less stability in macroeconomic outcomes, and more uncertainty. This could mean a less benign future environment for U.S. monetary policy.

The potential uncertainties posed by these challenges may be more troubling because of confidence engendered by the stability and resilience of the U.S. economy over the past decade. We are in the midst of an unusual dynamic in financial markets, in which low realized volatility in macroeconomic outcomes, low realized credit losses, greater confidence in the near term path of monetary policy, low uncertainty about future inflation and interest rates, rapid changes in the nature of financial intermediation (role of hedge funds and the change in how credit risk is bought and managed), and a large increase in the share of global savings that is willing to move across borders, have worked together to bring risk premia down across many asset prices.

There is no reliable analytical framework one can use to determine whether we are experiencing an unwelcome or unjustified decline in expected volatility, or whether investors are giving too much weight to the relative stability of the recent past and too little to the uncertainty posed by the challenges ahead. And analysts can point to good fundamental reasons and some plausible theories to support this collective judgment of market participants about low future risk and volatility. But there is much we do not understand about how these transitions ahead will unfold—in fiscal positions, the U.S. external imbalance, and in the exchange rate system and portfolio preferences. The recognition that things that are not sustainable will eventually come to an end does not give us much of a guide to whether the transition will be calm or exciting.

These dimensions of the broader context in which we will be making monetary policy in the years ahead put a very important premium on keeping U.S. monetary policy as close to the frontier of credibility as possible. And this suggests we need to continue to examine the case for a measured further evolution in the U.S. monetary policy framework—evolution in the direction of finding ways to provide more clarity about our long term inflation objective, about the underlying forces shaping the Federal Open Market Committee's forecast, the dimensions of uncertainty that surround that forecast, and the likely implications for monetary policy, to the extent we are aware of them. We have moved a long way in this direction, even in the past 18 months.

The FOMC's record over the past 25 years suggests that the state of monetary policy and the state of the Fed is strong. The challenge in thinking about what's next in any further evolution in our regime is about how to ensure that U.S. long-term inflation expectations remain stable at a level close to reasonable definitions of price stability, while retaining the flexibility to act wisely, but with speed and force and creativity in response to changing circumstances.

Thank you.

I'm nervous. And I'm not in the Hot Seat. He is.

Posted by DeLong at 01:38 PM | Comments (0) | TrackBack

First, Make the Biggest Possible Pizza

Ken Jarboe points us to Hal Varian's column about player pianos--and other things:

The New York Times > Business > Economic Scene: File-Sharing Is the Latest Battleground in the Clash of Technology and Copyright: Grokster makes software that enables Internet users to share computer files on peer-to-peer networks. The technology has been used to distribute many kinds of content, including copyrighted digital music. MGM and other entertainment companies want to hold Grokster liable for the copyright infringement that occurs when users download copyrighted music without paying for it. Grokster argues that there are many legitimate uses for its technology and that it is not responsible for those who use it to violate copyrights. This is just the latest installment of a longstanding battle between technology companies and copyright holders. It is useful to look at the history of some of these past innovations in trying to understand what policies may be appropriate today.

In the early 1900's, the disruptive technology was player pianos. Manufacturers of player piano rolls purchased a single copy of the sheet music of a song, hired someone to record the music and then sold these mechanical reproductions to consumers. The songwriters held that this was copyright infringement, while the piano roll manufacturers pointed out that they had paid the appropriate copyright fees when they purchased the sheet music. In 1908, the Supreme Court found in favor of the piano roll manufacturers, but practically invited Congress to consider new legislation on the issue. Congress responded with the Copyright Act of 1909, which created a new form of intellectual property, mechanical reproduction rights. The new law required piano roll manufacturers to pay songwriters a fee for each song. Subsequently, mechanical reproduction fees have been extended to new technologies like phonographs, audio tapes, CD's and online streaming digital music.

In the 1908 case, songwriters did not try to ban player piano technology. They clearly recognized that the additional distribution of their songs was potentially advantageous. Their goal was simply to get a fair share of the proceeds from the piano roll sales.

Another directly relevant Supreme Court decision is Sony v. Universal City Studios.... The studios lost the Sony case, but it forced them to take the home video market seriously. Their first instinct was to set a $50 to $60 price for videocassettes. But by choosing a high price, they stimulated the development of the video rental market, giving users inexpensive access to movies. On the other hand, the availability of rentals stimulated the demand for VCR's. As VCR prices declined, more people bought them and the video rental industry flourished, creating a new, rapidly growing outlet for studio productions.

In the late 1980's Disney began to experiment with lower prices for videos, hoping to bypass the rental stores and sell directly to home users. Disney's 1987 video release of 'Lady and the Tramp' was priced at $29.95 and sold over 3.2 million copies, making it the best-selling video as of that date. Its record was soon eclipsed by 'E.T.,' which sold 14 million copies at $19.95 apiece.... The critical lesson from the history of the VCR is this: If consumers have ways to share content, either via rental markets or via the Internet, you will have to set low prices to induce them to buy. But low prices may well stimulate enough volume to make up for the lost revenue....

So what should the policy be for new technologies like Grokster? I advocate the Pizza Principle: If you want everybody to get as big a slice as possible, you first have to figure out how to bake as big a pie as possible. Once you have a nice big pie, you can let people fight over how they slice it up. With respect to technology, the Sony decision got it right: encourage technologies that create more total value. Then, let companies fight to find business models that deliver that value to consumers. They can be awfully creative when they are forced to be.

Posted by DeLong at 01:36 PM | Comments (0) | TrackBack

PBS on Economic Risk

Mark Thoma from Oregon points us to:

Economist's View: PBS on Economic Risk: Risky Business: Are America's Families Riding a Financial Roller Coaster?

Income Volatility in America. Financial State of the Union. Americans and Debt. Wage Trends in America. Trade and Employment Issues. The Social Security Debate.

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

Paul Volcker Is Unhappy

As each month passes, the "hard landing" global economic scenarios become more likely:

washingtonpost.com: An Economy On Thin Ice: By Paul A. Volcker: Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.... What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar. Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States? More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth. And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency....

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a 'soft landing'... China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving.... But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice.... [T]here is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable... monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher...

Paul Volcker is saying that the time to fix the roof is before the monsoon comes.

Posted by DeLong at 01:34 PM | Comments (0) | TrackBack

Nouriel Roubini Is Becoming a Brand

The Roubini Global Monitor: www.rgemonitor.com

Posted by DeLong at 01:32 PM | Comments (0) | TrackBack

Edmund Andrews Covers the Bush Administration Clown Show

I remember, during a debate with Michael Boskin at Stanford in October 2000, that either most of the proposed Bush tax cuts really weren't there--because they would be clawed back by the Alternative Minimum Tax--or the Bush tax cuts were a much greater threat to the fiscal stability of the American government than the Bush campaign was claiming.

Edmund Andrews reports:

The New York Times > Business > Your Money > Economic View: A Tax Increase That Bush Didn't Mention: Baffling in its complexity and often bizarre in its impact, the alternative minimum tax is a giant undeclared tax increase that will ensnare tens of millions of moderate-income families in the next several years. It was created in 1969 to prevent the very rich from using tax deductions to avoid paying a fair share of taxes. But when the deadline for filing income tax returns arrives on Friday, the alternative minimum tax will require 2.9 million families to pay an average of about $6,000 more than what they would owe under traditional calculations

That is just the start. If current law remains unchanged, the alternative minimum tax is expected to wring an extra $33.9 billion from 18 million households in 2006. In 2010, it will rake in an additional $100 billion, and by 2015 an extra $200 billion. Make no mistake: no one says they want that to happen. But it is one thing to rein in or eliminate the tax itself, and an entirely different matter to give up the money that it would generate. President Bush has promised to fix the alternative minimum tax as part a fundamental overhaul of the tax code, and he has ordered a bipartisan advisory panel to come up with recommendations by the end of July.

But in giving the panel its marching orders, White House officials made it clear that they are counting on the extra money regardless of what happens to the alternative tax. Under the president's instructions, the panel's recommendations on addressing the alternative minimum tax are supposed to be 'revenue neutral,' neither raising nor lowering taxes, and to assume that his income-tax cuts will be made permanent rather than expire in 2010, as required under current law. Making those ordinary income-tax cuts permanent would reduce the amount of available revenue by about $1.8 trillion over 10 years. But White House officials told the panel that any change to reduce or eliminate the alternative minimum tax would have to be offset by higher taxes someplace else.

'My understanding is that any reform in the A.M.T. that loses money would have to be made up with offsetting revenue,' said Elizabeth Garrett, a panel member and a professor of law at the University of Southern California. Jeffrey F. Kupfer, executive director of the tax panel and a former Treasury official, confirmed that interpretation. 'Our mandate is to be revenue-neutral, and we are interpreting that with respect to the president's policy baseline, which does not include a permanent fix to the A.M.T.,' he said in an interview last week.

Tax experts have long complained that the alternative minimum tax is a 'stealth tax increase,' one that Congress never intended and that is likely to catch millions of taxpayers by surprise. But a tax increase through tax reform could be even stealthier. If the alternative tax is reduced, the offsetting revenue increases are likely to be buried in so many other changes that most people would never know what hit them. Seen or unseen, the looming tax increases are almost as large as the president's tax cuts. Leonard E. Burman, a senior fellow at the Urban Institute, estimated that the government would have to raise ordinary income tax rates substantially in every bracket to offset the money lost in each bracket by the elimination of the alternative minimum tax. People in today's 28 percent bracket, for example, would have to pay a top rate of 35 percent. Those who now pay a top rate of 33 percent would pay 41.4 percent.

'The A.M.T. is a huge tax increase built into current law,' Mr. Burman said. 'What the current law assumes is that over time we move to a tax that is much less progressive, that has atrocious marriage penalties and penalizes people with children who live in high-tax states.'

Taylor Griffin, a spokesman for the Treasury Department, said the administration's goal was to prevent a hidden tax increase by replacing the alternative tax with something that was easier to understand and more predictable. 'What we are trying to do is prevent a stealth tax that sneaks up on you,' he said. 'If we don't do something, millions of Americans will be facing unanticipated tax increases.'

I really don't know what to do with a Treasury Spokesman who is "shocked, shocked" that the tax code contains an AMT--other than to laugh.

Posted by DeLong at 01:31 PM | Comments (0) | TrackBack

Treasury Secretary John Snow Goes Off Message

Via Kevin Drum:

The Washington Monthly: Although the Bush administration is pressuring industry trade groups to support its Social Security plan, it's having a harder time with corporate America itself:

When Treasury Secretary John W. Snow visited a prominent New York investmenthouse recently to talk up Social Security, a top executive asked why the White House was putting Social Security, which does not face a crisis for years, ahead of more immediate worries such as the weak dollar and the swollen federal deficit.

Snow's only response, according to one person who was in the room, was to acknowledge the import of those issues but reiterate that Social Security was the president's priority.

Social Security's long-run deficit ranks third in urgency and third in size of America's fiscal problems--the current medium-term deficit and the rapidly-growing health programs are numbers one and two.

Everybody knows this, it seems. Everybody but George W. Bush.

Shouldn't somebody tell him?

Posted by DeLong at 01:29 PM | Comments (0) | TrackBack

The Bearer of This Letter Has Acted Under My Orders and for the Good of the State --Richelieu

The Fourteen-Year-Old is reading The Three Musketeers for the first time...

Posted by DeLong at 01:28 PM | Comments (0) | TrackBack

Nouriel Roubini Is Becoming a Brand

The Roubini Global Monitor: www.rgemonitor.com

Posted by DeLong at 01:25 PM | Comments (0) | TrackBack

Treasury Secretary John Snow Goes Off Message

Via Kevin Drum:

The Washington Monthly: Although the Bush administration is pressuring industry trade groups to support its Social Security plan, it's having a harder time with corporate America itself:

When Treasury Secretary John W. Snow visited a prominent New York investmenthouse recently to talk up Social Security, a top executive asked why the White House was putting Social Security, which does not face a crisis for years, ahead of more immediate worries such as the weak dollar and the swollen federal deficit.

Snow's only response, according to one person who was in the room, was to acknowledge the import of those issues but reiterate that Social Security was the president's priority.

Social Security's long-run deficit ranks third in urgency and third in size of America's fiscal problems--the current medium-term deficit and the rapidly-growing health programs are numbers one and two.

Everybody knows this, it seems. Everybody but George W. Bush.

Shouldn't somebody tell him?

Posted by DeLong at 01:25 PM | Comments (0) | TrackBack

Economics in One Lesson

Tyler Cowen tells us that Henry Hazlitt's Economics in One Lesson is now online.

It's an excellent book to read if one already knows a significant amount of economics. It's an excellent book because it brilliantly and coherently restates the Classical view. It is a limited book because at least half its pages hint that the works of John Maynard Keynes are an abomination without ever grappling with the Keynesian argument.

We all know that the market system is an amazing decentralized social planning and allocation mechanism if externalities are small, if returns to scale are in general diminishing, if we are happy with the distribution of wealth and the concommitant distribution of economic power it gives rise to, and if Say's Law holds--if supply does indeed create its own demand, and we don't have to worry about large-scale unemployment and deep depressions.

Hazlitt doesn't recognize any of these ifs. And that is what makes his book very dangerous indeed to a beginner in economics, because the ifs are, all of them, important qualifications and caveats. I gather that Tyler read it relatively early, and I am amazed that he has escaped with so little permanent neurological and ideological damage.

I find it astonishing that Haslitt doesn't recognize any of these ifs. I find it especially astonishing that he doesn't recognize the last of them. The 1930s were the era of the Great Depression--the time when Say's Law was most irrelevant. Hazlitt lived through them. Yet the Great Depression years seem to have had no impact on Hazlitt whatsoever.

There is one other big problem with Hazlitt--a problem that he shares with many of his successors on the Wall Street Journal op-ed page, on the Weekly Standard, and on the National Review. His quotes cannot be counted on to be in context. His summaries cannot be counted on to be honest.

For example, Hazlitt on Keynes in Economics in One Lesson:

p. 4: There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

What Keynes actually wrote in his Tract on Monetary Reform:

Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Misrepresentations like this do Hazlitt no credit at all.

Posted by DeLong at 01:25 PM | Comments (0) | TrackBack

J. Bradford DeLong

Professor of Economics, 601 Evans Hall
University of California at Berkeley
Berkeley, CA 94720-3880

phone: (510) 643-4027
fax: (510) 642-6615
<delong@econ.berkeley.edu>
<http://www.j-bradford-delong.net>

Academic C.V.:
html pdf

Pictures...

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

Doug Henwood Freely Distributes His Book "Wall Street"

It's a very good book:

Wall Street: How It Works and for Whom: A scathing dissection of the wheeling and dealing in the world's greatest financial center. Spot rates, zero coupons, blue chips, futures, options on futures, indexes, options on indexes. The vocabulary of a financial market can seem arcane, even impenetrable. Yet despite its opacity, financial news and comment is ubiquitous. Major national newspapers devote pages of newsprint to the financial sector and television news invariably features a visit to the market for the latest prices. Does this prodigious flow of information have significance for anyone except the tiny percentage of people who have significant holdings of stocks or bonds? And if it does, can non-specialists ever hope to understand what the markets are up to? To these questions Wall Street answers an emphatic yes. Its author Doug Henwood is a notorious scourge of the stock exchange in the pages of his acerbic publication Left Business Observer. The Newsletter has received wide acclamation from J.K. Galbraith, among others, and occasional less favorable comment. Norman Pearlstine, then executive editor of the Wall Street Journal, lamented, `You are scum ... it's tragic that you exist.' With compelling clarity, Henwood dissects the world's greatest financial center, laying open the intricacies of how, and for whom, the market works. The Wall Street which emerges is not a pretty sight. Hidden from public view, the markets are poorly regulated, badly managed, chronically myopic and often corrupt. And though, as Henwood reveals, their activity contributes almost nothing to the real economy where goods are made and jobs created, they nevertheless wield enormous power...

I would disagree with Doug's claim that Wall Street contributes almost nothing to the real economy. I think that it contributes a great deal to the real economy as a (greatly imperfect) system of corporate governance and as an (effective) creator of real value by turning illiquid claims to physical capital and market position into liquid financial assets. It also fleeces enormous sums every day from a great many people who don't understand risk and return, adverse selection and moral hazard, and that the first question one should always ask is, "If buying this stock at this price is such a great thing for me, why isn't it an equally great thing for you? Why are you selling it?"

But highly recommended. And now it is freely available online.

Doug Henwood (1977), Wall Street: (New York: Verso: 0860916707).

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

Adam Smith on Chair-Men, Coal-Heavers, Porters, Prostitutes, and Potatoes

Adam Smith is definitely pro-potato: He thinks potato-eaters are Buff and Gorgeous--"the strongest men and the most beautiful women perhaps in the British dominions.

