« April 2005 | Main | June 2005 »

May 25, 2005

Why Oh Why Are We Ruled by These Idiots? (Social Security Edition)

The Bush administration's Social Security policy development process is definitely more mendacious or far less competent than Ira Magaziner's health care policy development effort in 1993-1994. For one thing, the Bushies either don't have or dare not release numbers. Jason Furman reports:

The Impact of The President's Proposal On Social Security Solvency And The Budget, 5/10/05: [T]he White House has not released the traditional analysis by the Social Security actuaries of the effect of its plan on Social Security solvency. It is standard practice for policymakers and outside analysts who present Social Security plans to provide the actuaries’ analysis when, or shortly after, they release their plans....

I and the people I talk to are undecided with respect to whether this failure to release numbers is because (a) the numbers are so scary and unfavorable that they dare not do so, or (b) there is still no agreement among the White House barons as to what the Bush Social Security proposal will be, hence nothing to analyze.

In either case, it's not encouraging: successful policy requires successful implementation of program details, and this crowd cannot even produce summary tables.

What would the effects of the Bush plan be? Jason Furman has come up with some estimates, which in the absence of others are our best guides:

In the absence of an analysis by the Social Security actuaries, this analysis provides some of the standard actuarial and fiscal estimates of the President’s proposal... based on the actuaries’ analysis of the Pozen proposal, which has been released, analyses by the actuaries of other private-account plans that contain features similar to those of the President’s plan, analysis by the actuaries of the President’s private accounts through 2015, and the data in the 2005 Social Security trustees report....

[W]hen both components of the President’s plan are examined... the plan... move[s] forward the year [of trust fund exhaustion]... from 2041 to 2030.... The plan also would accelerate the year in which the program begins to run cash-flow deficits from 2017 to 2011....

[T]he President’s plan as a whole... [would] close only 30 percent of the [projected] 75-year [Social Security funding] gap.... Additional benefit reductions, new revenues, or large transfers from the rest of the budget would be necessary to fill the substantial remaining gap.

It is a clown show, an episode of stupidity of a jaw-dropping magnitude:

1. The administration's Social Security gurus shove Bush out there with talking points saying that we need to act now to pass the Bush plan, because starting in 2017 Social Security will start taking resources away from the rest of the government and that's a very bad thing--and then they roll out a plan in which Social Security starts taking resources away from the rest of the government in 2011.

2. The administration's Social Security gurus shove Bush out there with talking points saying that passing the Bush plan is essential because if we don't the Social Security trust fund balance will hit zero in 2041, and big benefit cuts will then be necessary--and then they roll out a plan in which the Social Security trust fund balance hits zero in 2030.

3. The administration's Social Security gurus shove Bush out there with talking points about the importance of restoring actuarial balance to Social Security--and then they roll out a plan which closes less than a third of the 75-year funding gap (and refuse to specify the plan in sufficient detail to allow anyone to do a longer-run analysis).

Posted by DeLong at 07:05 PM

Brad Setser Is Unhappy with the U.S. Treasury

There is a lot to be unhappy about it:

Brad Setser's Web Log: Rhetoric that runs ahead of reality: I noticed that the US Treasury statement that accompanied the foreign currency report adopted the rhetoric of shared sacrifice:

We are not bashing China in lieu of tackling our own problems; we in the US are committed to reducing our deficit and raising national savings.

The problem: the policies to back the rhetoric aren't there, and most of the world knows it. The much-touted partial privatization of Social Security won't raise national savings so long as it is financed by debt.... At best, it is neutral; at worse, it might lead national savings to fall.... The 'on-budget' fiscal deficit... seems to be falling for the same reason why the overall current account deficit is rising... [t]he real estate boom.... Tax revenues seem to have outperformed in part because of capital gains.... In an asset-based economy... tax revenues are quite pro-cyclical.... [T]he longer-term outlook is not pretty if the tax cuts are made permanent.

Nice words from the Treasury, but little credibility.

Posted by DeLong at 03:32 PM

On the Deficit

Robert Rubin:

Attention: Deficit Disorder - New York Times: Most pressing is the 10-year federal deficit, which most independent analysts project at $4.5 trillion to $5 trillion.... Over the longer term, Social Security has a 75-year estimated deficit of $4 trillion, while the different components of Medicare, including its new prescription drug benefit, represent a fiscal problem of roughly $20 trillion.... [O]ver time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth.... [F]ar more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar. These market effects, plus the adverse impact of continuing fiscal imbalances on business and consumer confidence, could seriously undermine our economy.

We have managed to avoid these market effects so far because private demand for capital has been relatively limited, and because the central banks of Japan, China and other countries have provided large inflows of foreign capital. A change in either of those circumstances, or simply a change of market psychology for whatever reason, could, however, turn these interest rate and currency risks into a reality....

We must have serious spending discipline and entitlement reform - though any entitlement reforms likely to be proposed would have little immediate effect.... [The revenue] shortfall is especially pressing given the rapid increases in entitlement costs and the need to finance national security, investments in education and infrastructure and other critical programs.... [R]evenue-increasing measures must reverse the recent trend of disproportionately favoring upper-income taxpayers.... [I]f the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall....

Dana Milbank:

On the eve of a titanic partisan clash in the Senate, eggheads of the left and right got together yesterday to warn both parties that they are ignoring the country's most pressing problem: that the United States is turning into Argentina.... Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget "nightmare."

There were no cameras, not a single microphone, and no evidence of a lawmaker or Bush administration official... they agreed that without some combination of big tax increases and major cuts in Medicare, Social Security and most other spending, the country will fall victim to the huge debt and soaring interest rates that collapsed Argentina's economy and caused riots in its streets a few years ago. "The only thing the United States is able to do a little after 2040 is pay interest on massive and growing federal debt," Walker said. "The model blows up in the mid-2040s. What does that mean? Argentina."

"All true," Sawhill, a budget official in the Clinton administration, concurred.

"To do nothing," Butler added, "would lead to deficits of the scale we've never seen in this country or any major in industrialized country. We've seen them in Argentina. That's a chilling thought, but it would mean that."

Each of the three had a separate slide show, but the numbers and forecasts were interchangeable.... The unity of the bespectacled presenters was impressive -- and it made their conclusion all the more depressing....

The congressional staffers, accustomed to sitting on opposite sides of the room in such events, seemed flummoxed by yesterday's unusual session in the Rayburn House Office Building. One questioner suggested Republicans are to blame for multiple tax cuts; another implied the problem is a Democratic appetite for spending. The bipartisan panel would not be goaded. "I'm willing to talk about taxes if you're willing to talk about entitlements," Butler offered...

Posted by DeLong at 02:33 PM

Limits to Arbitrage: The Sociology Side

Brayden King writes:

Pub Sociology: Dissertation relief and the busy summer ahead: I did it! I turned in a dissertation draft to my committee this afternoon and now I'm just waiting for feedback. My defense is on June 13. Until then I plan on finishing an R&R, getting a re-write of an older paper mostly finished, find somewhere to live in Provo, and have a baby. Well, I'm not having a baby, but Karrie is - very soon. Here's the dissertation abstract:

The origin of market value has not been sufficiently explored in the social sciences. While there is a tendency among economists and sociologists to see value as imported to the market from external sources (e.g. culture, internal preferences), I argue that shifts in market value are often endogenous to the market setting. Perceptions of value, or collective beliefs that specific sets of assets will yield benefits for the owner, are most malleable when markets are unstable. Instability is caused by intense competition and rapid technological change, both of which upset firms’ abilities to make consistent profits and retain their market position. Instability amplifies general uncertainty about the best ways to create value.

Perceptions of value emerge in unstable markets as firms monitor and mimic their peers, who act as information proxies about the future value of assets. I look at acquisitions within the communications industries from 1997 to 2002 to assess this claim. I expect that firms acquire target assets in the same segments as their closest competitors and market leaders. Unstable market conditions amplify the extent to which firms use their peers to guide their acquisition choices. The collective flow of acquisitions caused by this mimicry creates perceptions of value that become reflected in concrete, standard measures of market value. Investors and other third-party observers use peer behavior as an interpretive frame for estimating value creation. They assume the collective acquisitions are social proof that value is being created and this is reflected in their investment behavior, which in turn drives up the stock prices of acquiring firms.

Regression findings support these propositions; although there is weak evidence that market value gains from peer mimicry are long-term. Instead, I find that using peers to frame acquisition value tends to lead to initial overvaluation, which is subsequently corrected through a long-term value discount. I suggest that unstable market conditions tend to lead to speculative behavior and inefficient market pricing....

Posted by DeLong at 02:07 PM

Equal Suffrage in the Senate

We have a long-term problem here:

MyDD: In the 100 elections that determined the current make-up of the Senate, 200,723,923 votes were cast. The Democratic candidates in these elections received a combined 96,307,088 votes.... The Republican candidates received 94,994,293...

To the extent that heavily-populated states that pay federal taxes swing more Democratic, and lightly-populated states that receive lots of giveaways (military bases, agricultural subsidies, cut-price access to national resources) swing more Republican, senate votes will become less and less legitimate.

Time, I think, to reapportion the senate: combine the Great Plains states and divide up California, New York, and Texas for purposes of senate representation.

Posted by DeLong at 02:04 PM

Ken Rogoff Is Unhappy with the Bush Administration

Yet another unhappy camper: Ken Rogoff:

FT.com / Comment - A healthy global economy begins at home : In its biannual foreign exchange report to Congress, [the Treasury] declared that while China is not yet guilty of exchange rate manipulation, it will soon become guilty unless it changes its policy.... Too many lawyers must have worked on this phrasing....

To be fair, the Treasury report is... aimed at mollifying trade protectionists in Congress.... The report... focus[es] on the way that China's current dollar peg blocks an important price mechanism from helping to unwind today's massive global trade and current account imbalances. Of course, what the Treasury report does not say is that 'global imbalances' is a euphemism for 'US borrowing binge'. After all, America is now absorbing 75 per cent of the current account surpluses of the world's surplus countries, not just China. Nor does the report mention [that]... US... policies... played a far bigger role than China's peg in exacerbating the problem....

The report spews the official line... reducing its own fiscal deficit. But the official target... 50 per cent deficit reduction by 2009 is [not] ambitious enough, even if it were... credible.... [I]t is hard to see any scenario for unwinding the global imbalances in which Asian currencies do not appreciate sharply against the dollar.... Eliminating the global imbalances would entail a proportionately larger appreciation (35 per cent) of Asian currencies, and a 10-20 per cent appreciation of major non-Asia currencies including the pound and the euro....

We have talked about China's contribution to smooth global adjustment in the face of massive US borrowing, but what policy is best for China? It is a very tough question... China is really two economies rolled.... Wealthy coastal China has 450m people living in a vibrant emerging market... the rest... 750m... living in a poor developing country... rural unemployment at over 150m people. Poor developing countries typically do well with relatively fixed exchange rates, whereas emerging markets typically need more flexible ones....

[T]he US Treasury ought to focus its next report on getting the country's own fiscal house in order.

Posted by DeLong at 01:50 PM

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

Calculated Risk writes:

Calculated Risk: Fed News: Gramlich Resigns, Greenspan Might Stay Longer: Meanwhile, the WaPo is reporting that 'Administration Considers Delaying Fed Chief's Exit'.

Bush administration officials are mulling whether to encourage Greenspan, 79, to continue as Fed chairman for at least a few months beyond the Jan. 31 expiration of his term, according to sources told of the possibility. That would give the White House more time to broaden the search for possible successors, looking beyond the academic and policy worlds to the corporate world, as they have been urged to do by some financial analysts...

'More time to broaden the search'? The White House wasn't aware that Greenspan was retiring in January?

Even weirder is the implication later on in the article by the Post's Nell Henderson that Paul Volcker was a corporate-world appointee "beyond the academic and policy worlds." Henderson describes Volcker as someone who had "worked for Chase Manhattan Bank and did not have a PhD in economics." She makes no reference to the Paul Volcker's years as Undersecretary of the Treasury for Monetary Affairs, or to his being President of the Federal Reserve Bank of New York when appointed Chairman of the Fed.

I'll try to find out tomorrow morning whether she (a) simply did not know that Paul Volcker was not a "corporate world" Chair but a "policy world" one, or (b) knew but was trying to score some White House favor points by misrepresenting Volcker's career in a way the White House momentarily finds convenient.

Posted by DeLong at 01:30 PM

Nuclear Option

Josh Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: May 15, 2005 - May 21, 2005 Archives: As we wait on the sidelines for the seemingly inevitable chain reaction to take place on the senate floor, it is worth observing and considering the fact that every Republican senator certainly knows that the proposition they're about to attest to is quite simply a lie.... What do I mean?... [W]hat "it" actually is is this: the Republican caucus, along with the President of the Senate, Dick Cheney, will find that filibustering judicial nominations is in fact in violation of the constitution.... Their reasoning will be that the federal constitution requires that the president makes such nominations "by and with the Advice and Consent of the Senate" and that means an up or down vote by the full senate.

Nobody believes that.

Not Dick Cheney, not any member of the Republican Senate caucus.

For that to be true stands not only the simple logic of the constitution, but two hundred years of our constitutional history, on its head. You don't even need to go into the fact that other judicial nominations have been filibustered, or that many others have been prevented from coming to a vote by invocation of various other senate rules, both formal and informal, or that almost countless numbers of presidential nominees of all kinds have simply never made it out of committee. Indeed, the whole senate committee system probably cannot withstand this novel and outlandish interpretation of the constitution, since one of its main functions is to review presidential appointees before passing them on to the full senate.

Quite simply, the senate is empowered by the constitution to enact its own rules.

You can think the filibuster is a terrible idea. And you may think that it should be abolished, as indeed it can be through the rules of the senate. And there are decent arguments to made on that count. But to assert that it is unconstitutional because each judge does not get an up or down vote by the entire senate you have to hold that the United States senate has been in more or less constant violation of the constitution for more than two centuries.

For all the chaos and storm caused by this debate, and all that is likely to follow it, don't forget that the all of this will be done by fifty Republican senators quite knowingly invoking a demonstrably false claim of constitutionality to achieve something they couldn't manage by following the rules.

This is about power; and, to them, the rules quite simply mean nothing.

Posted by DeLong at 01:15 PM

Why Did They Choose Bill Frist, Anyway?

The pool of Republican talent is amazingly thin, isn't it?

: "This morning on the floor of the Senate, Sen. Chuck Schumer asked Majority Leader Bill Frist a simple question:

SEN. SCHUMER: Isn't it correct that on March 8, 2000, my colleague [Sen. Frist] voted to uphold the filibuster of Judge Richard Paez?

Here was Frist's response:

The president, the um, in response, uh, the Paez nomination - we'll come back and discuss this further.... Actually I'd like to, and it really brings to what I believe - a point - and it really brings to, oddly, a point, what is the issue. The issue is we have leadership-led partisan filibusters that have, um, obstructed, not one nominee, but two, three, four, five, six, seven, eight, nine, ten, in a routine way.

So, Frist is arguing that one filibuster is OK. His problem is that several Bush nominees have been filibustered. This position completely undercuts Frist's argument that judicial filibusters are unconstitutional. (Which is, in turn, the justification for the nuclear option.) If judicial filibusters are unconstitutional there is no freebee. But Frist digs his hole even deeper:

The issue is not cloture votes per se, it's the partisan, leadership-led use of cloture votes to kill - to defeat - to assassinate these nominees. That's the difference. Cloture has been used in the past on this floor to postpone, to get more info, to ask further questions. When Frist voted to filibuster Paez's nomination it had been pending for four years. It's hard to believe he couldn't get all the info he needed or ask all the questions he had during that time. Make no mistake about it: Bill Frist was trying to kill the Paez nomination. A press release issued the following day by former Sen. Bob Smith, who organized the filibuster effort, read "Smith Leads Effort to Block Activist Judges."...

Posted by DeLong at 01:12 PM

Not a Good Paragraph

CEA Chair Harvey Rosen writes:

WSJ.com - Data Bait: Tax policy represents an opportunity to strengthen our economy. The president is committed to keeping taxes low by making his tax relief permanent. And he has called on Congress to join him in reforming the tax code to make it simpler, fairer, and more pro-growth. Fiscal policy is another opportunity. By controlling spending and keeping taxes low, we can improve growth and fiscal health. Congress has adopted two consecutive budgets that increase discretionary spending at or below inflation. And for the first time since 1997, the budget includes savings for entitlement spending as well. Policy makers now need to follow through on these initial steps and take the much bigger step of permanently fixing Social Security's funding imbalance...

If a CEA Chair dares not write the phrase "budget deficit," he is useless.

Posted by DeLong at 01:10 PM

Why Oh Why Are We Ruled by These Idiots? (Republican Senate Edition)

Pandagon quotes Mike Allen and Jeffrey H. Birnbaum:

Pandagon: Hey, Dick, Can We Turn The Democratic Side Of The Aisle Into A W.G. Grinder's?: The Washington Post has a script for the nuclear option...

Here's what Republican aides and officials say is most likely to happen:

At 9:30 a.m. today, the Senate will begin debating Bush's nomination of Priscilla Richman Owen, an abortion opponent on the Texas Supreme Court who was nominated to the U.S. Court of Appeals for the 5th Circuit, based in New Orleans.

Tomorrow or Friday, Frist and other Republican senators are likely to file a motion seeking cloture, or an end to debate. One session day must pass before a vote to end debate, so a vote would be held and Republicans would expect to get fewer than 60 votes to confirm Owen.

Frist aides say he has not decided exactly what would occur next. But the scenario most widely expected among senators in both parties is that he would seek a ruling from the chair -- Vice President Cheney, if it looked as if the vote was going to be close -- that filibustering judicial nominations is out of order. Assuming the chair agreed, Reid would then object and ask that the ruling of the chair be tabled. Most Republicans would then vote against the Democratic motion, upholding the ruling. Then the Senate would move to a vote on Owen, and a precedent will have been set that it takes 51 votes, not 60, to cut off debate on a judicial nomination...

Ummm.... Yes and no. A precedent will be set that it takes 51 votes to change the rules of the Senate in a direction that the Senate majority leader wishes.

As Pandagon says:

There's a standing rule in the Senate that it takes 67 of 100 votes to change Senate rules on procedure. What they're asking Cheney to do is to make a ruling that the rules don't allow the disputed course of action, despite the fact that there's approximately zero evidence behind their position. The nice thing for Republicans is that courts stay out internicine procedural warfare in Congress - they'd prefer if you can't have sex with someone of your same gender in the privacy of your own home, but we can pay for Congress to rub its collective ass over the Constitution. Granted, it is double-ply, but still...

It would be one thing for Frist to get 67 votes to change the Senate rules so that 51 votes closes debate on a judicial nomination. This is something very different: a declaration that no matter what the rules have been, the Senate will pretend that the rules are whatever the majority leader can get 51 votes for.

Posted by DeLong at 01:08 PM

Hearts and Minds, Hearts and Minds

From the Rising Hegemon:

Rising Hegemon: ...the implementation of 'Operation Matador'.

In interviews, influential tribal leaders and many residents of the remote border towns said the 1,000 U.S. troops who swept into their territories in the weeklong campaign that ended over the weekend didn't distinguish between the Iraqis who supported the United States and the fighters battling it. 'The Americans were bombing whole villages and saying they were only after the foreigners,' said Fasal al Goud, a former governor of Anbar province who said he asked U.S. forces for help on behalf of the tribes. 'An AK-47 can't distinguish between a terrorist and a tribesman, so how could a missile or tank?'

Once again, the troops are only following the dictates of their commanders -- none of them know f***-all about Iraq, or what the hell is going on. The Bush Administration had no idea what it was doing in Iraq, nor has it really learned shit about how to deal with it since.

Posted by DeLong at 11:29 AM

More Bad News from Iraq

And Eric Umansky is shrill about it:

Eric Umansky: Good to know we have enough troops to control the place: From the AP:

QAIM, IRAQ -- Iraqi fighters toting machine guns and grenade launchers swaggered Friday through the rubble-strewn streets of this town on the Syrian border, setting up checkpoints and preparing to do battle despite a major U.S. offensive aimed at rooting out followers of Iraq's most-wanted terrorist. The six-day U.S. offensive in the area -- one of the largest since insurgents were driven from Fallujah six months ago -- was launched in Qaim and is aimed at supporters of Abu Musab al-Zarqawi.

Capt. Jeffrey Pool, a military spokesman, said Marines have not conducted operations inside Qaim since the opening days of the campaign, called Operation Matador, which began overnight Saturday and led to the killing of six suspected insurgents and capture of 54 in the town.

In other words, Qaim was one of the focuses of the campaign and yet while the offensive is still under way, guerillas are tooling around and actually feel secure enough to set up checkpoints! You might recall what one 'military official' told the LAT a few days ago: 'We require more manpower to cover this area the way we need to.' So why aren't there enough Marines in the area to do more than spot-check the insurgency? Well, for one thing the military is just about plain tapped out. That's a problem that's been exacerbated by and embodied in one SecDef Rumsfeld. I bring you Republican (but non-winger) Senator Sue Collins: 'When it became evident that we were going to face a determined and prolonged insurgency, he was very resistant to increasing troop levels, stepping up production of up-armored Humvees, and modifying the game plan,' said Senator Susan Collins, a Maine Republican on the Armed Services Committee....

Posted by DeLong at 11:03 AM

Not Good Macro News

The Financial Times reports:

FT.com / US - US wholesale prices rise 0.6 per cent: Producer prices rose by more than expected last month, with the headline rate rising 0.6 per cent and the core rate excluding food and energy - up 0.3 per cent, the Labor Department reported. Over the past 12 months, the overall PPI rose by 4.8 per cent, just below the March level, while the core rate increased by 2.6 per cent....

Separately, a report released by the Federal Reserve on Tuesday pointed to a surprising drop in industrial activity last month. Industrial production fell by 0.2 per cent in April, compared with the consensus forecast of a 0.2 per cent increase. Capacity utilisation fell slightly to 79.2 per cent....

The Federal Reserve has signalled concern about inflation pressures, and has said it expects to continue raising its target interest. Earlier this month, the Fed tightened by another quarter point, bringing the federal funds rate to 3 per cent. Don Kohn, a Federal Reserve governor, said following a speech yesterday that higher core inflation represented in part the effort by businesses to pass on higher energy costs to their customers. "My best guess is that inflation will remain contained provided we continue to tighten at a measured pace," Mr Kohn said.

Posted by DeLong at 10:58 AM

Thank God I'm Not a Republican!

If I were, I would have to vote for people who would choose somebody like this for their leader:

Carpetbagger Report: Why would anyone contribute $5,000 to a campaign that ended two years ago, to a candidate who finished a distant fourth? It makes more sense when the donor is Bill Frist and the candidate is Family Research Council President Tony Perkins.... I can appreciate that Frist is desperate to rally religious right support for his Senate agenda (and his 2008 presidential campaign), but donating $5,000 to a campaign that doesn't exist just to curry favor with a far-right group is bound to look pretty bad.

For that matter, maybe Frist could elaborate a bit on why, exactly, he would offer such generous financial support to Perkins's long-finished campaign. After all, this is the same Perkins who paid former Ku Klux Klan Grand Wizard David Duke $82,000 for his mailing list and later tried to hide the payment from the Federal Election Commission. It's also the same Perkins who blamed MTV for the Abu Ghraib scandal, compared Thomas Jefferson's wall of separation between church and state to the communists' Berlin Wall, and argued that federal judges who disagree with him pose "a greater threat to representative government" than"terrorist groups." Sounds exactly like the kind of guy who should get $5,000 checks from the Senate Majority Leader, right?

Posted by DeLong at 10:52 AM

The Lebanonization of Iraq Progresses...

In this morning's news, John Burns and Terence Neilan report:

Iranian Envoy in Iraq for Talks: Iran's foreign minister arrived in Baghdad for talks that he has said will tackle a number of issues.... The Iranian foreign minister, Kamal Kharrazi, is the second senior visitor to Baghdad since the formation of the new Iraqi government, following the meetings held here on Sunday by Secretary of State Condoleezza Rice. Mr. Kharrazi is to hold talks with Prime Minister Ibrahim al-Jaafari, a Shiite, and Foreign Minister Hoshyar Zebari, a Kurd.

It is clear that his arrival sends a signal as to where the friendships are going to lie between Iran and the two Shiite religious parties that control the new government: Sciri, headed by Abdul Aziz al-Hakim, and Dawa, led by Dr. Jaafari. Indeed, his visit throws into question the degree of Iranian influence in Iraq. Ahead of the visit, Mr. Kharrazi described the Iran-Iraq relationship as an important one, and that his meetings would deal with a number of topics.... Now that Iraq's majority Shiite community has risen to power, Baghdad has been working to build on ties with Iran, a Shiite-dominated republic...

How many Iranian troops and secret police are currently in southern Iraq? And what are they doing?

It seems more and more likely to me that the endgame is that Iran plays a role in Iraq like that Syria has played in Lebanon for the past two decades, and that the U.S. tolerates it just as Israel has tolerated Syria's domination of Lebanon.

A principal goal of U.S. foreign policy since 1979 has been to minimize and contain the influence of the Iranian government. It seems that that goal has failed.

Posted by DeLong at 10:16 AM

Distressing Innumeracy

How can the people who run the scoreboard at Oakland's baseball stadium think that someone with three major-league at-bats can have a batting average of 0.200? That someone with ten at-bats can have a batting average of 0.275? This is very distressing indeed.

And the Network Associates Colosseum is no more. In its place we have the McAfeee Colosseum. I wonder if the first 10,000 paying customers get a free computer virus...

Posted by DeLong at 10:14 AM

God! I'm Glad I'm Not a Republican!

If I were a Republican, I'd have to write things like this:

danieldrezner.com :: Daniel W. Drezner :: So how do Mexicans view African-Americans?: While Latinos critics in the United States have their hands full combating discrimination in the Star Wars movies (link via Glenn Reynolds), Latinos south of the border have a slightly bigger problem... dealing with their own racial prejudices.... An intriguing angle about this story is the ability of [Jesse] Jackson and [Al] Sharpton to go global with.... that thing they do (though in this case they have a pretty valid point). Readers are heartily encouraged to predict the next world leader who will be required to mau-mau Jackson and Sharpton for something they say. I think it's a toss-up between Silvio Berlusconi and Vladimir Putin.

Posted by DeLong at 10:12 AM

May 16, 2005

Brad DeLong's Spring 2005 Berkeley Schedule

Brad DeLong's Summer 2005 Berkeley Schedule

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

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

Office Hours: Summer office hours are by appointment in Evans 601: email delong@econ.berkeley.edu for an appointment, because I am not guaranteed to be in town and checking my phone.

Posted by DeLong at 08:21 PM

Keynes's General Theory Online

John Maynard Keynes (1936), The General Theory of Employment, Interest and Money (London: Macmillan).

Posted by DeLong at 01:55 PM

Alamedia of "Unfogged" Is Puzzled by Investment Banker Compensation Levels

She writes:

Unfogged: The Mysteries of Chet: I have here a special, economics-type query which I direct to Brad DeLong, among others. Here's the thing: I have known many investment bankers in my day. Hell, I'm related to plenty of investment bankers, even if only by marriage. Many of these men are stand-up guys, fun to be with, always up for smoking a few bowls and playing golf. Others are asshole blowhards....

All of them, however, have the same basic character type, which I will call 'Chet'. Chet is a hail-fellow-well-met sort, cracking jokes all the time (some of most of which may be 'politically incorrect', because he doesn't care about things like that). Chet is tall, probably tan, and has big white teeth like a mouthful of chiclets.... Chet is a member of country clubs, and has a thin wife, and two adorable kids, etc. etc. If you close your eyes and imagine a picture in a silver frame on an end table in an apartment on 84th and Park, then you know what Chet's kids look like (super cute!).