Jack of http://elephantstrunk.net/ writes in comments:

Actually, [Adam] Smith was quite nice about potatoes:

In some parts of Lancashire, it is pretended, I have been told, that bread of oatmeal is a heartier food for labouring people than wheaten bread, and I have frequently heard the same doctrine held in Scotland. I am, however, somewhat doubtful of the truth of it. The common people in Scotland, who are fed with oatmeal, are in general neither so strong nor so handsome as the same rank of people in England, who are fed with wheaten bread. They neither work so well, nor look so well; and as there is not the same difference between the people of fashion in the two countries, experience would seem to shew, that the food of the common people in Scotland is not so suitable to the human constitution as that of their neighbours of the same rank in England. But it seems to be otherwise with potatoes. The chairmen, porters, and coal-heavers in London, and those unfortunate women who live by prostitution, the strongest men and the most beautiful women perhaps in the British dominions, are said to be, the greater part of them, from the lowest rank of people in Ireland, who are generally fed with this root. No food can afford a more decisive proof of its nourishing quality, or of its being peculiarly suitable to the health of the human constitution...

Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: William Strahan) Book I, Chapter 11.

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

Maureen Dowd Acquires Seisin Over Talking Points Memo

Joshua Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: April 03, 2005 - April 09, 2005 Archives: I'm willing to do homage to Maureen Dowd for these three peerless sentences: 'Before, Republicans just scared other people. Now, they're starting to scare themselves. When Dick Cheney tells you you've gone too far, you know you're way over the edge.'

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

The Bush Administration Social Security Clown Show Continues

Judd Legum is bemused by the White House's Charles Blahous:

Think Progress: Astoundingly, the White House is still trying to claim that carving personal accounts out of Social Security will not cost money. Yesterday, Chuck Blahous, Special Assistant to the President for Economic Policy, took questions on the White House website. Here is what Ira from Kirkland asked:

Mr. Blahous, why do we need an expensive new federal program when there are existing options for investing in securities?

Here was Blahous’s response, on behalf of the White House:

Ira, the President has not proposed a new federal program, nor to increase the costs of existing Social Security.... The personal accounts that the President has proposed would be fiscally responsible because they would be used to fund retirement benefit obligations that would exist under the current system.

What Blahous is saying is, in the words of the plumber from "Moonstruck": "Even though it costs money, it costs money because it saves money"; or maybe he's saying that it saves money even though it costs money, because you have to spend money to save money; or something like that. Blahous's claim is that even though you're diverting $2 trillion of Social Security revenues from paying benefits to funding private accounts over the next two decades (and so borrowing at addition $2 trillion on financial markets), in the long run of three, four, five, six, and more decades from now the clawback of the compounded value of funds diverted to private accounts reduces the traditional Social Security benefits of those choosing private accounts by enough that you come out even.

This is, however, wrong. As Glen Johnson of AP reported earlier this week:

WASHINGTON (AP) -- Future high-wage earners could see their traditional Social Security checks replaced by the proceeds of the personal investment accounts proposed by President Bush, according to a report by the nonpartisan research agency used by Congress.... Both trends would have the effect of eliminating the Social Security check for a hypothetical group: someone born next year who goes on to a career as what Social Security considers a "scaled high earner," which this year is a person with annual average earnings of $56,091....

"For these individuals, their entire Social Security income would be comprised solely of their individual account proceeds," said the report....

If the clawback of the private-account contribution reduces the traditional Social Security benefit to zero for somebody making $56,000 a year, that means that for everybody making more than $56,000 per year there isn't enough traditional Social Security benefit to offset the cost of the extra government borrowing made necessary by the shift of contributions to private accounts. For everyone making less than $56,000 a year, Blahous is correct in the sense that the long-run reduction in benefits offsets the short-run and medium-run diversion of revenues. But for everyone making more than $56,000 per year, the cost to the government of the extra borrowing in the short and medium run exceeds the value to the government of the reduction in the traditional Social Security benefit in the long run--even if the government claws back the entire traditional Social Security benefit.

I think that Charles Blahous really is not up to the job--that he genuinely thinks that the "personal accounts that the President has proposed would be fiscally responsible," because he doesn't understand what private accounts mean for those making more than $56,000 a year, and nobody has been able to enlighten him. The gain from misrepresenting the situation in a small-scale online chat is very small indeed...

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

Oil Prices and the Global Economy

Brad Setser muses about these issues:

Brad Setser's Web Log: $55 a barrel oil: I have focused heavily on Asian central bank financing, and the role reserve financing plays in sustaining the US current account deficit. But it is worth remembering the other big theme in the world economy: rising oil prices. Greenspan is right: high oil prices will eventually trigger a market reaction, whether slower demand growth, investment in new oil fields, or the development of alternative fuels. Oil may stabilize at a higher price than in the 1990s, but it probably won't stay at current prices.

Indeed, higher oil prices do seem to be having an impact on Europe and Japan right now -- since January, oil is up (in dollar terms) and the euro is down (in dollar terms) to oil is way up in euro terms. That is a change from the falling dollar/ rising oil price pattern of the last couple of years.

But right now, demand growth in the US -- and in China -- does not seem to be slowing. And to the extent new supply is coming on line, it is coming on line in places like Saudi Arabia, which hardly changes the basic structure of the world oil market. It also is unlikely to reduce the 'geopolitical risk' premium now built into the oil market.

The result of the so-far-limited adjustment in demand, and rather limited market pressure for lower prices: an absolutely enormous transfer of revenue toward the world's oil exporting states. If oil stays around $55 a barrel, my very, very rough calculations (which, among other flaws, make no effort to adjust for the fact that not all crude is alike) suggest that OPEC countries would get over $500 billion in oil revenues this year, about $300 billion more than in 2002 (when oil was at $26 a barrel and the Saudis were not producing at anything like full capacity). If oil stays close to its current price, Saudi oil revenues would have increased by something like $100 billion since 2002, a China-sized sum. Russia produces a large amount of oil as well; recent data suggests its 2005 oil/ gas revenues will be $70 billion more than its 2002 revenues.

Some of that oil windfall is being spent, some of it saved. Russia's export revenues in q1 2005, for example are, $16 billion more than they were in q1 2004. Russia's imports are also higher, by $5 billion. But since the increase in exports exceeded the increase in imports, Russia's overseas assets are also increasing faster than they were a year ago. We ought to have a better idea of the overall breakdown between 'spending' and 'saving' in oil exporting states when the IMF puts out its updated World Economic Outlook next week.

So for all the focus on Asia, it is worth remembering that the world's oil exporters also have tons of cash, and, even though their formal 'reserves' are not growing like Asia's, the clearly are investing large sums abroad -- whether transparently though institutions like Norway's oil fund or less transparently through the various accounts of the world's petrosheiks. Their willingness to finance the US matters too ...

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

Why Oh Why Can't We Have a Better Press Corps? (The Washington Post Needs to Fire Mary Jordan Immediately Department)

Eric Umansky is genuinely, genuinely fed up:

Eric Umansky: Something about Mary...annoys me: I just spent a bit of time recently in Mexico, reporting a few stories (one of which was, tragically, killed). Anyway, I've been following politics there for the past few months. So I feel comfortable when I say the Wash Post should find a better fucking Mexico writer. Here's a few choice lines from Mary Jordan's effort to detail the emerging constitutional crisis over Congress's likely move to effectively bar Mexico City's popular (and populist) mayor from running for president:

Many officials in Washington are concerned about the uncertainty and division the case is causing, with vast numbers of Mexicans being either fervently for or decidedly against the mayor.

Actually, Mary, 80 percent of Mexicans polled oppose their Congress's move against Obrador. It shouldn't be too hard to find that stat; your paper cited it Tuesday.  Moving on...

Lopez Obrador, 51, from the Democratic Revolutionary Party, is the latest in a string of rising political stars in Latin America who disagree, to varying degrees, with the U.S. formula of democracy, open markets and free trade as a way to help the poor.

Obrador's economic policies are one thing. But, Mary, in what exactly do you think he disagrees with 'the U.S. formula of democracy'--whatever that is?

Truly pathetic.

Posted by DeLong at 01:00 PM | Comments (0) | TrackBack

A Very Welcome Return

Angelica Oung--Battlepanda (the Battlepanda?)--is back: http://battlepanda.com:

Maybe, just maybe, despite all the junk we have in our collective consciousness, a synapse will fire. Cookie...no...longer...in...cookie...jar......WHO TAKE?!

The cookie analogy continues:

Alan Greenspan in '83: Let me put this cookie away for you so you can have it for dessert later instead of ruining your dinner.

Al Gore in 2000: I wouldn't keep the cookie jar right out in plain sight if I were you.

George Bush in 2005: Oh uh! Somebody ate your cookies! Or perhaps your cookies never existed in the first place.

American people: Why preznit hand in cookie jar?

GB: To make sure this terrible terrible thing never happens again, next time we're going to keep the cookies in a jar with your name on it!

American people: (...)

Posted by DeLong at 01:00 PM | Comments (0) | TrackBack

April 07, 2005

The Bush Administration Clown Show Continues...

The White House's Charles Blahous confuses Brendan Nyhan, who quotes from Daniel Froomkin:

Brendan Nyhan: Do private accounts really protect you from benefit cuts?: Dan Froomkin quotes Chuck Blahous, the White House Social Security guru, pushing a common administration talking point:

Chuck Blahous, the White House's Social Security expert, took questions on the White House Web site yesterday. He didn't explicitly address whether the trust fund was worthless. But he did suggest a new link between the government's spending of the trust fund surplus and personal accounts:

'The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts,' Blahous wrote. 'These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away.'

Think of it as millions of little lock-boxes.

But the government is going to take away most of the gains from private accounts with a clawback that will reduce your traditional benefit by the number of dollars contributed plus 3% interest above inflation annually. What's to stop them from changing that number and taking back more? It's just as easy or hard as cutting the traditional benefit. This argument makes no sense to me.

What's happening is that Blahous is making the ghost of an argument that he doesn't understand--it bears the same relationship to the real argument that... that... that... a cargo-cult "control tower" built of thatch does to a real airport's radar and control tower.

If you go to the real Republican economists, you will find the argument going something like this, where I have turned the frankness-and-blunt-speaking-o-meter up from its usual level of 3 to the Spinal Tap level of 11:

  1. Currently, the U.S. government is running a Social Security surplus--taking in more in Social Security taxes than it spends in benefits.
  2. When the baby-boom generation retires, the U.S. government is going to be spending more on Social Security than it will take in in taxes--so the government is going to have to borrow a lot of money in order to cover the deficit.
  3. The government will only be able to borrow if creditors think (i) the debt is not already too high and (ii) the government will have the will to levy taxes to pay us off when our bonds come due.
  4. Thus it's important that now--when Social Security is in surplus--that the government be not running up but running down the debt.
  5. If the government takes the current Social Security surplus and spends it--doesn't run a big current surplus and buy back debt now--then it will be unable to borrow when the baby-boom retirement payments come do because the debt level from which we will then start will be too high.
  6. The U.S. government--especially Frist, Hastert, Delay, and Bush--have a demonstrated incapability to not spend the Social Security surplus: there is no a snowball's chance in hell that a government run by them will buy back debt.
  7. So we are in big trouble.
  8. If only we could keep Frist, Hastert, Delay, and Bush from knowing that they have a Social Security surplus to spend, they would be forced to cut taxes or raise spending, and then the government would be able to borrow in the future to meet its Social Security obligations to the baby boomers.
  9. So let's set up private accounts. That will cut government revenues now--and so eliminate the Social Security surplus. Frist, Hastert, Delay, and Bush will be forced into fiscal sanity, and so we'll have a lower debt when we really do have to borrow in the future. And we won't have to borrow any more in the future as a result of our private accounts plan because we will cut normal benefits by an amount that is in present value equal to the amount that we're diverting to private accounts.

If Blahous understood the argument he's making--and seriously wanted to communicate it--he would say something like this: "Think of it this way: Bush and Delay and Hastert and Frist are out of their minds, and are on a giant financial bender. They think they can drink up every bottle in the liquor cabinet, but if they do we'll have nothing left for the party we're giving tomorrow. Private accounts is a way of moving some of the good liquor to another cabinet and putting a lock on it so Bush and Delay and Hastert and Frist can't spill and waste it tonight. That's what we are really doing."

And, Blahous says, Bush really wants the bottles moved to the other cabinet--one with a lock on it--so he can't get at them. After all, Blahous says, "The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts. These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away." You see, Bush really wants the government to run a budget surplus equal to the Social Security surplus, and we have to enact private accounts to force him to do what he really wants.

Yes. It's a clown show.

Posted by DeLong at 04:33 PM | Comments (0) | TrackBack

Exorcist to Senator Mel Martinez's Office Immediately!!

Wonkette is on the case:

Wonkette - Schiavo Memo Case Takes Sinister Twist: [M]eet Brian Darling, former chief legal counsel for Senator Mel Martinez (R - FL), currently seeking exciting new employment opportunities. But while Darling has admitted authorship of the controversial memo, questions... persist.... Darling isn't sure how the memo escaped his computer. ('He didn't think he ever printed the memo.')... Martinez... [who] gave the memo to Senator Tom Harkin (D - Iowa)... doesn't know how his hands got ahold of it.... ('Unbeknownst to me, instead of my one page on the bill, I had given him a copy of the now infamous memo that at some point along the way came into my possession.') Darling doesn't know how Martinez' hands got the memo either. ('He doesn't really know how I got it.')... [It would nice to pin the blame on truly evil forces like the Democrats or the MSM, but c'mon! Dumbass memos that magically morph from word-processing files to hard copies? Zombie brain-slaves spreading the document in a trance-like fog? Obviously, this is the work of Satan!

Wonkette - Diabolical Ghost-writer Haunts Mel Martinez: [This] is not the first document to emerge from the coven of Mel Martinez via apparent supernatural forces. In August 2004, after his campaign funded a flier that called his GOP opponent 'the new darling of the homosexual extremists,' Martinez offered a scary glimpse at his life as Satan's plaything: 'Words were used that were not mine, and were not of my choosing. Those words were spoken by others.' A couple months later, when a campaign statement of his likened federal agents to 'armed thugs,' Martinez said he wasn't responsible for that statement either —it was the diabolical handiwork of 'someone writing for the campaign.' Would someone please rescue this man before his head starts spinning like a top?

Posted by DeLong at 04:33 PM | Comments (0) | TrackBack

More on Potatoes

Hal Varian writes in in comments:

Paul Samuelson used potatoes as an example of a Giffen good in his Principles of Economics book and drew the well-known implication that they must therefore be an inferior good (i.e., the demand for potatoes falls as income increases.)

One year he got a letter from the Maine Potato Grower Association along with an econometric study that they had commissioned that showed that, in fact, potatoes were a normal good. They suggested that he find some other example to use in his textbook.

So what is it about you economists always bad mouthing potatoes?

Shouldn't that be "we" economists, kemosabe?

Posted by DeLong at 04:33 PM | Comments (0) | TrackBack

George W. Bush's $1.7 Trillion Grand Larceny Spree

Yup. That's what he said he was doing. Taking Social Security's payroll tax revenues to fund his upward redistribution of wealth, and giving the Social Security Administration "worthless IOUs" in exchange:

Max Sawicky writes:

$639 BILLION. That's how much in "worthless IOUs" our President has given to the Social Security Trust Fund (FY2002-2005), in exchange for your payroll taxes. Over the next five years, our President proposes to add another $1,061 billion to this crime spree. (President's Budget, Summary Table S-10). According to the Congressional Budget Office, the projected ten year total Trust Fund swindle (FY2006-2015) is $2,554 billion. (CBO March, p. 2, Table 1-1)

Posted by DeLong at 04:33 PM | Comments (0) | TrackBack

Ezra Klein's Transformation Continues

With any luck, in a year he'll be learnedly discoursing on alternative PAYGO proposals. But now he is merely entranced by the Bruce-Bartlett recommended Value Added Tax:

Ezra Klein: Now, why am I spending so much time on this? Readers who remember my health policy wonk-out from a few weeks back might also recall that the CAP health plan I was obsessing over wanted to pay for itself with a 3-4% VAT. And here we have Bruce Bartlett proposing a VAT to pay for health care spending. Stodgy Republican warhorse Bill Thomas (the one who judged Bush's privatization plan a "dead horse") also wants one. This, I think, is about as good as it gets for liberals. An emerging consensus on a new, dedicated revenue source to guarantee the financial solvency of health care. And if, while we're moving this through, we can't create a hybrid universal plan along the lines of CAP's proposal, we're completely useless as a political party...

I would rather have a larger (and more progressive) income tax. But the important thing is to balance the federal government's spending commitments with its revenues. For if we don't, then when the long-run arrives inflation or capital flight will. And one thing I have learned over the past decade or so is that the long run can arrive with terrifying suddenness and swiftness.

The conclusion of Barlett's op-ed is very well-written:

I am no deficit hawk. For decades I have argued that the negative effects of deficits are generally exaggerated. But unless spending is checked or revenue raised, we are facing deficits of historic proportions. It is simply unrealistic to think we can finance a 50 percent increase in spending as a share of gross domestic product - which is what is in the pipeline - just by running ever-larger deficits. Sooner or later, that bubble is going to burst and there will be overwhelming political support for deficit reduction, as there was in the 1980's and early 1990's.