Finally, Chet has an incredibly high opinion of himself. He is confident to the point of arrogance, but friendly, outgoing. There is one thing Chet is not, ever, in my experience, and that is particularly bright. Really. Not an intellectual powerhouse, is where I'm going with this. Not, in all likelihood, able to perform complex mathematical operations. Given that this is so, I have a few questions:

  1. Is the role of these guys just to schmooze clients for their banks?... [A]re there wonky types behind the scenes, making the actual money decisions? Strangely enough, I take it that there are not, otherwise there would be all these rich, but wonky, investment bankers. As far as I know, there aren't any.
  2. So let us say that my sucessful Chet friends at Lazard Freres and whatnot are actually deciding stuff about money. The question is, why them given that they aren't the brightest bulbs on the chandelier? (But can be perfectly nice!)
  3. Is this a market failure caused by suceeding generations of Chets selecting other Chets?... [C]ould someone clean up by having a bank with a front office of Chets and a back office of Brad DeLongs? But maybe the colossal failure of LTCM, one of the only times I ever heard of anyone trying to have smart people who knew about economics in charge of a hedge fund, has scared people off Brad DeLongs and back into the welcoming, hearty hug/back-slap combo of Chet?
  4. If it's not a market failure, and Chets do just as well as brainiac PhD's in Economics at making decisions about hellishly complex derivatives, then is the whole thing just random?...
  5. Why do they all have to be irritating Republicans who are convinced there is some very real sense in which they have earned a multi-million-dollar bonus, when it's so clear to anyone that they cannot possibly, ever, have done enough work to 'deserve' all that money (which is not to say that you can't structure a semi-sucessful company on this basis). It's so very tedious of them. Oh well, they're probably less-overpaid than Fortune 500 CEO's, I'll give them that.

There are a lot of investment bankers who are not "Chets" and who are very smart as I define smart: my brother's bosses Frank Brosens and Ken Brody; Robert Rubin and Roger Altman; the late Fischer Black. Read Emmanuel Derman's My Life as a Quant to get the idea of what life is like for the very antithesis of Chet-hood.

But there are a lot of investment bankers who are "Chets." Indeed, a very smart quant like Emmanuel Derman is (from one point of view) a Chet-enabler: he constructs models and writes programs so that the Chets can, with three keystrokes, know what they have to charge their clients in order to make money for the firm. So Alameida's question is a good one: why are the Chets paid so much?

Part of the answer is that they are sitting at a nexus: a huge amount of money blows past Wall Street, and if you can sit in the right place with a large net, unbelievable quantities of money will be trapped by it.

A bigger part of this answer is that there are four relevant human capabilities here: the ability to master details, the ability to quickly grasp what the salient issues are and follow them through to their conclusion, the ability to work like a dog, and the ability to size up people--figure out quickly who will actually produce something useful and who will not, who will hang tough and who will easily bid more, who will soften if wooed and who will stay hard-nosed. Next to nobody has all four or even three of these capabilities in world-class measure. Fewer people than you think have even two. And for someone who has one of the other three--mastery of detail or skill at analysis or the ability to work like a dog for ungodly periods of time--mastery of Chet-hood is a very valuable and lucrative skill.

Consider Felix Rohatyn, running the auction of RJR-Nabsico in the 1980s. Rohatyn tells the bidding syndicates that there will be only one round--that they will have no opportunity to rethink their bids and raise them, so that they had better choose their bids carefully. The competing syndicates bid. Rohatyn says, "Thank you." And then:

the board, Atkins said, was willing to give Kohlberg Kravis one final opportunity to bid. "If you haven't already done so, this is the time to put in your best bid."

Silence.

Kravis and Roberts were too startled to speak. Beattie and Cogut exchanged a glance of amazement. *One final bid? Hadn't they been through this five hours ago?*

Felix Rohatyn's voice filled the void: "This is a serious offer. You should do your best to respond to it." Then, looking Kravis square in the eye, Rohatyn said: "We want your highest and last offer."

"This is the craziest thing I've ever seen," Kravis said. "We gave it to you five hours ago!"

A half hour later, Beattie and Cogut emerged from the aquarium room.... Kohlberg Kravis has two conditions before it will place its final bid on the table....

Kravis went around the room one last time. What should we bid?... Fifty cents a share too much or too little could be the difference. Already the bidding had reached heights all but the foolhardy were uncomfortable with.... The verdict seemed unanimous. They would throw in one last raise, just fifty cents a share in cash, roughly $115 million. "Is everybody comfortable with that?" Roberts asked....

"No, I'm not." The voice was Jamie Greene's.... "I don't know if we should do it at all" Greene said. "But if we do, let's do it with a dollar in cash. We've come this far. We want to win this deal."

"I think he's right," Roberts said. "That's exactly what we should do. We've gone this far. We've made up our minds we want to own this company. Let's not get shortsighted now."...

From Bryan Burrough and John Helyar (1990), Barbarians at the Gate: The Fall of RJR-Nabisco (New York: HarperCollins).

By being Chets--knowing when to push and when not to, and how far KKR could be pushed--Felix Rohatyn and company gained their clients an extra $230 million dollars with fifteen minutes' worth of work. You need people who know what the big things that affect fundamental values are. You need people who know how the details of contract provisions interact. And you need Chets--lots and lots of Chets--if you're going to squeeze anything like the best prices out of your counterparties. As Rohatyn did with KKR. KKR made a fortune, but it and its backers took on a huge amount of risk in doing so. Rohatyn made his clients a fortune, and did so by shedding risk rather than bearing it.

As to why the ones whom Alameida knows are all Republicans who believe that they generally deserve all their wealth. It is very annoying, but it's inevitable given what humans are: all our successes are due to our skills and industry, and all our failures are do to bad luck, right? (And there are a bunch I know--not a majority of those I know, but a bunch--who are Democrats, in a plurality of cases because being told once a year that you were slaves to Pharoah in Mizraim influences how you think about a whole bunch of issues.)

Posted by DeLong at 01:54 PM

Time to Learn from Tojo Hideki...

Ted Galen Carpenter and Justin Logan write:

American Prospect Online - ViewWeb: Clearly, the X factor for China is potential U.S. intervention. But China's strategists think they may have the key to overcoming the United States: sinking a U.S. aircraft carrier. Chinese Major General Huang Bin explained the reasoning: "Once we decide to use force against Taiwan, we definitely will consider an intervention by the United States. The United States likes vain glory; if one of its aircraft carriers should be attacked and destroyed, people in the United States would begin to complain and quarrel loudly, and the U.S. president would find the going harder and harder." China has equipped its advanced Sovremenny-class destroyers with Sunburn supersonic anti-ship missiles -- missiles designed to sink large vessels such as aircraft carriers...

I would advise General Huang Bin and China's other military strategists to very carefully study the mistakes of Tojo Hideki and the history of the 1940s. Very carefully.

Posted by DeLong at 01:52 PM

COINS Is Inching... No, Nanometering... Forward

From Berkeley's Science Matters:

Nanoscience's Master Mechanic: This fall, UC Berkeley is launching a new $11.9 million center for researchers to design and test novel motors, sensors, batteries, and other mechanical components. What will set this center apart from most engineering endeavors is that none of the devices built there will be visible without an electron microscope. The Center of Integrated Nanomechanical Systems (COINS) aims to develop a storehouse of mechanical components hundreds of times smaller than the diameter of a human hair. Physics professor Alex Zettl is leading the charge, having recently demonstrated a conveyor belt for ferrying atoms, the world's smallest nanomotor, and an oscillator based on drops of liquid metal that weight just one-quadrillionth of a gram.

I am no Associate Director for Societal and Ethical Implications of this thing, COINS. It is becoming more and more clear that there will indeed be a thing called "nanotechnology". But what will be its social, economic, and ethical implications? It's going to be a hard puzzle...

Posted by DeLong at 01:49 PM

May 15, 2005

I Need Minions...

One thing I could do if I had serious minions is set them to work reading the comment threads at Teresa Nielsen Hayden's Making Light to alert me of absolute gems like this:

Making Light: Which sf writer?: David Goldfarb ::: (view all by) ::: May 15, 2005, 09:16 PM: [Re] "there are lots of locations where, if you search on (e.g.) 'Ming's Purple Death Dust,' you'll get offers to provide all your Ming's Purple Death Dust needs on eBay. At exceptional discounts. Order tickets to Frigia on Travelocity now."

My favorite example was when I was poking around on the San Francisco Chronicle's web site and found an article about the activity of the Hayward Fault. At the bottom of the page:

Fault Line New and used Fault Line available at low prices on eBay.

Um, I'll pass, thanks.

Posted by DeLong at 07:52 PM

Dana Milbank on the Bolton Nomination

He writes:

A Defection on the GOP Side: Lugar, as shepherd of Bolton's nomination, was scarcely more helpful.... It was, perhaps, not the ideal slogan for confirmation: Bolton -- not a criminal. Only four days earlier, Lugar predicted that Bolton would be endorsed by the committee on a party-line vote. Yesterday, he was reduced to urging colleagues not to 'reject Secretary Bolton without even granting him a vote on the Senate floor.'The difference, of course, was Voinovich, who challenged Bush and GOP leaders in a way few of his colleagues have dared. 'What message are we sending to the world community?' he asked about Bolton. Though he said that 'all things being equal' he would support a presidential nominee, 'all things are not equal.' Responding to a main White House argument, he added: 'To those who say a vote against John Bolton is against reform of the U.N., I say, 'Nonsense.' ' Lugar held a thin smile while Voinovich talked. Sen. Lincoln Chafee (R-R.I.), who took a political risk by backing Bolton, stared at his water glass and looked as if he were about to cry...

Posted by DeLong at 07:50 PM

Senate Hearing on Social Security Proposals

Mark Thoma finds the CSPAN video link to last Friday morning's Democratic Policy Committee Social Security hearing:

Economist's View: CSPAN Video: Senate Hearing on Social Security Proposals: Testimony of Shiller, DeLong, Max, Orszag, and Kobliner on Social Security Reform Before the Senate Democratic Policy Committee: Link to CSPAN page listing video file. Link to Real Player

Approximate starting times of segments:

Shiller: 11:00 min.
DeLong: 23:00 min.
Max 32:00 min.
Orszag 41:00 min.
Kobliner 49:00 min.
Q&A (Dayton and Lincoln) 57:00 min.

I thought that Beth Kobliner and Bob Shiller were highly effective, and that Peter Orszag was awesome. Derrick Max has the hard problem of being a convinced small-government Republican who must show considerable loyalty to the current Republican Party line or else he will simply be unable to function. He must confine his dissent to secondary points and footnotes as he tries to push the Republican Party in a constructive direction.

It is always a pleasure to testify before the Senate: they know their issues very well.

As for me?... Well, see for yourself: I cannot judge. To the extent that I was effective, the credit should go to Jack De Vore and Michael Levy, who ran a talking-to-senators minicourse on the third floor of the Treasury's west wing in 1993.

My written statement: http://delong.typepad.com/sdj/2005/05/statement_on_so.html#more.

My spoken statement is in the extension...

Statement on Social Security Reform

J. Bradford DeLong
U.C. Berkeley and NBER

Democratic Policy Committee
192 Dirksen
May 13, 2005, 10 AM

3385 words

Thank you.

Mr. Chairman, Members of the Committee:

America has three fiscal policy problems:

Of these three problems, Social Security is both the least urgent and the smallest. The Trustees' projected 75-year deficit in Social Security is 0.6% of GDP. The projected 75-year deficit of the U.S. government as a whole is roughly 4.8% of GDP.

I think what is going on is that the administration (a) has no idea what to do with health, and (b) is unwilling to talk about the current on-budget deficit because it made the mess, and would rather pretend the mess doesn't exist. It's the three-year-old approach: "What broken jelly jar on the kitchen floor?"

Is this the best use of our collective time. The government's limited decision-making capability should be focused on dire and urgent problems, not less dire and far-off ones.

Nevertheless, we are focusing on Social Security. And in my view a plan needs to clear five hurdles before it is worth considering:

  1. If it offers private accounts, they must be a good deal.
  2. The plan must raise national savings.
  3. The plan needs to restore long-run solvency.
  4. The plan must preserve the valuable defined-benefit nature of the current program.
  5. The plan must be competently implemented.

Robert Shiller says that at a 3% offset private accounts are not a good deal. He's right. I find this distressing. I am, in one of my hearts-of-hearts, an Eisenhower Republican, a believer in private accounts. I agree with Marty Feldstein that the equity premium tells us that the stock market does not mobilize America's risk-bearing capacity, and we need to broaden and deepen stock ownership. I agree with former Bush II Treasury Deputy Assistant Secretary Kent Smetters that it is an outrage that the poorest half of Americans do not make automatic, straightforward, and trustworthy low-fee investments in diversified portfolios of stocks. But private accounts that are a bad deal cannot be a good idea.

You know that Alan Greenspan is worried that the Bush plan will not raise but might lower national savings. In his view, arguments that it will neither help nor harm national savings and interest rates--are based on what we guess, not what we know. As he said: "If indeed the financial markets do not distinguish... you could go... without any response in interest rates.... But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I could imagine."

You know that the Bush administration does not restore expected fiscal balance. Robert Pozen's progressive price indexing proposal envisions funding some of Social Security out of income tax revenues, but the Bush administration has been very careful to say that its plan is not Pozen's plan--merely that Pozen's is "directionally consistent."

Most important, however, is the defined-benefit nature of Social Security: it returns a certain, inflation-adjusted, stable monthly benefit check that replaces a reasonable (although sliding-scale) proportion of your pre-retirement income. Defined-benefit retirement programs are very valuable things: people like them a lot. Thes days defined-benefit programs are very hard to get elsewhere than Social Security: Businesses are hesitant and unwilling to assume the risks. And, indeed, businesses are not large and stable enough to be able to bear the risks: ask the steelworkers or the employees of United Airlines about their defined-benefit pensions.

The government, however, is large enough to bear the risks of defined-benefit pensions. And when there is something that people value very much that only the government can provide, I think the government's business is to provide it, for in another of my hearts-of-hearts I am a social democrat who believes that government should be a good servant of the American people. Thus I am very skeptical of progressive price indexing, for over the long-run it (a) cuts average benefits relative to current law by about 40%, and (b) changes Social Security from a defined-benefit program to which you contribute a share of your income to a simple flat benefit check equal to roughly 22% of the average wage.

It is important to register the magnitude of the benefit cuts relative to current law that Pozen is proposing. Medicare premiums are already deducted from your Social Security check. Deduct the claw-back for private-accounts as well, and by late in this century Social Security would no longer be a universal program. A great many Americans, they would have lost a key element of what Social Security provides them: a defined-benefit pension program. And I do not see anything they could do to compensate for and replace it.

Let me make one more point: competence in implementation. It is very hard to have trust. Let me give one example: the staffwork underlying George W. Bush's Social Security statement on April 28. The President said that because: "some Americans have reservations about investing in the stock market... I propose that one investment option consist entirely of treasury bonds.... Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses."

But on April 28, the twenty-year inflation-protected Treasury bond yielded a real rate of return of 1.87% per year. Under the Bush plan, money diverted into private accounts is charged against the normal Social Security benefit at a real rate of 3% per year. If interest rates stay where they are now, if you were 25 now, if you made an average of $80,000 a year over your career, if you diverted 4% of your wages into your private account, if you followed the President's advice for those wanting safe investments and and invested them in inflation-protected Treasury bonds, then when you retired your Social Security benefit--normal plus the annuitized check from your private account balance--would be $514 a month less than if you had said "no thanks" to private accounts.

This isn't building a nest egg. This is taking $514 a month of your Social Security eggs and rolling them out of the nest so they fall and smash on the ground.

Did nobody inside the White House bother to run the underlying numbers? Did nobody care?

And this is also heartbreaking, for in another of my hearts-of-hearts I am a technocrat who who believes that it is important to have an executive branch that cares to get the details and the numbers right, for if it does not it cannot be a good servant to the American people.

Thank you.

Posted by DeLong at 07:49 PM

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

Kevin Drum reads David Brooks so we don't have to, and says that yes, he is a dork:

The Washington Monthly: INCOME MOBILITY....David Brooks writes about income mobility today:

The big difference between poor Republicans and poor Democrats is that the former believe that individuals can make it on their own with hard work and good character. According to the Pew study, 76 percent of poor Republicans believe most people can get ahead with hard work. Only 14 percent of poor Democrats believe that.

Elsewhere in the New York Times we learn who's right: "New research on mobility... shows there is far less of it than... most people believe.... The incomes of brothers born around 1960 have followed a more similar path than the incomes of brothers born in the late 1940's, researchers at the Chicago Federal Reserve and the University of California, Berkeley, have found. Whatever children inherit from their parents -- habits, skills, genes, contacts, money -- seems to matter more today."

Ever since World War II, the United States has done a phenomenal job of sorting people by talent.... The result is that life roles have become more hardened... [while] incomes -- and jobs -- ... are far more unstable than they were a few decades ago. And as recent research indicates, most of them are increasingly stuck....

In the face of this, Brooksian paeans to the hardworking Republican poor are little less than appalling. Clap your hands and you can be rich! What this faux optimism masks is the astonshing real-life pessimism of modern conservatism. Among advanced economies, the United States is by far the richest, youngest, and fastest growing country in the world. By far. And yet, we're supposed to believe that an increase in Social Security costs from 4% of GDP to 6% over the next 50 years is cause for panic. We're supposed to believe national healthcare would bankrupt us -- never mind that our current dysfunctional system is the most expensive and most unfair on the planet. We're supposed to believe that broader unionization would ruin American industry, home of the highest profits and most highly paid executives in the world. We're supposed to believe that the nation's millionaires, having already had their tax rates slashed by a third over the past two decades, are still being bled to the bone by federal taxes...

Posted by DeLong at 07:48 PM

The Return of "My Pet Goat"

Belle Waring asks the obvious question:

John & Belle Have A Blog: They Told Cheney Right Away, So...: Can it really be the case that everyone who works for President Bush in any capacity is convinced he's just a cypher when it comes to potential security threat? That he shouldn't be told anything worrying till the My-Pet-Goat-reading/bike-ride-with-high-school-pal is over? This just seems weird to me.

Capitol Police officers began shouting to stragglers, 'Run, run, this is for real!' At the Patuxent Wildlife Research Center in suburban Maryland, a half-hour's drive from the White House, Mr. Bush's Secret Service detail - following him on bicycles and in vehicles as he got some midday exercise after returning the previous night from a five-day trip to Russia, Latvia, Georgia and the Netherlands - decided not to inform him of what was unfolding, said Scott McClellan, the White House spokesman.

Mr. McClellan said the members of the security detail had decided that Mr. Bush need not be informed because there was no danger to him and because procedures for intercepting the airplane, evacuating buildings in Washington and increasing security at the White House did not require his authorization. The Secret Service agents did not consult with Andrew H. Card Jr., the White House chief of staff, or other senior administration officials, Mr. McClellan said.

Mr. McClellan said Mr. Bush was told of the incident at 12:50 p.m., after his ride with a high school friend. Asked whether Mr. Bush wished he had been informed earlier, Mr. McClellan replied: 'The president has great trust in his security detail. He was never in any danger, and the protocols that were in place were followed.'

I mean, obviously it turned out to be no big deal, but not even to mention it?

Posted by DeLong at 07:11 PM

Why Oh Why Are We Ruled by These Idiots? (Bush Department)

Josh Micah Marshall outlines a few of the reasons that negotiating with *this* administration over the future of Social Security makes no substantive policy sense at all:

Talking Points Memo: by Joshua Micah Marshall: May 15, 2005 - May 21, 2005 Archives: There seems to be a rising chorus of claims that, even if the expected shortfalls in Social Security funding are still almost forty years in the future, every year that goes by the cost and difficulty of fixing the problem increases. But this makes no sense...e\ President Bush's proposed means of 'fixing' Social Security's shortfall turn entirely and exclusively on cuts in guaranteed benefits.... If the issue was prefunding Social Security as a social insurance program, then the sooner we start doing that the better. But President Bush has specifically ruled out new funds.... [I]t's even wors... Bush has also ruled out the existing funding mechanism by which any sort of pre-funding could take place....

Let's say we immediately cut everyone's Social Security benefits by 20%.... [T]he Trust Fund last longer... there's more money in it... it would pay down more slowly.... But [Bush] doesn't believe that the Trust Fund exists.... [I]t would be foolish for current beneficiaries of the program, or people currently paying payroll taxes, to fatten up the Trust Fund in this way so long as the current president isn't even willing to stipulate that the money will be paid back....

Given... [what] Bush will allow, it won't be any harder or more costly to 'fix' Social Security five or ten or any number of years into the future than it is today...

Posted by DeLong at 07:08 PM

Alan Greenspan Gives Sarbanes-Oxley Praise--Faint Praise, but Praise

Andrew Balls of the FT reports:

FT.com / US - Greenspan praises corporate governance law: Alan Greenspan, the Federal Reserve chairman, said on Sunday that the Sarbanes-Oxley Act, the legislation introduced in 2002 to improve corporate governance, had been surprisingly successful.... Mr Greenspan said there was scope for fine-tuning of the legislation. But he sounded a very different note to some business lobbyists, and some Bush administration officials, who have warned of excessive compliance costs and of the potential impact of the legislation on corporate risk-taking."I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has," Mr Greenspan said. "The act importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use." Mr Greenspan, in the commencement address to students graduating from the Wharton business school at the University of Pennsylvania, gave a wide-ranging lecture on the importance of ethical behaviour among business leaders. Chief executives, he said, held most of the decision-making power in US companies, and had a duty to promote ethical behaviour in their companies. Mr Greenspan said the US could not have achieved its strong economic performance over the past 200 years if corporate governance had been deeply flawed. He also said financial market punishment was the best antidote to business and financial transgressions. But he praised the Sarbanes-Oxley requirement that chief executives vouch personally for their company's financial statement, saying that mere adherence to generally accepted accounting principles had been shown to be inadequate by the "imaginative accounting" of recent years....

Posted by DeLong at 07:06 PM

Why Oh Why Are We Ruled by These Idiots? (Yet Another Social Security Edition)

Edmund Andrews tries to keep score:

Beware the Easy Fix for Social Security - New York Times: The problem is that Mr. Bush's [Social Security] plan would not keep Social Security from running out of money. An apples-to-apples comparison would have to take into account that the government would eventually need to cut benefits or raise taxes even if the government did adopt progressive price indexing.

White House officials contend that the changes Mr. Bush has outlined would close about 70 percent of the long-term deficit, but... the changes would eliminate less than 60 percent... of the shortfall expected over the next 75 years. The projected insolvency would be delayed by only six years, to 2047. At that point... the government would have to reduce benefits by an additional 15 percent. Kent Smetters, a former Treasury official under President Bush and now an associate professor at the Wharton School of Business, came up with similar estimates about the impact of progressive price indexing.

Mr. Smetters noted that Mr. Pozen's original plan would have gradually trimmed disability benefits and would have closed about 70 percent of the shortfall. But Mr. Bush has vowed to preserve disability benefits at current levels, and to ensure that even low-income retirees are kept above the poverty line. 'I would say it solves about 60 percent, or a little less' of the projected deficit, Mr. Smetters said in an interview.

White House officials do not dispute those estimates, but they have redefined the problem. Instead of saying they would solve 70 percent of the 75-year deficit, the measure most analysts use, administration officials say the plan would reduce about 70 percent of the deficit in the 75th year of their plan. The difference is worth about $500 billion over 75 years. 'The real question is how close you are to getting the system back to positive cash flow by the final year,' said Andrew G. Biggs, deputy director of Mr. Bush's National Economic Council. 'How much of the final-year deficit does it eliminate? By that measure the plan closes about 70 percent of the deficit.'

Now let's be clear about what's going on here:

It would be much better for Mr. Biggs to admit that he is badly overworked and outnumbered by substance-free spinmasters, and as a result things get sloppy.

Posted by DeLong at 07:02 PM

Class, Status, Prada

Matthew Yglesias is unhappy with the New York Times:

http://yglesias.typepad.com/matthew/2005/05/huh.html: I'm glad someone decided to write about class in America -- an important subject -- but the Times's first take is just filled with baffling assertions:

http://www.nytimes.com/2005/05/15/national/class/OVERVIEW-FINAL.html?pagewanted=print: There was a time when Americans thought they understood class. The upper crust vacationed in Europe and worshiped an Episcopal God. The middle class drove Ford Fairlanes, settled the San Fernando Valley and enlisted as company men. The working class belonged to the A.F.L.-C.I.O., voted Democratic and did not take cruises to the Caribbean. Today, the country has gone a long way toward an appearance of classlessness. Americans of all sorts are awash in luxuries that would have dazzled their grandparents. Social diversity has erased many of the old markers. It has become harder to read people's status in the clothes they wear, the cars they drive, the votes they cast, the god they worship, the color of their skin. The contours of class have blurred; some say they have disappeared....

Why does it appear that class is fading as a force in American life? For one thing, it is harder to read position in possessions. Factories in China and elsewhere churn out picture-taking cellphones and other luxuries that are now affordable to almost everyone. Federal deregulation has done the same for plane tickets and long-distance phone calls. Banks, more confident about measuring risk, now extend credit to low-income families, so that owning a home or driving a new car is no longer evidence that someone is middle class.

Obviously, those things are happening. But if you can't tell who owns the expensive stuff and who owns the less expensive stuff you're not paying very much attention. Surely we all know the difference between a really fancy car and a less-fancy one, no? A gigantic house and a small house?

I think Matthew has misread Janny Scott and David Leonhardt. They are, I believe, trying to make three points: (a) consumption is more "middle class" than ever before, so that (b) it appears as though class is unimportant, but (c) in reality choosing the right parents matters more than ever in America today:

The economic advantage once believed to last only two or three generations is now believed to last closer to five.... [I]n the past, Professor Solon added, "people would say, 'Don't worry about inequality. The offspring of the poor have chances as good as the chances of the offspring of the rich.' Well, that's not true. It's not respectable in scholarly circles anymore to make that argument." One study, by the Federal Reserve Bank of Boston, found that fewer families moved from one quintile, or fifth, of the income ladder to another during the 1980's than during the 1970's and that still fewer moved in the 90's than in the 80's. A study by the Bureau of Labor Statistics also found that mobility declined from the 80's to the 90's.

The incomes of brothers born around 1960 have followed a more similar path than the incomes of brothers born in the late 1940's, researchers at the Chicago Federal Reserve and the University of California, Berkeley, have found. Whatever children inherit from their parents - habits, skills, genes, contacts, money - seems to matter more today.... But there is broad consensus about what an optimal range of mobility is. It should be high enough for fluid movement between economic levels but not so high that success is barely tied to achievement and seemingly random.... [T]here should remain an incentive for parents to cultivate their children. "Most people are working very hard to transmit their advantages to their children," said David I. Levine, a Berkeley economist and mobility researcher. "And that's quite a good thing."

One surprising finding about mobility is that it is not higher in the United States than in Britain or France. It is lower here than in Canada and some Scandinavian countries but not as low as in developing countries like Brazil, where escape from poverty is so difficult that the lower class is all but frozen in place.... [T]he United States differs from Europe in ways that can gum up the mobility machine. Because income inequality is greater here, there is a wider disparity between what rich and poor parents can invest in their children. Perhaps as a result, a child's economic background is a better predictor of school performance in the United States than in Denmark, the Netherlands or France, one recent study found.

"Being born in the elite in the U.S. gives you a constellation of privileges that very few people in the world have ever experienced," Professor Levine said. "Being born poor in the U.S. gives you disadvantages unlike anything in Western Europe and Japan and Canada."