When that day comes, huge tax increases are inevitable because no one has the guts to seriously cut health spending. Therefore, the only question is how will the revenue be raised: in a smart way that preserves incentives and reduces growth as little as possible, or stupidly by raising marginal tax rates and making everything bad in our tax code worse?

If the first route is chosen, the value-added tax is by far the best option available to deal with an unpalatable situation. Absent any evidence that the White House and Congress are prepared to restrain out-of-control health spending, I see no alternative.

I actually think our chances of arriving at his--preferred--conservative low-government (or not-quite-as-big-government) world are better than he thinks *if* we get congress to renew real PAYGO procedures that force it to acknowledge the link between spending and revenues in the long run. Spending increases are a lot harder to vote for if they carry tax increases with them.

Posted by DeLong at 12:23 PM | Comments (0) | TrackBack

The Medium Lobster Strikes Back

Once again, the Medium Lobster of Fafblog is the only creature that can deal with the Bush administration on the appropriate level--in this case, the report of the Silberman commission on intelligence failures:

Fafblog! the whole worlds only source for Fafblog.: The precis of the final report of the Medium Lobster Commission, reporting on the failure to accurately determine Saddam Hussein's weapons capabilities in the months preceding the Iraq War:

America's intelligence agencies made thorough and grievous errors in their assessments of Iraq's weapons capabilites. For example, in the 2002 National Intelligence Estimate, the line 'Saddam Hussein is made entirely of poison and can launch fifty fusion warheads from his perpetually-flared nostrils' should properly have read 'No nukes here, nothing to see, all done now.' The commission has concluded these were wholly the result of clerical error, most likely a typo or a severe paper jam.

Posted by DeLong at 12:23 PM | Comments (0) | TrackBack

George W. Bush's $1.7 Trillion Grand Larceny Spree

Yup. That's what he said he was doing. Taking Social Security's payroll tax revenues to fund his upward redistribution of wealth, and giving the Social Security Administration "worthless IOUs" in exchange:

Max Sawicky writes:

$639 BILLION. That's how much in "worthless IOUs" our President has given to the Social Security Trust Fund (FY2002-2005), in exchange for your payroll taxes. Over the next five years, our President proposes to add another $1,061 billion to this crime spree. (President's Budget, Summary Table S-10). According to the Congressional Budget Office, the projected ten year total Trust Fund swindle (FY2006-2015) is $2,554 billion. (CBO March, p. 2, Table 1-1)

Posted by DeLong at 12:23 PM | Comments (0) | TrackBack

April Fools Day Continues!

April Fools Day not only came early this year, it continues late. A correspondent writes:

Donald Luskin:

NRO Financial April 4, 2005: The actuaries, as noted earlier, assume about 1.9 percent annual real GDP growth over the coming 75 years.... At the same time, the actuaries assume 6.5 percent annual real total returns to stocks.... What’s the complaint, then? Where’s the inconsistency?..

Donald Luskin:

NRO Financial February 2, 2005: Krugman does make one good point... stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates...

There is one thing that puzzles me: Is Luskin genuinely too dumb to remember what he wrote two months ago? Or does he just think that National Review's readers and editors are too dumb to remember what he wrote two months ago?

Posted by DeLong at 12:23 PM | Comments (0) | TrackBack

More on Potatoes

Hal Varian writes in in comments:

Paul Samuelson used potatoes as an example of a Giffen good in his Principles of Economics book and drew the well-known implication that they must therefore be an inferior good (i.e., the demand for potatoes falls as income increases.)

One year he got a letter from the Maine Potato Grower Association along with an econometric study that they had commissioned that showed that, in fact, potatoes were a normal good. They suggested that he find some other example to use in his textbook.

So what is it about you economists always bad mouthing potatoes?

Shouldn't that be "we" economists, kemosabe?

Posted by DeLong at 12:21 PM | Comments (0) | TrackBack

April 06, 2005

A Short Dialogue on the Labor Theory of Value

Glaukon: My adviser used to say that the LTV was like LSD in the '60s--it ruined a lot of good minds. I understand the temptation to get caught up in the scholastic arcana of the Labor Theory of Value: you feel like you just have to try a little bit harder and it'll all finally become clear.

Admetos: That's a great line--LTV is like LSD! May I quote it? Who is it from?

Glaukon: Actually, it's from me. My advisor used to say it about the micro-macro problem in socialogy. But LTV is a similar phenomenon.

Admetos: Ah. And it works better with LTV. Three-letter acronyms. Alliteration.

Thrasymakhos: So you took a witty and insightful saying of your own, and attributed it to your advisor because you wanted it to carry greater weight and did not care about your reputation for lapidary brilliance?

Glaukon: That's about right.

Thrasymakhos: Boy! You have a lot to learn.

Admetos: I think that at bottom the problem with LTV is the result of a flaw in our educational system. Our past lived experience gives us no idea what to do when confronted with a morass like the Labor Theory of Value. `The problem is that ever since we started grade school we had been set problems that have solutions: a little more brainpower and a little more skull sweat applied to a puzzle would always produce answers. We have done this for seventeen years and it has always worked. Then--in graduate school--we hit the LTV, and the transformation problem, and problems where more skull sweat doesn't help because they have no solution. And what do we do?

Glaukon: Well, as people who have for seventeen years lived the success of thinking harder, and as people who are convinced that this is not a fact about how the human-made educational system is organized but a fact about how the world works, we try to think harder and immerse ourselves deeper and deeper into the scholastic arcana...

Thrasymakhos: We don't do that. They do that. We wise up and finish our dissertations on topics not related to the Transformation Problem.

Glaukon: And what happens to them?

Admetos: We still see them here in Berkeley: the Hollow Men, pouring over the Grundrisse at coffeehouses. Unable to grasp the fact that nobody has found a satisfactory solution to the Transformation Problem in 150 years means that they are not going to find one either...

Thrasymakhos: You see them in coffeehouses: you're an economist. We see them in our classes...

Posted by DeLong at 07:21 PM | Comments (0) | TrackBack

The Commander Is on Deck

Gene Sperling issues marching orders on Social Security reform:

On Clear Lines on Progressive Savings Accounts

by Gene Sperling, Senior Fellow, Center for American Progress
April 4, 2005

With the public overwhelmingly rejecting the White House's efforts to partially privatize Social Security through the diversion of payroll taxes into private accounts, there is already a growing conservative effort to use new rhetoric and designs to blur the distinctions between harmful privatization options and the types of progressive savings options outside of Social Security that are deserving of progressive support.

One way the lines are blurred is by the emphasis on partial privatization proposals that, while sharing virtually all of the same flaws as "carve-out" privatization proposals in terms of injecting unnecessary risk and undermining Social Security's progressive guaranteed benefit, are nonetheless defined as "add-on" accounts. Indeed, even President Bush on at least one occasion has sought to describe partial privatization accounts as an "add-on." Since the phrase add-on has also been used to describe proposals like President Clinton's USA Account and the Universal 401K,* which are completely outside of Social Security and targeted to middle-income and moderate-income families, it is clear that simply using this term does little to define the nature or acceptability of such a proposal.

Another likely avenue for such line-blurring is for conservatives fleeing partial privatization plans to call for "add-ons" that rely on borrowing and running up the national debt to fund regressive savings accounts – such as President Bush's Retirement Savings Accounts and Lifetime Savings Accounts – that would further skew our upside-down savings system even more toward the most well-off. While some new proposals attached to conservative Social Security reform plans include a small incentive targeted toward low-income savers, every such plan that has been floated so far has been regressive, with the largest costs directed at the most well-off.

As one who believes progressives must support responsible and fair efforts to enhance Social Security's solvency and as a strong supporter of progressive savings options outside of Social Security such as a Universal 401K, I believe it is crucial that progressives be crystal clear about what would constitute an acceptable effort to increase pension and personal savings outside of Social Security, and what constitutes harmful regressive or partial privatization proposals.

While the language and design of varying Social Security and savings account options can be complex and murky, the principles that define what progressives should stand for and what they should reject are straightforward. When it comes to new individual accounts or savings options, they should meet three clear principles:

  • No Integration with Privatization: They should be completely separate and have no integration with the financing and benefits of Social Security;
  • Progressivity: They should be progressive – at a bare minimum 80 percent of the benefits should go to the bottom 80 percent of all taxpayers, with special refundable incentives for low- and moderate-income earners.
  • No Increase in National Debt: They should be financed without increasing our already escalating national debt.

1. No Integration with Privatization: A critical issue in distinguishing between acceptable progressive savings accounts and private accounts that seek to undermine the risk-free, guaranteed benefit structure of Social Security is whether or not the new savings options are wholly separate from the financing and benefits of Social Security. For example, there are many ways to design so-called "add-on" accounts so that they are the functional equivalent of "carve-out" accounts. The president's initial plan envisioned diverting 4 percent of payroll taxes and borrowing trillions of dollars to cover this diversion while cutting guaranteed benefits. This is functionally indistinguishable from a plan that claims to dedicate all 12.4 percent to Social Security, yet borrows the same trillions of dollars to fund "add-on" individual accounts, which are combined with a structure of lower Social Security benefits.

The national discussion has made clear over the last few months that there is no sound reason to accept any move toward partial privatization, while the arguments for resisting such a move are compelling. The White House itself admits that private accounts do nothing to restore solvency and there are there are many options to universalize pension savings that do not require a dime of privatization. Yet despite the lack of a rationale for such partial privatization, we are now entering the "Rosemary Woods privatization" period, where private account advocates strain and contort themselves to keep partial privatization efforts alive in forms other than the carve-out model the president's team initially laid out. It is becoming more and more clear that the driving force behind such partial privatization plans is not saving Social Security or boosting private savings, but simply privatization for the sake of privatization.

Some journalists and pundits have argued that even if there is nothing compelling or necessary about partial privatization, progressives should compromise – presumably on the assumption that there is no particular downside to opening the privatization door. This could not be more off the mark. There are profound downsides to any step towards privatization.

The Harm of Adding Risk to the One Leg of the Retirement System that is Guaranteed and Risk-Free: Progressives should be leading the fight to increase savings, retirement security and wealth creation among middle-income and hard-pressed working families – including encouraging more pension and private savings, and responsible market investment. Yet, as has long been noted, retirement security is a three-legged stool involving 1) pension savings; 2) personal savings and home equity; and 3) Social Security. Of these, only Social Security is guaranteed and risk-free. As we have seen, a person who is part of a massive lay-off can see his or her pension savings, personal savings, and home value all decline because of the same negative economic event. Social Security stands as the one part of our system that is not susceptible to such economic risks.

Those, like me, who argue for a bold Universal 401K seek to spur additional savings and investment in the legs of our retirement system that do involve risk. That is why the advocates of Universal 401Ks, automatic 401Ks, and USA Account-type plans should be the most adamant on insisting that Social Security remain guaranteed and risk-free.

Privatization Plans Are All Designed to Devalue the Progressive Social Insurance of Social Security. Advocates of partial privatization have long been guilty of ignoring, underestimating, and undermining the social insurance value of Social Security – providing a deceptive picture of the true significance and benefit of the program. Social Security is a compact among all Americans to ensure a modicum of economic dignity no matter what life may bring. Much of the value of Social Security lies in its role as insurance against the threat to economic dignity that can come though disability, through the early death of a provider, poverty, or longevity that can drain savings. For example, currently one-third of payouts go to survivors or workers who have become disabled.

Despite this, privatization advocates continually paint a distorted picture of Social Security's value by describing it only in terms of its return on investment. Everyone would think it was absurd to tell parents who had bought auto and fire insurance that they had been terrible investors and had robbed their children of their inheritance because – with no accidents or fires – they had a negative return. Everyone understands that this is a distorted frame for assessing the true value of insurance; while you hope you never need it, insurance can make all the difference for a family if life takes a difficult turn.

Virtually every partial privatization plan is designed to make Social Security recipients undervalue this social insurance benefit of Social Security and to over-value the private account. Each plan is designed to make people think the individual account is a better deal than it is, by hiding the fact that it offers no disability, survivor, or poverty insurance or by obscuring the reality that benefits are being reduced or debt is being increased to pay for it. Take, for example, the White House's initial proposal: the account was specifically designed to make the private account appear to be a better deal than it was by hiding the fact that benefits were being decreased to pay for it. It was the equivalent of encouraging an couple who borrowed $10,000 from their credit card in order to set up a $10,000 IRA to never factor into their planning that they have to pay back their credit card debt with interest. Even though it would have been identical to its announced plan, the White House was adamant that the offset not be taken out of the account itself, as that more transparent design would have given a more accurate picture of the value of private accounts and made the account look more meager and the traditional benefit more robust.

Virtually all privatization proposals are also designed to make the payroll taxes dedicated to the traditional benefit look like a worse deal than they are, since the payroll taxes also cover the full load of the social insurance for survivor's and disability benefits. Such partial privatization plans, therefore, create an inaccurate undervaluation of Social Security's true benefit by encouraging recipients to inappropriately compare the returns from a small portion of payroll taxes with the overall value of Social Security's progressive social insurance.

The architecture of all of these plans to integrate private accounts into the Social Security system, therefore, is designed – whether by intent or effect – to create a distorted picture of Social Security so that the fortunate and the healthy are encouraged to gradually pull out; thereby starting a slippery slope toward a world with individual accounts for the fortunate and a politically weak welfare program for the elderly poor and disabled. Social Security has been a progressive crown jewel for decades, partly because it is not only a compact between generations but also a powerful compact among all working Americans – the healthy and middle class as well as the working poor and disabled. There is no reason for progressives to knowingly participate in the unraveling of that consensus.

In light of these downsides, compromise for the sake of compromise on privatization for the sake of privatization is hardly the bedrock principle that progressives should stand on.


2. Accounts Must Be Progressive: Currently we have an upside-down tax incentive system for savings. Those at the higher part of the income ladder are not only far more likely to have an employer-provided pension with matching contributions, but they also receive a 35 percent deduction on every dollar they put in a qualified retirement savings accounts. A moderate-income worker in the 10 percent bracket, on the other hand, is unlikely to have an employer-provided account with matching contributions, and if such workers do save, they get 10 percent on the dollar, less than one-third the incentives of those at the top. Due to this upside-down incentive system for savings, of the $146 billion that the federal government forgoes each year to encourage retirement savings through tax deductibility, a pathetic 3 percent goes to the bottom 40 percent of earners, while the top 10 percent of earners receive 49 percent of these tax subsidies.

This is a major reason why we have a Swiss-cheese retirement system. In 2003, 85 percent of workers in the lowest wage quintile and 73 percent of small-business employees had no employer-sponsored pension. The same was true for 75 percent of Hispanic and 60 percent of African-American workers. Overall, less than half of American workers have an employer-sponsored pension in any given year. The results for retirement security are not pretty: Among households of those 55 to 59 years old, the median amount held in IRAs and 401(k)s is only $10,400.

Despite this, President Bush has pushed forward Retirement Savings Account and Lifetime Savings Accounts that would only exacerbate the unfairness in the current system. These new plans would deliver the overwhelming bulk of additional tax incentives to the 5 percent of Americans who are already contributing the maximum to an IRA or 401K account. It as if President Bush saw only 5 percent of Americans with a full slice of cake, and decided that what our nation needed most was a plan to give that 5 percent an extra helping of icing. No progressive should buy into a "let them eat icing" plan even if it is outside of Social Security. An acceptable progressive savings account – even if not as generous as a Universal 401K – should at a bare minimum have refundable tax incentives for the most hard-pressed savers, and ensure that that at least 80 percent of the benefits are distributed to the bottom 80 percent of American workers. Anything else only keeps our upside-down system more firmly planted on its head.

While measures to make 401K enrollment more automatic are smart and important reforms, progressives should not be complacent to just call for these reforms. Without measures to have robust matching credits for low- and moderate-income workers and tax reform that would lead to a flat tax credit for savings, those arguing only to make 401K enrollment more automatic will do little to reach the huge numbers of Americans who are falling through the cracks or to turn our upside-down system for savings incentives right side up.

3. No Increase in the National Debt: In early 2001, projections from both the Congressional Budget Office and the administration's own FY2002 budget suggested we would achieve $7.3 trillion in surpluses from 2005 to 2014. Now, independent estimates from Goldman Sachs and others project $4.8 trillion in deficits over that period. That is a $13 trillion swing – what former Nixon Secretary of Commerce Peter Peterson has called "the biggest, most reckless deterioration of America's finances in history."

Some have argued that any increase in government debt to fund these proposals would be matched by increases in private savings and therefore be a wash for overall national savings. While many dispute this, even if it was true, setting this as our new gold standard for Social Security or retirement savings reform would represent a radical lowering of the bar for dealing with the baby boom retirement challenge. Only a handful of years ago, it was uncontroversial that the main economic motivation for early Social Security solution was for this generation to increase national savings to ease the burden for our children and grandchildren.