This argument--that rising standards of living as a whole are making it appear that class is unimportant while in fact class matters more than ever--is an old one. It is one of the centerpieces of George Orwell's The Road to Wigan Pier. Orwell is distressed by the consumption of "cheap " by the relatively poor. He thinks: The system is taking advantage of the relatively poor by enabling them to consume commodities that they think are luxuries, but that in fact are not or are no longer so. It is conning them.

In the middle of the Great Depression in Britain, Orwell expected that the economic catastrophe would bring dismay, discontent, protest, and revolt. Yet it did not do so. Why? Orwell thought that even though "whole sections of the working class... have been plundered of all they really need" by high unemployment, they had also been "compensated... by cheap luxuries which mitigate the surface of life": fish and chips, artificial-silk stockings, tinned salmon, cut-price chocolates, movies, radio, tea.

Note the words: "palliative," "mitigate," "surface." Orwell is in the final analysis not pleased at all by the fact that:

the youth... for two pounds ten on [installments]... can buy himself a suit which... at a... distance looks... tailored on Saville Row. The girl can look like a fashion plate at an even lower price.... [I]n your new clothes you can stand on the corner, indulging in a private daydream of yourself as Clark Gable or Greta Garbo."

For Orwell writing in the 1930s this pattern of cheap middle-class consumption masks the reality--that the working class has lost relative income, relative wealth, and relative power. It makes tolerable what should not be tolerated: that the upper class has much too large a share of the pie.

Part of what is going on is that it is a mistake to say that the shop-girl of today has the same standard of living as a duchess of a century ago because the key element of being a duchess is being exceptional. To the extent that goods are valued not for the services they provide by themselves but as indices of exclusivity, it is pointless to produce them for more people because then they become less exclusive and so less valuable. Paul Krugman, for example, has placed himself on Orwell’s side: he would rather be middle-class in the fifties than working poor in the nineties-—even though the material standard of living of America's working poor in 1990 is higher than that of America's middle class in 1950. He:

know[s] quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter because they have never received a [job] offer from Harvard and will probably not get a Nobel Prize. The live very well... but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing ‘em jump." Privilege is not merely a means to other ends, it is an end in itself.

It may be a very big mistake to think that human happiness is necessarily and significantly increased by piling up larger and larger heaps of material goods. Richard Easterlin in his Growth Triumphant points to evidence from public-opinion surveys that suggests that money does not buy happiness over time or across countries, and believes (though I think he is wrong) that people are no happier in the U.S. today than they are in India today, or were in the U.S. a century ago. Happiness is attained when you achieve your dreams and solve your problems. Material abundance helps you do so, but it also teaches you to dream bigger dreams and pose yourself more complicated problems. Easterlin thus concludes that modern economic growth is a "hollow victory": the "triumph of economic growth is not a triumph of humanity over material wants; rather, it is the triumph of material wants over humanity."

On the other hand, it may not be a very big mistake to think that human happiness consists in expanding our powers and capabilities to accomplish things (not the least of which are maintaining our comfort and satisfying our curiosity), and that wealth is a powerful tool to those ends. There is a standard American response to the claim that money doesn't buy happiness: "Your money doesn't buy you happiness? Then send it all to me. It will help buy me mine."

Posted by DeLong at 06:59 PM

Economist's View: The Art and Practice of Fed Watching

Mark Thoma introduces Tim Duy:

Economist's View: The Art and Practice of Fed Watching: I am pleased to announce a regular feature at Economist's View. Tim Duy, whose qualifications are noted here, has agreed to resume his formal role as Fed Watcher for us on a regular basis. Here are Tim's thoughts on the art of Fed Watching:

Raised From The DeadI seemingly gave up my career as a Fed Watcher more than three years ago, choosing instead to reinvent myself as a local and regional economist in an effort to build a life in the Pacific Northwest (I am hoping global warming increases rain in the region. I understand there is a 50-50 chance of that outcome). Under some congenial prodding from Mark Thoma, however, I am warily putting my feet back in the water.

Some initial observations on Fed Watching, so I can establish something of a baseline:

  1. I do not claim to have any special contacts with members of the Federal Reserve. To be sure, I know economists who work or have worked at the Federal Reserve Board of Governors or District Banks, but I am not pumping them for inside information.
  2. I do not believe that there are mountains of secret information about Fed policy waiting to be discovered. Of course, on occasion a loose piece of information may slip via a private conversation from someone closely connected with the Fed. But such slip ups are relatively rare, especially as the Fed has become increasingly transparent.
  3. As a corollary to point 2 above, I am amazed that investment firms will pay thousands of dollars for the inside scoop on the Fed. My recommendation is to buy a subscription to the Wall Street Journal. Greg Ip is more likely than anyone else to get the story right (except me, of course!). I expect some angry comments back on this one.
  4. The secret to remember is that Fed Watching is not about your interpretation of the economy or what you would do if you were a Board member. That approach will lead you down a bad road. The secret is to interpret the data as the Fed sees it, and remain agnostic about whether the policy is wrong or right.
  5. The worst screw ups will happen when the Fed switches gears in their policy stance. The Fed Watcher must both anticipate a turn in the economy and the Fed's timing of any reaction. Given that economists have correctly predicted something like 8 of the past 5 recessions, a shift in the business cycle will likely leave the Fed Watcher bloodied (been there, done that).
  6. One should be aware of what is happening on Wall Street, but not be overly influenced by the day to day noise. It is easy to get carried away in the hype.
  7. Read the speeches of Fed officials, particularly Board members. Speeches from District Bank Presidents may be interesting and insightful, but policy is made in Washington (New York is the exception to this rule).
  8. Everything will change next year. Be wary -- no matter who replaces Greenspan, he (or, in a bow to political correctness, she) will be fresh blood, and thus a mystery. Uncertainty is the bane of financial markets....

Fed policymakers keep a careful eye on global developments, to be sure. But policy remains focused on domestic stabilization. And also, all economies should maintain a similar focus.... [T]he Fed will keep watch on the current account deficit, and consider how to respond to the challenges a sudden stop of capital would create, but are unlikely take policy action directed toward the current account. Likewise, there may in an asset bubble in the housing market, but don't expect the Fed to react to that, at least not before it bursts. What to look for then? Growth, jobs, and inflation. Boring, I know, but these are the tried and true friends of any Fed Watcher....

Posted by DeLong at 06:43 PM

Text of the Downing Street Memo

An historical document: The Downing Steet Memo:

SECRET AND STRICTLY PERSONAL - UK EYES ONLY

DAVID MANNING
From: Matthew Rycroft
Date: 23 July 2002
S 195 /02

cc: Defence Secretary, Foreign Secretary, Attorney-General, Sir Richard Wilson, John Scarlett, Francis Richards, CDS, C, Jonathan Powell, Sally Morgan, Alastair Campbell

IRAQ: PRIME MINISTER'S MEETING, 23 JULY

Copy addressees and you met the Prime Minister on 23 July to discuss Iraq.

This record is extremely sensitive. No further copies should be made. It should be shown only to those with a genuine need to know its contents.

John Scarlett summarised the intelligence and latest JIC assessment. Saddam's regime was tough and based on extreme fear. The only way to overthrow it was likely to be by massive military action. Saddam was worried and expected an attack, probably by air and land, but he was not convinced that it would be immediate or overwhelming. His regime expected their neighbours to line up with the US. Saddam knew that regular army morale was poor. Real support for Saddam among the public was probably narrowly based.

C reported on his recent talks in Washington. There was a perceptible shift in attitude. Military action was now seen as inevitable. Bush wanted to remove Saddam, through military action, justified by the conjunction of terrorism and WMD. But the intelligence and facts were being fixed around the policy. The NSC had no patience with the UN route, and no enthusiasm for publishing material on the Iraqi regime's record. There was little discussion in Washington of the aftermath after military action.

CDS said that military planners would brief CENTCOM on 1-2 August, Rumsfeld on 3 August and Bush on 4 August.

The two broad US options were:

(a) Generated Start. A slow build-up of 250,000 US troops, a short (72 hour) air campaign, then a move up to Baghdad from the south. Lead time of 90 days (30 days preparation plus 60 days deployment to Kuwait).

(b) Running Start. Use forces already in theatre (3 x 6,000), continuous air campaign, initiated by an Iraqi casus belli. Total lead time of 60 days with the air campaign beginning even earlier. A hazardous option.

The US saw the UK (and Kuwait) as essential, with basing in Diego Garcia and Cyprus critical for either option. Turkey and other Gulf states were also important, but less vital. The three main options for UK involvement were:

(i) Basing in Diego Garcia and Cyprus, plus three SF squadrons.

(ii) As above, with maritime and air assets in addition.

(iii) As above, plus a land contribution of up to 40,000, perhaps with a discrete role in Northern Iraq entering from Turkey, tying down two Iraqi divisions.

The Defence Secretary said that the US had already begun "spikes of activity" to put pressure on the regime. No decisions had been taken, but he thought the most likely timing in US minds for military action to begin was January, with the timeline beginning 30 days before the US Congressional elections.

The Foreign Secretary said he would discuss this with Colin Powell this week. It seemed clear that Bush had made up his mind to take military action, even if the timing was not yet decided. But the case was thin. Saddam was not threatening his neighbours, and his WMD capability was less than that of Libya, North Korea or Iran. We should work up a plan for an ultimatum to Saddam to allow back in the UN weapons inspectors. This would also help with the legal justification for the use of force.

The Attorney-General said that the desire for regime change was not a legal base for military action. There were three possible legal bases: self-defence, humanitarian intervention, or UNSC authorisation. The first and second could not be the base in this case. Relying on UNSCR 1205 of three years ago would be difficult. The situation might of course change.

The Prime Minister said that it would make a big difference politically and legally if Saddam refused to allow in the UN inspectors. Regime change and WMD were linked in the sense that it was the regime that was producing the WMD. There were different strategies for dealing with Libya and Iran. If the political context were right, people would support regime change. The two key issues were whether the military plan worked and whether we had the political strategy to give the military plan the space to work.

On the first, CDS said that we did not know yet if the US battleplan was workable. The military were continuing to ask lots of questions.

For instance, what were the consequences, if Saddam used WMD on day one, or if Baghdad did not collapse and urban warfighting began? You said that Saddam could also use his WMD on Kuwait. Or on Israel, added the Defence Secretary.

The Foreign Secretary thought the US would not go ahead with a military plan unless convinced that it was a winning strategy. On this, US and UK interests converged. But on the political strategy, there could be US/UK differences. Despite US resistance, we should explore discreetly the ultimatum. Saddam would continue to play hard-ball with the UN.

John Scarlett assessed that Saddam would allow the inspectors back in only when he thought the threat of military action was real.

The Defence Secretary said that if the Prime Minister wanted UK military involvement, he would need to decide this early. He cautioned that many in the US did not think it worth going down the ultimatum route. It would be important for the Prime Minister to set out the political context to Bush.

Conclusions:

(a) We should work on the assumption that the UK would take part in any military action. But we needed a fuller picture of US planning before we could take any firm decisions. CDS should tell the US military that we were considering a range of options.

(b) The Prime Minister would revert on the question of whether funds could be spent in preparation for this operation.

(c) CDS would send the Prime Minister full details of the proposed military campaign and possible UK contributions by the end of the week.

(d) The Foreign Secretary would send the Prime Minister the background on the UN inspectors, and discreetly work up the ultimatum to Saddam.

He would also send the Prime Minister advice on the positions of countries in the region especially Turkey, and of the key EU member states.

(e) John Scarlett would send the Prime Minister a full intelligence update.

(f) We must not ignore the legal issues: the Attorney-General would consider legal advice with FCO/MOD legal advisers.

(I have written separately to commission this follow-up work.)

MATTHEW RYCROFT

As originally reported in the Times of London, May 1, 2005

Posted by DeLong at 06:41 PM

Larry Lindsey Wants to Boost National Savings

Ex-Bush NEC head Larry Lindsey thinks that the administration's Social Security plans move in the wrong direction:

Hearing Archives: Committee on Ways & Means :: U.S. House of Representatives: Statement of The Honorable Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group, Fairfax, Virginia

Testimony Before the House Committee on Ways and Means

May 12, 2005

Mr. Chairman, members of the Committee, I am honored to have been asked to testify today on the issue of Social Security reform. It is surprising that the issue of promoting national saving is not at the center of the current debate over Social Security reform, and that will be the focus of my comments today....

The first part of any credible Social Security reform plan is to permanently eliminate the actuarial deficit in the system.... There are a number of ways of closing this gap, but with different implications for national saving. For example, it would take a 28 percent increase in payroll taxes to make sure that the government collected all the money it needed to meet benefit promises over time....

The second way of bringing the system into balance is to change the formula for determining benefits now.... The system could be brought into balance by limiting future benefits to the level of benefits enjoyed by those retiring from the system now, while fully indexing those benefits to inflation. This could even be coupled with a generous minimum Social Security benefit....

In order to maintain the level of consumption in retirement that the government previously promised, but could not deliver, individuals would have to gradually increase their personal saving during their working lives. This may not be easy for some folks. So, a second part of any Social Security reform that promotes national saving should include a personal account plan that helps people save and learn the benefits of saving by watching their own accounts grow.... The best way is to allow workers to choose a plan where they would contribute more to their retirement in return for gaining ownership and a higher return on their existing payroll taxes... the government could match private contributions.... Consider... a plan that asked employees to contribute 1 1/2 percent of their wages to their own personal account, with no change in their current taxes. For only a slightly higher short run budget effect than the President’s proposal, Social Security could offer a four-for-one match on employee contributions made on the first $10,000 of earnings and a one-for-one match on contributions made on earnings above that amount. A worker making $10,000 would thus contribute $150 a year to his account and be matched $600 from existing payroll tax revenue – producing a $750 account. A worker making $50,000 would contribute $750 a year and be matched $1,200, producing a $1,950 personal account. The resulting accounts would build up much more quickly, generate more earnings, and provide far more funds for retirement. The employee’s contribution would not affect their Social Security defined benefit in any way. But as in the President’s plan, the Social Security system would be made whole for any diversion of existing payroll tax revenue.

Best of all, national saving would be enhanced unambiguously. The funds being contributed by workers would largely be net contributions to national saving. They would also involve the real attributes of ownership of capital since the worker would unequivocally have some “skin in the game.” A high initial match rate would also create the right kind of incentives to change long term attitudes toward national saving....

This proposal is not a “carve out.” Nothing is carved out or removed from the Social Security system. The dollars allocated to personal accounts impose no additional strain on the Social Security system. This proposal is not an “add on.” There is no new entitlement.... The combination of gradual reductions in the promised rate of real increase in future benefits and a personal account system that promotes national saving – that is neither a carve out, nor an add-on – is the best approach.

Larry's is a fine idea. The only complaint I can have it is his characterization of it: it is too an "add-on"...

Posted by DeLong at 06:40 PM

Why Oh Why Can't We Have a Better Press Corps? (American Press Corps Doesn't Cover Iraq Department)

David Sirota is now Grand Heresiarch of the Ancient and Hermetic Order of the Shrill:

Sirotablog: ABC News: We're Not Interested in Covering the Iraq War: Why do Americans think journalism is a complete and total joke? Maybe because news organizations treat the most serious, somber news as a a complete and total joke. Just look at this from ABC News's 'The Note' today:

'Brides gotta run, planes gotta stray, and cable news networks gotta find a way to fill a lot of programming hours as cheaply as possible.... We say with all the genuine apolitical and non-partisan human concern that we can muster that the death and carnage in Iraq is truly staggering. And/but we are sort of resigned to the Notion that it simply isn't going to break through to American news organizations, or, for the most part, Americans.... What is hands down the biggest story every day in the world will get almost no coverage.'

Let me reiterate how unbelievable this actually is: A MAJOR AMERICAN MEDIA OUTLET HAS NOW DECLARED THAT THEY SIMPLY ARE NOT INTERESTED IN LETTING THE CARNAGE IN IRAQ 'BREAK THROUGH' IN THEIR NEWS COVERAGE - AS IF IT IS SIMPLY NOT NEWSWORTHY. You can just imagine the pathetic newsroom attitude: we don't cover cats getting stuck in trees, we don't birthday parties at the local McDonalds, and we don't cover America's multi-billion dollar war in the Mideast. Sorry America, the insulated, out-of-touch, Washington media is simply uninterested in providing any real coverage about the war. Because remember, the media has to be 'very deferential' because 'no one want[s] to get into an argument with the president at this very serious time.' Truly nauseating.

Posted by DeLong at 06:37 PM

Why Oh Why Are We Ruled by These Idiots? (Religious War Department)

Let's strengthen Al Qaeda!

Informed Comment : The Guardian reports that news (from Newsweek) that US soldiers desecrated the Koran--and at one point flushed pages of it down the toilet as a technique for humiliating and breaking detainees at Guantanamo--has provoked a second day of protests and then rioting in Jalalabad, this time with loss of life. On Tuesday, 2000 students had demonstrated. On Wednesday, 5,000 to 10,000 university, medical and K-12 students came out, and then they went on the attack, including against US troops. Four died and 70 were injured.... In secular American society, I suppose the shock value here could only be hinted at if we imagined someone flushing a small American flag down the toilet. But probably we can't imagine it at all. The technique of humiliating Muslims as a way of 'breaking' them for interrogation has often veered toward torture at Guantanamo and Abu Ghraib, and it wasn't effective as a technique. The Israeli flag was also used at one point, apparently. The US military has a tradition of such humiliations, going back to treatment of the Filipino Muslim rebels in the early 20th century. But there is a difference between humiliating Muslim prisoners and humiliating Islam. Whatever goddam military genius came up with the bright idea of flushing the Koran down the toilet at Guantanamo should be court-martialed, and Bush had better get out there apologizing before this thing spirals further out of control.

Posted by DeLong at 06:32 PM

Extra! Federal Reserve a Bunch of "Soviet-Style Bureaucrats"

Mark Thoma reads National Review so that the rest of us don't have to. It's a dirty job. He's a brave man to dare to do it:

Economist's View: Kudlow: Fed a Bunch of "Soviet-Style Bureaucrats": Larry Kudlow is unhappy with the Fed's interest rate increases. Therefore the Fed is full of "Soviet-style bureaucrats" trying to manipulate the economy. What he's really unhappy about is not the manipulation per se, but that they aren't manipulating things according to his desires. I always knew Greenspan, Bernanke, and company were a bunch of pinko communists:

The Economy in the Fed's Hands? Our money-meddlers in Washington are up to their old tricks, Larry Kudlow, NRO: Does anyone really know what Alan Greenspan is up to? %u2026 Is there a theory behind this money-tightening policy that can justify the threat it poses to future economic growth?.... Take, for example, the latest monetary data from the Federal Reserve Bank of St. Louis. The data show a marked slowdown in key money-supply measures.... Instead of targeting inflation-sensitive, forward-looking market-price indicators... Keynesian fine-tuners at the Fed are up to their old tricks.... Vladimir Putin%'s remaining Soviet-style bureaucrats have nothing on our money-meddlers in Washington.

Darn communists at the Fed

Posted by DeLong at 06:30 PM

May 12, 2005

Statement on Social Security Reform

J. Bradford DeLong
U.C. Berkeley and NBER

Democratic Policy Committee
192 Dirksen
May 13, 2005, 10 AM

3385 words

Any discussion of Social Security reform needs to begin with one too-rarely-asked question: Why is the American political system focusing its attention on Social Security? Is this really the aspect of American fiscal policy that should be absorbing our attention right now?

The answer is that we shouldn't. We shouldn't be focusing on Social Security right now. America has three problems with the fiscal policy pursued by the Bush administration:

The first of these--the current Bush deficits--is the most urgent. The second of these--the health care funding "opportunity"--is the largest. The third of these--Social Security--is both the least urgent and the smallest. So why are we spending our time on it? There's no good reason. As Berkshire-Hathaway Chairman Warren Buffett, no bleeding-heart liberal he, said last week:

...a [Social Security] deficit of $100 billion a year, something, 20 years out, seems to terrify the administration. But the $400 plus billion dollars deficit currently does nothing but draw yawns....

The answer, I think, is that the Bush administration doesn't want to deal with our current deficit because it made the mess and hopes that if it pretends it doesn't exist nobody will really notice. It's very much the three-year-old approach to fiscal policy: "What broken jelly jar on the kitchen floor?" The answer, I think, is that the Bush administration doesn't want to deal with health-care financing issues because they have no idea what to do: the only person even close to the inner circle with serious views is Mark McClellan who could get nobody else to pay any attention, so he's parked himself at CMS in the hope that by writing rules he can improve the efficiency of the public health-care systems.

Focusing on Social Security thus performs the important political function for the administration of allowing it to pose as seriously concerned with responsible governance while at the same time ignoring the mess on the kitchen floor. And in this case, it's not a three-year-old who has dropped a jelly jar. It is the moral equivalent of a three-year-old who has climbed up on the counter and thrown everything breakable in the room down onto the floor.

Moreover, how serious is Social Security's long-run financing problem? The 2005 Social Security Trustees' Report reduced its estimate of Social Security's 75-year deficit from 0.7% to 0.6% of GDP. Using the same accounting methods, the 75-year deficit of the U.S. government as a whole under current law plus extension of the Bush tax cuts and an AMT fix is 4.8% of GDP. The Social Security Trustees assume, for their intermediate run, that productivity growth in the economy will average 1.6% per year. They justify this assumption by writing that:

[since] productivity growth can vary substantially within economic cycles.... [We] consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively...

And the average of 2.2, 1.2, 1.3, and 1.6 is 1.6, hence their 1.6% per year assumed growth rate--the same growth rate they assumed in 2004, and 2003, and 2002. In 2003 the Trustees learned that the previous year's rate of productivity growth had been 3.2%, but this good news did not lead them to increase the assumed productivity growth rate. Ditto for 2004, when they learned the previous year's rate had been 3.5%. Ditto for 2005, when they learned the previous year's rate had been 3.3%. Past groups of Social Security Trustees have not been hesitant to lower estimates of productivity growth when bad news comes in; this group of Trustees is extremely eager to throw away all of the good news about the underlying productivity trend of the American economy we have had since 2000. I cannot think of a defensible economic rationale for such a forecast construction procedure. Nobody else I have talked to--not Democrats, not Republicans, not Independents--has been able to think of a defensible rationale either.

Taking account of the three places where I think the Trustees' forecasts are clearly awry--productivity growth, life expectancy, and also immigration--if I were running the Social Security Trustees, I would be forecasting a 75-year deficit of 0.2%-0.3% of GDP. Even if we weren't facing other much more urgent, dire, and serious fiscal problems, that deficit would be too small for me to think that it would be a good idea to focus for a year the limited discussion and decision-making power of the U.S. government on this issue. The limited attention span of the government needs to be focused on dire and urgent problems, not limited and far off ones.

With that note--that it is really a bad idea for us to be here talking about Social Security rather than talking about bringing the on-budget deficit down to zero from its current value of nearly $600 billion a year--let me, finally, begin:

In my view, a Social Security reform plan needs to clear five hurdles before it is worth considering:

  1. The private accounts it offers people must be a good deal for beneficiaries.
  2. The plan must raise national savings.
  3. The plan must preserve the valuable defined-benefit nature of the current program.
  4. The plan should restore long-run solvency, and put in place mechanisms for automatic adjustment should the system fall further out of balance.
  5. We must have confidence that the plan will be competently implemented.

You have already heard from Robert Shiller on how private accounts as proposed by the Bush administration are not a good deal for beneficiaries. They do promise some higher returns, yes, but those higher returns are not worth the risk they make beneficiaries bear--the extra purchasing power gained in those states of the world when stocks do well does not match the losses beneficiaries see in states of the world when stocks do not do so well, because the lower your income is the more you miss the extra dollars that just aren't there. I don't have more than quibbles with Shiller's analysis, and none of my quibbles have any effect on his conclusions.

It is depressing to have to say this, because I am actually, in at least one of my hearts-of-hearts, the heart-of-hears of an Eisenhower Republican, a believer in private accounts. I agree with Marty Feldstein that the higher value of the equity premium in the United States over the past half-century tells us that the stock market has really not done very well at mobilizing the risk-bearing capacity of the American economy, and that any steps we can take to broaden and deepen stock ownership promise not just boosts the income and wealth of new stock owners but also significant improvements in the ability of America's business to raise capital for large risky and entrepreneurial ventures. I agree with former Bush II Treasury Deputy Assistant Secretary Kent Smetters that it is a scandal and an outrage that the poorest half of Americans have no easy, automatic, straightforward, and low-fee way of investing in stocks.

But the Bush plan's private accounts are not private accounts that anybody should endorse. The 3%-plus-inflation clawback rate is just too high given likely future asset reurns--as Robert Shiller has just demonstrated. When I conduct informal conversations with those who have been called senior administration officials and ask "Why? Why not a clawback rate that is the Treasury's actual borrowing rate, or even subsidize the private accounts a bit?" I tend to get one or more of four answers:

  1. We know. We're trying to fix it. Our voice isn't very loud in here...
  2. There are powerful people who think that if we set the clawback rate at the Treasury's borrowing rate, it will look like our plan is nothing more than letting people borrow from Social Security to speculate in stocks.
  3. We can't find any money for a subsidy to make private accounts a good deal: we don't have the resources to reach actuarial balance as it is.
  4. There's a "fuzzy math" problem in here. People think that "ownership" is a good thing by itself, and don't focus on the numbers.

Let me skip over the "increase national savings issue" even though it is very important. Let me just say that boosting national savings in the medium run is a dealbreaking essential for Social Security reform, that the most even those under tight message discipline like Greg Mankiw dare say is that the Bush plan will neither raise nor lower national savings, and that Alan Greenspan, among others, is very worried that Mankiw and company are wrong and fear that it might lower national savings and raise interest rates:

We don't know the extent to which the financial markets... trading in long-term bonds, are discounting the... contingent liability.... If indeed the financial markets do not distinguish... one would say, 'Well, if you wanted to go to a private [accounts] system, you could go... without any response in interest rates because... you're just merely switching assets....' But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I could imagine.

The boosting-national-savings concern is the big reason that it is important that properly-designed and properly-implemented private accounts will be an add-on to Social Security as it currently exists, not a carve-out from it.

Now let me turn to the defined-benefit nature of Social Security: that it takes a share of your wages, and returns a certain, inflation-adjusted, stable monthly benefit check that replaces a reasonable (althought sliding-scale) proportion of your pre-retirement income. Such a defined-benefit retirement program is a very valuable thing: people like the idea a lot. Such a defined-benefit program is very hard to get elsewhere than Social Security these days: Businesses today are very hesitant and unwilling to assume the risk and liabilities involved in setting one up. And businesses are not large and stable enough to be able to bear the long-run risk: ask the steelworkers, or the employees of United Airlines, where there defined-benefit corporate pensions are. Or ask the workers of GM.

The government, however, is big enough to bear the risk of a defined-benefit pension program. And I think that where there is something that people regard as extremely valuable that only the government can provide, the government should provide it. In another of my hearts-of-hearts, you see, I am a social democrat. An it is in this context that I find myself very skeptical of progressive price indexing, for over the long-run it eliminates Social Security as a defined-benefit pension program, replacing it with a Social Security system that gives everybody the same value monthly check equal to about 22% of the average wage. It (a) cuts average benefits relative to current law by about 40%, and (b) changes Social Security from a defined-benefit program to which you contribute a share of your income to a simple flat benefit check, along the lines of what George McGovern proposed in the 1972 presidential campaign.

Now this is a progressive change in America's tax and transfer system. But Peter Orszag talks fast enough to be able to list 20 better ways to make America's tax and transfer system more progressive in less than thirty seconds. And this way does come at a major cost: eliminating people's defined-benefit pension component, a component that cannot be easily replaced in the economy we are moving into.