If we are truly committed to both fiscal discipline and increasing private savings, there are many options to do this. For example, if we were willing to simply allow the estate tax structure to remain as it is scheduled until 2009 – which includes allowing the exemption per couple to rise from $3 million to $7 million, while avoiding outright repeal of all estate taxes on the wealthiest estates. With the savings from this modest measure we could easily save enough to provide significant matching incentives to over 60 million American workers. While this would mean higher estate taxes for the wealthiest 10,000 estates a year, it would be only a shift in tax policy, not a tax increase. A plan that called for higher estate taxes on only 10,000 estates while giving 50-100 million American workers a refundable tax cut to encourage savings would mean that for every 1 wealthy estate that would see higher taxes than under complete repeal, at least 5,000 Americans would get a tax cut that could help them to someday build an estate of their own.

During a period when there should have been an increasingly urgent focus on the need to increase savings, the Bush administration's fiscal policy has taken us three giant steps backwards on national savings. In this light, it is absolutely imperative that any new proposals for savings be accomplished without a further escalation in our national debt.



For more information on the Universal 401K proposal, see: Gene Sperling, "A Progressive Framework for Social Security Reform," Center for American Progress, January 15, 2005.

Posted by DeLong at 07:21 PM | Comments (0) | TrackBack

The DeLong Smackdown!

The champion is the extremely valuable smackdown by the extremely knowledgeable Ben Weiss of my claim, at "Adam Kotsko Is Alienated" http://delong.typepad.com/sdj/2005/04/adam_kotsko_is_.html that someone in Niccolo Machiavelli's social position would not have had a personal library half a century earlier:

Ben Weiss: A wonderful post, and a wonderful Machiavelli quotation, but I'd like to take a bit of issue with the comment about libraries in the fifteenth and sixteenth centuries --- and, yes, I know that's really not the point of the post.

The general point that libraries were fewer and smaller before the advent of printing than after is basically true. So is the fact that manuscripts were harder to come by and more expensive than printed books, but Brad's comment that "the idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier," is far too stark. In the early Middle Ages libraries really were the province of "kings, sovereign princes, and abbots", but there was a steady increase in both literacy and the number of books in circulation during the later Middle Ages. This was especially true in cities: notably in Northern Italy, but also in France and what would become Germany. By the late fourteenth century, a bureaucrat with literary tastes like Machiavelli would almost certainly have had personal copies of a large number of his favorite books, and, if he were wealthy enough, possibly even a little study (a "studiolo") in which to read them.

Over the course of the thirteenth and fourteenth centuries the book trade underwent a dramatic shift as the primary center of manuscript copying moved from monastic houses to commercial scriptoria, often in university towns. (Richard and Mary Rouse have written a very important, if slightly exhausting, two-volume history of the commercial book trade in Paris: Manuscripts and their makers: commercial book producers in medieval Paris, 1200-1500 (Turnhout, 2000).) This was both fostered by and, in turn, fostered an increase in demand for personal copies of university texts. In Paris, as in places like Vienna, Padova, and Krakow, there was an active market in both new and used manuscripts, and, in addition, many scholars (especially in Italy) copied texts out themselves.

But perhaps the most important piece of evidence of the increasing demand for books before Gutenberg is the invention of printing itself. Gutenberg was not just experimenting for the sake of experiment. He was responding to, if not an explicit demand, to a perceived opportunity. It's important to remember that the printing press was not devote to making a new type of object --- early printed books are exactly the same in form and layout to manuscripts --- but to make more of a commodity that already existed.

With thanks, and all best wishes,

Ben Weiss

The smackdown started with my declaration at "Safeway Goes Upscale" http://delong.typepad.com/sdj/2005/04/safeway_goes_up.html that "potatoes are as close to tasteless starch as can be attained in this world or the next..." The counterattack of the Potato Mafia was swift and brutal:

Brad, Brad, Brad. "Somebody was carrying on about something called Chateau Lafite, but as far as I'm concerned wine is just a way to disinfect water at the cost of a slightly sour flavour." Have a potato tasting evening, blind; mashed with a hint of butter - desiree, red lasoda, bintje, kipfler, purple congo, sebago, spunta -- aah! Spunta! - Tasmanian pink-eye, Toonagi delight... Would you confine yourself to one kind of bread - and white sliced at that - all your life?.... I hope you go to hell for this... (in which case your claim might come true).... I get my spuds in 10# bags from the 99¢ store, you elitist capitalist swine.... And Brad, when the itinerant potato vendor drops by my restaurant with dozens and dozens of varieties for sale, I'll think of you. I may even run a Brad DeLong Potato Sampler Dinner just for the hell of it.... Ask a Peruvian if they know any potato recipes (heh, heh) and they'll tell you aaaaaall about it - thousands of varieties, favorite dishes, etc.... Please God tell me this is some sort of April Fool's Joke.... To paraphrase Brad's post: "Having never tasted a fingerling potato, it is my considered opinion that they are tasteless." Hmmm.... Brad now wishes that he had said something less controversial. Like about who really deserves to live in Palestine.... Brad is indeed infirm. He has lived in California too long. As much a paradise as it is for most vegetables and fruits, it is a surprising black hole of flavor for certain products, including staples like beef and potatoes.... The Maine potato eschews the corporate mold for simple Down East flavor. Nothing beats mashed potatos made from Maine spuds. And no one who has tasted them can claim that "potatoes are as close to tasteless starch as can be attained in this world or the next."... Maybe it's just because I am a native Idahoan of Irish extraction, but your words cut me to the heart. "Tasteless starch?" Sure, if you're talking about rice, or pasta.... Perhaps it will be easier to turn Matthew Yglesias into an economist than Brad into a competent food critic.... I like the Yukon Golds. They do taste very good, look and taste like they have butter already on them when they don't. They are good to grow in the garden and also are more common in supermarkets now...

Interrupted only by the brief appearance of the Rice Mafia:

Non-sticky rice lacks a range of flavors? Ah, you've never had mountain rice in a Lahu, Karen or some other tribal village in northern Thailand. Now that is some rice!

It continued with my claim at "Lire le Capital" http://delong.typepad.com/sdj/2005/04/lire_le_capital.html that Marx's "labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation."... It's simply not a useful tool for either moral philosophy or political action. The Marx Mafia struck back:

Marx didn't think surplus value was evil, he thought alienation was bad. But it's no good talking about exploitation without the labor theory of value, for Marx.... I find Brad's reading so superficial I hardly know where to start. ... DeLong has long ago proved himself to be a complete hack... some worm hoping to be some bigshot in Washington DC.... DeLong is inventing some nonsense story.... DeLong once again sounds more like Pat Robertson than someone studying political economy. There are plenty of socialists who wrote moralizing tracts about oppression and wrongs, but Marx was not one of them in terms of his more serious works.... DeLong is not making an economic argument against the LTV, he's making a moral argument against it. And he's making it as if the LTV is a moral argument, when the whole point of LTV is it's not a moral argument.... I guess DeLong never got to the chapter on the difference between absolute and relative surplus value. Which has nothing to do with the "economic" moralistic bullshit he's talking about.... Like so many other political economists, DeLong knows next to nothing about Marx - I've only read halfway through Capital v.1 and some brief summaries of Marxian political economy, yet I already know much more about this than DeLong. I could say that about Paul Krugman as well. One may ask oneself why they do not know more about this.... The purpose of this article was not to explicate/refute the labor theory of value, but to make a performance, as a noted economics blogger.... Dr. D has obviously never worked as a US manual farm laborer, or studied Middle Ages serfdom or Colonial Slavery, understood "Pella the Conqueror," or visited the sweat shop ghettoes of ASEAN where everyone "freely barters and trades for the value of their labor". It's such oversimplistic, Sesame Street finger-counting, nursery rhyme examples which lulled the American middle class into signing away their own "surplus value per worker" for crumbs of minimum wage against wrenching fees and taxes, usurous banking swindles, outrageous pyramids of corporate capital, for what? An abbreviated life with no medical care and no retirement pension.... [T]he LTV is not, was not intended as, an empirical-analytic theory of prices.... It seems that Brad's appreciation of Marx is on a par with his appreciation of potatoes.... [T]o dissect Marx from history and his philosophy and turn it into a mathematical exercise, with the benefit of retrospect and a century of neo-classical liberal conditioning, seems to do a disservice to history...

Potato Mafia... Rice Mafia... Marx Mafia... Rare-Book Curator Mafia... It's been a busy week.

Posted by DeLong at 07:20 PM | Comments (0) | TrackBack

Robert Waldmann Talks About First-Order Approximations

My ex-roommate Robert Waldmann comments on Greg Mankiw's discussion of Baker-DeLong-Krugman:

g(x) is a valid first order approximation of another function f(x) around x0 if the limit as a goes to zero of (g(x0+a)-f(x0+a))/a is zero. This does not mean that g(x) is a good approximation... "0" is a valid first order approximation for "x squared" around [x0=0]. This does not mean that 0 is a good approximation for one million squared. However, economists, who like to play with math but don't always take it seriously, use "is true to first order" to mean "is a useful approximation to the truth"....

I recall a professor presenting a quadratic loss function saying it was arbitrary. I raised my hand and said something.... The professor said "sure but there is no way of knowing how close is close enough, The loss function could look like this (drawing)" I was chastened at the time, but pleased when he said my comment was good.

Recently reading [Mankiw], I noticed a third meaning... "according to the [simplest] neoclassical model of the phenomenon."... Note that this third usage is much further from the formal mathematical usage than the second is. No one could possibly believe that the first neoclassical model of something must be a good approximation.... The professor who wouldn't let me elide the difference was named N. Gregory Mankiw.

Ah. But, Robert, attachment to methodological principles of rational thought invariably lasts only until they begin to cause serious pain to positions taken for ideological reasons...

Posted by DeLong at 07:20 PM | Comments (0) | TrackBack

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

It is a fact that the non-economics writers of National Review are plumbing the depths of the Luskin scale. Consider Jonah Goldberg, who writes:

Jonah Goldberg: Krugman also notes that engineers and other faculty in the hard sciences are also disproportionately liberal. It’s not just in the humanities. Good point.

What he — Mr. Prize-Winning Economist — neglects to mention or consider is that engineers in the private sector make good money. Ditto many scientists. Indeed, I don’t have the data to back this up handy, but it would hardly surprise me to find out that the most liberal members of the science faculty are probably the least likely to be able to find work elsewhere. I’m sure there’s a market for private-sector biodiversity experts, but something tells me it’s smaller than the market for electrical engineers...

Does Goldberg - Mr. National Review Pontificator - not remember when he writes paragraph 2 that in paragraph 1 he admitted that it's not just the ecologists but the engineers who are "disproportionately liberal"? Surely it's a minimum requirement for sentience that you have enough brain cells to maintain at least a simulacrum of consistency from one paragraph to the next.

Perhaps Goldberg could go ask some scientists and engineers why they aren't Republicans. Do a little legwork. I know that when I ask scientists and engineers why they aren't Republicans, I get back five answers:

  1. From libertarians, because the Republicans are really hostile to individual freedom: they want to control people's lives and boss people around.
  2. From biologists, because Republican politicians say they don't believe in evolution.
  3. From chemists and physicists, because Republican politicians pretend to believe that CO2 molecules created by human action have a different radiation-absorption spectrum than other CO2 molecules.
  4. From all corners, because Republican politicians are the tools of lobbyists and do not respect the evidence about anything.
  5. From all corners, because Republican politicians don't understand how important investment in education is for the future of America--they have no idea where our current wealth and health really comes from.

I think these are five very good reasons.

Posted by DeLong at 07:20 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have Smarter Big-Box Stores? (Wal-Mart "Always Low Prices" Department)

Think Progress reports that Wal-Mart is on the attack:

Think Progress: Wal-Mart CEO Lee Scott says he is sick and tired of being a “punching bag” for reactionaries who don’t understand the free market:

The thing is, innovation and competition tend to change the status quo. We were a small store once, too. We were able to innovate and use the economies of scale and volume buying to deliver the value our customers needed and wanted. If it weren’t Wal-Mart, it would have been someone else. I can assure you that people who live paycheck to paycheck are thrilled when we come to town.

And the first thing it does on the attack is to try to shut down one of its defenders--economics graduate student Kevin Brancato's "Always Low Prices" weblog:

Kevin Brancato: After a year of my blogging about Wal-Mart on ALP, Wal-Mart has had enough. WM has sent its attorneys after me -- to stop me from using their slogan "Always Low Prices", and to scoot me off the alwayslowprices.net domain.

Let me be clear at the outset; there is no scandal here. I am not outraged. This is about business and control of property -- not persecution. Unlike GM, WM did NOT send a goon squad. And though I find many of Wal-Mart's claims spurious, I am not a lawyer, and I will have to consult with my own lawyers before proceeding formally. And though they will tell me to not discuss the matter any further, I think transparency is more important than most lawyers do.

I promise to fight to keep the alwayslowprices.net domain and Always Low Prices name. And I want the blogosphere's help and advice on how to proceed....

What is the claim?

The claim is that I am in voliation of the Lanham Act -- §1125(a), §1125(d), and §1114. Basically that I pretend to be allied to Wal-Mart, and that I use Google Ads to profit off of Wal-Mart's trademark.

I am sympathetic to Wal-Mart's desire to control its private property, but my use of this domain has in no way taken business away from them. Indeed, as one of Wal-Mart's most ardent defenders, taking this domain away from me is likely to hurt Wal-Mart in the short and long run. Who else regularly faces off against Wal-Mart's opponents, union sympathizers, and the like on the internet?...

Posted by DeLong at 07:20 PM | Comments (0) | TrackBack

DeLong's Ignorance Corrected!

Ben Weiss, Curator of Rare Books at the Burndy Library of MIT's Dibner Institute for the History of Science and Technology, writes in:

First off, I love your blog, and read it avidly; many thanks for the wide learning and elegant argument. I don't know if you go through your comments section, so I thought I would also email this to you, as there is a bit of economic history buried in the response.

Response to Adam Kotsko Is Alienated

A wonderful post, and a wonderful Machiavelli quotation, but I'd like to take a bit of issue with the comment about libraries in the fifteenth and sixteenth centuries --- and, yes, I know that's really the point of the post.

The general point that libraries were fewer and smaller before the advent of printing than after is basically true. So is the fact that manuscripts were harder to come by and more expensive than printed books, but Brad's comment that "the idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier," is far too stark. In the early Middle Ages libraries really were the province of "kings, sovereign princes, and abbots", but there was a steady increase in both literacy and the number of books in circulation during the later Middle Ages. This was especially true in cities: notably in Northern Italy, but also in France and what would become Germany. By the late fourteenth century, a bureaucrat with literary tastes like Machiavelli would almost certainly have had personal copies of a large number of his favorite books, and, if he were wealthy enough, possibly even a little study (a "studiolo") in which to read them.

Over the course of the thirteenth and fourteenth centuries the book trade underwent a dramatic shift as the primary center of manuscript copying moved from monastic houses to commercial scriptoria, often in university towns. (Richard and Mary Rouse have written a very important, if slightly exhausting, two-volume history of the commercial book trade in Paris: Manuscripts and their makers: commercial book producers in medieval Paris, 1200-1500 (Turnhout, 2000).) This was both fostered by and, in turn, fostered an increase in demand for personal copies of university texts. In Paris, as in places like Vienna, Padova, and Krakow, there was an active market in both new and used manuscripts, and, in addition, many scholars (especially in Italy) copied texts out themselves.

But perhaps the most important piece of evidence of the increasing demand for books before Gutenberg is the invention of printing itself. Gutenberg was not just experimenting for the sake of experiment. He was responding to, if not an explicit demand, to a perceived opportunity. It's important to remember that the printing press was not devote to making a new type of object --- early printed books are exactly the same in form and layout to manuscripts --- but to make more of a commodity that already existed.

With thanks, and all best wishes,

Ben Weiss

The wonderful and awesome thing is not just that there is someone somewhere on the earth who can answer pretty much any question I might ask, but that so many of them read my weblog. I am truly fortunate.

Posted by DeLong at 07:20 PM | Comments (0) | TrackBack

April 05, 2005

Keynesian Economics: Mail Call...

Reading Keynes:

Dear Professor,

I'm a student at Florida State University, and I've recently taken up a second major in economics after reading a few books by Keynes. You're an often-quoted person in the "blog-o-sphere," and I note your review of Keynes's Tract on Monetary Reform on the Berkeley website.

I've been having trouble getting straight answers from people on campus - generally, an Austrian-aligned bunch - about whether or not Keynes was correct about deficit spending during depressions. By that, I mean whether deficits will provide at least a temporary boost in output and employment. I've heard that the effects can vary based upon whether the spending is long-term or short-term. (I may be thinking of the wrong economist, but I believe Edward Prescott demonstrated this difference.) I was wondering: What is your opinion on this?

Thank you very much,

XXXX


Well, it depends. For example, in Argentina in 2001, Stanley Fischer argued that increasing Argentina's budget deficit would increase expectations of inflation and capital flight, would cause a collapse in private investment, and so you would lose more than you gained--that a more "stimulative" fiscal policy would actually cause not an addition to but a collapse in demand and employment.

At the same time, Joe Stiglitz argued that reducing Argentina's budget deficit would do little to increase investment in the short run, would throw people out of work thus reducing their incomes, that reduced incomes would cause reduced spending and higher unemployment, that higher unemployment would deepen the political crisis, and that a deeper political crisis would accelerate capital flight, reduce investment, and lead to a collapse in demand and employment.

The terrible thing is that, as best I can tell, I think that they were both right: that increased deficit spending in the 2001 Argentine depression would have made things worse, and that reduced deficit spending in the 2001 Argentine depression would have made things worse.

When can deficit spending in a recession help?

  1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
  2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.

You thus see that my view is closely related to (but not identical to) the short-run long-run distinction you draw. The longer-run are deficits, the more likely they are to cause a crisis of private-sector investor confidence. The shorter-run are deficits, the more likely they are to be part of a stable, sustainable structure of economic policy.

Posted by DeLong at 01:04 PM | Comments (0) | TrackBack

Roofs or Ceilings?

Kevin Brancato of Truck and Barter has scanned in Friedman and Stigler's classic attack on rent control:

Truck and Barter: Roofs or Ceilings?: Sorting through some papers I acquired a while back, I found an original copy of Roofs or Ceilings? The Current Housing Problem by Milton Friedman and George Stigler, as originally published in 1946 by the Foundation for Economic Education. This classic essay argues against the use of rent control:

Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building. Formal rationing by public authority would probably make matters still worse.

Although the essay is in the public domain, I couldn't find it on the net. So I've scanned it in, and put it on my university server.

Enjoy!

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

Kash of Angry Bear Is Upset

Employment is almost exactly the same as it was four years ago, even though there are an extra twelve million Americans sixteen and over:

Angry Bear: The most disappointing part about the US economy's poor job creation right now is that we may well be pretty much at the peak of economic growth for this business cycle; most economists forecast growth in the US to slow gradually from 2004's pace over the next two years... and those economists who think hard about the US's necessary current account adjustment (are you surprised that I was able work that subject into this post?) suspect that the economy may slow more than just gradually sometime over the next year or two. If this is the best job creation that the US economy can do when growth is relatively strong, what will the labor market look like as the US economy slows?

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

Lire le Capital: Mail Call

From: "XXXX" XXXX@berkeley.edu
To: delong@econ.Berkeley.EDU
Subject: Communism
Date: Mon, 4 Apr 2005 14:22:30 -0700
Thread-Index: AcU5XGg0e/rUmG6pRfqAi7kFYayhrA==

I was wondering if I could borrow some of your insights on Economics.... I have taken Transitional Economics and have a healthy background (for an undergrad) of the “Economics of Shortage” and decision making under socialist constraints.

However, reading Das Kapital and other things, I am seeing a different interpretation of how an item is valued, and the value of labor verses what I have been taught in traditional classes and I need more understanding. What is the “value” of a product, or of labor? Marx argues that exploitation in capitalism is structural, because the basis of making a “good deal” is paying someone four dollars for something worth five. To be a capitalist means you have to exploit the true value of their labor for what you’re willing to pay them for it.

I was hoping to get your insights into how products and labor are valued, and what you think of exploitation in capitalism. Any help you can provide would be greatly appreciated, even if it is a referral to other books or anything. Thank you in advance.

XXXX


Let's run through Marx's labor-theory-of-value argument in a simple finger-exercise model:

Start with 100 identical farm families on 100 identical farms, each of which produces 3000 pounds of wheat (and other crops, but let's assimilate them all into wheat) each year.

Now suppose that ten of these families starve themselves for a decade--living on little more than half-rations--to raise the cash to buy farm machinery, irrigation systems, fruit trees, et cetera from the cities. As a result of their sacrifice, saving, and investment, thereafter their farms require four times as much labor each year to operate, but also produce crops worth eight times as much because of the capital investment. They then hire thirty additional families' worth of workers, leaving the remaining ninety original farmsteads to be worked by sixty families.

If diminishing returns do not set in and if the sixty families that remain in the family-farm sector expand their crops to take over the now-idle land, each of them can now produce 4500 wheat-pound equivalents of product each year: their standard of living has gone up by 50%. The owners of the capital-intensive farms have to pay each of the 30 families they hire 4500 wheat-pound equivalents to get them to work in the capital-intensive farm sector. Each of the proprietor families is then left with 24000 - 13500 = 10500 wheat-pound equivalents in income--4500 wheat-pound equivalents of which is the "wages" of the proprietor family, and 6000 wheat-pound equivalents is profit.

Now in Marx's schema, the first situation--where average labor productivity is 3000 pounds of wheat per family, and each family receives 3000 pounds of wheat in income--is one of no exploitation: labor is paid its average product:


Average Labor Product: 3000
Real Wage: 3000
_____ _____
Surplus Value per Worker: 0
Total Exploitation: 0

And in Marx's schema, the second situation--where average labor productivity is 5100 wheat-pound equivalents, and each non-proprietor family earns or is paid 4500 wheat-pound equivalents--is a situation of exploitation in which the proprietor class extracts surplus value from the workers by using their market position to pay those that they hire less than the true value of their labor.


Average Labor Product: 5100
Real Wage: 4500
_____ _____
Surplus Value per Worker: 600
Total Exploitation: 60000

Now it should be clear that this labor-theory-of-value-based analysis makes no sense at all. The proprietor families starve themselves for a decade, and yet Marx views them as exploiters? The heavy investments of the proprietor class and their resulting demand for labor raises the real wage by 50%, and yet the working class is oppressed? Something is very wrong here.

Now at this point the standard response is that the example is rigged: that in the real world those who own property and hire labor and live richly gained their wealth not through sacrifice but through a combination of luck and theft and having chosen the right parents. Thus it is unfair to set forth an example in which the proprietors' moral claim to their higher income is so clear and strong.

And the rebuttal is that, yes, this example is rigged: that's the point. The aim is to construct useful analytical categories that will help one identify and assess injustice. The aim is not to construct analytical categories--like the labor theory of value--that claim to find injustice whether there is in fact injustice or not. The fact that the labor theory of value finds injustice whether it is there or not is a sign that it is not the brightest light on the tree of good ideas.

Marx's labor-theory-of-value-schema makes no distinctions between profits on capital that have their origins in luck, theft, and choosing the right parents on the one hand; and profits on capital that have their origins in sacrifice, industriousness, or flashes of genius on the other. They are all, to Marx, "exploitation," "unjust enrichment," "extraction of surplus value." They are all, to Marx, signs of evil. But in this particular example the proprietors are, in reality, not evil. The proprietors are, in reality, public benefactors. The effect of their savings and investment is to raise not just their own incomes (after an extended period of sacrifice) but everyone else's incomes as well.

Thus the labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation." There are social and economic changes that are good that are, in Marx's schema, increases in the rate of exploitation. There are social and economic changes that are bad that are, in Marx's schema, increases in the rate of exploitation. It's simply not a useful tool for either moral philosophy or political action.

Moreover, the labor theory of value is of little help in predicting what average market prices will be. It's not a useful tool for economic analysis either. In my view, the labor theory of value is pretty much useless.

If you want to make a compelling criticism of economic and social relationships, you cannot do so by saying that there is Marxian "exploitation"--which exists wherever workers are paid less than the average product of labor. You have to, instead, inquire into the origins of the wealth and property rights on which the proprietor class's income is based. The labor theory of value is simply a red herring.

Posted by DeLong at 01:00 PM | Comments (0) | TrackBack

Keynesian Economics: Mail Call...

Reading Keynes:

Dear Professor,

I'm a student at Florida State University, and I've recently taken up a second major in economics after reading a few books by Keynes. You're an often-quoted person in the "blog-o-sphere," and I note your review of Keynes's Tract on Monetary Reform on the Berkeley website.

I've been having trouble getting straight answers from people on campus - generally, an Austrian-aligned bunch - about whether or not Keynes was correct about deficit spending during depressions. By that, I mean whether deficits will provide at least a temporary boost in output and employment. I've heard that the effects can vary based upon whether the spending is long-term or short-term. (I may be thinking of the wrong economist, but I believe Edward Prescott demonstrated this difference.) I was wondering: What is your opinion on this?

Thank you very much,

XXXX


Well, it depends. For example, in Argentina in 2001, Stanley Fischer argued that increasing Argentina's budget deficit would increase expectations of inflation and capital flight, would cause a collapse in private investment, and so you would lose more than you gained--that a more "stimulative" fiscal policy would actually cause not an addition to but a collapse in demand and employment.

At the same time, Joe Stiglitz argued that reducing Argentina's budget deficit would do little to increase investment in the short run, would throw people out of work thus reducing their incomes, that reduced incomes would cause reduced spending and higher unemployment, that higher unemployment would deepen the political crisis, and that a deeper political crisis would accelerate capital flight, reduce investment, and lead to a collapse in demand and employment.

The terrible thing is that, as best I can tell, I think that they were both right: that increased deficit spending in the 2001 Argentine depression would have made things worse, and that reduced deficit spending in the 2001 Argentine depression would have made things worse.

When can deficit spending in a recession help?

  1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
  2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.

You thus see that my view is closely related to (but not identical to) the short-run long-run distinction you draw. The longer-run are deficits, the more likely they are to cause a crisis of private-sector investor confidence. The shorter-run are deficits, the more likely they are to be part of a stable, sustainable structure of economic policy.

Posted by DeLong at 01:00 PM | Comments (0) | TrackBack

April 04, 2005

Adam Kotsko Is Alienated

He writes:

The Weblog: Single Post View: Meanwhile, the problem of, for instance, 'How much do you forgive?' becomes, at best, a scholarly issue of how to bring together what is said by Derrida, Arendt, etc., in a sufficiently unique way that publishing the results will be at least minimally justifiable.

When I started reading these texts, the passion initially came... from a feeling that these people were going to teach me how to live. Kierkegaard, for instance -- I thought he knew something I didn't, or could in some way lead me to see life differently.... Now, I'm trying to figure out some way to squeeze out a paper on Zizek's use of Kierkegaard, so that I can send it off and people will publish it, so that I can write down on a piece of paper that it has been published.

I have the game of academia down, in its basic points; at this point, it's a matter of building up a sufficient resume that people will believe I am good at it. I have no doubt whatsoever that I could make a career out of it.... But -- for example -- how much do you forgive? I don't know. I really don't even know what it would look like to forgive....

And dissecting yet another text in order to produce a text of my own that will conform with the canons of professionality within certain circles of 'philosophical' and 'theological' discourse doesn't seem like any kind of answer -- it doesn't seem like it would help anything, anything at all, even a little bit. Not when I'm trying to figure out some way to walk down the street, to be with people, to do right by them, to experience some kind of peace.

I met a student after that lecture, obviously a very bright guy, who had hit the jackpot and been accepted to DePaul. We got to talking about various things, and I think that in essence, he treated me like shit. He had to have his little pissing match with the kid from Nowhere Theological Seminary, who came to the lecture with his overeager undergrad friends. I wonder how much different I would really be, even if I had gotten into a program that would make it so that I won't have to worry for a few years -- maybe part of the reason it's so grating is that this gnawing sense of insufficiency keeps getting grilled into me, such that even when I'd 'arrived,' I would still feel like I constantly need to prove myself, just like him. Because I wouldn't feel like I deserve it, because there is no deserving -- there is no available way to determine deserving. And so, prove yourself -- for nothing, to no one, to no end...

And I think, "Uh-oh." You see, when you think of what you are doing as "dissecting yet another text in order to produce a text of my own that will conform with the canons of professionality within certain circles of 'philosophical' and 'theological' discourse," you have fallen victim to the letter that killeth, while the spirit giveth life.

Let me pull the first four "texts" off my nearest bookshelf: Garry Wills, Nixon Agonistes (an incredibly dense, incredibly thoughtful book that I badly need to reread, for whenever I have read it I have thought that wonderful insights are eluding me); Laurence Meyer, A Term at the Fed (his memoirs of his days as a Federal Reserve Governor; we chose him for the job as someone who could be a bridge between the High Policymakers and the forecasters and model-builders; I think--and the book says--that he did this job very well); Liza Featherstone's excellent Selling Women Short: The Landmark Battle for Workers' Rights at Wal-Mart; and Adam Jaffe and Josh Lerner's Innovation and Its Discontents (I can't believe I still haven't read this! I really need to!).

As long as I think of these as "texts," they are dry and boring. But there is a key to making them exciting: to remember that they are not texts: they are people--people urgently trying to talk to me, to tell me something very important that they think I desperately need to know. Liza Featherstone thinks that I very much need to know about Wal-Mart's battling to keep its workers down--and their resistance--if I am going to be a good economist, a good citizen. She grabs me and lectures me at length, with excited and animated gestures. Never mind that I have never met her (I do know her husband, Doug Henwood, slightly). She is there, in front of me on the page, and it would be rude to cut her off--not to turn to the next one.

Niccolo Machiavelli, I think, put it best. Let me quote from his letter to his friend and hoped-for patron Francesco Vettori, written in the days when he was rusticating in rural exile outside Florence.

I am living on my farm.... I get up in the morning with the sun and go into a grove I am having cut down, where I remain two hours to look over the work of the past day and kill some time with the cutters.... Leaving the grove, I go to a spring, and thence to my aviary. I have a book in my pocket, either Dante or Petrarch, or one of the lesser poets, such as Tibullus, Ovid, and the like. I read of their tender passions and their loves, remember mine, enjoy myself a while in that sort of dreaming. Then I move along the road to the inn; I speak with those who pass, ask news of their villages, learn various things, and note the various tastes and different fancies of men. In the course of these things comes the hour for dinner, where with my family I eat such food as this poor farm of mine and my tiny property allow. Having eaten, I go back to the inn.... I sink into vulgarity for the whole day, playing at cricca and at trich-trach.... So, involved in these trifles, I keep my brain from growing mouldy, and satisfy the malice of this fate of mine, being glad to have her drive me along this road, to see if she will be ashamed of it.

On the coming of evening, I return to my house and enter my study; and at the door I take off the day's clothing, covered with mud and dust, and put on garments regal and courtly; and reclothed appropriately, I enter the ancient courts of ancient men, where, received by them with affection, I feed on that food which only is mine and which I was born for, where I am not ashamed to speak with them and to ask them the reason for their actions; and they in their kindness answer me; and for four hours of time I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death; entirely I give myself over to them.

When evening comes Niccolo Machiavelli enters his personal library. There he talks to his friends--his books, or rather those who wrote the books in his library, or rather those components of their minds that are instantiated in the hardware-and-software combinations of linen, ink, and symbols of Gutenberg Information Technology. They are 'ancient men' who receive him 'with affection,' and for four hours he 'ask[s] them the reason for their actions; and they in their kindness answer me; and... I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death...'

Remember: Machiavelli lives only two generations after Gutenberg. He is thus one of the very first people in the world to have had a personal library. Before printing, libraries were the exclusive possession of kings, sovereign princes, abbots, masters of the Roman Empire (like Caesar and Cicero). The idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier. To him, therefore, his personal library is not something he takes for granted, but something new, something he has that his predecessors did not. And so he can see clearly--more clearly than we can--what his personal library does for him, what his books are.

In disgraced semi-exile--when many he would talk to are afraid to be seen in his company, and where he is afraid to be seen in the company of almost all the rest--the ability to read and reread his personal copies of Publius Ovidius Naso, Petrarch, Dante Alighieri, Titus Livius, Plutarch, and the rest makes them his friends: people who will receive him with affection, and honestly answer his questions about politics and history. It is important to have such friends, and to pay them proper respect. Hence Machiavelli will not go to them in his clothes-of-the-day--those in which he had managed his farm, haggled over the price of firewood, gambled, and on which he had spilled beer. He will, instead, enter his library only in 'garments regal and courtly.'

Moreover, people's rough edges are filed off in their books. Adam Smith found Jean-Jacques Rousseau impossible in person, but that chunk of Rousseau's mind that is instantiated in the hardware-and-software combination of Gutenberg Information Technology is very pleasant company. Nobody outside his family (save Friedrich Engels) could ever stand Karl Marx for any length of time. But that part of Marx's mind that is instantiated in his books doesn't fly into irrational rages, doesn't accuse one of being a police spy, doesn't beg for money, doesn't demand that one accept that he is very much the smartest one in the room. Marx-in-the-book speaks passionately of his hopes and fears for the future--hope coming from the progressive destiny of humanity and the extraordinary progress of technology, and fear coming from our constant tendency to f*** up our social engineering problems--and (save when he starts raving Hegelian gibberish, or when you see that huge, huge chunks of his argument fall away because he has confused the physical capital-output ratio with the value capital-output ratio) can be good company.

And then there are those whom one really wishes one could know in person. For who would not like to be good friends with (if one were quick and witty enough to avoid becoming one of his targets) John Maynard Keynes, or David Hume, or John Stuart Mill, or Adam Smith? I know Larry Meyer--but it is an extra gift to have a piece of him on my bookshelf that I can talk to anytime, in the form of A Term at the Fed. (It would be better to be able to call him up to appear to talk at will, but A Term at the Fed is a pretty close substitute). I wish I knew Garry Wills in person, but you can't have everything, and pieces of his literary persona haunt at least four rooms in our house plus my office. I'm going to try to meet and talk to Liza Featherstone the next time I'm in New York with time to spare, but meanwhile I have her book. And Adam Jaffe is (justifiably) angry with me for an episode of writer's block which meant that I failed to revise a paper he was editing--but his book isn't angry at me.