Now there are problems in analyzing what the administration's progressive price indexation proposal is. It came without numbers, which is why we are all using the numbers that Jason Furman has cranked out based on Pozen's original plan and on Jason's Talmudic reading of what actual modifications of Pozen's proposal would be needed if the words from speeches and press conferences were to actually make sense. And we have disturbing claims on Meet the Press that Pozen's plan is "'...really not necessarily the president's plan,' [Andrew] Card noted. 'It's directionally consistent with the president's plan'."

Robert Pozen proposes to fill the post-2050 projected funding gap in Social Security by reducing benefits and raising taxes. He would fill 10 percent of the gap by cutting Social Security disability payments. He would fill 60 percent by shifting to "progressive price indexing." He would fill 30 percent of the hole by tapping into income tax revenue. Is Bush's adoption of Pozen's ideas a backhand way of saying that he too wishes to fill the anticipated funding hole with income taxes? Does anybody know?

It is important to register the magnitude of the benefit cuts relative to current law that Pozen is proposing. For those retiring in 2075, Pozen would keep the replacement rate at 49 percent for the working poor—those making half the average income. But the replacement rate for those making more would be cut: At the average income, the replacement rate would go from 36 percent to 26 percent; at one-and-a-half times average, from 30 percent to 17 percent; at the Social Security maximum, from 24 percent to 12 percent. Medicare premiums are already deducted from your Social Security check. Deduct the claw-back for the private-accounts diversion as well, and by late in this century the odds are that—-at least for the upper middle class—-the standard Social Security check would be zero. Social Security would no longer be a universal program: It would be a program in which the half of America that is richer and more powerful and more likely to vote sees large chunks of its money going in and nothing coming out.

It is possible that this is the point, at least for some factions within the White House: perhaps creating a large and powerful class of Americans who get much, much less out of Social Security than they put in and for whom Social Security as a whole is demonstrably a very bad deal is the objective. It was early Social Security guru Wilbur Cohen who said that "in the United States, a program that deals only with the poor will end up being a poor program. ... " Loading a large chunk of the burden of fixing Social Security onto America's upper middle class may be the first step in the creation of a mid-21st-century political majority for the phasing-out of the program as a whole. But it is also possible that the White House doesn't have such a long-run Machiavellian plan in mind--that it is hoping to attract some more support for its proposals by making them more progressive, and is just trying to trick its right-wing supporters by pretending that this is a deep, long-run, Machiavellian plan to eventually eliminate Social Security entirely. The only thing that is clear is that it is very unlikely that the White House is proposing progressive price indexing because it believes the government needs to put its thumb on the scales to make the U.S. distribution of income and wealth more equal: that's not their game. (It is, however, Robert Pozen's game: that's why he advocates this proposal.)

Let me skip over point four, solvency, by pointing out that the Bush plan--excuse me, there is no Bush plan, there are only "ideas" that are "not necessarily" the Bush plan but are only "directionally consistent" with it--doesn't reach actuarial solvency unless Bush's embrace of Pozen includes his plans to rest part of Social Security on income taxes. If that is in fact what Bush's embrace of Pozen means, that's big news.

And let me end with point five: competence in implementation. A Social Security reform plan could clear hurdles one through four, and still fall flat on its face if incompetently implemented: the devil is in the details. And looking at the farm bill, the steel tariff, the return of deficits bigger than ever, the use of intelligence by the NSC, the absence of a real plan for post-invasion Iraq, the Medicare drug bill that ex-HHS Secretary Thompson now really wishes had been structured differently, et cetera, et cetera, it is hard to believe that any reform to be implemented by this administration will be implemented competently. It has the anti-Midas touch: whatever it grasps turns to mud.

Let me give a small example of this, from George W. Bush's statement on April 28:

In a reformed Social System, voluntary personal retirement accounts would offer workers a number of investment options.... I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government.... Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses.

The "build a nest egg" part... The "invest in Treasury bonds" part... On April 28 the Federal Reserve was reporting that the twenty-year inflation-protected Treasury bond was yielding 1.87% plus inflation per year. The money you divert into your private account under the Bush plan is clawed back--charged against your normal Social Security benefit--at a rate equivalent to 3% per year plus the rate of inflation. Were interest rates to stay where they are now over the next fourty years, if you were 25 now, made an average of $80,000 a year over your career, and diverted all 4% of your wages possible into your private account and invested them in twenty-year inflation-protected Treasury bonds... then your Social Security benefits--normal plus the annuitized check from your private account balance--would be $514 a month less than if you had said "No thanks" to private accounts and kept your money in the standard program.

"Building a nest egg"?! Given current interest rates, following George W. Bush's advice and investing Social Security private-accounts money in inflation-protected Treasury securities is a really bad idea. Yet they let him go out there and say that.

Did nobody inside the White House bother to run the numbers? Did nobody care? This breaks my heart--for in yet another of my hearts-of-hearts, I am a technocrat who believes in administrative competence, and think that the President of the United States should not be sent out to make speeches that only an underbriefed fool would write because of the nonsensical things that they say.

Until the center of policy making and implementation in this administration is moved outside the White House to someplace else where people seriously concerned with the substantive design and implementation of policy, nothing the White House proposes--nothing, no matter how good it sounds at first--can be expected to turn out to be anything other than a large pile of mud.

Thank you.

Posted by DeLong at 01:43 PM

Why Oh Why Can't We Have a Better Press Corps? (American Press Corps Doesn't Cover Iraq Department)

David Sirota is now Grand Heresiarch of the Ancient and Hermetic Order of the Shrill:

Sirotablog: ABC News: We're Not Interested in Covering the Iraq War: Why do Americans think journalism is a complete and total joke? Maybe because news organizations treat the most serious, somber news as a a complete and total joke. Just look at this from ABC News's 'The Note' today:

'Brides gotta run, planes gotta stray, and cable news networks gotta find a way to fill a lot of programming hours as cheaply as possible.... We say with all the genuine apolitical and non-partisan human concern that we can muster that the death and carnage in Iraq is truly staggering. And/but we are sort of resigned to the Notion that it simply isn't going to break through to American news organizations, or, for the most part, Americans.... What is hands down the biggest story every day in the world will get almost no coverage.'

Let me reiterate how unbelievable this actually is: A MAJOR AMERICAN MEDIA OUTLET HAS NOW DECLARED THAT THEY SIMPLY ARE NOT INTERESTED IN LETTING THE CARNAGE IN IRAQ 'BREAK THROUGH' IN THEIR NEWS COVERAGE - AS IF IT IS SIMPLY NOT NEWSWORTHY. You can just imagine the pathetic newsroom attitude: we don't cover cats getting stuck in trees, we don't birthday parties at the local McDonalds, and we don't cover America's multi-billion dollar war in the Mideast. Sorry America, the insulated, out-of-touch, Washington media is simply uninterested in providing any real coverage about the war. Because remember, the media has to be 'very deferential' because 'no one want[s] to get into an argument with the president at this very serious time.' Truly nauseating.

Posted by DeLong at 01:38 PM

Why Oh Why Are We Ruled by These Idiots? (Religious War Department)

Let's strengthen Al Qaeda!

Informed Comment : The Guardian reports that news (from Newsweek) that US soldiers desecrated the Koran--and at one point flushed pages of it down the toilet as a technique for humiliating and breaking detainees at Guantanamo--has provoked a second day of protests and then rioting in Jalalabad, this time with loss of life. On Tuesday, 2000 students had demonstrated. On Wednesday, 5,000 to 10,000 university, medical and K-12 students came out, and then they went on the attack, including against US troops. Four died and 70 were injured.... In secular American society, I suppose the shock value here could only be hinted at if we imagined someone flushing a small American flag down the toilet. But probably we can't imagine it at all. The technique of humiliating Muslims as a way of 'breaking' them for interrogation has often veered toward torture at Guantanamo and Abu Ghraib, and it wasn't effective as a technique. The Israeli flag was also used at one point, apparently. The US military has a tradition of such humiliations, going back to treatment of the Filipino Muslim rebels in the early 20th century. But there is a difference between humiliating Muslim prisoners and humiliating Islam. Whatever goddam military genius came up with the bright idea of flushing the Koran down the toilet at Guantanamo should be court-martialed, and Bush had better get out there apologizing before this thing spirals further out of control.

Posted by DeLong at 01:36 PM

Extra! Federal Reserve a Bunch of "Soviet-Style Bureaucrats"

Mark Thoma reads National Review so that the rest of us don't have to. It's a dirty job. He's a brave man to dare to do it:

Economist's View: Kudlow: Fed a Bunch of "Soviet-Style Bureaucrats": Larry Kudlow is unhappy with the Fed's interest rate increases. Therefore the Fed is full of "Soviet-style bureaucrats" trying to manipulate the economy. What he's really unhappy about is not the manipulation per se, but that they aren't manipulating things according to his desires. I always knew Greenspan, Bernanke, and company were a bunch of pinko communists:

The Economy in the Fed's Hands? Our money-meddlers in Washington are up to their old tricks, Larry Kudlow, NRO: Does anyone really know what Alan Greenspan is up to? %u2026 Is there a theory behind this money-tightening policy that can justify the threat it poses to future economic growth?.... Take, for example, the latest monetary data from the Federal Reserve Bank of St. Louis. The data show a marked slowdown in key money-supply measures.... Instead of targeting inflation-sensitive, forward-looking market-price indicators... Keynesian fine-tuners at the Fed are up to their old tricks.... Vladimir Putin%'s remaining Soviet-style bureaucrats have nothing on our money-meddlers in Washington.

Darn communists at the Fed

Posted by DeLong at 01:17 PM

Shifting Points of Reference?

Over at a Fistful of Euros, Tobias Schwartz has a very nicely-argued piece about Guenter Grass:

A Fistful of Euros: Shifting points of reference?: [DeLong's] reading of the article was most certainly influenced by the date on which it appeared. Of course it is almost natural to believe that a German author... on May 7, would be mainly concerned with the era that ended on VE-day, not the one that began.... [H]ad Grass been predominantly concerned with the Nazi dictatorship, not explicitly referring to the Holocaust would have mattered a lot more than it does with respect to the time thereafter. But Grass was mainly concerned with the latter....

Brad probably made the same mistake the NYT editors made: They haven’t realized to which extent the current economic problems, and political narratives, are influencing the way Germany is remembering its past. For the first time that I can remember, Germany is not only looking back to the before 1945, not only comparing its presence to the Nazi-era, but also comparing it to misty-eyed memories times of the economic miracle, “les trentes glorieuses”, the “Modell Deutschland”....

May 8 is a complicated and important watershed for Germany in so many ways that it can easily be applied in a number of discourses. What Günter Grass did - and what Brad Delong probably could not see - was using the date to reflect about the time thereafter.

Of course, there will always be occasions and dates that will remain less ambiguous - as yesterday’s official opening of Peter Eisenman’s Holocaust memorial in Berlin. And I bet Grass was there, too.

Very nicely argued...

But doesn't Grass write on May 8 for a reason--he wants to get his electrical juice and power from the horror of the era that ended in May 1945? To call the "power of capital" a "new totalitarianism" and described it as "backed... by the world's last remaining ideology"--the equivalences are implicit, but they are very clear and very disturbing.

And there are the claims that "Parliament is no longer sovereign in its decisions. It is steered by the banks and multinational corporations.... Lately, perhaps too late, we have come to recognize that... Public Enemy No. 1, comes not from right-wing radicalism but rather, from the impotence of politics, which leaves citizens exposed and unprotected." The claim is not that the Social Democratic Party has made a mistake in pushing Harz IV--that the neoliberal approach to economic reform is wrong, and that the analyses of people like me and my friends are flawed. The claim is that the duly-elected representatives of the people do not represent the people, and are in fact "Public Enemy No. 1."

These rhetorical moves by Grass strike me as (a) very false, and (b) very ugly--especially because the historical memory of May 8 is not a taxicab that takes you whereever you want to go: it is much more powerful than that.

Posted by DeLong at 12:44 PM

Limitations of the Marshallian Toolkit

An (unfortunately still early) draft of my paper for the IFPRI/Cornell conference on threshold effects and nonlinearities in economic growth:

Adding to the Marshallian Toolkit: Big Push and Nonlinearity in History and Theory

J. Bradford DeLong
U.C. Berkeley and NBER
May 2005

ABSTRACT: Most of economics practiced, even today, uses the Marshallian toolkit. But there is an often-undervalued thread of economic theory--with traces in Smith, and visible in writers like Hirschman and Rosenstein-Rodan--that has focused on virtuous circles that, it is claimed, produce powerful non-linearities in growth and development. Looking back at economic history, one cannot be struck by how much of the economic past that is truly interesting is inaccessible to the neo-Marshallian toolkit. My hope, at least, is that a closer engagement with economic history will help economists build alternatives to the Marshallian toolkit, and help specify the situations under which "big pushes" are beneficial in that the whole is greater than the sum of the parts, and under which small changes in incentives may produce powerful changes for good or ill.

Introduction

This is the first time I have been asked to give a keynote, so I am unpracticed and somewhat unsure how one is supposed to proceed. I suspect that my greatest value-added will come in simply sketching out the importance of the problem that this conference is attempting to address. And the best way to do that, I think, is to point out how very little the smooth continuous-curve economics of Alfred Marshall--he who said that "nature does not make leaps"--can explain of the truly important aspects of economic life worldwide over the past two centuries. We live in a world of big pushes, thresholds, and nonlinearities. Yet we economists try to tackle it with a broadly neo-Marshallian toolkit of smooth changes and equilibrating responses, and so we do not do as well as we should.

There are, of course, theoretical alternatives and additions to the Marshallian toolkit: think of Rosenstein-Rodan (1943, 1961); Hirschman (1958); and Murphy, Shleifer, and Vishny (1989). Krugman (1996) regards Rosenstein-Rodan's (1943) "Big Push story as the essential high development model" in which:

development is a virtuous circle driven by external economies... an interaction between economies of scale at the level of the individual producer and the size of the market.... If modernization can be gotten started on a sufficiently large scale, it will be self-sustaining, but it is possible for an economy to get caught in a trap in which the process never gets going....

But as Krugman says, this "Big Push" branch of theory--even though it can trace itself back to Adam Smith (1776) and "the division of labor depends on the extent of the market--virtually vanished from the face of the earth in the 1960s and 1970s. Krugman attributes this to the fact that:

economies of scale were crucial to high development theory.... [And] economies of scale were very difficult to introduce into the increasingly formal models of mainstream economic theory.... A rise in the standards of rigor and logic [in economics] led to a much improved level of understanding of some things, but also led for a time to an unwillingness to confront those areas the new technical rigor could not yet reach.... After 1960... an attempt to publish a paper like Rosenstein Rodan's would have immediately gotten a grilling: "Why not build a smaller factory...? Oh, you're assuming economies of scale? But that means imperfect competition, and nobody knows how to model that, so this paper doesn't make any sense."... By the 1970s (when I was myself a student of economics)... [Big Push ideas] seem[ed] not so much wrong as meaningless.... Where were the models?...

But the increasing-returns model-building is not that hard. (Indeed, Krugman wonders about his own argument: "[was] the long slump in development theory... really necessary. The model [of Murphy, Shleifer, and Vishny (1989)] is so simple: three pages, two equations, and one diagram... could... have been written as easily in 1955 as in 1989. What would have happened to development economics, even to economics in general, if someone had legitimized the role of increasing returns and circular causation with a neat model 35 years ago? But... economists... were still absorbed in the possibilities of perfect competition and constant returns.... Good ideas were left to gather dust in the economics attic for more than a generation; great minds retreated to the intellectual periphery.) I suspect that the major problems lay elsewhere than in Krugman's diagnosis--which I think was a factor but not the factor. Two more important factors were, first, that investments in the standard neo-Marshallian toolkit promised high returns; and, second, that thresholds, increasing returns, and Big Pushes were scary. Small changes can have big effects, yes, but how then does one know which small changes to study?

As an economic historian, I cannot help with the second problem--although I will have a few words to say about it at the end of the essay. But I can help with the first: I am here to say that the payoffs to investments in the standard neo-Marshallian toolkit are in fact a lot smaller than most economists who do not worry about threshold effects and nonlinearities presume. Indeed, the most interesting parts of economic history are issues on which the neo-Marshallian toolkit has next to no purchase.

This essay documents that claim. In the next section, I briefly discuss how unlikely it is that the neo-Marshallian toolkit could give us much purchase on the biggest problems of development: neither the fact of modern economic growth nor the extraordinary divergence in relative prosperity over the next two centuries yields to the neo-Marshallian toolkit. Section 3 takes a slightly less Olympian view. It argues that three major problems in economic history--understanding the British Industrial Revolution itself, the East Asian Miracle, and western Europe's rapid post-World War II growth--all require serious thought about thresholds. We do not have all the answers, but it is plain that we cannot make progress without incorporating substantial nonlinearities into our models. At its end, section 3 considers a separate, non-historical problem: the macroeconomic collapse of neoliberal reform in Argentina at the start of this decade, and makes a similar argument that the neo-Marshallian toolkit is not of much help.

This paper thus serves a primarily negative purpose: it shows the extent of our ignorance, rather than putting forward strong positive models of how exactly, thresholds were passed and Big Pushes triggered. The concluding section 4 offers an apolog for this, and tries to provide a few insights into how economic inquiry might be able to use models in which thresholds and increasing returns are central in a productive way.

2. The Big Problem

Consider the biggest push of all. We live today in a world of extraordinary and unbelievable wealth. Within two generations human literacy will, if we avoid blowing ourselves up with thermonuclear weapons, be nearly universal. 2300 years ago Aristotle said that a society of even narrow literacy--let alone a society in which philosophy in its oldest sense of the love and pursuit of relatively abstract knowledge--was impossible in the absence of widespread slavery, or something like it, and that that would never change unless we went back to the Golden Age in which there were looms that could throw the shuttle by themselves and plows that could dig the furrows by themselves. We don't quite have those--although I did last year hear a presentation by a Caterpillar executive about prospects for teleoperated bulldozers that could be controlled from places of air-conditioned comfort. But we are close enough. What involuntary servitude exists in the world today is by and large an exercise of power over those who have none by those who have little, and not (as it was in the Classical Athens of Aristotle, the Imperial Rome of Hadrian, or the Federalist Virginia of Jefferson) a key distributive institution in the economy as a whole.

We have acquired this extraordinary per-capita wealth in the past three centuries. Before three centuries ago the overwhelming effect of technological progress--and there was a great deal of technological progress, from the mechanical clock and the watermill to the cannon and the caravel to the development of strains of rice that you can crop three times a year in Guangzhou and the breeding of merino sheep that can flourish in the hills of Spain--was to increase the numbers of humanity, not to raise median standards of living. Today, if we divided up what we produce worldwide equally, would it give us a standard of living ten times that of the bulk of our preindustrial ancestors? Twenty times? A hundred times? Does the question even have meaning? David Landes (1999) likes to tell the story of Nathan Meyer Rothschild, richest man in the world in the first half of the nineteenth century, dead in his fifties of an infected abscess. If you gave him the choice of the life he led as the finance-prince of Europe or a life today low-down in the income distribution, checking-in items as they arrive at the loading dock at the local Target, with thirty extra years of life to see his great-grandchildren, which would he choose?

We also live today in an extraordinarily unequal world. There are families today near Xian, in what was the heartland of the Tang Dynasty Empire, with two-acre dry wheat farms and a single goat. There are families today with four-bedroom two-story houses in Tacoma Park and civil-service jobs that could buy the two-acre wheat farm and the goat with one day's wages. Yet in terms of communication, transport, and shipment, the world today is far smaller than the world of three centuries ago when a passage from Britain to India could take half a year, and the London headquarters of the East India Company's directives to its agents on the spot were always at least a year out of date.

Marshall's economics--the equilibrium economics of comparative statics, of shifts in supply and demand curves, and of accomodating equilibrating responses--is of next to no help to us in accounting for any of this. Why, worldwide, did median standards of living stagnate for so long? Why did their rate of growth undergo an acceleration that is extraodinarily rapid in such a short period of time? Where is the economics of invention, innovation, adaptation, and diffusion anyway? Not in Marshall. And why is today's world so unequal--so unequal that it is hard to find any measures of global distribution that do not show divergence at least up until the 1980s (see DeLong (1986))?

It was Robert Solow (1957) and Moses Abramovitz (1956) who most strikingly pointed out that Marshall's economics is of little help in understanding modern economic growth. The action comes not from smooth supplies-and-demands and the allocation of scarce resources to alternative uses, but from the technological-and-organizational-change residual--and that is, after all, nothing but a measure of our ignorance. Mankiw, Romer, and Weil (1989) made a valiant attempt to shore-up the Solow growth theory version of Marshall, and attribute relative wealth and poverty in the world distribution of income to virtue (having a high investment rate and a low population growth rate) and vice (having a low investment rate and a high population growth rate) respectively. But Hsieh and Klenow (2002) undermine this by asking: are countries relatively poor because they have a low rate of investment (and thus little capital), or do they have a low rate of investment because they are poor (and so face a high real price of capital goods)? And that countries are still in the high-population-growth middle of the demographic transition is also both cause and conseuqence of relative poverty. The best that can be said is that the Mankiw, Romer, and Weil (1989) story is the top half of a vicious-virtuous circle--one assigned priority because the authors conduct their investigation under the maintained hypothesis that investment rates and population growth rates are determined exogenously.

Truly exogenous variables to identify cross-country growth patterns are very hard to find. But it is hard to think about the determinants of population growth and relative price structures without concluding that there is potential for the circles of reciprocal causation to be very strong indeed, with infinitesimal changes in outside variables having large and measurable effects.

3. The Problems of Detail

Things get little better when we examine the past several centuries from a less Olympian height, and try to look at instances where it at least looks as though there has been a highly successful Big Push. Once again the things that we find of greatest interest are the places where the neo-Marshallian toolkit helps us the least. Consider, briefly, three positives and one negative: the British Industrial Revolution, Western Europe's extraordinary post-World War II growth spurt, the rise of East Asia, and--the negative one--the crash of Argentina's neoliberal reform program.

The Industrial Revolution

Consider, first, the Industrial Revolution itself. This great threshold nonlinearity is, in many ways, the greatest of them all. Economic historians like Ken Pomeranz (2000) point out truthfully that back before the Industrial Revolution differences in median standards of living across the high civilizations of Eurasia were relatively small. A peasant in the lower Yangtze Valley under Kangxi in the late seventeenth century had a different style of life than his or her contemporary peasant in the Thames Valley under Charles II Stuart, but not one that was clearly better or worse. Two centuries later that was no longer the case: by the end of the nineteenth century median standards of living in Britain and in other countries to which the Industrial Revolution had spread were, for the first time in recorded history, light-years above any neo-Malthusian benchmark of bio-sociological subsistence. Britain's early industrial-era economic accomplishment took place in spite of the drawing-off of a substantial proportion of national income to support a corrupt, decadent, and luxurious aristocracy (see Namier (1929)); in spite of a tripling of population that put extraordinary Malthusian pressure on the natural resource base underpinning the economy (see Wrigley and Schofield (1993)); and in spite of the mobilization of a prevously unheard-of proportion to national income for a near-century of intensive war against a power, France, with three times Britain's population (see Brewer (1989), Williamson (1984), Temin and Voth (2005)).

But the explanation of this extraordinary nonlinearity remains contested. Rostow's (1958) non-Communist manifesto boldly speculated that all that was needed was a market economy coupled with the doubling of society's investment share. North and Weingast speculated that all that was needed was a government strong enough to enforce private property rights and yet limited enough to respect them--and have been criticized by others pointing out that the eighteenth and nineteenth century British state's extraordinary powers of eminent domain and its eagerness to exercise them did play a key role and are definitely not part of the picture of the night-watchman state. Kremer (1991) argued from the principal that "two heads are better than one" that human brainpower was bound to someday attain its critical mass, boost the rate of productivity growth, and elevate standards of living enough to trigger the demographic transition and so cause a phase transition of the economy from neo-Malthusian medieval and early modern dynamics to the dynamics of modern economic growth. But at the key moments of the Industrial Revolution English was a language written and read fluently by at most a million people, and Chinese was written and read fluently by at least ten million. If two heads are that much better than one, shouldn't ten heads be even much, much better? Debate over even the quantitative shape continues. There are those in the ascendant (Crafts (1985), Harley (1982)) who see the Industrial Revolution as narrowly-focused on key transformative leading-sector industries: coal, cotton, machinery, and steam. Such an Industrial Revolution would be ripe for explanation in terms of the narrow logic of technological creativity in the context of the abundance of particular resources like coal, cotton, and iron ore. Others in eclipse--perhaps temporarily (see Temin (1997))--see the Industrial Revolution as an extremely broadly-based phenomenon, and so ripe for explanation as the result of political, social structural, or cultural factors.

We can build models of such a transition as the Industrial Revolution. But these models must have threshold effects. Nonlinearities. The rate of growth of British technological capabilities does not rise smoothly as world population (or even British population) increases. The level of productivity does not inch upward at each generation at a pace only a little bit faster than it had done before. Even the Crafts (1985) and Harley (1982) interpretations that see a "little" Industrial Revolution see it as made up of earth-shaking changes in the key leading sectors--they just see those key leading sectors as, initially, a relatively small part of the entire economy. And, of course, there is the most famous contemporary assessment of the power of the Industrial Revolution, even though it was written from the middle Rhine Valley, a place definitely on its fringes. In its authors' view, the Industrial Revolution:

has shown what man's activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals.... The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together....

Why? How? The neo-Marshallian toolkit is of little help here.

Post World-War II Europe in the Argentine Mirror

Consider, second, a more cheerful story: the story of Western Europe's post-World War II economic and political miracle. Before World War II, the countries of continental Western Europe appeared to be lagging further and further behind the United States. Brutally bitter labor relations, sharp social cleavages, intense distributional struggles that threatened and in many cases extinguished democracy--the interwar political economy of Western Europe as narrated by historians like Maier () sounds a lot like the post-World War II political economy of countries like Chile, and Argentina.

The aftermath of World War II threatened to make things much worse in Western Europe. Its export earnings were gone. Required repair and rebuilding needs were enormous. Inflows of private capital were nonexistent. In the absence of large-scale American aid--by some mechanism like the Marshall Plan--Western Europe faced a future in which hard-currency imports would be meted out by an eyedropper, reconstruction would be prolonged and slow, and distributional fights would once again destabilize its politics.

It is true that in a well-functioning market economy, it is hard to argue that resources for repair and rebuilding would remain critically scarce for long. The European economy had substitution possibilities, and market economies are very good at finding and using them where they exist.

Eichengreen and Delong (1991) take a back-of-the-envelope look at the most severe post-World War II Western European bottleneck: coal:

In 1938 Western Europe consumed 460 million tons.... It produced only 400 million tons in 1948.... [During the] Marshall Plan, Western Europe imported... seven percent of its coal consumption from the United States. Assuming... half of national product... produced in coal-burning sectors... [with] fixed [production] coefficients... elimination of coal imports would have reduced Western European total product over the duration of the Marshall Plan by no more than three per cent.

But would the market economy have been allowed to find the substitution possibilities? The memory of the Great Depression was still very fresh, and predisposed politicians toward intervention and regulation. Governments might well have severely constrained market mechanisms by continuing wartime controls (indeed, the British government tried to do so). The late 1940s and early 1950s might have seen the building-up of bureaucracies to allocate foreign exchange, and to impose price controls to protect the living standards of urban working classes. In short, post-World War II Western Europe might well have been a lot more like post-World War II Argentina.

Post-World War II Argentina did adopt demand stimulation and income redistribution coupled with a distrust of foreign trade and capital and a bias toward the use of controls as allocative mechanisms rather than prices. Diaz-Alejandro (1970) is still the classic analysis of Argentina's post-World War II long-run economic stagnation. As Eichengreen and DeLong summarize his interpretation:

[T]he collapse of world trade in the Great Depression [had been] a disaster of the first magnitude for an Argentina tightly integrated into the world division of labor.... Argentina continued to service its foreign debt... [but Britain and America] took unilateral steps to shut it out of [its traditional export] markets. The experience of the Depression justifiably undermined the nation's commitment to free trade. It was in this environment [that] Juan Perón gained mass political support. Taxes were increased, agricultural marketing boards created, unions supported, urban real wages boosted, international trade regulated. Perón sought to generate rapid growth and to twist terms of trade against rural agriculture and redistribute wealth to urban workers who did not receive their fair share....

This Perónist program was not prima facie unreasonable given the memory of the Great Depression, and it produced almost half a decade of very rapid growth. Then exports fell sharply... as the consequences of the enforced reduction in real prices of rural exportables made themselves felt. Agricultural production fell... low prices offered by government marketing agencies. Domestic consumption rose. The rural sector found itself short of fertilizer and tractors. Squeezed between declining production and rising domestic consumption...

Thus Juan Perón's government had only unattractive options: (i) devalue to bring imports and exports back into balance and meanwhile borrow from abroad (reducing the living standards of his domestic political base and abandoning a great deal of his appeal to national price); (ii) contract the economy, raising unemployment and reducing consumption, and expand incentives to produce for export by decontrolling agricultural prices (but this is even worse, and there is not yet a functioning IMF to blame for the policy turnarounds); (iii) control and ration imports to keep domestic demand growing. Not surprisingly, Perón and his advisors chose the third option, hoping that a dash for growth and a reduction in dependence on the world economy was good for Argentina. But the long-run consequences were dire indeed. As Díaz Alejandro writes:

First priority was given to raw materials and intermediate goods imports needed to maintain existing capacity in operation. Machinery and equipment for new capacity could neither be imported nor produced domestically. A sharp decrease in the rate of real capital formation in new machinery and equipment followed. Hostility toward foreign capital, which could have provided a way out of this difficulty, aggravated the crisis...

Subsequent governments could not fully reverse these policies, for even after his overthrow the political forces that Perón had mobilized still had to be appeased. The 1950s saw capital goods become hugely expensive in Argentina--and thus even a healthy savings effort produced little in the way of real investment. To quote Diaz-Alejandro again: "the capital... in electricity and communications increased by a larger percentage during the depression years 1929-39 than... 1945-55." Unable to invest on a sufficient scale, the Argentine economy stagnated.

In 1929 Argentina had been richer than any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. Eichengreen and DeLong conclude that slow Argentinean growth thereafter came because Argentina's "mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage."

Why didn't Western Europe follow a similar post-World War II trajectory? Díaz Alejandro argued that four factors set the stage for Argentina's astonishing post-World War II relative decline:

  1. a politically-active and militant urban industrial working class,
  2. economic nationalism,
  3. sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity.

From the perspective of 1947, Western Europe looked as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been sharply divided along class lines for two generations.

Yet Europe avoided this trap because of small differences that mattered. Large-scale American aid to boost the pace of reconstruction and create, earlier, the impression that the liberalized mixed-economy was working? Fear of Stalin's T-34 tanks just east of the Fulda Gap and a belief by nearly all--conservative and social democrats alike--that this was not a good time to sharpen distributional conflicts? From the standpoint of 1945 it is not easy to see what would lead one then to forecast the wide gaps between Argentina and company on the one hand and France and Germany and company that we see today.

Once again, small differences that appear to matter a lot.

The East Asian Miracle

Last, consider East Asia. It is hard for us today to cast our minds back to the 1960s, and to realize how broadly unexpected the rapid economic rise of East Asia over the past generation and a half has been. From today's perspectives, studies like World Bank (1993) or Rodrik (1994) look back at East Asia and see a host of favorable initial post-World War II initial conditions, from favorable demography and low income inequality to high education levels and relative ethnolinguistic integration as playing a large role. Even Rodrik (1994), who wants to conclude that skillful government interventions (i.e., providing subsidies to producers that win the export tournament) can do significantly better than laissez-faire feels a need to caution his readers: South Korea and Taiwn shared a number os special initial conditions... high levels of educational attainment... equal distribution... that... other countries lack.... [T]he relevance of their experience with government intervention to other developing economies may well be limited. The World Bank's (1993) East Asian Miracle shades the story more toward the initial conditions side. And expressions of official orthodoxy like the Asian Development Bank's 1997 Emerging Asia: Changes and Challenges can flatly assert that East Asia is rich today because of "a fortunate combination of initial potential."

This would come as a surprise to those on the ground in the 1950s and 1960s examining that potential. Berkeley undergraduate thesis student Charlene Huang (2005) cites William Easterly (1995) reporting a World Bank mission's conclusion at the start of the 1960s that there is "no doubt that the development program [proposed by the government] far exceeds the potential of the Korean economy.... It is inconceivable that exports will rise as much as [forecast]..." And, of course, South Korean exports and GDP growth exceeded their targets.

Indeed, Huang (2005) claims that regressions suggesting a powerful role for initial conditions in East Asian development characterize it as:

having high initial levels of human capital (Rodrik 1994).... Primary school enrollment rates circa 1960 are...employed.... However, a country’s primary school enrollment rate circa 1960 is less of an "initial [post-WWII] condition" than an indicator of the competence and success of [governance]... a reflection of the... government's commitment to education and human capital development than as an indicator of initial levels of human capital.... Barro and Lee’s data on the percentage of the adults over 25 years of age in 1960 who completed primary school is... a [better] indicator.... The percentage of adults who completed primary school during the time of colonization is a better indicator of colonial legacy.... 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... Singapore and Korea both have about 100% primary enrollment in 1960, [but] 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.... Singapore’s British colonizers were not as interested in educating the masses...

The East Asian tradition of heavy investment in human capital is, for many of the high-performing Asian economies, quite recent. That their governments' abilities to create and manage impressive educational systems has played a key role is not in dispute. But the ability to successfully make a Big Push for education from a near-standing start is a social capability that was, in many high-performing Asian economies, created after decolonization--rather than being a long-standing historical legacy.

Many other countries in the 1960s tried to build high-performing mass school systems, and failed. East Asia succeeded. What alternatives to the neo-Marshallian toolkit will help us understand how?

Modern Argentina in the European Mirror

Consider, last, the recent history of Argentina. Of all the disappointments of neoliberal reform in the 1990s, perhaps the most disappointing was the catastrophic 2001 financial crisis in Argentina. Coming after four years of slow recession, it pushed output per capita down to a full quarter below its late 1990s peak and inflicted extraordinary economic pain on a country that only a few years before had been the toast of card-carrying neoliberals like myself, and the example that we pointed to to show the benefits of neoliberal reform programs.

What the Argentinean government did wrong is well known (see Mussa (2002), Blustein (2005)). It failed to reform its tax collection system to reduce evasion. It failed to either put the provinces on their own bottoms as far as financing their expenditures was concerned, or to gain effective control over provincial-level spending. It failed to recognize that the hard external peg of the peso's value provided by the currency board required that confidence be maintained that the debt-to-GDP ratio would be stabilized. Without confidence in a stable debt-to-GDP ratio, a hard currency peg was an incredible and an unsustainable policy--and there is nothing worse than an attempt to make a credible commitment to an incredible and an unsustainable monetary policy.

In the end, when the immovable object of the currency board met the irresistible forces of a government unwilling to balance its budget and currency speculators--both domestic and foreign--sure that they had a sure-win one-way bet, it was the currency board that crumbled, and carried Argentina into a recession twice as deep relative to the size of the Argentinean economy as the Great Depression was in Argentina.

But what surprised me then and surprises me now is the speed of the collapse of the currency board. When it collapsed, Argentina's consolidated debt-to-GDP ratio was about 50%. That is not an unsustainable debt load. And the Argentinean government was managing to run a primary surplus. If there had been confidence in Argentina's fiscal future--confidence that no financial crisis was on the horizon--then interest rates would have been much lower, and the primary surplus would have generated only a moderate general deficit. With low interest rates, Argentina's prospects for growth would have been relatively good. With good growth prospects and a relatively moderate overall government budget deficit, there would be no reason to fear that fiscal policy is unsustainable. Only the fact that a crisis was expected pushed interest rates up to the level where investment was strangled, growth impossible, the overall budget deficit large, and a crisis inevitable.

Michael Mussa (2002) sharply criticizes the fiscal-policy dynamic analyses carried out by the IMF staff a year and more before the collapse:

What should be made of this analysis? The general principle in such matters is that if you are prepared to swallow the assumptions than you should also eat the conclusions. Or, as we used to say when I was growing up, "If, if, if... If my grandmother had wheels, she would be a bus...

This is, I think, too harsh. For the alternative, good equilibrium was out there somewhere: the equilibrium in which domestic and foreign speculators have confidence, interest rates stay low, policies appear successful, the government can leverage that apparent success into larger primary surpluses which further increase confidence, and has a decade or more to get the political-economy ducks in a row to ensure long-run fiscal balance and so medium-run rapid growth. We know that that good equilibrium was out there: Lula da Silva just to the north in Brazil, in a country with equally intractable long-run problems of macroeconomic management and much worse problems of income distribution and public management, appears (cross your fingers) to have found it. But the Argentineans could not.

Here, too, the neo-Marshallian toolkit is of little use.

4. Conclusion: What Is To Be Done?

Suppose that we accept the belief that Alfred Marshall and his toolkit no longer help us where we need help. Perhaps it never did. Perhaps it is just that the mother lode of problems accessible to this toolkit is now nearly mined out. In either case, what do we do now? This would be a far better paper if it could do more than point out that the truly important and interesting parts of economic history are filled with Big Pushes, thresholds, and nonlinearities. But unfortunately all I can do is offer scattered observations.

First, Harry Johnson (1971) observed in his not-quite-fair critique of Milton Friedman's monetarism that a successful intellectual revolution in economics had to do two things: (i) provide the young with a reason not to have to spend their time studying the work and doctrines of the old, and (ii) provide the young with something interesting and straightforward to do. In this, Johnson wrote, both Keynes and Friedman succeeeded admirably. The General Theory claimed that there was simply no point in reading pre-Keynesian business cycle theory. Friedman's monetarism claimed that the only relevant macroeconomic equation was the money-demand function (and perhaps some price adjustment process): all else was illusion and deception. Young Keynesians could go estimate consumption, investment, and export functions. Young monetarists could go estimate money demand functions and think about the division of nominal output into prices and quantities. Alternatives simply fell by the wayside. The endogenous business cycle tradition of Joseph Schumpeter and Wesley Mitchell required that the young spend too much time learning the doctrines of their elders, and so delayed the beginning of their own research. The American institutionalist tradition did not provide the young with something straightforward and productive to do: thus John Kenneth Galbraith is the last American institutionalist.

A successful economics of thresholds and nonlinearities will have to meet these challenges, especially that of providing the young with clearly productive things to do. On the theoretical side, there needs to be a grammar, or perhaps a hierarchy, of threshold models worth investigating. On the empirical side, there need to be consensus views about which potential ways of modelling are in fact likely to be fruitful.

Second, the stakes are quite large--and always were very large. The neo-Marshallian toolkit really is not sufficient. The chances of long-run success are greatly raised by keeping economists' minds focused on all the truly important problems where the neo-Marshallian toolkit makes little progress.

Third, success is not guaranteed: just because economics needs models of virtuous and vicious circles to help it understand the world doesn't mean that journal editors will publish articles using them, or that graduate students will become excited by them. The new toolkit must be shown to be of great use even before it is built, which is hard to do.

Bibiography

Moses Abramovitz (1956), "Resource and Output Trends in the US since 1870," American Economic Review.

T.S. Ashton (1968), The Industrial Revolution 1760-1830 (Oxford: Oxford University Press).

Paul Blustein (2005), And the Money Kept Rolling in--and Out: Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs).

John Brewer (1989), The Sinews of Power: War, Money, and the English State, 1688-1783 (New York: Knopf).

Gregory Clark (2001), "Debt, Deficits, and Crowding Out: England 1727-1840," European Review of Economic History

N.F.R. Crafts (1985), British Economic Growth during the Industrial Revolution (Oxford: Oxford University Press).

J. Bradford DeLong (1986), "Productivity Growth, Convergence, and Welfare: Comment," American Economic Review

Carlos Diaz-Alejandro (1970) Essays in the Economic History of the Argentine Republic (New Haven: Yale University Press).

Barry J. Eichengreen and J. Bradford DeLong (1991), "The Marshall Plan: History's Greatest Structural Adjustment Program"

C. Knick Harley (1982), "British Economic Growth Before 1841: Evidence of Slower Growth," Journal of Economic History 42:2, pp. 267-89.

Albert Hirschman (1958), The Strategy of Economic Development (New Haven: Yale University Press).

Albert Hirschman (1967), Development Projects Observed (Washington: Brookings Institution).

Albert Hirschman (1970), Exit, Voice, and Loyalty (Cambridge: Harvard University Press).

Chang-Tai Hsieh and Pete Klenow (2002), "Relative Prices and Relative Prosperity"

Charlene Huang (2005), "Can Favorable Initial Conditions Explain Rapid Growth in East Asia?" (Berkeley: B.A. Thesis Draft).

Harry Johnson (1971), "The Keynesian Revolution and the Monetarist Counter-Revolution," American Economic Review

Michael Kremer (1991), "Population Growth and Technical Change: One Million BC to 1990," Quarterly Journal of Economics.

Paul Krugman (1996), "The Fall and Rise of Development Economics" http://web.mit.edu/krugman/www/dishpan.html

David Landes (1999), The Wealth and Poverty of Nations

Charles Maier (1988), In Search of Stability (Cambridge: Cambridge University Press).

N. Gregory Mankiw, David Romer, and David Weil (1989), "A Contribution to the Empirics of Economic Growth," Quarterly Journal of Economics.

Alfred Marshall (), Principles of Economics

Karl Marx and Friedrich Engels (1848), Manifesto of the Communist Party.

Kevin Murphy, Andrei Shleifer, and Robert Vishny (1989), "Industrialization and the Big Push," Journal of Political Economy 97: pp. 1003-1026.

Michael Mussa (2002), Argentina and the Fund: From Triumph to Tragedy (Washington: IIE).

Louis Namier (1929), The Structure of Politics at the Accession of George III.

Ken Pomeranz (2000), The Great Divergence (Princeton: Princeton University Press).

Dani Rodrik (1994), "Getting Interventions Right: How South Korea and Taiwan Grew Rich" (Cambridge: NBER).

Paul N. Rosenstein-Rodan (1943), "Problems of Industrialization of Eastern and South-Eastern Europe," Economic Journal.

Paul N. Rosenstein-Rodan (1961), "Notes on the Theory of the Big Push," in Economic Development for Latin America (London: Macmillan).

Walt Whitman Rostow (1958), The Stages of Economic Growth (Cambridge: Cambridge University Press).

Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: Millar).

Robert Solow (1957), "Technical Change and the Aggregate Production Function," Review of Economics and Statistics 39: pp. 312--320.

Peter Temin (1997), "Two Views of the Industrial Revolution," Journal of Economic History

Peter Temin and Hans-Joachim Voth (2005), "Credit Rationing and Crowding Out during the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862" (Cambridge: MIT).

Abbott Payson Usher (1929), A History of Mechanical Inventions (Cambridge: Harvard University Press).

Jeffrey Williamson (1984), "Why was British Growth so Slow During the Industrial Revolution?" Journal of Economic History 44 (1984), 687-712.

World Bank (1994), The East Asian Miracle (Washington: World Bank)(.

Wrigley and Schofield (1993), The Population History of England ().

Posted by DeLong at 11:49 AM | Comments (0)

Ah. So That's How the Republican Party Works...

Mark Schmitt writes:

The Decembrist: Peter Ferrara: Too Busy Being a Hack: From Franklin Foer's article on Jack Abramoff and the corruption of Washington think tanks, I learn.... Consider the case of Peter Ferrara, the fellow who wrote a paper on privatizing Social Security in college and supposedly has spent the twenty years since refining and promoting the idea. Only he wasn't. What he was doing was Abramoff's errands:

As money-for-influence scandals unwind, pundits usually invoke Deep Throat's famous aphorism, 'Follow the money.' But, to understand Abramoff's success, you must follow the byline. Seemingly every time Abramoff acquired a client, Norquist or ATR's chief counsel, Peter Ferrara, would write a Washington Times column making that client's case. In the mid-'90s, Channel One, a TV network beamed into schools, paid Abramoff several hundred thousand dollars. Meanwhile, Norquist argued, 'Channel One has come up with a brilliant free-market innovation that can translate into lower taxes.' In 1998, the Puerto Rican statehood movement shelled out $400,000 for Abramoff's services. That year, Ferrara made the conservative case for that client's cause: 'Moreover, unlike the United States, Puerto Rico has school vouchers and school prayer. Polls indicate it would be another bastion for the religious right.' After Abramoff reportedly began working with the Malaysian government, a Ferrara op-ed argued, 'The U.S. should reaffirm its relations with Malaysia and collaborate closely with it in the global war against terror.'

The Republican scandals and the Republican policy failures, it turns out, are intimately related in more ways than you might realize.

Posted by DeLong at 11:47 AM

Unqualified Offerings Is Disturbed

It writes:

: The Dog That Hasn't Barked?: Is it just me, or do none of the reports on the current offensive in northwestern Iraq advert to "Ccombined US and Iraqi forces," as customary in Pentagon PR for most of a year? The reporting makes it sound like a pure American play. Are the Iraqi troops all off painting schools?

Posted by DeLong at 11:46 AM

May 11, 2005

Why Oh Why Are We Ruled by These Fools? (Yet Another Social Security Edition)

Ah. It becomes clearer and clearer why nobody in the administration who knew anything about Social Security substance was trotted out the week before last to provide details on Bush's endorsement of Pozen's "progressive price indexing." The numbers are ugly.

Jason Furman reports:

The Impact of The President's Proposal On Social Security Solvency And The Budget, 5/10/05: In an April 28 press conference, the President announced sliding-scale benefit reductions modeled on a plan proposed by investment executive Robert Pozen. Unfortunately, the White House has not released the traditional analysis by the Social Security actuaries of the effect of its plan on Social Security solvency. It is standard practice for policymakers and outside analysts who present Social Security plans to provide the actuaries’ analysis when, or shortly after, they release their plans.

In the absence of an analysis by the Social Security actuaries, this analysis provides some of the standard actuarial and fiscal estimates of the President’s proposal. The analysis is based on the actuaries’ analysis of the Pozen proposal, which has been released, analyses by the actuaries of other private-account plans that contain features similar to those of the President’s plan, analysis by the actuaries of the President’s private accounts through 2015, and the data in the 2005 Social Security trustees report....

Because the sliding-scale benefit reductions (also called “progressive price indexing”) that the President has proposed would not start until 2012 and would be small initially, this proposal would move back the date when Social Security’s benefit costs will first exceed its tax revenues by only two months, to slightly later in 2017. [Note that Bush and the Bushies have been pushing the 2017 date as a "crisis" point for months.] The sliding-scale benefit reductions would have a somewhat larger effect on the date when Social Security would become "insolvent" — the benefit reductions would move that date back by six years, from 2041 to 2047.

The President’s private accounts, however, would accelerate the date on which Social Security begins to have a cash-flow deficit, as well as the date of insolvency, because establishing the accounts requires diverting large sums from Social Security to the accounts. When the sliding-scale benefit reductions and the private accounts are considered together (i.e., when both components of the President’s plan are examined), the plan is found to move forward the year in which Social Security would become "insolvent" from 2041 to 2030. This result could be averted only by large cash transfers from the Treasury or additional benefit reductions or tax increases. The plan also would accelerate the year in which the program begins to run cash-flow deficits from 2017 to 2011.

The President’s sliding-scale benefit reductions, by themselves, would close 59 percent of Social Security’s long-term (i.e., 75-year) funding shortfall.[2] (White House statements that the benefit changes would close 70 percent of the cash flow gap are somewhat misleading; they refer to the percentage of the gap that would be closed in a single year — 2079, the 75th year — not to the share of the cumulative 75-year gap that would be closed.)

When the private accounts are added in, however, the President’s plan as a whole is found to close only 30 percent of the 75-year gap. [Here Furman assumes a--high, as assumed by the SSA actuaries--3% real Treasury borrowing rate. With a lower, more realistic borrowing rate private accounts make money for the government (it borrows at 2% and lends at 3%) and lose money for beneficiaries.]

More than two-thirds of the gap would remain. Additional benefit reductions, new revenues, or large transfers from the rest of the budget would be necessary to fill the substantial remaining gap.

Posted by DeLong at 12:03 PM

Crowding Out During the Industrial Revolution

Peter Temin and Hans-Joachim Voth (2005), "Credit Rationing and Crowding Out during the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862":

Qualitative evidence reinforces the view that quantity rationing was frequent. Hoare's bank told one of its clients who sought to take out a loan that... it could not extend credit:

At present we do not advance Money to anyone on any security.... The uncommon supply of millions and millions granted and now raised [to pay for the Seven Years' War] obliges all of our Profession to be prepared for the Payments [to customers moving their money from the bank into government stock] coming on, so that instead of lending out money, we have called it in on this occasion...

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

Paul Krugman Does Some Math on Right-Wing Class Warfare

He writes:

The Final Insult - New York Times: Hell hath no fury like a scammer foiled. The card shark caught marking the deck, the auto dealer caught resetting a used car's odometer, is rarely contrite. On the contrary, they're usually angry, and they lash out at their intended marks, crying hypocrisy. And so it is with those who would privatize Social Security. They didn't get away with scare tactics, or claims to offer something for nothing. Now they're accusing their opponents of coddling the rich and not caring about the poor. Well, why not? It's no more outrageous than other arguments they've tried. Remember the claim that Social Security is bad for black people?...

In last fall's debates, Mr. Bush asserted that 'most of the tax cuts went to low- and middle-income Americans.' Since most of the cuts went to the top 10 percent of the population and more than a third went to people making more than $200,000 a year, Mr. Bush's definition of middle income apparently reaches pretty high. But defenders of Mr. Bush's Social Security plan now portray benefit cuts for anyone making more than $20,000 a year, cuts that will have their biggest percentage impact on the retirement income of people making about $60,000 a year, as cuts for the wealthy.... Let's consider the Bush tax cuts and the Bush benefit cuts as a package. Who gains? Who loses?

Suppose you're a full-time Wal-Mart employee, earning $17,000 a year. You probably didn't get any tax cut. But Mr. Bush says, generously, that he won't cut your Social Security benefits. Suppose you're earning $60,000 a year. On average, Mr. Bush cut taxes for workers like you by about $1,000 per year. But by 2045 the Bush Social Security plan would cut benefits for workers like you by about $6,500 per year. Not a very good deal. Suppose, finally, that you're making $1 million a year. You received a tax cut worth about $50,000 per year. By 2045 the Bush plan would reduce benefits for people like you by about $9,400 per year. We have a winner!

Mr. Bush likes to play dress-up, but his Robin Hood costume just doesn't fit.

Posted by DeLong at 11:03 AM

Paul Krugman Does Some Math on Right-Wing Class Warfare

He writes:

The Final Insult - New York Times: Hell hath no fury like a scammer foiled. The card shark caught marking the deck, the auto dealer caught resetting a used car's odometer, is rarely contrite. On the contrary, they're usually angry, and they lash out at their intended marks, crying hypocrisy. And so it is with those who would privatize Social Security. They didn't get away with scare tactics, or claims to offer something for nothing. Now they're accusing their opponents of coddling the rich and not caring about the poor. Well, why not? It's no more outrageous than other arguments they've tried. Remember the claim that Social Security is bad for black people?...

In last fall's debates, Mr. Bush asserted that 'most of the tax cuts went to low- and middle-income Americans.' Since most of the cuts went to the top 10 percent of the population and more than a third went to people making more than $200,000 a year, Mr. Bush's definition of middle income apparently reaches pretty high. But defenders of Mr. Bush's Social Security plan now portray benefit cuts for anyone making more than $20,000 a year, cuts that will have their biggest percentage impact on the retirement income of people making about $60,000 a year, as cuts for the wealthy.... Let's consider the Bush tax cuts and the Bush benefit cuts as a package. Who gains? Who loses?

Suppose you're a full-time Wal-Mart employee, earning $17,000 a year. You probably didn't get any tax cut. But Mr. Bush says, generously, that he won't cut your Social Security benefits. Suppose you're earning $60,000 a year. On average, Mr. Bush cut taxes for workers like you by about $1,000 per year. But by 2045 the Bush Social Security plan would cut benefits for workers like you by about $6,500 per year. Not a very good deal. Suppose, finally, that you're making $1 million a year. You received a tax cut worth about $50,000 per year. By 2045 the Bush plan would reduce benefits for people like you by about $9,400 per year. We have a winner!

Mr. Bush likes to play dress-up, but his Robin Hood costume just doesn't fit.

Posted by DeLong at 10:31 AM

The White House Mounts a Feeble Defense of Its Social Security Plans

John McKinnon writes:

WSJ.com - White House Defends Reining in Pensions of Affluent: The White House... releas[ed] an internal analysis showing their payouts still would be higher than those the Social Security system can actually afford by the middle of the century.... The White House analysis sought to further highlight the upside of their proposal. It showed that by 2050, middle-income retirees would be receiving about $1,532 a month in today's dollars under Mr. Bush's proposals, compared with the $1,208 that the system would actually be able to pay. That includes the effect of Mr. Bush's proposed scaling back of promised benefits, and also the prospective investment returns from the personal retirement accounts he wants to create using part of Social Security's payroll-tax revenues. The administration assumes an inflation-adjusted return of 4.6% on personal retirement accounts. The promised benefit is $1,670 in today's dollars -- but Mr. Bush and other administration officials note that the system is now projected to go bankrupt in 2041, meaning that those benefits can't be paid without a payroll-tax increase that could cripple the economy....

Democratic critics... noted that the plan that serves as the model for Mr. Bush's proposal would only delay the Social Security system's insolvency to 2047.... A senior administration official said the administration plans to work with Congress to find additional ways to make the program completely solvent, so didn't reduce the payout under its proposals...

Three interesting things here:

  1. The last sentence is an endorsement of tax increases to close the Social Security funding gap: you can't pay higher benefits than current-law revenues generate without additional revenues. That's new. That's the big news here--but McKinnon underplays it.
  2. This "payroll-tax increase that could cripple the economy." Where does that analytic judgment come from? I pity the poor (anonymous) fool that made it, and McKinnon for swallowing it: he should do better.
  3. The 4.6%-above-inflation expected return on private accounts: that's simply not a sensible forecast when inflation-protected Treasury bonds are yielding 1.8% per year, and when dividend yields are as low as they are today. Once again, McKinnnon should call them on this: demand at the very least numbers from more realistic scenarios with lower private-account returns.

Posted by DeLong at 08:46 AM

Blockages to Development in MENA

Praktike reports:

Development Porn | Liberals Against Terrorism: Lounsbury, everyone's favorite expat, reads a World Bank report, and then goes on a hot date:

[T]he minimum capital for starting... [businesses is exceedingly high in the MENA region, almost five times as high as the world average and well above any region of the world... the requirement is "a measure of the amount an entrepreneur needs to deposit in a bank account to obtain a company registration number.".... Eyeballing the chart, Egypt requires minimum capital (c. 2004) equal to 800 percent of per capita income, Jordan somewhat over 1000 percent of per capita income, Morocco somewhere around 750 percent, Syria around 5000 percent... Tunisia... 350 odd percent, UAE, 400 odd percent, Kuwait, somewhat under 180 percent. By way of comparison, the chart reflects an average for Latin America in the 50 percent rage, Asia-Pacific in the 180 percent range.

[...]

Now, I have all kinds of observations in this connexion but let me share rather a conversation I had, about this very point with my afternoon coffee companion. A banker for one of the largest (fully private, international) banks in the region.

[...]