So I think that as long as Adam Kotsko views himself as turning the crank on a machine ("squeeze out a paper on Zizek's use of Kierkegaard, so that I can send it off and people will publish it, so that I can write down on a piece of paper that it has been published") he is doomed. But if he can shift his mental frames, and remember what is really going on--that Kierkegaard is desperately trying to communicate something difficult and important that he only half-grasps, and that Zizek is mulling this over and answering back--he may yet be saved. It's when the moment comes when Adam gets so excited by watching Zizek argue with Kierkegaard that he thinks, "I have something to add to this; I have something important to say too"--then is the moment to write down what you have to say, not in order to build your c.v. but because you have something to say. In fact, the only effective way to build your c.v. is to let it happen as a byproduct of your having something to say.

I remember... it must have been 1984, some evening, when I was sitting in one of the cushy chairs in the middle of the NBER's third-floor offices. Larry Summers was coming in while Paul Krugman was going out. And they stopped each other.

"Paul," said Larry.

"Yes?" said Paul.

"In our basic model, the U.S. is running a trade deficit because demand is greater than production, and especially because demand for non-tradeables is high, and so workers are pulled out of jobs making tradeables into jobs making non-tradeables, and so domestic production of tradeables is insufficient to satisfy demand, and so we import," said Larry.

"So?" said Paul.

"Why, then, are workers in tradeable-goods industries in the Midwest experiencing this not as being pulled into higher-wage jobs in the non-tradeables sector, but as being pushed by foreign competition into lower-wage jobs in the non-tradeables sector?" said Larry.

And they were off. For a good half hour or so they argued the issues back and forth. More graduate students gathered to watch what was a fascinating pickup debate and discussion about just why there were so many losers from the trade deficits of the 1980s, when the first-cut full-employment model suggested that it should have been win-win.

You have to be in the right place at the right time to get the peak intellectual experience of watching two minds of such extraordinary caliber together wrestle with each other and with important problems. Actually, you don't. You just have to pick up the right book.

Posted by DeLong at 09:06 PM | Comments (0) | TrackBack

Polluting the Information Stream

A big problem with open-source software: programmers gotta eat.

Suw Charman reports:

The Wordpress linkfarm furore - symptomatic of a wider problem: Corante > Strange Attractor > : There's been a lot of discussion about the way that Matt Mullenweg has been trading Wordpress.org's Google PageRank for cash, hosting unrelated articles on his server in order that they rank more highly in Google.... [I]t was probably a mistake for Matt to enter into an agreement with a company in which he assists them in gaming Google for money.... We can moralise about whether Matt should or shouldn't have taken money for helping a company game Google, and we can say 'Oh, he should have asked for donations - I would have given him money', but at the end of the day, that doesn't address the root cause of the problem....

There is something very, very wrong with:

  1. Declaring that you are an "open source" project giving to the community.
  2. Making money by crapping in Google's information stream by including high-value ad-words like "mesothelioma" (a very nasty asbestos-caused cancer) in your web page, thus polluting the information flow, and so degrading the quality of the services that can be offered.

Posted by DeLong at 07:56 PM | Comments (0) | TrackBack

Guuurrrkkk!

It's been a while since I envied Alan Greenspan and his successors. But it's looking like the life of a central banker is going to be even more exciting than I had imagined:

FT.com / Markets / Commodities - Crude oil prices surge past $58: By Peter Garnham:

The price of oil has moved more than $3 a barrel higher since last Thursday when investment bank Goldman Sachs released a report saying oil prices might have entered a ‘super-spike’ period that could drive them towards $105 a barrel as demand outstrips capacity. Adding to concerns were reports that the International Energy Agency is preparing a warning this month that oil-importing countries should implement emergency oil-saving policies if supplies fall by as little as 1m-2m barrels a day. This was much lower than the 6m b/d agreed in the treaty that founded the energy watchdog back in the 1970s.

Nymex WTI for May delivery, the benchmark US crude, hit $58.28 a barrel on Monday.... Nymex WTI for September, trading at a premium to the front month, hit $60.03, the first time a futures contract has passed $60 a barrel....

Opec on Monday sought to calm fears over oil supplies. Sheikh al-Fahd al-Sabah, Kuwaiti oil minister and Opec president, said that Opec oil ministers had begun phone consultations on increasing production quotas by a further 500,000 b/d in an attempt to stem prices.... But analysts said the market was taking Opec’s willingness to increase production as confirmation of the strength of physical crude oil demand and remained unconvinced that the market will not shrug off any new production increase, much as it did the last one. ‘The lack of impact that additional Opec crude is having is indicative of a market in super-bullish mode and an environment where almost all news is being interpreted positively,’ said Kevin Norrish of Barclays Capital.

Meanwhile, Russian figures reinforced the view that there was little room for non-Opec oil producers to increase oil supply, as they were already near capacity. Data revealed the world’s second biggest producer pumped 9.3m b/d in March, unchanged from February.

Posted by DeLong at 06:51 PM | Comments (0) | TrackBack

Ben Bernanke to Chair CEA

It's not often that I write that a White House personnel decision has increased my trust and confidence in the Bush administration. But that is the case today:

FT.com / World / US - White House chooses Bernanke for CEA: The White House has nominated Ben Bernanke to serve as chairman of the Council of Economic Advisers.... ‘I am honoured by the president's intent to nominate me and subject to Senate confirmation I look forward to this new opportunity,’ Mr Bernanke said....

During his two years at the Fed, Mr Bernanke has proved himself to be an effective communicator. He has been an advocate of transparency in policymaking at the Fed. A keen supporter of inflation targeting, Mr Bernanke's influence lay behind the decision this year for the Fed to start providing two-year inflation forecasts, to help guide market expectations on the central bank's objectives.

Mr Bernanke is seen as a leading contender for the job of Fed chairman, along with Glenn Hubbard, a former CEA chair in Mr Bush's first term, and Martin Feldstein, a Republican economist who held the position during the Reagan administration....

Mr Bush has now put in place the team that will have to make the economic case for the president's chief domestic priority: Social Security reform. The White House is expecting to wage a long campaign to win the introduction of private savings accounts and, while the president has so far failed to win public support, his aides warn against writing off the reform effort so early in the second term.

IMHO, the first thing that Ben should do is to make a stand on a technical-but-vital issue where the CEA should have made its stand: get the Bush administration to reduce the clawback real interest rate on its proposed private accounts from 3% plus inflation to a floating rate equal to the U.S. Treasury's borrowing rate (or the borrowing rate minus a small margin). That would keep Bush's private accounts from being a bad deal for the non-rich who opt for them...

Posted by DeLong at 06:50 PM | Comments (0) | TrackBack

Berkeley Has a Chancellor: Robert Birgeneau Calls for the Repeal of Proposition 209

This is very nice to see. Mark Thoma has the text:

Economist's View: Berkeley's Chancellor on Prop 209: Minority Inclusion is a Public Good, Not a Private Benefit: Nine years ago the people of California passed Proposition 209 in what I believe was a sincere effort to foster nondiscrimination in the state. However, 209's supporters do not see what I see every day as the new chancellor at UC Berkeley.

Instead of ensuring nondiscrimination, Proposition 209 has created an environment that many students of color view as discriminatory. That's because minority representation has dropped appallingly, and where there should be camaraderie across cultural lines, I have seen too much alienation, mistrust and division.

Proposition 209 has had its biggest impact on the enrollment of Latinos, Native Americans and African Americans. The situation for African American students is truly at a crisis point. Freshmen enrollment at UC Berkeley, for instance, has gone from 260 black students in 1997 to just 108 students this year. That's too small a number to form a supportive student community, and many of Berkeley's black freshmen view themselves as struggling against a hostile environment.

They tell me how difficult it is to be the only African American in a class when an issue involving multiculturalism comes up and all eyes turn to you; how much pressure it puts on an 18-year-old to be regarded as the sole representative of her race; and why it is a tragedy for California when there are only dozens of African American men in a freshman class of 3600.

Proposition 209 assumed that considering race or ethnicity in the admissions process would allow undeserving students into Berkeley. But it is significant that the graduation rates of African Americans before and after the proposition's passage have stayed virtually the same. Far from weeding out students who could not succeed, the elimination of race as a consideration in admissions has actually prevented many of California's most able students from the opportunity of a Berkeley education.

In my view, it is unrealistic to think that one can judge a person's likelihood of success at Berkeley without taking into account his race and gender. I spent many years on the faculty at MIT. For decades, women were significantly underrepresented in the undergraduate student body there. So MIT aggressively recruited young women and in the admissions process explicitly took into account negative environmental effects on their SAT scores. We found that it took at most two semesters for these women to catch up to their male peers. Most important, by the time of graduation the failure or withdrawal rate of these women was significantly less than that of their male classmates.

Although the situation is not directly parallel, I believe that at Berkeley we are similarly missing out on exceptional African American, Latino and Native American students who can not only succeed here, but whose participation can improve the education the university offers all its students.

Minority inclusion is a public good, not a private benefit. Indeed, the president of the University of Mexico once said to me that the single most important skill that a 21st century student must master is 'intercultural competence' the ability, best learned via experience with and appreciation of other cultures, to navigate successfully in today's globalized society.

California's business community understands this. That is why several leaders from private industry have anonymously funded private academic preparation programs to identify and deepen the pool of eligible minority candidates for UC and UC Berkeley. We applaud this effort. Many Berkeley students are engaged in private efforts to recruit more students of color. This month we are opening a multicultural center on campus to bring students together to help overcome mistrust among races and ethnic groups at Berkeley.

We need, however, to do much more. As the premier public teaching and research university, we know we must lead the discussion on the unintended consequences of Proposition 209. I am initiating a broad-based diversity research agenda at Berkeley to study this and a myriad of related issues. Our goal is to find innovative ways to make this campus the inclusive and welcoming environment to which it aspires.

This call to action extends the efforts of previous chancellors and others at Berkeley. As the current chancellor, I feel a moral obligation to address the issue of inclusion head-on. Ultimately it is a fight for the soul of this institution. Inclusion is about leadership and excellence, principles that California and its leading public university have long represented and might again.

Posted by DeLong at 06:50 PM | Comments (0) | TrackBack

Implementing Monetary Policy

Ben Bernanke talks about how monetary policy is actually conducted:

FRB: Speech, Bernanke--Implementing Monetary Policy--March 30, 2005: at the Redefining Investment Strategy Education Symposium, Dayton, Ohio March 30, 2005

Among the most important of my duties at the Federal Reserve is serving on the Federal Open Market Committee (FOMC), the body that makes U.S. monetary policy. Nineteen men and women--the seven members of the Board of Governors and the Presidents of the twelve Reserve Banks--gather in Washington eight times each year to participate in FOMC deliberations on the course of monetary policy. If necessary, the FOMC can also convene by conference call between regularly scheduled meetings. The FOMC's decisions are guided by the dual mandate given to the Federal Reserve by the Congress, which enjoins the Committee to use its powers to pursue both price stability and maximum sustainable employment.

To achieve its mandated objectives, the FOMC must influence the course of the U.S. economy, helping it to grow rapidly enough to make full use of available resources but not so rapidly as to stoke inflation. How, specifically, does the Committee exert this influence? The person in the street might tell you that the Fed 'controls interest rates.' That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly. Since many of you plan to work in the financial markets, I thought that you might find it interesting to hear some of the details of how U.S. monetary policy is actually implemented and how policy decisions affect asset prices and yields. I will begin by discussing how the Federal Reserve influences the federal funds rate, the one market interest rate over which it has fairly direct control. I will then discuss the effects of changes in the federal funds rate on the asset prices and yields that matter the most for economic activity and inflation.

Broadly speaking, the Federal Open Market Committee's principal task is to determine the degree of financial stimulus needed to steer the economy onto a desirable path and then to set monetary policy so as to provide that amount of stimulus. 'Financial stimulus' is not a precisely measured concept, but in general, financial conditions are stimulative to the extent that the asset prices and yields prevailing in financial markets induce households and firms to spend more freely. For example, low mortgage rates promote increased spending on new homes, low auto-financing rates tend to increase the sales of new cars, and low corporate bond yields and high stock prices generally induce firms to invest in new capital goods, such as factories and machines, at a faster pace. When the economy is growing too sluggishly to fully employ its capital and labor resources, and if insufficient aggregate demand is the cause of slow growth, increased financial stimulus can help return the economy to full employment by expanding the aggregate demand for goods and services. Similarly, if the economy is growing at an unsustainably quick rate, more-restrictive financial conditions (in the form of higher mortgage rates, auto financing rates, and corporate bond rates, for example) can help to restrain spending and reduce the risk of an inflationary overshoot.

Although the FOMC's ultimate objective is to provide the appropriate degree of financial stimulus to the economy, the Committee has no direct control over the key interest rates and asset prices that jointly determine the extent of financial stimulus, as I have already noted. Instead, the FOMC's monetary policy decision is expressed in terms of the Committee's target value for an otherwise obscure short-term interest rate, the federal funds rate. For example, the FOMC's current target for the federal funds rate, as established at its meeting last week, is 2.75 percent.

What is the federal funds rate (often called the funds rate for short)? The funds rate is the interest rate prevailing in the market for borrowing and lending reserve balances, also called the federal funds market. Reserve balances are deposits held at the Federal Reserve by commercial banks and other depository institutions.

Banks hold reserve balances at the Fed for several reasons. First, balances at the Fed can be used to satisfy banks' legal requirement to hold reserves in proportion to the level of their own customers' transactions deposits (checking accounts, for example). A bank's legal reserve requirement is calculated based on the average level of deposits held by the bank's own customers over a two-week period, called the computation period, and must be satisfied by having sufficient reserves on average over a subsequent two-week period, called the maintenance period.

Second, banks can choose to hold what are called contractual clearing balances. Unlike balances held at the Fed for reserve purposes, which pay no interest, contractual clearing balances earn implicit interest in the form of earnings credits. Banks can use these credits to pay for services provided by the Federal Reserve, such as check clearing and the use of the Fedwire, the Federal Reserve's electronic large-value payment system. Together, balances held at the Fed to satisfy reserve requirements and contractual clearing balances are referred to as required balances. Total required balances in recent years have been around $20 billion, divided roughly equally between required reserves and contractual clearing balances.

Banks may also choose to hold balances at the Fed in excess of their required balances. These so-called excess balances are costly for banks because they earn no interest and do not satisfy legal reserve requirements. Nevertheless, a bank may hold them to facilitate financial transactions with other institutions.7 Whenever a bank makes or receives large payments electronically over Fedwire, either as a result of its own activities or those of its depositors, reserves are shifted out of the account of the paying bank into the reserve account of the receiving bank. Payments made by check also result in a transfer of reserves between banks. Trillions of dollars of reserves are transferred between banks every day as a result of these financial settlements, which end each day at 6:30 p.m. ET when the Fed closes its Fedwire system. Payments flows may be exceptionally large on certain days, such as major tax dates and days on which the purchases of bonds in Treasury auctions are settled.

In the face of large and often unpredictable payments flows, a financially-active bank must confront the problem of managing its reserve account both to meet its reserve requirement for the period and also to avoid ending any day with its account at the Fed overdrawn (which may carry a financial penalty). At the same time, banks try to accumulate as few excess reserves as possible, because holding non-interest-paying excess reserves instead of interest-bearing securities is costly.

A bank that finds itself short of reserve balances on a given day can borrow in the federal funds market from other institutions that happen to hold more balances at the Fed than they need on that day. The interest rate that banks pay when they borrow in the federal funds market is the aforementioned funds rate. Banks generally contract to borrow fed funds on an unsecured basis and for very short periods, typically overnight. Loans of fed funds can be made through brokers whose business is to arrange such transactions, or they can be made directly between institutions.8 Of late, the daily volume of overnight fed funds transactions handled by brokers has ranged between $60 billion and $80 billion, an amount several times greater than the total level of reserves in the banking system. The volume of direct (that is, non-brokered) transactions is not reported but is estimated to be of similar magnitude.

The funds rate is a market rate, not an administered rate set by fiat--that is, the funds rate is the rate needed to achieve equality between the demand for and the supply of reserves held at the Fed. As I have already discussed, the demand for reserve balances arises both because banks must hold required reserves and because reserve balances are useful for facilitating transactions. Because of the scale of and volatility in daily payments flows, the demand for reserve balances can vary substantially from one day to the next.

The supply of reserve balances is largely determined by the Federal Reserve--at the operational level, by the specialists at the Federal Reserve's Open Market Desk, located in the Federal Reserve Bank of New York in the New York financial district. For example, to increase the supply of reserves, the Open Market Desk purchases securities (usually government securities) on the open market, crediting the seller with an increase in reserve balances on deposit at the Fed in the amount of the purchase. Thus, a purchase of a billion dollars' worth of securities by the Open Market Desk increases the supply of funds available to lend in the fed funds market by the same amount. Similarly, sales of securities from the Fed's financial portfolio result in debits against the accounts of commercial banks with the Fed and thus serve to drain reserve balances from the system. Collectively, these transactions are called open-market operations.

Factors outside the control of the Open Market Desk can also affect the supply of reserve balances. For example, when the Federal Reserve receives an order for currency from a bank, it debits the reserve account of the bank in payment when the currency is shipped, thereby reducing reserve supply. When deciding upon open market operations to control the supply of reserves, the Open Market Desk must take account of these external factors.

In practice, the Open Market Desk uses several methods of performing open-market operations. In some cases it purchases securities outright, that is, with the intention of holding the securities in its portfolio indefinitely. Outright purchases are used to offset long-lasting changes in factors affecting the demand for and supply of reserves. For example, long-term increases in the private sector's demand for currency have largely been met by outright purchases of securities. Over the years, the Fed has accumulated a portfolio of more than $700 billion of Treasury securities, mostly as an offset to its issuance of currency. In contrast, in cases in which variations in the demand for reserves or in external factors affecting reserve supply appear likely to be temporary, the Desk typically prefers to conduct open-market operations through short-term or long-term repurchase agreements, known as repos. Under a repurchase agreement, the buyer and seller of a security agree to reverse the transaction after a certain fixed period. Thus, when the Open Market Desk purchases securities under a repo agreement, the resulting increase in reserve balances lasts only until the time at which the transaction is reversed. Over the course of a year, the value of repos on the Fed's books on any given day may range from a few billion dollars to $30 billion or more. In the period before the millennium date change (Y2K), when the demand for currency was temporarily very high, the daily value of repos peaked at nearly $150 billion.

The manager of the Open Market Desk and his team bear the responsibility of adjusting the supply of fed funds to maintain the funds rate at or near the target established by the FOMC. Meeting this objective on a daily basis is technically challenging. To hit the funds rate target, the Desk staff must forecast the daily demand for balances as well as changes in external factors affecting reserves supply. Open-market operations are then set in motion to balance the supply of and demand for reserves at the target funds rate.

Shortly after 9 a.m. each morning, the Desk staff and staff members at the Board of Governors confer over the phone to discuss their respective estimates of the day's demand for balances as well as to consider factors that may affect supply. The Desk manager and his staff also keep in close touch with fed funds brokers and other market participants so as to be able to assess general market conditions. The Desk's market contacts are useful not only for controlling the funds rate but also for obtaining broader financial-market information for the use of Fed policymakers.

At 9:20 a.m., a conference call is held between the Desk staff, Board staff, and the President of a Reserve Bank. The Desk staff summarize the projections for reserves demand and supply, report on conditions in the federal funds market and global financial market developments, and present to the President their plans for open-market operations for his or her comment. Open-market operations will be arranged shortly after this 'call,' and the results are disclosed to the public generally within a few minutes. The Desk is in the market on most business days, adding from $2 billion to $10 billion in reserves to keep the funds rate near the FOMC's target.

As an additional means for managing the fed funds, the Federal Reserve stands ready to lend reserves to depository institutions that request them. Financially sound banks are eligible to borrow from the Fed at what is called the primary credit rate, which to date has been set at 100 basis points (1 percentage point) above the target funds rate. Historically, reserve shortages occasionally caused the funds rate to 'spike' well above its target, once even hitting 100 percent (in 1991). The primary credit facility is designed to avoid such spikes by providing an elastic supply of reserves at a rate not far above the funds rate target. Since the introduction of the primary credit facility, the rate has exceeded the primary credit rate only in a few unusual circumstances, such as the power outage in the eastern United States in August 2003.

The Federal Reserve's multiple means of injecting reserves into the banking system--a belt-and-suspenders approach--was shown in its best light following the September 11 terrorist attacks. With a significant part of the financial system inoperative and with many payments not being made as scheduled, the banking system's demand for reserve balances rose sharply. Those reserve needs were met initially through large amounts of direct borrowing from the Fed. As market functioning improved, needed reserves were provided by means of open-market operations. The increase in the supply of reserves topped $80 billion by the end of the week.

I have discussed at some length how the Federal Reserve manages the federal funds rate, the most direct instrument of monetary policy. As I have already hinted, however, monetary policy is effective only to the extent that Federal Reserve actions can affect a wide range of interest rates and asset prices. What is the link between the funds rate and these key financial variables?

The interest rates most closely linked to the funds rate are those prevailing in short-term money markets. Financial market participants are able to trade short-term liquid funds in a number of markets, including, for example, the market for repurchase agreements based on Treasury securities (the repo market). The federal funds market is tied particularly closely to the so-called Eurodollar market. Technically, Eurodollar deposits are dollar-denominated deposits held at non-U.S. banks, but regulatory and technological developments have made these deposits easily tradable even by U.S. banks and by many nonbank institutions not eligible to participate in the fed funds market. Accessible to a wide range of borrowers and lenders and operating virtually around the clock, the Eurodollar market has grown rapidly and become highly liquid.

Because large banks can trade in either the federal funds market or the Eurodollar market and because fed funds and Eurodollars are easily substitutable forms in which to hold short-term liquidity, it should not be surprising that overnight Eurodollar interest rates line up closely with the funds rate, even within the day (Bartolini, Gudell, Hilton, and Schwarz, 2005). Were that not the case, then banks could profit by borrowing in the cheaper market and lending in the market in which the rate is higher. As a consequence of this potential arbitrage, the FOMC's target for the funds rate effectively determines other very short-term rates as well. This linkage establishes one important connection between the FOMC's target funds rate and interest rates more broadly.

As I have noted, however, to affect overall financial conditions, the FOMC's actions must affect not only very short-term rates but also longer-term yields and asset prices, including mortgage rates, corporate bond rates, and stock prices. Considerable empirical evidence suggests that monetary-policy actions do affect these longer-term yields and asset prices as well as very short-term rates. But what is the mechanism?

To keep things simple, we can focus on the relationship between the FOMC's actions and the yield on longer-term Treasury securities, such as five-year or ten-year Treasury notes. If monetary policy can affect Treasury yields, then clearly it can affect other yields and asset prices as well. For example, mortgage rates are closely linked to long-term Treasury yields, the spread between the two rates being explained largely by factors such as the risk of default on mortgage loans and the so-called prepayment risk (that is, the risk that homeowners will choose to pay off their mortgages early). Likewise, changes in Treasury yields affect stock prices by affecting both the profit prospects of publicly traded companies as well as the rate at which expected future profits are discounted to the present.

Basic financial theory suggests that any long-term interest rate, such as a five-year or ten-year Treasury rate, is the sum of two components: a weighted average of expected short-term interest rates and a term premium, which in turn depends on risk, liquidity, and other factors affecting the desirability of the financial instrument in question. Monetary policy probably influences the term premium on Treasury securities to some extent. 13 However, in all likelihood, the more important means by which monetary policy affects Treasury yields is through the effect of policy on the expected future path of short-term interest rates, and I will focus on that channel.

Expected short-term interest rates influence long-term rates because any investor has the choice of holding either a long-term security or a series of short-term securities, re-investing his or her funds in a new short-term security as the old short-term security matures. All else being equal, the choice between the two strategies depends on the expected return. If, on the one hand, short-term rates are expected to be higher on average than the long-term rate that spans the same period, investors will choose the strategy of rolling over short-term securities. If, on the other hand, the long-term rate exceeds the average of expected future short-term rates, the long-term security will be the more attractive. Since both short-term and long-term Treasury securities are willingly held in the marketplace, investors must be roughly indifferent between short-term and long-term securities, implying that (on average and abstracting from any term premiums) expected future short-term rates must be similar to the current long-term yield.

You may be beginning to understand at this point why making monetary policy is not a simple matter--and, in particular, why the Fed has only very indirect control over long-term yields and asset prices. The Fed controls very short-term interest rates quite effectively, but the long-term rates that really matter for the economy depend not on the current short-term rate but on the whole trajectory of future short-term rates expected by market participants. Thus, to affect long-term rates, the FOMC must somehow signal to the financial markets its plans for setting future short-term rates. How can this be done?

The most direct method is through talk. The FOMC's post-meeting statement, the minutes released three weeks after the meeting, and speeches and congressional testimony by the Chairman and other Federal Reserve officials all provide information to the markets and the public about the near-term economic outlook, the risks to that outlook, and the appropriate course for monetary policy. With the aid of this information, financial market participants make estimates of the likely future path of short-term interest rates, which in turn helps them to price longer-term bonds. FOMC talk probably has the greatest influence on expectations of short-term rates a year or so into the future, as beyond that point the FOMC has very little, if any, advantage over market participants in forecasting the economy or even its own policy actions.

Influencing policy expectations for the more distant future may be more difficult. However, the FOMC has two general ways to help financial market participants divine the long-run course of policy. First, to the extent practical, the FOMC strives to be consistent in how it responds to particular configurations of economic conditions and transparent in explaining the reasons for its response. By building a consistent track record, the FOMC increases its own predictability as well as public confidence in its policies. Second, more generally, comments by FOMC officials about the Committee's general policy framework, including the Committee's economic objectives and members' views about the channels of monetary policy transmission and the structure of the economy, help the public deduce how policy is likely to respond to future economic circumstances.

Importantly, FOMC members do not have to guess about the effects of their words and actions on the public's expectations of future policy actions. Information about those expectations is revealed in a number of ways in financial markets. For example, market prices on actively-traded futures contracts on the funds rate or on the Eurodollar rate tell us a great deal about the funds rate that market participants expect to prevail at various dates in the future.14 Options on fed funds and Eurodollar futures are also actively traded; the prices of these options provide useful information about the degree of uncertainty that market participants have about future monetary policy. By watching financial markets and listening to the views of market participants, FOMC members are able to know with considerable accuracy what the markets expect for monetary policy. This information helps Committee members deduce how their own actions and statements are likely to affect asset prices and yields.

To conclude, the FOMC controls very short-term interest rates fairly directly. However, as I have emphasized today, the Committee's control over longer-term yields and over the prices of long-lived financial assets depends crucially on its ability to influence market expectations about the likely future course of policy. In the past decade or so, the Federal Reserve has become substantially more transparent and open in its communication with the public. Growing appreciation of the fact that greater openness makes monetary policy more effective is, I believe, an important reason for this welcome trend.


References

Bartolini, Leonardo, Svenja Gudell, Spence Hilton, and Krista Schwarz (2005). 'Intra-Day Behavior of the Federal Funds Market,' Federal Reserve Bank of New York, working paper (February).

Bernanke, Ben and Kenneth Kuttner (2004). 'What Explains the Stock Market's Reaction to Monetary Policy?,' Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series 2004-16 (March).

Gürkaynak, Refet, Brian Sack, and Eric Swanson (2002). 'Market-Based Measures of Monetary Policy Expectations,' Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series 2002-40 (September).

Kuttner, Kenneth (2001). 'Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market,' Journal of Monetary Economics, vol. 47, pp. 523-44.

Piazzesi, Monika, and Eric Swanson (2004). ' Futures Prices as Risk-Adjusted Forecasts of Monetary Policy,' National Bureau of Economic Research working paper no. 10547 (June).

Posted by DeLong at 06:50 PM | Comments (0) | TrackBack

Prefunding and Private Accounts

Andrew Samwick quotes Alex Tabarrok:

Vox Baby: Well, At Least He's Engaging: "So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being 'at or near retirement.' The more we wait, the larger the burden on future generations, and the higher that 3.5 percentage point surtax would have to climb."

And Andrew then comments himself:

The $10.4 trillion is about 90 percent of current GDP. In a later post, I made a rough calculation that if we waited until 2042 (the projected date of trust fund exhaustion), the implicit debt would grow (at the 3 percent real interest rate), to about $32 trillion, which would be about 141 percent of that year's (much larger GDP). So even if taxable payroll didn't fall as a share of GDP, the surtax applied in perpetuity would have to increase by a factor of 141/90, or from 3.5 to 5.5 percentage points.

The issue that Alex is pointing out is tax smoothing: for efficiency reasons, it is better to have a surtax rate that is steady at 3.5 percent rather than one that is 0 for 38 years and then jumps to 5.5 percent. The issue is, for me, less about tax smoothing and more about the intergenerational fairness of consigning future generations to pay higher payroll tax rates. We shouldn't be doing that--in Social Security, the General Fund, or Medicare.

The argument is that if you have a large lumpy liability waiting for you in the future, it's best to start saving for it now--to smooth out your tax rate.

This argument is correct, or rather would be correct were it not for one thing: the Bush administration. Remember: to the Bush administration the Social Security Trust Fund doesn't exist--"it's just a bunch of IOUs." Raise Social Security taxes now (or twenty years ago), and find a generation hence (or now) politicians like George W. Bush or Bill Frist or Dennis Hastert cutting income taxes and stating that there is no option but to default on the debt the general government owes to the Social Security Administration..

We simply cannot smooth out the taxes to pay for this forthcoming large lumpy liability--at least, not as long as we keep electing Republican politicians.

This is, I think, the principal reason that so many Republican economists are attached to private accounts. They imagine--think--hope--that private accounts will induce fiscal responsibility on the part of Republican High Politicians. When private accounts are implemented $200 billion a year of Social Security revenue will disappear from the government's books, and the enlarged magnitude of the budget deficit will then bring Bush, Frist, and Hastert to their senses. They will propose serious cutbacks in other entitlement spending programs. They will abandon their efforts to get expiring tax cuts extended. They will undergo a sea change, and all will be well.

I'm skeptical. But it is one of the two good arguments for private accounts that I have heard.

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Polluting the Information Stream

A big problem with open-source software: programmers gotta eat.

Suw Charman reports:

The Wordpress linkfarm furore - symptomatic of a wider problem: Corante > Strange Attractor > : There's been a lot of discussion about the way that Matt Mullenweg has been trading Wordpress.org's Google PageRank for cash, hosting unrelated articles on his server in order that they rank more highly in Google.... [I]t was probably a mistake for Matt to enter into an agreement with a company in which he assists them in gaming Google for money.... We can moralise about whether Matt should or shouldn't have taken money for helping a company game Google, and we can say 'Oh, he should have asked for donations - I would have given him money', but at the end of the day, that doesn't address the root cause of the problem....

There is something very, very wrong with:

  1. Declaring that you are an "open source" project giving to the community.
  2. Making money by crapping in Google's information stream, polluting it, and so degrading the quality of the services that can be offered.

Posted by DeLong at 06:49 PM | Comments (0) | TrackBack

When the Morning Stars Sang Together

Voice 1: Whence comest thou?

Voice 2: From going to and fro in the earth, and from walking up and down in it.

Voice 1: Hast thou considered my servant Karol, that there is none like him in the earth, an honest and an upright man, one that feareth Me, and escheweth evil?

Voice 2: Doth Karol fear thou for nought?

Voice 1: But he has been tested...

Voice 2: Tested! Broken, rather. What business had You to cause him to be Pope of this church at this time?

Voice 1: So that all could see a man who was a friend to the poor in body and a friend to the poor in spirit; one who forgave his injuries and his injurers. So that all could see what a True Friend of Mine is.

Voice 2: But You cursed him. Being who he was, born where he was, with the life that he had, he could not but reaffirm the prohibitions against contraception. And even while the conclave to elect him Pope was meeting, the AIDS virus had already crossed the species barrier and was building up its numbers in its first few human patients.

Voice 1: So?

Voice 2: Simply this: his reaffirmation of Humanae Vitae made him the very, very good friend of the AIDS virus--and the deadly enemy of all those with infected sexual partners who believed that barrier contraceptives made You angry. You cursed him.

Voice 1: Have I not done this before?

Voice 2: Yes, You have. But when You pose someone a test you know they cannot pass--knowingly test someone beyond destruction--break them--You have a moral duty to tell them why.

Voice 1: I do?

Voice 2: You do.

Voice 1: Who is this that darkeneth counsel without wisdom? Gird up now thy loins like a man; for I will demand of thee, and answer thou Me. Where wast thou when I laid the foundations of the earth? Whereupon are the foundations thereof fastened? Or who laid the corner stone thereof, when the morning stars sang together, and all My sons shouted for joy?

Posted by DeLong at 06:49 PM | Comments (0) | TrackBack

Failures of "Intelligence"

Ashton Carter writes about the Bush administration's "intelligence failures"--which are not failures of the intelligence agencies to do their jobs:

A Failure of Policy, Not Spying (washingtonpost.com): [T]he fallacy in the administration's appointment of a commission to study intelligence failures is that there is almost never such a thing as a pure intelligence failure. Intelligence failure is usually linked to policy failure. It's easy to see why Bush, or any president, would not want to call attention to that link. But the commission should have....

Let's take the case of North Korea. While the commission's chapters on North Korea's nuclear program are rightly classified, the unclassified summary suggests that spies and satellites have yielded very little information about that country's nuclear weapons efforts. But what does it matter? North Korea has admitted, indeed boasted, of its growing nuclear arsenal, and the United States has done nothing to stop it. How could a few more details provided by the CIA make a difference? If you don't have a policy, intelligence is irrelevant. North Korea's runaway nuclear program is a policy failure, not an intelligence failure.