I shared my outrage and incomprehension over these figures with her (Yes, sadly in taking coffee with attractive young women on the weekend, I remain unable to have light conversation. I am afraid she only puts up with it because she wants to bed me and my handsome passport. I remain coy. Ha...) and I believe rather got something of a window on the thinking -- perverse, conservative and risk-averse-- behind these otherwise completely incomprehensible numbers....

First, she argued that high minimum capital requirements are very positive because that ensures that undercapitalized companies are not created.... [S]he most interestingly asserted that the "wrong kind of people" would create firms if just anyone with a little capital was allowed to do so.... She also argued that there would be "too much" firm creation by doubtful types and that this would lead to explosion of failures, of bankruptcies.... As one might suspect, this absolutely horrified me and provoked a perhaps too excited anti-regulation rant.... The moronic mistake of the anti-globos, pushing for more "protection" for workers in terms of useless laws that will only present opportunities for rent seeking corruption...

Posted by DeLong at 08:10 AM

Marginal Revolution Makes a Forecast

Tyler Cowen refuses to forecast interest rate changes, but will forecast the quality of Revenge of the Sith:

Marginal Revolution: Revenge of the Sith review: Variety.. in my opinion they write the most reliable reviews available. Most of all, they do not conflate or blur together predictions of quality and predictions of commercial success. Variety, which is written for industry insiders, evaluates movies explicitly in both terms, and also for overseas box office. A newspaper also will hire a movie critic to meet the tastes of its readers, but this is typically at a lower level.

I do believe it will be awesome.

Posted by DeLong at 08:07 AM

Our Not-Very-Sane Tax System

Alex Tabarrok finds a nice graph from Alan Auerbach and Kevin Hassett on how silly our current marginal tax rates are:

Marginal Revolution: Tax Reform: "The graphic below shows how under the current system the marginal tax rate rises and falls arbitrarily.

Posted by DeLong at 08:00 AM

May 10, 2005

Economics 113: The Omnibus Great-Depression-and-After Lecture Notes File

The Great Depression II

The New Deal as Macroeconomic Policy: Did It Do Any Good?

Parts of the New Deal that Boosted Demand:

But There Were Also Parts of the New Deal that Reduced Demand:

And There Were the Parts of the New Deal that Created the American "Mixed Economy"--America's version of social democracy:

Still, the Great Depression had not lifted by the end of the decade: unemployment rates still 12% or so at the end of the 1930s. Roosevelt's New Deal greatly reduced the size of the Great Depression and eased the misery caused by the Great Depression. It did not cure the Great Depression. For that, we needed the surge in demand that was World War II.


World War II

Origins of World War II

Rough Numbers with Respect to Military Production (as percent of Nazi Germany):

450%: U.S.150%: Britain
100%: Germany
80%: Russia
25%: Japan
15%: Italy

The wonder is not that the allies won, but that the axis powers--out-produced five-to-one--held on for so long. Professional excellence of the Nazi Army and of the start-of-war Japanese fleet...

50 million dead in World War II--6 million Jews, 5 million Chinese civilians, 5 million Russian civilians, 4 million Russian POWs, 2 million Polish civilians, et cetera... plus all the battle and military deaths...

World War II Cured the Depression in the U.S.:


Labor and Capital

America's Commitment to Education

America and Unions: The Early Stages

America and Unions: The Great Depression and After

Rolling Back Unionized America

Investment Banking: Routing Around Capital Market Failures

Finance After the Great Depression

Investment, Resources, Invention, and Technological Change


Upward Mobility

Horatio Alger and Benjamin Franklin

All This Changes in the Middle of the Gilded Age:

The Closing of the Frontier and the Great Immigration Wave

Ending the Gilded Age

Middle-Class America

The Returns to Skill

The Anemia of Social Democracy in America

Why Doesn't the United States Have a European-Style Welfare State?


Focus on Women

The Weaker Vessel

Wage Discrimination and Job Segregation

A Balance Sheet for Feminism?


Focus on African-Americans


Governing the Post-World War II Macroeconomy

The "accelerationist" Phillips curve: its location depends on (a) the natural rate of unemployment, and (b) the expected rate of inflation...

[Standard macroeconomic Phillips curve discussion: Federal Reserve is desperate to keep expectations of inflation low, because if expectations of inflation become high--then there are no good options]* The sad case of President Mitterand of France

The problem of the Reagan deficits... and the Bush deficits... why is fiscal responsibility so hard in the modern era?


Productivity Slowdowns and New Economies

Causes of the productivity slowdown:

The productivity slowdown gave us an 'age of diminished expectations':

Most likely scenario: a bunch of things hitting at once...

The productivity speedup of the 1990s

Why did it take so long for the information technology revolution to get going?

Why isn't Silicon Valley getting really rich anymore?


The Future of the Social Insurance State

Does American social democracy have a future?

Total mid-century problems: current 3% of GDP plus 2% of GDP for Social Security plus 5% of GDP for health programs--a big shift is coming, either a big expansion in the size and government and the tax base, or a big rollback in the promises that we have collectively made to each other...

The big federal tax share is a legacy of the Cold War, after all. Tax collections jump a lot in wars, and then come back down only very slowly (if at all) after the wars are over.* No Cold War gives us a much smaller federal government...* Uneasiness about Bush administration fiscal policy: liking for tax cuts and spending increases

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

Practice Final for Econ 113

Practice Final

Posted by DeLong at 06:21 PM | Comments (0) | TrackBack

May 08, 2005

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

Mark Thoma directs us to Robert Samuelson in Newsweek on Washington's apparent lack of concern about the budget deficit:

MSNBC - A Deficit of Seriousness : There's no one in Washington--no one with any power--trying to balance the budget. President George W. Bush's budget did not ever envision reaching a balance. The Republican Congress's new budget resolution purports to halve the budget deficit by 2010 but does so only on the basis of optimistic assumptions. Balancing the budget is simply too much trouble. It requires asking unpopular questions about who deserves help, which government programs actually work--and how to pay for the rest. Plenty of programs could disappear without serious ill effects....

In this debate, there is no high moral ground. To critics, the Republican budget strategy is 'starve the beast'--cut taxes and use the resulting deficits as an excuse to squeeze spending. Agree or disagree, that's principled; it's a means to an end (smaller government). In practice, the real Republican strategy is more cynical--cut taxes and feed the beast. As a share of national income, federal taxes in fiscal 2004 were 16.3 percent, the lowest since 1959. Meanwhile, budget increases go well beyond defense and homeland security. Even excluding these categories and 'mandatory' programs (Social Security, Medicare, etc.), federal spending has risen 4.8 percent a year (after inflation) under Bush, estimates Stephen Slivinski.... In 2003, Bush proposed and Congress approved the biggest new spending program since Lyndon Johnson, the Medicare drug benefit. It was all deficit financing; there was no new tax for any of it. Gone is any sense of shame about overspending and undertaxing. For 2006, the... estimated deficit close to $400 billion. Bridging that gap would require Republicans and Democrats to do what neither want--scrub government of less useful spending and then raise taxes. Democrats prefer to deplore Republican 'irresponsibility.' Republicans prefer to tax less and spend more...

My first reaction was, "Huh?" I thought that the Democrats in the House of Representatives had offered a plan to balance the budget--by 2012, in fact.

But Samuelson explains this away:

In floor debate, the Democrats never offered a realistic balanced budget. The closest they came was in the House, where they promised balance by 2012. But that happens only by assuming that all of Bush's tax cuts expire in 2011--a position that even many Democrats reject...

Ah. Now I see. The Democratic leadership's plan was not "realistic." The only "realistic" plan, in Samuelson's eyes, is one that (a) keeps the Bush tax cuts for the rich, and (b) balances the budget by cutting spending.

But then shouldn't somebody make his lead be different, and accurate? It's not "There's no one in Washington... trying to balance the budget," it's "The Republicans are cynical feckless cowards who aren't trying to balance the budget, and the Democratic leadership is trying to balance the budget in a way that I don't like." Truth in packaging would be a good thing, after all.

Posted by DeLong at 05:22 PM

Guenter Grass Minimizes the Holocaust

Well, well, well...

I find, in my New York Times this morning, this Nobel Literature laureate closing his article, "The Gravest Generation," with: "We can only hope we will be able to cope with today's risk of a new totalitarianism, backed as it is by the world's last remaining ideology... we should freely resist the power of capital, which sees mankind as nothing more than something which consumes and produces."

I confess that I knew that there were Germans who asserted the moral equivalence (both "totalitarianisms") of Hitler's Thousand-Year Reich and today's political-economic order--but I had (naively) thought that they were limited (in the past) to stooges of Stalin and ex-Nazis, and (in the present) to those who dressed in SS uniforms in the privacy of their bedrooms. And I had thought that even they stayed quiet around the anniversaries of the downfall of the Nazi regime: on this and other such anniversary weekends, attempts to minimize the crimes of the Nazis by false comparisons do rise from the level of lies to crimes.

Do not think that this is just a last-paragraph slip. Guenter Grass's rhetoric is filled throughout with echoes of Nazi propaganda:

But what creeped me out above all else were two additional rhetorical moves by Grass. In the first, he perversely asserts that Germany is in fact morally elevated above Japan, Turkey, Spain, France, and Britain:

Compared with other nations which have to live with shame acquired elsewhere - I'm thinking of Japan, Turkey, the former European colonial powers - we have not shaken off the burden of our past...

The second is far uglier. The second is an absence: Grass writes 2191 words. Not one of them contains the syllable "Jew." That cannot be an accident.

It was Hermann Goering who said, "A thousand years shall pass and the guilt of Germany will not be erased." Yet here after only sixty Guenter Grass finds the particular Nazi animus against Jews not worthy of mention.

Crypto-Nazi scum.


May 7, 2005
The Gravest Generation
By GÜNTER GRASS
Lübeck, Germany

TOMORROW, it will be 60 years to the day since the German Reich's unconditional surrender. That is equivalent to a working life with a pension to look forward to. It goes so far back that memory, that wide-meshed sieve, is in danger of forgetting it.

Sixty years ago, after being wounded in the chaotic retreat in Lausitz, I lay in a hospital with a flesh wound in my right thigh and a bean-sized shell splinter in my right shoulder. The hospital was in Marienbad, a military hospital town that had been occupied by American soldiers a few days earlier, at the same time as Soviet forces were occupying the neighboring town of Karlsbad. In Marienbad, on May 8, I was a naïve 17-year-old who had believed in the ultimate victory right to the end. Those who had survived the mass murder in the German concentration camps could regard themselves as liberated, although they were in no physical condition to enjoy their freedom. But for me it was not the hour of liberation; rather, I was beset by the empty feeling of humiliation following total defeat.

When May 8 comes round again and is celebrated in complacent official speeches as liberation day, this can only be in hindsight, especially as we Germans did little if anything for our liberation. In the initial postwar years our lives were determined by hunger and cold, the misery of refugees, the displaced and bombed-out. In all four zones occupied by the wartime allies - Britain, France, the Soviet Union and the United States - the only way to manage the ever increasing crush of the more than 12 million Germans who had fled from, or been driven out of, East and West Prussia, Pomerania, Silesia and the Sudetenland, was to force them into our own cramped living rooms.

Whenever the question is posed, "What can we Germans be proud of?", the first thing we should mention is this essential achievement - even though it was forced on us. We had hardly become used to freedom when compulsion had to be applied. As a result, in both German states, huge long-term camps for refugees and displaced persons were avoided. The risk of building up feelings of hate was thereby diverted, as was the desire for revenge engendered by years of camp life, which, as today's world shows, can result in terrorism and counterterrorism.

Even then there were spokesmen for the rhetoric of liberation. So many self-appointed anti-fascists suddenly set the tone, so much so that one was entitled to ask: how had Hitler been able to make headway against such strong resistance? Dirty linen was quickly washed clean, with people being absolved of all responsibility. Counterfeiters were busy coining new expressions and putting them into circulation. "Unconditional surrender" was changed to "collapse." Although in business, law and in the rapidly re-emerging schools and universities, even the diplomatic service, many former National Socialists maintained their hereditary wealth, stayed in office, continued to hold onto their university chairs and eventually continued their careers in politics, it was claimed that we were starting from "zero hour" or square one.

A particularly infamous distortion of facts can be seen even today in speeches and publications, with the crimes perpetrated by Germans described as "misdeeds perpetrated in the name of the German people." In addition, language was used in two different ways to herald the future division of the country. In the Soviet-occupied zone, the Red Army had liberated Germany from the fascist terror all by itself; in the Western occupied zones, the honor of having freed not only Germany but the whole of Europe from Nazi domination was shared exclusively by the Americans, the British and the French.

In the cold war that quickly followed, German states that had existed since 1949 consistently fell to one or other power bloc, whereupon the governments of both national entities sought to present themselves as model pupils of their respective dominating powers. Forty years later, during the glasnost period, it was in fact the Soviet Union that broke up the Democratic Republic, which had by that point become a burden. The Federal Republic's almost unconditional subservience to the United States was broken for the first time when the Social Democratic-Green ruling coalition decided to make use of the freedom given to us in sovereign terms 60 years ago, by refusing to allow German soldiers to participate in the Iraq war.

THE question today, then, is have we dealt carefully with the freedom that we did not win, but was given to us? Have the citizens of West Germany properly compensated the citizens of the former Democratic Republic, who, after all, had to bear the main burden of the war begun and lost by all Germans? And a further question: is our parliamentary democracy still sufficiently sovereign as a guarantor of freedom of action to act on the problems facing us in the 21st century?

Fifteen years after signing the treaty on unification, we can no longer conceal that despite the financial achievements, German unity has essentially been a failure. Petty calculation prevented the government of the time from submitting to the citizens of both states a new constitution relevant to the endeavors of Germany as a whole. It is therefore hardly surprising that people in the former East Germany should regard themselves as second-class Germans.

The jobless rate is twice as high as in the former West Germany. West German arrogance had no respect for people with East German résumés. The mass migration, feared from the beginning, is happening now, daily. Whole areas of the country, its cities and its villages, are being emptied. After the Treuhandanstalt, the entity responsible for privatizing East Germany, had completed its bargain sales, West German industry and banks withheld the necessary investment and loans and, consequently, no jobs were created. Here, fine exhortations have been of little use. To right this skewed situation, only Parliament, the lawmakers, can help. Which brings us back to the question of whether parliamentary democracy is able to act.

Now, I believe that our freely elected members of Parliament are no longer free to decide. The customary party pressures are not particularly present in Germany; it is, rather, the ring of lobbyists with their multifarious interests that constricts and influences the Federal Parliament and its democratically elected members, placing them under pressure and forcing them into disharmony, even when framing and deciding the content of laws. Consequently, Parliament is no longer sovereign in its decisions. It is steered by the banks and multinational corporations - which are not subject to any democratic control.

What's needed is a democratic desire to protect Parliament against the pressures of the lobbyists by making it inviolable. But are our parliamentarians still sufficiently free to make a decision that would bring radical democratic constraint? Or is our freedom now no more than a stock market profit?

We all are witnesses to the fact that production is being demolished worldwide, that so-called hostile and friendly takeovers are destroying thousands of jobs, that the mere announcement of measures like the dismissal of workers and employees makes share prices rise, and this is regarded unthinkingly as the price to be paid for "living in freedom."

The consequences of this development disguised as globalization are clearly coming to light and can be read from the statistics. With the consistently high number of jobless, which in Germany has now reached five million, and the equally constant refusal of industry to create jobs, despite demonstrably higher earnings, especially from exports, the hope of full employment has evaporated.

Older employees, who still had years of work left in them, are pushed into early retirement. Young people are denied the skills for entering the world of work. Even worse, with complaints that an aging population is a threat and simultaneous demands, repeated parrot-fashion, to do more for young people and education, the Federal Republic - still a rich country - is permitting, to a shameful extent, the growth of what is called "child poverty."

All this is now accepted as if divinely ordained, accompanied at most by the customary national grumbles. Worse, those who point to this state of affairs and to the people forced into social oblivion are at best ridiculed by slick young journalists as "social romantics," but usually vilified as "do-gooders." Questions about the reasons for the growing gap between rich and poor are dismissed as "the politics of envy." The desire for justice is ridiculed as utopian. The concept of "solidarity" is relegated to the dictionary's list of foreign words.

THOUGH we initially did not know what to do with our freedom when we were given it 60 years ago, we gradually made use of this gift. We learned democracy and in doing so proved star pupils, because after all we were incontrovertibly German. With the benefit of hindsight, what was crammed into us through lectures was enough to get us a reasonable end-of-term report. We learned the interplay between government and opposition, whereupon long periods of government ultimately proved arid. The much lauded and reviled generation of '68 produced a different kind of political leaders and ultimately also tolerance. We had to acknowledge that our burdens could not be cast aside, they are passed by parents to children and that our German past, however much we travel and export, comes back to haunt us. Neo-Nazis repeatedly brought us into disrepute. Even so, we felt that democracy was here to stay.

It had to withstand several challenges. After the debris had been cleared and disposed of in both German states, reconstruction in the East proceeded under the constraints of the Stalinist system; but in the West, it took place under favorable conditions. What retrospectively is called the "economic miracle" was not, however, the result of any individual achievement but was won by many. Included in that number are displaced persons and refugees, those who had in fact to start at square one in terms of material possessions. We must not forget the contribution of foreign workers, initially politely called "guest workers." In the rebuilding phase businessmen were exemplary in investing every penny of profit into job creation. The trade unions and businesses were clearly aware of the decay of the Weimar Republic, so they were forced to compromise and ensure social equality.

With so much toil and profit-chasing, however, the past was in danger of being forgotten. Only in the 60's did we meet the second challenge, when writers and then the student protest movement began to ask questions about everything that the war generation would sooner forget. The protest movement strove for revolution but was paid off with reform; without it, we would still be living in the claustrophobic fog of the postwar years under Adenauer.

The third challenge arose when the Berlin Wall fell. The two German states had existed for four decades more against than beside each other. As there was no willingness on the Western side to offer equal rights to the East, the unity of the country has so far existed only on paper. It was all done too hastily and without an understanding of what far-reaching consequences this haste would have.

Since then, the expanded country has stagnated. Neither the Kohl government nor the Schröder government succeeded in correcting the initial errors. Lately, perhaps too late, we have come to recognize that the threat to the state, or what should be regarded as Public Enemy No. 1, comes not from right-wing radicalism but rather, from the impotence of politics, which leaves citizens exposed and unprotected from the dictates of the economy. What is being destroyed, then, is not the state, which survives, but democracy.

When the German Reich unconditionally surrendered 60 years ago, a system of power and terror was thereby defeated. This system, which had caused fear throughout Europe for 12 years, still casts its shadow today. We Germans have repeatedly faced up to this inherited shame and have been forced to do so if we hesitated. The memory of the suffering that we caused others and ourselves has been kept alive through the generations. Compared with other nations which have to live with shame acquired elsewhere - I'm thinking of Japan, Turkey, the former European colonial powers - we have not shaken off the burden of our past. It will remain part of our history as a challenge.

We can only hope we will be able to cope with today's risk of a new totalitarianism, backed as it is by the world's last remaining ideology. As conscious democrats, we should freely resist the power of capital, which sees mankind as nothing more than something which consumes and produces. Those who treat their donated freedom as a stock market profit have failed to understand what May 8 teaches us every year.

Posted by DeLong at 05:19 PM

Why Oh Why Are We Ruled by These Idiots? (Bush Blames Winston Churchill Edition)

George W. Bush blames Winston Churchill (and Franklin Roosevelt) for not starting World War III in central Europe in July 1945:

Bush: U.S. Had Hand in European Divisions - Yahoo! News: 'We will not repeat the mistakes of other generations, appeasing or excusing tyranny, and sacrificing freedom in the vain pursuit of stability,' the president said. 'We have learned our lesson; no one's liberty is expendable. In the long run, our security and true stability depend on the freedom of others.' Bush singled out the 1945 Yalta agreement signed by Roosevelt in a speech opening a four-day trip focused on Monday's celebration in Moscow of the 60th anniversary of Nazi Germany's defeat.... 'Once again, when powerful governments negotiated, the freedom of small nations was somehow expendable,' the president said. 'Yet this attempt to sacrifice freedom for the sake of stability left a continent divided and unstable.'... 'Secret deals to determine somebody else's fate %u2014 I think that's what we're lamenting here today, one of those secret deals among large powers that consigns people to a way of government,' Bush said...

Bush has the excuse of not understanding what the alternative to Yalta that he is wishing really would have been like. Condi Rice has no such excuse.

Posted by DeLong at 05:00 PM

Desired Reading Habits

I am asked:

Talking Points Memo: by Joshua Micah Marshall: May 01, 2005 - May 07, 2005 Archives: If you have to read a long magazine article (such as a New Yorker profile), do you prefer to read it: on a website, in a printed magazine, printed from a website from a printer, or not at all?

My answer: re: I prefer to read it in a printed magazine, in the bathtub--but only if I want to read it in the very week that it comes out.

If it's not the very week that it comes out, I have no chance of finding the magazine anywhere in the house (even if it has not been recycled). So in that case I prefer to read it on a website...

Posted by DeLong at 04:33 PM

May 07, 2005

Why Oh Why Can't We Have a Better Press Corps? (The New York Times's Downward Spiral Continues Department)

Earlier this week, Paul Krugman wrote apropos of Bush's "progressive indexing" Social Security proposal:

The New York Times > Opinion > Op-Ed Columnist: A Gut Punch to the Middle: The average worker - average pay now is $37,000 - retiring in 2075 would face a cut equal to 10 percent of pre-retirement income. Workers earning 60 percent more than average, the equivalent of $58,000 today, would see benefit cuts equal to almost 13 percent of their income before retirement.But above that level, the cuts would become less and less significant. Workers earning three times the average wage would face cuts equal to only 9 percent of their income before retirement. Someone earning the equivalent of $1 million today would see benefit cuts equal to only 1 percent of pre-retirement income.In short, this would be a gut punch to the middle class, but a fleabite for the truly wealthy...

Today, David Brooks writes:

Calling Democrats' Bluff - New York Times: [Bush] has asked us to redistribute money down the income scale. Why should programs for children and families be strangled so Donald Trump can get bigger benefit checks?...

Shouldn't the New York Times have columnists who can read their own paper?

Perhaps the senior management of the Times could provide us with some insight into their lack of quality control?

Posted by DeLong at 06:57 PM

Why Oh Why Can't We Have a Better Press Corps? (Yet Another New York Times Edition)

Today it's the nearly-always-unreliable John Tierney, claiming that Social security is in trouble because: Place Your Bets: "Congress spent our money, leaving the Social Security trust fund with a file cabinet full of i.o.u.'s in the form of Treasury bills."

Congress... Isn't it a fact that the *President's* signature is also required on legislation? Isn't it a fact that the President proposes to Congress a budget for the United States for each fiscal year? Isn't it a fact that those budgets--even those declared "dead on arrival" substantially guide taxing and spending decisions? That it is very, very rare for actual spending and taxes to significantly deviate from what the President wishes?

Different Presidents wish for very different things. The Congress in 2002 was very similar to the Congress in 2000; the Congress in 1994 was very similar to the Congress in 1992; and the Congress in 1982 was very similar to the Congress in 1980. Yet the Presidents were different--and the deficit outcomes were very different.

One of the most striking patterns in recent American budgetary history is the way that every newly-elected Republican President blows the budget deficit wide open in his first term. Here's the federal "on budget" budget balance--the thing that doesn't count the Social Security surplus, and that would under a good government be at or moving toward balance:

But this is not something that Tierney is anxious to tell his readers, is it? No responsibility allowed. There are no "Reagans," "Bush Is," and "Bush IIs" in the text of his article--none of the Presidents who submit the exploding-deficit budgets, are there? There are not even any of the budget-busting Republican Congressional leaders--no Bakers, no Doles, no Gingriches, no Armeys, no DeLays, no Lotts appear. Just a faceless "Congress."

But people do make a difference. In fact, let's add another President to our graph: here's what happens to the budget deficit in the first term after we elect a Democratic President--Clinton.

Again, not something Tierney is eager to remind his readers of, is it?

Bill Keller, this is pathetic: you need to change your lineup, and you need to do it fast.

Posted by DeLong at 05:23 PM

How Many Number Three Men Does Al Qaeda Have?

Michael Froomkin directs us to First Draft, where we learn that Al Qaeda's number threes include:

Posted by DeLong at 05:17 PM

Memo to Self

You know that car? The one with the "U.C. Berkeley Eye Center" one-day parking pass? The one drifting over into your lane? It really *doesn't* see you.

Posted by DeLong at 05:16 PM

Republican Pond Scum

John Stuart Mill was wrong. The conservative party is not the stupid party. The conservative party is the bizarro mind-numbingly extreme stupid party.

Ezra Klein informs us of the Carpetbagger's report on House Judiciary Committee Chair James Sensenbrenner:

Ezra Klein: Doesn't this sound more like... Saturday Night Live... than an actual strategy tried out on the floor of Congress?

About a week ago, the House Judiciary Committee was prepared to approve the Child Interstate Abortion Notification Act. Dem committee members offered some fairly reasonable amendments to shield some parties from criminal responsibility...For example, one amendment, offered by Rep. Bobby Scott (D-Va.), sought to exempt "cab drivers, bus drivers and others in the business transportation profession from the criminal provisions in the bill." So, if an underage woman takes a bus to another state to have an abortion, the bus driver, who probably wouldn't have any knowledge of the abortion, couldn't be charged with a federal crime. Judiciary Committee Chairman James Sensenbrenner (R-Wis.) not only helped kill the amendment, he decided to rephrase it for the official record:

'Mr. Scott offered an amendment that would have exempted sexual predators from prosecution if they are taxicab drivers, bus drivers, or others in the business of professional transport.'

Sensenbrenner did this multiple times. Every Dem attempt to amend the legislation was manipulated to make it appear Dems were trying to protect sexual predators. Whether one supports the bill or not, this was pathetic.

Yesterday, Sensennbrenner backed down and removed the 'sexual predator' language from the record. Fact is, however, it stil happened, and the floor of Congress, is, officially, one poorly-conceived skit.... Welcome to Congress.

Posted by DeLong at 05:14 PM

Warren Buffett Joins the Order of the Shrill

Calculated Risk Reports:

Calculated Risk: Buffett and FDR: Warren Buffett was on CNN's Lou Dobbs Tonight on Wednesday. Here is an excerpt:

DOBBS: Are you surprised when you focus on the two deficits we just talked about, the trade deficit, and the budget deficit? The budget deficit is 3.6 percent of our GDP. The trade deficit is reaching just almost 6 percent of GDP. And the president is talking about reforming Social Security. Does that surprise you?

BUFFETT: Well, it's an interesting idea that a deficit of $100 billion a year, something, 20 years out, seems to terrify the administration. But the $400 plus billion dollars deficit currently does nothing but draw yawns. I mean the idea that this terrible specter looms over us 20 years out which is a small fraction of the deficit we happily run now seems kind of interesting to me. There is no question that the Bush Administration is ignoring the most serious economic problems facing America and that they are more interested in ideological driven issues. The most serious fiscal issues are: the General Fund deficit, the current account / trade deficit, and health care. Why are we talking about Social Security?

I'm reminded of this letter that FDR wrote in 1924 to Delaware attorney Willard Saulsbury.

"I remarked to a number of friends that I did not think the nation would elect a Democrat again until the Republicans had led us into a serious period of depression and unemployment", FDR, Dec 9, 1924

Buffett might find the denial of our serious problems "interesting", but I'm worried that FDR's prediction might ring true again.

I hope not. I remain an optimist; I believe if we acknowledge our problems and address them in a rational manner, we can fix them.

But all I see from the Bush Administration is denial and wishful thinking.

Posted by DeLong at 05:11 PM

There's Privatization, and then There's Privatization...

Matthew Yglesias writes:

TAPPED: May 2005 Archives: Some people have written in to question my assertion that conservatives probably could have privatized Social Security in the late 1990s had they not decided to pursue the Monica Lewinsky matter again... take a look at what Prospect editor Bob Kuttner was writing about seven years ago: "Fast forward to 1998. Several Democrats, led by Senators Robert Kerrey and Pat Moynihan, have now endorsed plans for partial privatization. There is a near universal sense that the program is in grave financial crisis. And the Clinton administration, having bought a little time by proposing that the budget surplus be earmarked for Social Security, is close to concluding that some form of privatization is inevitable..."

At this point, we need to take a deep breath, undergo a cortico-thalamic pause, and distinguish between the privatization1 that would have been proposed by the Clinton Treasury and the privatization2 that Bush wants to serve us.

Privatization1 would have:

  1. Created private accounts that were a good deal for beneficiaries.
  2. Been part of an overall plan that would have raised national saving.
  3. Preserved a baseline defined-benefit component of Social Security.
  4. Been implemented by highly-competent and public-spirited centrist technocrats.

By contrast, privatization2 would:

  1. Create private accounts that--with the 3% real clawback--are quite possibly a bad idea for many if not most beneficiaries.
  2. Be part of an overall plan that is at least as likely to reduce as to add to national saving in the medium run.
  3. May well eliminate (we're not sure because the devil is in unreleased details) the baseline defined-benefit component of Social Security.
  4. Be implemented by deranged monkeys--the ones who brought us our current deficit, the steel tariff, the bizarre Medicare drug benefit, last year's corporate tax monstrosity, and the Iraqi nuclear weapons program.

These are not the same thing at all, are they? The fact that they are called the same does not mean that they are the same, any more than that you can call them both "food" makes tiramisu identical to moose-dropping pie.

Pythagoras, if I recall correctly, got into similar problems. For Pythagoras, the one word "pneuma" meant "wind," "breath," "spirit," "ghost," and "soul." Thus the Pythagorean doctrine that eating beans was destructive of your soul...

Posted by DeLong at 05:10 PM

Greenspan Warns on Credit Derivatives

Alan Greenspan says:

FT.com / Capital markets - Greenspan warns on credit derivatives : By Richard Beales and Gillian Tett in New York: Rapid growth in the credit derivatives markets has created considerable uncertainty about how the global financial system might react to any new economic shocks, Alan Greenspan, chairman of the US Federal Reserve, warned on Thursday.The sheer complexity of derivatives instruments, in particular, coupled with the consolidation in the financial industry, made it increasingly hard for regulators and bankers to assess levels of risk, he said...

Translated into English, this means: "We don't know what financial institutions might be underwater after a large sudden drop in the dollar or spike in interest rates."

Posted by DeLong at 05:07 PM | Comments (0)

High-Quality Spam

Chad Orzel is fortunate to get a better class of spam than most of us:

Uncertain Principles: Now We're Talking: This morning's spam sweep shows signs of increasing sophistication, as this header jumped out at me: "Need 532nm green laser?" Now that's what I want in spam. Don't try to offer me billions of ill-gotten African wealth in a transparent Spanish Prisoner update. I'm all about illicit laser technology...

As it happens, I don't need a 532 nm green laser at the moment. But if you throw in a Ti:Sapph laser to go with it, you might just get me to click a link.

Posted by DeLong at 04:47 PM

WSJ.com - As Boomers Retire, a Debate: Will Stock Prices Get Crushed?

E.S. Browning writes about mid-century asset meltdown scenarios:

WSJ.com - As Boomers Retire, a Debate: Will Stock Prices Get Crushed?: By E.S. BROWNING: For tens of millions of baby boomers and younger workers, the basic long-range financial plan is simple: accumulate stocks and bonds while working, then slowly sell them off to keep up a comfortable lifestyle in retirement. Not so fast, says Jeremy Siegel... a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices. He says it will take a massive investment in U.S. stocks by people in India, China and other developing countries to prevent a market meltdown.

Robin Brooks, an economist at the International Monetary Fund... thinks the wealthy individuals who own a large percentage of U.S. stock won't need to sell, and companies may boost dividends so retiree investors can hang on to their shares.... The ratio of working-age people to retirees will decline over the next 30 years to an estimated 2.6 to 1 from 4.9 to 1 today. Simple supply-and-demand economics suggests that as retirees dump their holdings into a thin market, stock prices could plummet.... "Whether we will see some sort of crash or slow crumble over the next decade or so, I don't know," says Andrew Abel, another finance professor from the Wharton School at the University of Pennsylvania. "But it is certainly likely enough that it has got to enter into people's planning."...

Prof. Siegel's model highlights a fundamental contradiction between common expectations today and reality. He starts with several reasonable-sounding assumptions: Productivity will continue to rise modestly but not leap forward. Taxes, the retirement age, immigration and life expectancy will stay broadly in line with current expectations -- as will the percentage of income that working people consume. In that case, the model suggests, retirees can't possibly maintain 90% of their preretirement standard of living, the typical level they now seek. Prof. Siegel thinks it's likely retirees would try to sell their assets -- stocks, bonds and real estate -- in a desperate effort to keep up their living standard. But in the aggregate they would fail.... The imbalance between U.S. buyers and sellers would drive stock prices downward, leaving people with far less money than their account statements today suggest they'll have.

The cumulative gap between what retirees would need to keep 90% of their standard of living and what they'll actually get -- given all those assumptions -- is about $123 trillion between now and 2050, the model suggests. That's the U.S. figure; if the same calculation includes Japan, Europe and other industrialized regions, the gap rises to $347 trillion....

When he built a model covering the entire world, he was amazed: People in countries such as China, India, Indonesia, Brazil, Mexico and even Russia were projected to increase their wealth substantially.... They could dramatically increase their purchases of U.S. stock. "By the middle of this century, I believe the Chinese, Indians and other investors from these young countries will gain majority ownership in most of the large global corporations" in the U.S., Europe and Japan.... "The whole country is going to be like Florida," he says in an interview -- meaning the U.S. will slowly sell assets to foreigners just as retirees in Florida live by selling their stocks and bonds to people in other states. But "if the Chinese and the Indians don't come in, it will be bear-market times."...

Prof. Siegel has plenty of allies, however. Yale University economist John Geanakoplos argues that baby boomers have influenced stocks for decades, contributing to a slow market in the late 1960s and the 1970s as they came of age and aiding the long post-1982 boom as they started building nest eggs. "Baby boomers are reaching the end of the line and soon are going to have to be selling," says Prof. Geanakoplos, a boomer himself. "We should not rationally expect the same rates of return on our investments that our parents did."...

I have a very hard time getting Jeremy Siegel's results out of my own favorite back-of-the-envelope models. I find that even big sell-offs of assets by the elderly have little effect on the prices of reproducible assets--the sell-off takes generations, and (mostly) has the effect of reducing corporate investment as firms decide that they can use their cash better to merge than in boosting their own capital stock and capacity. But just because my own favorite back-of-the-envelope models don't show it doesn't mean it isn't there...

Posted by DeLong at 04:44 PM

What's at Stake in the Social Security Debate

David Wessel writes:

WSJ.com - Capital: More significantly, the president's prime-time comments highlighted the contrast between his vision for Social Security and his critics', sharpening the choice that politicians and the public now face. The president argues that Social Security should be a safety net to keep the elderly out of poverty, not a broad social-insurance plan that pays retirement benefits to the poor, the middle class and the rich. He says it should be a way for Americans to save and build wealth, not a way for them to share the risk of death, disease or destitution.... 'Why should people not be allowed to own and manage their own assets who aren't the...investor class?' Mr. Bush said. 'I think everybody ought to be given that right.' In Mississippi this week, he said, 'I want it so that people can say: 'I own something.''...

Contrast that with Franklin D. Roosevelt's words in 1934: 'These three great objectives -- the security of the home, the security of livelihood and the security of social insurance... constitute a right which belongs to every individual and every family willing to work.'... Adding Bush-style private accounts would further reduce traditional benefits: Private accounts would grow or shrink with stocks and bonds, but traditional benefits would be reduced to reflect the payroll taxes a worker diverts from the government program. This two-fisted squeeze on traditional benefits means some high-wage workers would still pay into the government Social Security program, but would see a very small benefit check, perhaps none, when they retire in midcentury.... [T]his is a very big change in the essence of Social Security.... The erosion of FDR-style social insurance -- not just Social Security, but Medicare and unemployment insurance, too -- would be applauded by some. 'Unemployment-insurance programs raise unemployment,' Harvard University economics professor Martin Feldstein declared recently. 'Retirement pensions induce earlier retirement and depress saving. And health-insurance programs increase medical costs.'... Others fiercely argue that individual accounts have merit but not as a substitute for social insurance. 'It's extrapolating the germ of a good idea to wildly inappropriate settings,' says Peter Orszag, a Brookings Institution economist.... The Social Security debate is often bogged down in dueling myths and incomprehensible arithmetic... this actually is a debate about the fundamental nature of America's most popular government program.

I do wish David had pointed out that "own and manage their own assets" is *not* in Bush's plan. Bush's plan--what we know of it--allows you to place your private account in one or more of three and only of three places: a money-market index fund, a bond index fund, and a stock index fund. (If they're smart they'll limit beneficiaries' ability to churn among these three as well.) I suspect that Bush doesn't fully understand how tightly constrained and regulated his individual accounts are--if he did, he wouldn't be talking about people managing the assets in their private accounts.

Posted by DeLong at 04:42 PM

I'm Just a Boy Who Can't Say No...

Can't say no to teaching extra classes, that is. Well, it is a low-workload seminar. And *somebody* should smooth the path so that interdisciplinary social science students who want to finish their theses next fall to be able to do so. And if not me, who? There's no money in the budget to actually pay somebody to do it, and I'd feel uneasy about trying to get anybody else to "volunteer":

However, some people are very happy about this:

Good news! An honors thesis-writing seminar will be offered next fall by Prof. Brad DeLong. This seminar will bring students together from DS, LAS, MES, PACS and PEIS into a small group format for support and assistance with writing the honors thesis. Chair DeLong will be your first reader. You still get to choose your second reader, a faculty mentor who is familiar with your topic who will guide your research.

To enroll in the fall H195 seminar, you must:

1. Have completed IAS 118 or IAS 102, be currently enrolled in IAS 102, or be planning to take IAS 102 in the summer.
2. Have a viable research prospectus by the first day of the fall semester.
3. Will have at least a 3.5 cumulative and 3.6 major GPA by graduation.

Once written, you can send your completed research prospectus to Prof. DeLong (jbdelong@berkeley.edu).

The date and time of the class is yet to be determined, but I will email it to this list-serve as soon as it is scheduled.

Posted by DeLong at 04:35 PM

Why Oh Why Can't We Have a Better Press Corps? (We Fear the Stupidity of Our Adversaries... Department)

Matthew Yglesias looks into the abyss and shudders as he realizes that, as far as America's right is concerned, Max Boot is about as good as it gets--and that's none too good:

Matthew Yglesias: Taxes, Spending, and Britain: Max Boot, what passes for an intelligent conservative op-ed writer, offers some advice to the Tories:

Much of the Tories' trouble is due to the skill with which Blair has seized the political center. He has run a tough, pro-American foreign policy while not interfering with a domestic economy that has produced 13 years of growth. Yet there are still issues on which he could be vulnerable, even if the Tories stay away from the 'third rail' of British politics, the National Health Service.The first of these is taxes. Although the Labor government has kept top income tax rates where they were after the Thatcher cuts of the 1980s, it has presided over dozens of stealth tax increases. The share of the economy taken by government has edged up from 35% in 1997 to a projected 42% today. (In the U.S., it's 29%.) The Tories should be promising big tax relief, as Ronald Reagan and George W. Bush did. Instead they're offering a paltry $7.5 billion in cuts, just 0.6% of the budget. . . .

Admittedly the Tories have some credibility problems in all these areas because of the disastrous John Major government, which took Britain further into the EU, raised taxes and cut the defense budget. But Major has been out of office since 1997 -- long enough for the Tories to have recovered. The reason they haven't is that they've been focused more on political posturing than on principled policies. As Bruce Anderson writes in the Spectator, Britain's leading conservative magazine: 'For the past seven weeks, the Tories have been suffering the consequences of seven years' timidity.'

[Boot] thinks the Conservatives ought to propose large tax cuts, large increases in defense spending, and promise not to cut the U.K.'s largest domestic program, the National Health Service. Most astoundingly, this mathematically illiterate advice is explicitly contrasted with 'political posturing' and put forward instead as a 'principled' alternative. That should give you a sense of the ridiculously poor quality of substantive policy thought on the contemporary American right -- this crowd wouldn't know serious thinking if it smacked them in the face.

The other takeaway point is the sheer irrationality of the tax cut jihad. Britain, as anyone paying attention to today's election will know, and as Boot even manages to concede, has had very strong economic growth during the Blair years despite having significantly higher levels of taxation than the United States. Nevertheless, conservatives insist that further tax cuts are necessary to make the American economy succeed and that the Tories do poorly by not slavishly imitating the nonsensical policies of their pals across the Atlantic. The real lesson should be precisely the reverse -- if over the next several decades we fully-fund Social Security's promises, extend health care coverage to all Americans, recommit to investments in public infrastructure, maintain a strong miltiary, and provide some more liberal goodies taxes will need to go up. They'll need to go up quite a bit. And the economy will be -- just like the British economy -- just fine even if we do it.

Posted by DeLong at 04:33 PM

May 06, 2005

On Clarence Darrow

Ray Ginger on Clarence Darrow, from Ray Ginger (1975), The Age of Excess: The United States from 1877-1914 (Prospect Heights, IL: Waveland Press: 0192486013954), pp. 358-9:

Lawyer: Clarence Darrow: The name of Clarence Seward Darrow (1857-1938) conjures up the Monkey Trial and Leopold-Loeb. He is remembered as the foremost defense lawyer of his generation, spokeman for the accused in dozens of murder trials. This view is badly distorted. He was a courtroom advocate only in his waning years. The truth is far more complex.

Darrow found his springboard into the Chicago bar in the practice of civil law, not of criminal. His friendship with John Peter Altgeld made him the corporation counsel of Chicago, representing the city in such mundane actions as land titles and tax assessments. Next he was general attorney for the Chicago and Northwestern Railroad, trying to fend off the regulatory efforts of municipalities and legislatures and the federal authorities. It was his appearance as attorney for Eugene V. Debs in the Pullman boycott of 1894 that projected him onto a larger and more brilliantly lighted stage. For the next twenty years his best-known clients were a cross-section of the trade union officials of the nation.

Even after he became a famous labor lawyer, Darrow continued to represent large corporations--if they would pay his fee. His friends in the settlement houses sometimes challenged the contradiction in his behavior. He replied thus, probably in 1895, to one of them:

I undertook to serve this company or these people, believing they had an ordinance, procured by the aid of boodle. Judged by the ordinary commercial and legal standard of ethics I did right.... I am satisfied that judged by the higher law, in which we both believe, I could not be justified, and that I am practically a thief. I am taking money I did not earn, which comes to me from men who did not earn it, but who get it, because they have a chance to get it.... I came to Chicago about eight years ago, before I came I lived in a small country town.... I determined to take my chance with the rest, to get what I could out of the system and use it to destroy the system. I came without friends or money. Society provides no fund out of which such people can live while preaching heresy. It compels us to get our living out of society as it is or die. I do not choose yet to die, although perhap it would be the best...

Darrow was in a quandary. The lawyers he knew as a youth were private practitioners, each his own man, picking his own clients, serving in a wide spectrum of causes. But the legal firms on the ascendant in 1900 were bureaucratic teams of experts. Not only was each attorney a victim of the division of labor, so were most firms (specialists in municipal bonds, or railroad reorganizations, or land development). Darrow was the marginal man, teetering between these ways of life. In the long haul, he liked the old ways better than the new.

Posted by DeLong at 12:17 PM

Nick Barlow Explains the British-Election-in-Progress

The British election will be weblogged:

What You Can Get Away With - Nick Barlow's weblog: OK, I have no idea what's going on - Lib Dems lose Newbury on a 6% swing to the Tories, but hold Cheadle (the most marginal LD seat) on a 4% swing away from the Conservatives. Now, Labour hold Edgbaston with the Tories making almost no gain against a 6% drop in Gisela Stuart's vote.

I have no idea what's going on as Labour have now held Ynys Mon (Anglesey) from Plaid, so if anyone has a clue, please say so.

Actually, I'll make one prediction: at the next election, all three main parties will have new leaders.

Hornsey and Wood Green - Lib Dem gain with a 15% swing! Barbara Roche, you just took one hell of a beating!

Current predictions: BBC say 359/201/59, Phil Hunt says 365/190/60.

Posted by DeLong at 12:15 PM

Die, Redmondian Scum...

The Fifteen-Year-Old is upstairs writing an essay using Microsoft Word. I open Excel, and am told that I cannot do so: that my copy of Microsoft *Office* is already in use on the LAN. It seems that I do not have one license to use Word, one license to use Excel, and one license to use Powerpoint--I just have one license to use *Office*.

Time to see if the spreadsheet will open in NeoOffice/J... It will! I'm free! I'm free!

Posted by DeLong at 12:13 PM

Phillip Lenssen Is Spartacus! Or Cory Doctorow Is Spartacus! Or I Am Spartacus! Or Something!

Cory Doctorow decides that it's time to give Phillip Lenssen his "I am Spartacus!" moment as Phillip comes under attack from Search Engine Optimization, Inc. Please join in:

Boing Boing: Bullying Search Engine Optimization, Inc uses legal threats to silence critics: Phillip Lenssen blogged some material about a 'Search Engine Optimizer' (a company that helps web-developers inflate their rankings with search-engines) called Search Engine Optimization, Inc. The service had all but vanished from Google's database, and Phillip, a commentator on this industry, noted that this boded poorly for the company, indicating that they'd probably done something wrong to incur the wrath of Google (the 'Google Death Penalty'), which meant that they ended up looking totally incompentent: not only couldn't they improve your site's PageRank, they couldn't get themselves ranked on Google.

The company responded with a threatening, bogus Cease-and-Desist letter telling Phillip that he had to take his page down or face legal action. Never mind that Phillip's post contained nothing actionable, he couldn't afford a lawsuit and poof, these bullies were able to censor their critics off the Internet. Here's the stuff that they believe gives them grounds to sue Phillip. I think you'll agree that this is about as bogus a claim as we can imagine:

It's kind of ironic that SEOInc.com, a search engine optimization company which for a while was on the Google number 1 spot for the highly competitive query 'search engine optimization', is now nowhere to be found in the Google results. This is likely due to the recent PageRank update and even more algorithm tweaks implemented by Google. Enter 'SEOinc' into Google.com, and SEOInc.com is nowhere in the top 10; and the SEOInc.com PageRank has dropped to 'none'. Only by entering 'site:seoinc.com' into Google will you see the site is still indexed in some way. And while a low or non-existent Google ranking is bad enough for sites outside the SEO industry, it hits everyone in the SEO business twice as hard: not only are SEOInc not being found with search engines anymore, they've also lost their biggest proof their services are worth paying for.

Of course, the fact this site has seen the Google death penalty hints that they've overoptimized using 'black hat' search engine optimization (such as linkfarms, for example). In either case, these days it pays out more than ever to optimize your content and to deliver valid, accessible HTML, without spending a second thought on what search engines may like. They're just too flaky to be trusted.

The best response to this kind of bullying is shining a light on it. Looking for SEO, Inc in Google won't bring you to their website, but I'm pretty sure it will get you to this blog-post, where you can read all about what kind of censorious activity this company gets up to when someone points out their failings.

Link to Google cache of Phillip's post, Link to PDF of C&D letter

Posted by DeLong at 12:12 PM

May 05, 2005

2.6% First Quarter Productivity Growth

Now if we could only get back to more normal rates of employment growth, the future would look bright indeed:

Productivity and Costs, First Quarter 2005, Preliminary : The Bureau of Labor Statistics of the U.S. Department of Labor today reported preliminary productivity data--as measured by output per hour of all persons--for the first quarter of 2005. The seasonally adjusted annual rates of productivity change in the first quarter were: 2.1 percent in the business sector and 2.6 percent in the nonfarm business sector.

Productivity in the business sector grew more slowly than in the fourth quarter of 2004, when it increased 3.7 percent. In the nonfarm business sector, however, productivity increased more in the first quarter than it had in the previous quarter. Nonfarm business labor productivity increased 2.1 percent in the fourth quarter of 2004.

In manufacturing, productivity changes in the first quarter were: 3.9 percent in manufacturing, 6.3 percent in durable goods manufacturing, and 1.3 percent in nondurable goods manufacturing. Productivity growth in manufacturing in the first quarter of 2005 reflected a 3.3-percent increase in output and a drop of 0.7 percent in hours worked in the sector. Output and hours in manufacturing, which includes about 13 percent of U.S. business sector employment, tend to vary more from quarter to quarter than data for the aggregate business and nonfarm business sectors...

Posted by DeLong at 09:15 AM

May 04, 2005

Sekrit Identity

Walk around Berkeley in a coat and tie--or even lose the tie and walk around in a tweed jacket with shiny black dress shoes, a button-down shirt, and dark well-pressed wool pants--and you carry your own cone of silence and zone of insulation with you. People approaching you part so as to pass at least three feet from you as you go by. People talking animatedly get quieter and quieter and finally fall silent until you have passed..

Walk around Berkeley in white tube socks, sneakers, running shorts, and a t-shirt, and the experience is very different--particularly if your running shorts have a three-inch rip in the seam caused by catching them on a pole as you jumped over a fence in pursuit of America's Silliest DogTM, and if you are unshaven because you fell asleep nose-in-computer while you were working on a draft of a piece for Slate, had to finish it in the morning, and so ran out of shaving time. Then you appear to be one of those random souls wandering around Berkeley whose brain has been fried by too much time nose-in-Grundrisse or contemplating the poetry and drawings of William Blake:

"Oh, you should definitely take 101b!"

"Are you sure? After 1, 101a has been quite a shock."

"But the math in 101b is not nearly as ferocious. And the professor teaching 101b in the fall--he wrote the textbook. Do it!"

"I'm not sure..."

"Excuse me. I'm Brad DeLong. A tenured professor here at Berkeley with my office in Evans Hall. I'm teaching Economics 101b this fall..."

"Ulp!"

"How can I help?"

"Well, should I take Economics 101b? Or 100b?"

"It depends. Are you a person who finds math congenial? Are equations and mathematical concepts aids to your understanding? Or are they unpleasant obstacles you have to clamber over? If they are the second, you won't enjoy 101b. If they are the first, you probably will."

"'Enjoy'?"

Posted by DeLong at 06:41 PM

What Should the Fed Have Done Differently? Be Doing Differently?

Brad Setser muses:

Brad Setser's Web Log: Specializing in the production of houses: The big policy question, of course, is what, if anything, the Fed should do (or should have done) to try to limit the risk that the US is becoming too specialized in the production of houses. After all, the easiest way to reduce the incentive to produce houses would be to raise interest rates. By taking away the incentive to borrow against rising home prices to support current consumption, the Fed could bring US demand growth back in line with US income growth (See this FT oped by former Fed international staff director/ Treasury Ast. Secretary Ted Truman). But in the process, the Fed also might put a damper on employment growth.

Posted by DeLong at 06:36 PM

Evolving into a House-Producing Economy

A very good line of Kashif Mansori of Angry Bear:

Angry Bear: Month by month, the non-service portion of the US economy has slowly been evolving from a goods-producing economy into a house-producing economy...

Posted by DeLong at 06:30 PM

For Your Information...

Rain (as opposed to fog drip) in Berkeley on May 4 is completely ridiculous.

Posted by DeLong at 04:52 PM

Norman Ornstein Joins the Order of the Shrill!

Norman Ornstein speaks:

Norman Ornstein: "These Five Senators Know Better Than to Go Nuclear. Don't They?" Roll Call May 4, 2005: The fate of the Senate now rests in the hands of a handful of Republicans who have been great figures of the Senate, custodians of its traditions and its essence. They will soon come to a crossroads on the “nuclear” option.... All, I believe, know better, and each will be judged by history on their choice in this matter. They include Dick Lugar of Indiana, Ted Stevens of Alaska, John Warner of Virginia, Thad Cochran of Mississippi and Pete Domenici of New Mexico.... One late evening... I turned to Domenici and asked him why he was spending so many hours on a thankless task like ours. After all, his constituents would never notice, and any changes we recommended... were likely to be opposed vigorously.... He replied that service in the Senate was the highest honor he could receive, and he was determined to leave the place a better institution than when he arrived....

The Senate is on the verge of meltdown over the nuclear option, an unprecedented step that would shatter 200 years of precedent over rules changes and open up a Pandora’s box of problems in the years ahead.... [L]et’s look at the means used to achieve the goal of altering Senate procedures to block filibusters on judicial nominations.... [T]he Senate will have to get around the clear rules and precedents, set and regularly reaffirmed over 200 years, that allow debate on questions of constitutional interpretation--debate which itself can be filibustered. It will have to do this in a peremptory fashion, ignoring or overruling the Parliamentarian. And it will establish, beyond question, a new precedent... that whatever the Senate rules say... they can be ignored or reversed at any given moment on the whim of the current majority....

Rule XXII is clear about extended debate and cloture requirements, both for changing Senate rules (two-thirds required) and any other action by the Senate, nominations or legislation (60 Senators required).... Senate Rule XXXI... makes clear that there is neither guarantee nor expectation that nominations made by the president get an up-or-down vote.... It reads: “Nominations neither confirmed nor rejected during the session at which they are made shall not be acted upon at any succeeding session without being again made to the Senate by the President; and if the Senate shall adjourn or take a recess for more than thirty days, all nominations pending and not finally acted upon at the time of taking such adjournment or recess shall be returned by the Secretary to the President, and shall not again be considered unless they shall again be made to the Senate by the President.”

By invoking their self-described nuclear option without changing the rules, a Senate majority will effectively erase them.... The precedent set [will be one of] a majority ignoring its own rules to override longstanding practice....

I know that Lugar, Stevens, Cochran, Warner and Domenici know better. (I know that Orrin Hatch (Utah), Bob Bennett (Utah), Lamar Alexander (Tenn.) and Elizabeth Dole (N.C.) know better as well, but they are lost causes.) I also know that any of these five can withstand the heat that would come if they bucked their party leaders on this issue. Pete, remember what you said to me in 1977. Leave the Senate a better place. Please.

Does he wish that he'd been a little... clearer about his judgment of today's Republican leadership last fall, when it might have done some good?

Posted by DeLong at 04:37 PM

U.S. Treasury - Office Of Economic Policy - Monitoring the U.S. and World Economies

I see that Mark Warshawsky and his people in the Treasury's Office of Economic Policy have put the numbers in their data cards online:

U.S. Treasury - Office Of Economic Policy - Monitoring the U.S. and World Economies: Quarterly Data. Monthly Data.

Carry these around with you at all times and occasionally glance at them, and you'll be amazed at how well-informed about the current state of the economy you will be... well, maybe you will appear.

Posted by DeLong at 02:52 PM

Memo to Self

If you are going to skip lunch because writing up your lecture notes is so fascinating, do *not* then stop off at Trader Joe's for bread, milk, and orange juice on your way home.

$72.83 poorer...

Posted by DeLong at 02:48 PM

Progressive Price Indexing

Ogged watches the skies and informs me that my article for Slate is up:

Unfogged: Hey, it's Brad DeLong writing for Slate!

Nice to hear that it's up. It would be *very* nice to have minions who constantly scanned the internets for things of interest to me. Technorati and Google are very nice, but more would be better...