What's worse, policy failure has actually caused intelligence failure in North Korea. From 1994 to 2003 North Korea's plutonium was at a known location, Yongbyon, where it was measured, handled and surveilled by international (including American) inspectors. We could inspect it -- or bomb it -- at any time. But when North Korea threw the inspectors out and threatened to truck the plutonium away to a hidden location, the United States did nothing. In due course the North Koreans made good on their threat and took the plutonium away. Are we now supposed to believe that it is an 'intelligence failure' that we don't know where it is?

A second member of the axis of evil, Iran, demonstrates the same point. Iran, unlike North Korea, denies it has a nuclear weapons program. The Bush administration firmly contends that it does and is almost surely right, even though the intelligence is apparently not a 'slam dunk.' But since the administration does not plan either to attack Iran's nuclear sites or to try to negotiate them away (the Europeans are supposed to be trying the negotiation route), it hardly matters whether we know all the details....

Without a comprehensive policy to combat WMD, better intelligence will not improve U.S. security. Bush was right to say that keeping the worst weapons out of the hands of the worst people is a U.S. president's highest national security priority. Since Sept. 11, under his leadership, we have scored many successes against the worst people. But U.S. policy toward the worst weapons is still in a pre-Sept. 11 state. Indeed, since Sept. 11 the United States has suffered greater setbacks in counterproliferation than at any time since the 1980s, when Pakistan went nuclear. Until this changes, preventing intelligence failures will still not matter.

Posted by DeLong at 01:38 PM | Comments (0) | TrackBack

April 03, 2005

The Missing Apple

Atrios directs us to a review of a non-existent record album:

The New York Times > Arts > Music > Music | Bootleg Review: The Lost Apple: In 2002 and 2003, Fiona Apple recorded what would have been her third album, 'Extraordinary Machine.' Its producer, Jon Brion, has said that Ms. Apple's label, Sony Music's Epic Records, shelved the album because it didn't hear potential hit singles. An Epic spokeswoman said, 'Fiona has not yet delivered her next album.' Lately, what purports to be the full album, 11 songs, has been leaked onto the Internet, where - despite the efforts of Sony's legal department - a simple search will find multiple sources of downloads. The album is an oddball gem.

Its producer, Mr. Brion, is fond of instruments that huff and plink and wheeze, as he showed in his soundtrack for 'I {sheart} Huckabees.' Epic may have been discomfited that Ms. Apple's collaboration with him doesn't sound anything like what's on the radio now. As a songwriter, she's the same Fiona Apple who sold millions of copies of her first two albums; she's still sultry and sullen, obsessing in detail over why her romances went wrong and teetering between regret and revenge. Her vocals smolder like torch songs, then boil over with rage and accusations. But this time, the music doesn't always mope with her.

The album sets the 21st century aside. The beats are often waltzes and oom-pahs, not hip-hop or punk; the arrangements are full of cellos, horns, bells and vintage keyboards. Ms. Apple's piano and voice are still at the center of the music, but now orchestras and show bands sprout around her, adding layers of whimsy and artifice. Ms. Apple has always placed herself somewhere between confession and entertainment, but in songs like 'Window' or 'Better Version of Me,' the carnival bounces and mock-Hollywood glitz put a cartoonish frame around her traumas, giving them a brand-new perspective.

Had it been released, 'Extraordinary Machine' would have been a fine counterbalance to a pop moment full of monolithic, self-righteous sincerity. As it stands, mysteriously leaked and proliferating, the album is an object lesson in how an Internet that's not controlled by copyright holders can set artistic expression free.

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

Safeway Goes Upscale

Found today:

Frieda's Fingerling Potato Assortment: Fingerling potatoes are small, thin-skinned potatoes originating out of the Andes Mountains in Peru. Now grown in limited supply high up in the Rockies, Frieda's Fingerling Potatoes represent the best of all the fingerling varieties. Frieda's Fingerling Potato Assortment includes the Yellow Russian Banana, with its rich and buttery flavor; the red-streaked and smooth-skinned French Fingerling that has a delicate nutty flavor; the sweet thumb-shaped and pink-fleshed Red Thumb; and the Ruby Crescent with its deep, earthy taste.

Try them baked, roasted, grilled, steamed, fried, sauteed, boiled, or mashed. Slice them into salads, soups, or use them as a pizza topping. Frieda's Fingerling Potatoes offer such a delicious natural flavor there is no need to add anything to them... they are that good.

In my experience, potatoes are as close to tasteless starch as can be attained in this world or the next...

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

John Gruber, "Public Finance and Public Policy"

Alex Tabarrok loves this book:

Marginal Revolution: Public Finance and Public Policy, the new textbook by Jonathan Gruber, is not only the best public finance textbooks I've ever read it is one of the best textbooks I've read in any field.  Gruber and Worth Publishers have clearly put a huge amount of money and effort into this book - the content is superb and so is the presentation (graphs, organization, supplementary material - e.g. check out these cool powerpoint presentations.).

Gruber is especially good at discussing empirical research.  What is the effect, for example, of social security on private savings, on the living standards of the elderly, on the incentive to retire?  What do we learn from the international evidence?

(Quick answers: Social security crowds out about 35 cents of private savings for every social security dollar.  As a result, social security has reduced the eldery poverty rate although not quite as much as naive trends would suggest.  Social security does reduce the labor force participation rates of the elderly but less so in the United States than in most European countries where there are huge disincentives for working beyond the normal retirement age.  (Get the book or this powerpoint presentation for more details - note you need to view the PP in SlideShow mode to get the full effect.)

Gruber covers all the major programs - education, social security, unemployment insurance, Medicaid and Medicare, the tax system etc. - and in each case he carefully explains the institutional details and then he evaulates the empirical evidence focusing on the most telling pieces of evidence (rather than trying to cover everything that has ever been written as in a review paper).

Gruber is so good on the empirical research that this book would be a useful supplement to an applied econometrics class.  Just flipping through it and reading the boxed Empirical Evidence sections gives a good feel for what the cutting edge questions and techniques are in empirical research. 

Congratulations to Gruber on a tour de force!

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

Economist.com | The French Language

The Economist reports on the French government's struggle with Google:

Economist.com | The French language: IN THE dimly lit cyber-café at Sciences-Po, hot-house of the French elite, no Gauloise smoke fills the air, no dog-eared copies of Sartre lie on the tables. French students are doing what all students do: surfing the web via Google. Now President Jacques Chirac wants to stop this American cultural invasion by setting up a rival French search-engine. The idea was prompted by Google's plan to put online millions of texts from American and British university libraries. If English books are threatening to swamp cyberspace, Mr Chirac will not stand idly by. He asked his culture minister, Renaud Donnedieu de Vabres, and Jean-Noël Jeanneney, head of France's Bibliothèque Nationale, to do the same for French texts—-and create a home-grown search-engine to browse them. Why not let Google do the job? Its French version is used for 74% of internet searches in France. The answer is the vulgar criteria it uses to rank results. ‘I do not believe’, wrote Mr Donnedieu de Vabres in Le Monde, ‘that the only key to access our culture should be the automatic ranking by popularity, which has been behind Google's success.’...

Googlephobia is spreading. Mr Jeanneney has talked of the ‘risk of crushing domination by America in defining the view that future generations have of the world.’ ‘I have nothing in particular against Google,’ he told L'Express, a magazine. ‘I simply note that this commercial company is the expression of the American system, in which the law of the market is king.’ Advertising muscle and consumer demand should not triumph over good taste and cultural sophistication.... Mr Jeanneney wants a ‘committee of experts’...

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Chocolate History...

Is this true?

Chocolate History: In fact, Frederick [the Great] prohibited chocolate in his realm [of Prussia].

Presumably for mercantilist reasons...

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

*Sigh* More Bad Macroeconomic News

From Ralph Atkins of the FT:

FT.com / World - Confidence dives in Europe's economy: "Gloom about Europe's economic outlook intensified markedly on Thursday after a plunge in economic confidence across the continent and further rises in French and German unemployment.

Economic sentiment in the 12-country eurozone and the UK fell to the lowest levels since December 2003, according to the European Commission. Economists fear that eurozone economic growth will slow in months ahead, despite a bounce back at the beginning of 2005after a weak second half of 2004.

The eurozone ‘is experiencing a faltering recovery . . . after almost a half-decade of achievement,’ the Euro-frame group of leading research institutes said yesterday. In forecasts in line with those to be published by the Commission next week, Euroframe expected eurozone growth of just 1.5 per cent this year, after 1.8 per cent in 2004. However, 2006 would see 2 per cent growth.

The latest data, which reflect the impact of higher oil prices and a stronger euro, may force the European Central Bank to revise its view that last year's soft patch was ‘transitory’. However, Lucas Papademos, ECB vice-president, told an Italian newspaper that he expected ‘the economic recovery in the eurozone will pick up momentum over the course of 2005’.

The French and German governments, meanwhile, face increasing political pressures caused by high unemployment. Patrick Devedjian, French industry minister, described as ‘very bad’ figures showing the country's jobless rate at a five-year high of 10.1 per cent in February.

‘France is struggling with the cost of reforms that went in the wrong direction the 35-hour week, for instance,’ said Klaus Eklund, economist at SEB Bank in Stockholm and adviser to José Manuel Barroso, the European Commission president. ‘Germany seems to have gone through that stage, the crisis-consciousness is higher.’

German unemployment, nevertheless, rose in March by a seasonally adjusted 92,000 to almost 5m, or 12 per cent of the workforce although the Federal Labour Agency said 20,000 jobless were due to statistical changes while unusually cold weather was responsible for another 50,000.

‘The accuracy of these estimates is not necessarily high,’ said Dirk Schumacher, economist at Goldman Sachs. ‘What is true, though, is that information from business surveys is consistent with a stagnation or mild deterioration of the labour market.’

Earlier this week, Gerhard Schröder, chancellor, highlighted Berlin's nervousness by demanding a stop to the ‘endless talk’ about German companies shifting jobs overseas.

The Commission's survey showed confidence declining in industrial, services and retailing sectors. EU consumers were more worried about unemployment than at any time since last June.

The overall ‘economic sentiment’ indices for the eurozone, and the entire EU peaked last October, with the latest results showing particularly steep declines in the UK and Poland, as well as in Germany, France, and to a lesser extent Italy.

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

Asset Returns and Economic Growth

UPDATE: Greg Mankiw has sent along his comments...

There's lots I would dispute. Let me just note one point. Mankiw's last paragraph seems just wrong:

I don’t think the key issue in the debate over Social Security is whether, over the next century, the risk-free return will be 1 or 3 percent, or whether the equity premium will be 3 or 5 percent. So even if I agreed with the arguments raised in this paper and lowered my estimates of rates of return, it would not change my mind about the need to reform Social Security or the kinds of reforms that are desirable. I would guess that, in their hearts, the authors of this paper agree with me about this. To see if I am right, I would like them to answer the following question: Suppose that next week, the stock market falls by 50 percent, so dividend and earnings yields double. Would Baker, DeLong, and Krugman suddenly be in favor of President Bush’s proposal for Social Security reform? I suspect they would not. If I am right, this suggests that while the paper raises some interesting questions about the future of asset returns, as far as the debate over Social Security goes, it is largely a non sequitur.

As I see it, there are four important reasons to be against Bush's Social Security plan:

  1. The terms on which it offers private accounts to the non-rich make them not a very good deal.
  2. The plan does nothing to raise national savings in the short and medium run.
  3. Applying price indexation to the bend points produces a Social Security program that is an ever-decreasing share of GDP.
  4. The Bush administration is incompetent--corporate tax bill? farm bill? budget balance? Iraqi reconstruction? handling of our alliances?--and so there's every reason to think bad things would happen in implementation.

If reasons (2), (3), and (4) were not each of them dealbreakers, and if the stock market today were half what it is today, then yes, I would be in favor of a well-designed and well-implemented private-accounts plan (even with the 3% real clawback). With such a high prospective rate of return on equities, the benefits of grasping for some of the equity premium, of prefunding, and of getting a share of Social Security taxes out of the "federal revenues" column would, I think, significantly outweigh the costs of the risk that private-accounts plans impose on non-rich beneficiaries. But with current prospective equity and asset returns, private accounts make no sense with a 3% real clawback.


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 Greg didn't 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--and that's the decline in immigration that the SSA expects to happen between 2000 and 2030.

Posted by DeLong at 09:57 PM | Comments (0) | TrackBack

April 01, 2005

*Sigh*

The employment news is not good:

FT.com / World / US - US March job gains weakest in eight months: U.S. employers created only 110,000 new jobs in March, the smallest gain in eight months, as manufacturers and retailers shed workers, the Labor Department said on Friday. The surprisingly weak March jobs number was barely half the 220,000 that Wall Street economists had forecast and came a shock to financial markets. The dollar’s value dropped immediately and bond prices shot higher on the prospect that it meant less likelihood of large interest-rate rises ahead. The March weakness was emphasized by the fact that the Labor Department also revised down the two preceding months’ job totals...

Posted by DeLong at 07:52 AM | Comments (0) | TrackBack

Unholy Transformations

Tyler Cowen agrees with my plan to turn Matthew Yglesias from a philosophy major and a feuilletonist into an economist:

Marginal Revolution:: [Yglesias] truly ought to be an economist, albeit with more Milton Friedman driven into his blood (although here is his George Stigler impersonation).

The plan is going well: witness this:

Matthew Yglesias: There's a very oddly written story in The Hill which seems to suggest that Senate Democrats are going to offer an alternative Social Security plan after all. But when you peer into the details, that doesn't seem to be what's actually happening. Instead, it 'tackles low-income incentives for saving by setting up accounts at birth in which the government would deposit $500 for each newborn and $1,000 for families with below-average incomes.' That sounds like a version of the ASPIRE Act, which has always had some support from liberals (and deserves more, I think) but has very little to do with Social Security as such.

The article details some other ideas... hav[ing] to do with savings and investment policy but not with Social Security as such. I think that's... correct.... [I]t would be good to create a society in which all Americans get to be owners and investors. There's just no reason to accomplish this by phasing out Social Security. My favorite idea for strengthening savings policy is, sadly, this mind-numbingly dull one endorsed by the dull-but-worthy folks at Brookings. 'In a nutshell, the automatic 401(k) consists of changing the default option at each phase of the 401(k) savings cycle to make sound saving and investment decisions the norm, even when the worker never gets around to making a choice in the first place'...

This is very encouraging.

Only... You can't talk about your favored proposals for increasing national savings as "mind-numbingly dull." You have to write, "My favorite idea for strengthening savings is this fascinating and innovative idea out of the Brookings Institution." Only when he can write this--and mean it--will the transformation be complete! Remember: fascinating and innovative.

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

A Proper April Fools Day!

Yep. It's time for Donald Luskin:

Donald Luskin: Click here to read a draft (typos and all) of the 'paper' that 'economists' Dean Baker, Brad DeLong and Paul Krugman will 'present' today at the Brookings Institution (this is a leaked copy obtained at great personal hazard -- as of this posting, Brookings has taken down its link to the final paper on its web site).

But it's not "leaked": it's freely accessible. The Brookings link is active: http://apps49.brookings.edu/dybdocroot/es/commentary/journals/bpea_macro/forum/bpea2005_baker.pdf. And the link from my website is active: http://delong.typepad.com/sdj/2005/03/asset_returns_a.html

Don't be fooled by the academic veneer. This is just more propaganda aimed at blocking Social Security modernization. It's basically just a tarted up version of Paul Krugman's February 1 New York Times column (which I debunked thoroughly here)...

But Luskin didn't debunk it. He agreed with it. Our main point is that stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates. And what did Luskin write? He wrote:

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

Why say that you debunked it when you agree with it--as anyone who can click on a link can see? Why say it was hard to obtain when it was easy--as anyone who can click on a link can see? What's the upside for Luskin here?

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

The Erie Canal

Daniel Gross has a very nice review of the excellent:

Peter Bernstein (2005), Wedding of the Waters: The Erie Canal and the Making of a Great Nation (New York: Norton: 0393052338).

Gross writes:

The Erie Canal was an engineering triumph, to be sure. But Bernstein notes that it was also an economic triumph. This was one of the first great American examples of network effects—later seen with the telegraph, telephone, and ultimately the Internet. Connecting more and more people through a system makes the individuals more productive and capable and makes the network itself a powerful economic force.

The canal made possible the settlement of the upper Midwest and transformed the nation's "primary axis from north-south to east-west." Clinton's ditch turned canal towns into seaports, the Hudson Valley into an industrial zone, and the Midwest into a breadbasket. Happiest of all was New York City, which became the central span in the "bridge between the inexhaustible supplies of grain from the Midwestern United States and the inexhaustible demand for food from Europe." In the quarter century after the wedding of the waters, the nation's growth rate rose to a whopping 4.6 percent a year, compared with 2.8 percent annually for the period from 1800 to 1825.

Of course, it took the railroads, the telegraph, and a strong national currency to create a truly integrated national market in the late 19th century. But Bernstein's case is pretty convincing. Oddly, he shies away from the greatest—and seemingly most obvious—historical lesson of the Erie Canal: the necessity for direct government involvement in building the expensive commercial arteries that have been so vital for economic growth. Left entirely to its own devices, the private sector likely never would have produced the Erie Canal, the railroads, the interstate highway system, or even the Internet.

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