The piece, I think, is quite good and makes a bunch of good points. But I actually don't think it's a plan to kill Social Security--it's floundering around in the hope of gaining traction by proposing something progressive:

Pozen Pill: How Bush's version of "progressive indexing" would kill Social Security. By Brad DeLong. Posted Tuesday, May 3, 2005, at 2:45 PM PT

Will this man kill Social Security?
Will this man kill Social Security?

George W. Bush has come out in favor of a proposal for cutting Social Security benefits called "progressive price indexing."

Or has he? On May 1, White House Chief of Staff Andrew Card appeared on Meet the Press. A proposal by Robert Pozen "... is really not necessarily the president's plan," Card noted. "It's directionally consistent with the president's plan." So what does Pozen say, and where does Bush differ?

As everyone knows, Social Security has a problem: The current level of dedicated Social Security taxes is very unlikely to bring in enough money to fully pay the benefits currently specified by law beyond the middle of this century. Social Security taxes will have to go up, Social Security benefits will have to be cut below currently projected levels, or other tax revenues will have to be earmarked to pay Social Security benefits....

J. Bradford DeLong (2005), "Pozen Pill:

Pozen Pill: "How Bush's Version of 'Progressive Indexing' would kill Social Security," Slate (Tuesday, May 3, 2005) http://slate.msn.com/id/2117948/.

Robert Pozen proposes to fill the post-2050 projected funding gap by using other tax revenues and reducing benefits. He would fill 30 percent of the hole by tapping into income tax revenue. He would fill another 10 percent of the hole by cutting Social Security disability payments. He would fill 60 percent by shifting to "progressive price indexing" of the Social Security retirement benefit formula. That means cutting benefits relative to current-law projected levels for people at the top and the middle.

To understand where Bush might be going with this, let's first review how Social Security works. People contribute to the program through Social Security taxes—12.4 percent of their wages, up to a maximum payment of $11,260 a year taken from them and their employers. In return, they get a disability insurance program, a survivors' insurance program, and a prescribed level of retirement income that's protected against inflation.

The retirement-income component of Social Security provides a better relative deal to the working poor than it does to the relatively rich. For somebody making half the average wage (that is, making $18,000 a year today), Social Security benefits "replace" 49 percent of pre-retirement earnings. For somebody making the average wage ($36,000 a year today), the "replacement rate" is 36 percent. For somebody making the maximum taxed by Social Security ($90,000 this year), it's only 24 percent. This declining replacement-rate benefit formula makes sense: Social Security returns relatively less to high earners, who are more likely to have other retirement savings. But it's not supposed to be a means-tested welfare program: Someone at the Social Security maximum wage gets a check about two-and-a-half times as large as someone making half the average wage.

Now let's look at Pozen's numbers for those retiring in 2075. Pozen would keep the replacement rate at 49 percent for the working poor—those making half the average income. But the replacement rate for those making more would be cut: At the average income, the replacement rate would go from 36 percent to 26 percent; at one-and-a-half times average, from 30 percent to 17 percent; at the Social Security maximum, from 24 percent to 12 percent. Pozen's proposal gradually turns Social Security from a program in which benefits rise with incomes to one in which nearly everybody's benefit is roughly the same: about $1,900 of today's dollars a month. These are ferocious benefit cuts for those at or above average incomes—an across-the-board benefit cut of about one-seventh would do as much for Social Security's overall finances. But that's the point. Pozen's central aim is to keep the poorest one-third of beneficiaries from bearing any of the burden of future benefit cuts.

This sounds like a not unreasonable way to keep Social Security healthy through most of the century. And progressive price indexing, by itself, is neither left-wing nor right-wing. Insulating the working poor from benefit cuts and tapping income-tax revenues to fund Social Security is "liberal." For Social Security to become a flat-benefit guardian against destitution, rather than a substantial base line layer of retirement income for everyone, is arguably "conservative." But when you combine Pozen's progressive indexing with Bush's separate proposal for private accounts, it becomes something different: a way of phasing out Social Security altogether. Here's how:

Pozen's proposal caps the maximum Social Security retirement benefit at roughly $22,500 dollars a year (adjusted for inflation). Bush's private-accounts plan—which would allow people to contribute 4 percent of their wages—makes retirees repay the taxes they diverted into private accounts out of their standard Social Security benefit. Medicare premiums are already deducted from your Social Security check. Deduct the claw-back for the private-accounts diversion as well, and by late in this century the odds are that—at least for the upper middle class—the standard Social Security check would be zero. Social Security would no longer be a universal program: It would be a program in which the half of America that is richer and more powerful and more likely to vote sees large chunks of its money going in and nothing coming out.

Even without private accounts, aggressive means-testing a la Pozen risks undermining Social Security over time. Insulating the poor from cuts is a left-wing goal. But it will create a large class of Americans who get much, much less out of Social Security than they put in and for whom Social Security as a whole is demonstrably a very bad deal. Early Social Security guru Wilbur Cohen may well have been correct in his belief that "in the United States, a program that deals only with the poor will end up being a poor program. ... " Loading a large chunk of the burden of fixing Social Security onto America's upper middle class may be the first step in the creation of a mid-21st-century political majority for the phasing-out of the program as a whole.

Viewed in this way, Bush's embrace of a program to make the distribution of income more equal can be explained as a Trojan horse to eliminate Social Security in the long run. That must be what Bush is thinking, right? It's not that he's suddenly worried that the working poor don't get a large enough share of America's wealth, right?

But quite possibly wrong. It's also possible that the White House is just desperate to somehow generate forward motion on Social Security, and that it hopes that a fiscally progressive policy change will be popular. Bush's recent press conference did not illuminate much, and the information released smelled as though the administration did not fully know what it was doing: The headline numbers made sense only if Pozen's proposal to cut disability benefits was also part of the package, but Bush expressly said disability benefits were not to be touched.

So what, exactly, are the pieces of Pozen's proposals that Bush has signed on to? Will the next step be a proposal for income tax increases to cover the rest of the funding gap? Is there a second round of benefit cuts coming—possibly targeted at the poor? When it comes to the administration's ideas for Social Security, we're back where we started. No one knows.


Related in Slate


: In March, Jacob Weisberg explored how Bush might respond to defeat on privatization. In February, William Saletan suggested that biology might solve the Social Security debate. That same month, Steven Landsburg argued the program's "problem" wasn’t really a problem at all, while Chris Suellentrop decoded Bush's message to seniors. In January, Suellentrop wondered why the president wouldn’t look at the numbers. In 1996, a committee of panelists discussed making Social Security secure. That same year, Michael Kinsley delivered a "prejudiced primer on privatization." In 2001, he looked at Social Security's magic tricks.

Brad DeLong is a professor of economics at U.C. Berkeley and a research associate of the National Bureau of Economic Research. Click here to read his blog.
Photograph of Robert Pozen by Ira Wyman/PictureDesk International.

Posted by DeLong at 02:45 PM

Professor Grizzle

Signs on the wall inform me of all these interesting things going on around me that I never have time to go to:

Wed. 4-5. Prof. Grizzle, "Walking and Running in Bipedal Robots: Theory and Experiments."

But shouldn't somebody named Professor Grizzle be studying quadrupedal, hibernating robots?

Posted by DeLong at 02:42 PM

Apple's Tiger Slays Microsoft's Grazing Longhorn, Leaving Bloody Entrails Strewn All Over OS Marketplace

Jason Kottke writes:

Extra! Extra! Tiger Headlines Roar! (kottke.org): I'm somewhat disappointed I couldn't find a headline that depicted a battle between Tiger and Microsoft's Longhorn, something like 'Apple's Tiger Slays Microsoft's Grazing Longhorn, Leaving Bloody Entrails Strewn All Over OS Marketplace'. I mean, why even bother if you're not going to go completely over the top? Amateurs.

Jason: we aim to please...

Posted by DeLong at 02:41 PM

Fedwatching

Mark Thoma gives us TIm Duy's thoughts on the Fed:

Economist's View: WSJ: Fed Sees Inflation as Biggest Threat: Tim Duy, a colleague of mine, offers his thoughts.... Before coming to the UO, Tim was an International Economist at Treasury and a Fed Watcher for The G7 Group, a private consulting firm....

Tim says:

On balance, FOMC members want to drop the term 'measured.' They do not want to step up the pace of rate increases. They want instead to have more flexibility about policy. This has always been a problem with the statement - it is often difficult to back off of a critical catch phrase.... The Fed is trying to dissuade investors from concluding that the Q1 growth slowdown is significant enough to dissuade their rate rising campaign. Critics will claim the Fed is ignoring potentially disastrous underlying economic imbalances, and that rising rates threaten to trigger a financial crisis (see DeLong's piece on hard-landings). But the Fed is always behind the curve. I would be surprised to see any shift in the course of policy prior to the Q2 GDP release in July.

Posted by DeLong at 02:35 PM

Stupidest Man Alive

Think Progress believes that Don Luskin has competition from Doug Feith:

Dumbest Guy On The Planet Rides Again:

I don't think the rationale for the war hinged on the existence of stockpiles. - Undersecretary of Defense Douglas Feith, The New Yorker, 5/9/05

VERSUS

I'd like to spend a moment, if I can, stressing in particular the crucial task of eliminating weapons of mass destruction. We have begun detailed planning for this task, which includes securing, assessing and dismantling Iraq's WMD capabilities, its facilities and stockpiles. This will be a huge undertaking. - Feith, Senate Testimony, 2/11/03

No wonder Gen. Tommy Franks called Feith "the dumbest (expletive deleted) guy on the planet."

(Via .)

Posted by DeLong at 02:33 PM

Private Accounts: Add-on, Not Carve-Out

Pandagon is unhappy with Richard Cohen:

Pandagon: Splendiferous: Richard Cohen writes one of those delightfully ignorant faux-centrist pieces on Social Security today, even as Bush's support on Social Security divebombs. Cohen's problem isn't the idea that we should raise the payroll cap.... Cohen's problem is that he tries to be 'reasonable' (read: six of one, half a dozen of the other, even if one is flowers and the other is industrial runoff) by saying that there should be a compromise where we go with the whimsically good idea of private accounts coupled with a plan that acutally does anything to help Social Security.

Moreover, I kind of like the idea of personal investment accounts if funding them does not weaken the overall program or add to the nation's incredible debt. After all, there is something to be said for expanding the number of American worker-capitalists and having a nest egg an heir could inherit, or one that would not be eliminated by death. The idea is not all that radical, after all. It's being done in other countries -- Australia, Sweden, Chile, Britain.... A deal can be made on Social Security. If Bush raised the cap, the Democrats could permit some sort of move toward private accounts. Both objectives make sense.

Note Cohen's logic: raising the cap makes sense because it would stay true to the nature of American taxation and Social Security, make the program solvent, and insure it stays more than a simple bare-minimum welfare program that pays for high-earner tax cuts. Private accounts make sense because they exist and because if we can do it in a way that is actually impossible, they would be super sweet.

From my view, Cohen's major problem is that his message gets lost in the verbiage. A call for "personal investment accounts... [that do] not weaken the overall program or add to the nation's incredible debt" is a convoluted and somewhat obscure way of calling for private accounts that are an add-on to, not a carve-out from Social Security.

Private accounts competently implemented would be very nice to have. They aren't essential. There are four essentials of a good Social Security reform:

  1. It must raise national savings--hence private accounts need to be an add-on, not a carve-out.
  2. It must preserve the valuable defined-benefit nature of the current program.
  3. It must restore long-run balance, and put in place mechanisms for automatic adjustment should the system fall further out of balance.
  4. It must be competently implemented--which means implemented by a group very different from the deranged monkeys who have brought us the 2004 Corporate Hogs Bill, the 2003 Pharmaceutical Profits Boost Bill, our current deficits, and the claim that Saddam Hussein could strike the U.S. with weapons of mass destruction any day now.

Richard Cohen could be a positive influence if he would recognize these four essentials.

Posted by DeLong at 02:31 PM

George W. Bush: Liar or Fool?

The Carpetbagger Report says:

Carpetbagger Report: [O]ne of the more disturbing moments from... [Bush's] prime-time press conference.... Bush: "No, I appreciate that question. The person to ask that to, the person I ask that to, at least, is to the Chairman of the Joint Chiefs, my top military advisor. I say, 'do you feel that we've limited our capacity to deal with other problems because of our troop levels in Iraq?' And the answer is, no, he doesn't feel we're limited. He feels like we've got plenty of capacity...."

[O]ne thing is for sure: Gen. Richard Myers gave a very different answer to Congress about our ability to deal with a military conflict should a crisis arise. "The concentration of American troops and weapons in Iraq and Afghanistan limits the Pentagon's ability to deal with other potential armed conflicts, the military's highest ranking officer reported to Congress on Monday. The officer, Gen. Richard B. Myers, chairman of the Joint Chiefs of Staff, informed Congress in a classified report that major combat operations elsewhere in the world, should they be necessary, would probably be more protracted and produce higher American and foreign civilian casualties because of the commitment of Pentagon resources in Iraq and Afghanistan. General Myers cited reduced stockpiles of precision weapons, which were depleted during the invasion of Iraq, and the stress on reserve units, which fulfill the bulk of combat support duties in Iraq, as among the factors that would limit the Pentagon's ability to prevail as quickly as war planners once predicted in other potential conflicts.... One official told reporters we'd succeed in any conflict, but 'it wouldn't be as pretty.'"

Posted by DeLong at 02:23 PM

FT.com / US - Dark clouds on US economic horizon

Christopher Swann sees unhappiness about the macro outlook:

FT.com / US - Dark clouds on US economic horizon By Christopher Swann in Washington: The administration of President George W. Bush has remained relentlessly optimistic about the outlook for the US economy. Brushing off the recent spate of weak data by arguing that a similar slowdown at the same time last year was followed by a strong resurgence, Carlos Gutierrez, the commerce secretary, told reporters on Monday that there was "a very healthy momentum to the economy." But what initially seemed to be a short-lived "soft patch" much like the blip in growth last spring is now looking a little more ominous. Data released on Monday showed that manufacturing activity slowed further in April, with the Institute for Supply Management index sliding more steeply than expected from 55.2 to 53.3. The index has fallen in eight of the nine previous releases and is creeping perilously close to the 50 mark that separates expansion from contraction. Particularly worrying was a sharp fall in the new orders component of the index to 53.7 from 57.1, which may point to weaker production in coming months. The figures continued a pattern of fairly gloomy economic releases last month. Both the Federal Reserve and private sector economists have long been braced for a slowdown in consumer spending. Even so, evidence of an almost complete stagnation of retail sales in March which rose by just 0.1 per cent, excluding the volatile auto sector came as an unwelcome surprise.

The main concern, however, has been evidence of a slowdown in business investment. This grew by 10.6 per cent last year and was expected to continue to push the economy forward as consumers reined back their spending. Last week's gross domestic product figures showed the growth in overall business investment slowing to 4.7 per cent in the first quarter, from 14.5 per cent in the previous three months. Perhaps more worrying, there was evidence in the durable goods orders figures that this weakness is spilling over into the second quarter. Orders for non-defence capital goods components, excluding aircraft a proxy for business investment fell 4.7 per cent in March following a 2.5 per cent decline a month earlier...

Posted by DeLong at 12:41 PM

Dean Baker Says Progressive Price Indexing Isn't Very Progressive at All

He writes:

The Regressive Impact of the Progressive Indexation of Social Security Benefits: While this schedule of benefit cuts is supposed to be progressive... middle-income earners would see large and growing benefit cuts (measured against currently scheduled benefits) under this formula:

  • In 2030, a middle wage earner ($36,500 in annual earnings in 2005) would see a benefit cut of 12.2 percent, while a high wage earner ($58,400 in 2005) would see a benefit cut of 13.2 percent;
  • In 2050, a year when the Congressional Budget Office projects that Social Security would still be able to pay full scheduled benefits if no changes are made, middle wage earners would see a cut equal to 21.1 percent of their scheduled benefit, while high wage earners would see a cut equal to 28.3 percent of their scheduled benefit; *By 2080, the benefit cut for middle wage earners and high wage earners will have grown to 40.2 percent and 50.1 percent, respectively. At this point, low earners ($16,400 in 2005) and maximum earners ($90,000 in 2005) will be receiving almost the same benefit, even though a maximum wage earner will have paid more than five times as much money into the Social Security system;
    • Measured relative to retirement income, the benefit cuts implied by progressive indexation are regressive. The projected cut in benefits for a middle wage earner in 2080 is equal to 26.9 percent of their retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of their retirement income.
  • When coupled with private accounts, the benefit cuts create a situation in which the highest earning workers will owe the Social Security system an amount of money that is larger than their remaining Social Security benefit, if they opt for a private account. President Bush has created no mechanism through which this money can be reclaimed. This creates a situation in which the highest wage earners will be able to place money in a private account without any offsetting cut in benefits. As a result, the implied cut in benefits will fall even more sharply on middle--income workers....

Posted by DeLong at 12:39 PM

The Risks of Economic Crisis Rise

Brad Setser writes:

Brad Setser's Web Log: An unbalanced economy gets more unbalanced: I look at the latest evidence that the US housing market continues to be red hot in the same light as I look at the latest evidence that Chinese exports continue to grow at an amazing pace. I don't see either as good news, at least not in any but the very short-run.... I would much happier if the US real estate market was cooling down, and other sectors were taking up the slack and supporting the economy. Sectors like durable goods (oops). Similarly, I would be a lot happier if there were signs that domestic consumption growth was taking over from exports (and real estate) as the motor behind China's expansion. But if Chinese data are to be believed, the combination of rising investment and a rising current account surplus implies that Chinese consumption is falling as a share of GDP. That's what it takes for domestic savings to be rising even faster than investment, leading China's current account surplus to grow. In the long-run, the more resources (capital and labor) that flow into housing and other non-tradables sector, the harder it will be to move resources out of those sectors and into the tradables sector when the US eventually is forced to adjust..... Current growth by and large is coming from the sectors of the US economy (and sectors of the Chinese economy) that would need to slow in an orderly rebalancing story. My worry: the more dependent the US economy becomes on housing, and the more dependent the Chinese economy becomes on exports, the higher the risk the 'landing' will be hard rather than soft.

Posted by DeLong at 12:38 PM

Election 2004 Questions

Robert Koehler writes:

Robert C. Koehler | Common Wonders: Was the election of 2004 stolen? Thus is the question framed by those who don't want to know the answer. Anyone who says yes is immediately a conspiracy nut.... So let's not ask that question. Let's simply ask why the lines were so long and the voting machines so few in Columbus and Cleveland and inner-city and college precincts across the country, especially in the swing states, causing an estimated one-third of the voters in these precincts to drop out of line without casting a ballot; why so many otherwise Democratic ballots, thousands and thousands in Ohio alone, but by no means only in Ohio, recorded no vote for president (as though people with no opinion on the presidential race waited in line for three or six or eight hours out of a fervor to have their say in the race for county commissioner); and why virtually every voter complaint about electronic voting machine malfunction indicated an unauthorized vote switch from Kerry to Bush....

We might also ask why so many Ph.D.-level mathematicians and computer programmers and other numbers-savvy scientists are saying that the numbers don't make sense.... And we might, no, we must, ask... about those exit polls, which... last November went haywire, predicting Kerry by roughly the margin by which he ultimately lost to Bush. This swing is out of the realm of random chance, forcing chagrined pollsters to hypothesize a "shy Republican" factor as the explanation.... And the numbers are still haywire. A few days ago, Terry Neal wrote in the Washington Post about Bush's inexplicably low approval rating in the latest Gallup poll, 45 percent, vs. a 49 percent disapproval rating. This is, by a huge margin, the worst rating at this point in a president's second term ever recorded by Gallup, dating back to Truman.... Bush mustered low approval ratings immediately before the election, surged on Election Day, then saw his ratings plunge immediately afterward.

Posted by DeLong at 12:30 PM | Comments (0)

Web Clippings--20050503

What I would write about if time were infinite:

http://juliansanchez.com/notes/archives/2005/04/project_much.php: Notes from the Lounge: Project Much?: I should be beyond surprise of this story, but it's still a little striking to see self-righteous dudgeon and disingenuous horseshit combined in such close proximity and copious quantity. Glenn [Reynold]'s reminding everyone of his 'link-rich refutation' of the 'revisionist' claim that democracy promotion wasn't part of the rationale for invading Iraq.... Seriously now. We all know that this was advanced as a benefit of the invasion, but gimme a break. If someone sells you 'a Porche with a nice stereo system' and you then discover you've actually bought a Dodge Dart, are you supposed to be mollified because it actually has had a nice stereo system installed? Democratization was supposed to be a happy side effect of eliminating the WMDs... before the 'smoking gun' came in the form of a 'mushroom cloud,' why we couldn't keep pushing for a diplomatic solution. Anyone else remember that?... Here's what I'd call 'revisionism': Pretending that the imminent danger of some kind of WMD attack-by-terrorist-proxy hatched in Iraq wasn't, by an overwhelming margin, the major prong of the case for the war and a necessary condition of building public support for it...

http://news.ft.com/cms/s/5e8d7e5a-b8e8-11d9-bfeb-00000e2511c8,_i_rssPage=9d5b9ebe-c8bc-11d7-81c6-0820abe49a01.html: Labour beset by fears for its majority By James Blitz in London: Tony Blair, UK prime minister, entered the final weekend of the general election campaign assured of victory but beset by fears his massive majority in parliament will be severely eroded, destroying his hopes of serving a full third term. As the three main parties launch a final push for votes before the May 5 vote, the prime minister can be confident he will be back in Downing Street on Friday. "We're in a situation where a switch of vote by a few hundred people in more than 50 marginal seats could end up throwing out each of the sitting Labour candidates," said one party strategist. "That, in turn, could make the difference to the overall result. We don't know if we're coming back with a majority of 50 or 150." The size of Mr Blair's majority currently 161 seats in the House of Commons will be the central issue in the most uncertain UK election since 1992...

Daring Fireball: The Tiger Details List: I've been using the final developer build of Mac OS X 10.4 for the past few weeks, and compiling a list of observations and interesting details. Things that are new, things that are different. I'm going to assemble them together on a single page... update the list continuously over the next week or so... the URL:

http://daringfireball.net/misc/2005/04/tiger_details

You're welcome to reload that page every few hours, but the best way to ...a special, temporary RSS feed that will contain just the entries to this list of Tiger details:

http://daringfireball.net/feeds/tigerdetails.rss

In other words, it's sort of like a temporary mini-weblog dedicated to details about Tiger...

Meet The New Boss | Liberals Against Terrorism: I'm not sure to what extent the inability to form a government in the time spanning from the elections in late January to just yesterday was aiding the insurgencies in Iraq, but I do think that the formation of a cabinet and the transfer of power from Allawi's interim group to Jaafari should at least provide a spark of hope for a populace that was growing disenchanted and frustrated with the stalemated process. But this renewed optimism triggered by the long awaited establishment of an elected Iraqi government brings with it expectations, and with those expectations, the possibility for more frustration and let down. The questions remain: can the new government get results in terms of repairing Iraq's still dilapidated infrastructure, improve the delivery and availability of vital services, and clamp down on what are a variety of tenaciously resolute insurgencies plaguing the nation...

Stephen Roach: In all my years in this business, never before have I seen a central bank attempt to spin the debate as America’s Federal Reserve has over the past six or seven years. From the New Paradigm mantra of the late 1990s to today’s new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories. The problem is that this recasting of macro is very self-serving. It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.... It all began with Alan Greenspan’s worries over “irrational exuberance” on December 5, 1996, when a surging Dow Jones Industrial Average closed at 6437.... Alan Greenspan went on to champion the notion of a sea-change in the macro climate -- a once-in-a-century productivity miracle that would justify the stock market’s exuberance as rational... a New Economy actually did come into being. But it was not the new economy of ever-accelerating productivity growth that infatuated the New Paradigm Crowd and legions of equity-market speculators. Instead, it was the Asset Economy that enabled consumers and businesses to draw on the pixie dust of a new source of purchasing power -- asset appreciation -- as a means to augment what has since turned into a stunning shortfall of organic domestic income generation.... The Fed is not only hard at work in the engine room in keeping the magic alive with a super-accommodative monetary policy but is has also become the intellectual architect of the New Macro....

  • Chairman Greenspan has made light of traditional measures of household indebtedness -- even going so far as to urge consumers to move from fixed to floating rate obligations (see his February 23, 2004, speech, Understanding Household Debt Obligations. Note: All references are to speeches available on the Fed’s website at www.federalreserve.gov).
  • Fed governors have also borrowed a page from the Roaring 1990s in denying the possibility of a housing bubble (see Chairman Greenspan’s October 19, 2004, speech, The Mortgage Market and Consumer Debt, and Governor Kohn’s April 1, 2004, speech, Monetary Policy and Imbalances).
  • More recently, an army of senior Fed officials -- namely, Chairman Greenspan, Vice Chairman Ferguson, and Governors Bernanke and Kohn -- have unleashed a veritable broadside against the time-honored notion of the current-account adjustment (see their various 2005 speeches, especially Governor Kohn’s April 22 speech, Imbalances and the US Economy, Vice Chairman Ferguson’s April 20 speech, U.S. Current Account Deficit: Causes and Consequences, and Chairman Greenspan’s February 4 speech, Current Account).
  • Governor Bernanke has also led the charge in coming up with a new theory of national saving -- that the United States is actually doing the world a favor by absorbing a so-called glut of global saving (see his April 14, 2005, speech, The Global Saving Glut and the U.S. Current Account Deficit); Vice Chairman Ferguson has been on a similar wavelength in dismissing concerns over subpar personal saving (see his October 6, 2004, speech, Questions and Reflections on the Personal Saving Rate)....

The rhetorical flourishes of America’s central bankers have dug the US economy -- and by definition, a US-centric global economy -- into a deep hole.... The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates. Given the excesses that now exist, it may even require a federal funds rate that needs to move into the restrictive zone -- possibly as high as 5.5%.... But in the end, there may be no other choice. Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy...

http://www.liberalsagainstterrorism.com/drupal/?q=node/940: Zelikow? | Liberals Against Terrorism: "The number of serious international terrorist incidents more than tripled last year, according to U.S. government figures, a sharp upswing in deadly attacks that the State Department has decided not to make public in its annual report on terrorism due to Congress this week. Overall, the number of what the U.S. government considers 'significant' attacks grew to about 655 last year, up from the record of around 175 in 2003, according to congressional aides who were briefed on statistics covering incidents including the bloody school seizure in Russia and violence related to the disputed Indian territory of Kashmir.... After a week of complaints from Congress, top aides from the State Department and the NCTC were dispatched to the Hill on Monday for a private briefing. There they acknowledged for the first time the increase in terrorist incidents, calling it a 'dramatic uptick'.... Both Republican and Democratic aides at the meeting criticized what a GOP attendee called the 'absurd' explanation offered by the State Department's acting counterterrorism chief, Karen Aguilar, that the statistics are not relevant to the required report on trends in global terrorism. 'It's absurd to issue a report without statistics,' said the aide, who is not authorized to speak publicly on the matter. 'This is a self-inflicted wound by the State Department.' Aguilar, according to Hill aides, told them that Rice decided to withhold the statistics on the recommendation of her counselor, Philip D. Zelikow. He was executive director of the Sept. 11 commission that investigated the terrorist attacks on the United States." Stupid. So the headline comes out anyway, and now there's this controversy over the numbers. Dumb.

http://www.commondreams.org/headlines05/0425-07.htm: Marines From Iraq Sound Off About Want of Armor and Men, by Michael Moss: On May 29, 2004, a station wagon that Iraqi insurgents had packed with C-4 explosives blew up on a highway in Ramadi, killing four American marines who died for lack of a few inches of steel. The four were returning to camp in an unarmored Humvee that their unit had rigged with scrap metal.... "The steel was not high enough," said Staff Sgt. Jose S. Valerio, their motor transport chief, who along with the unit's commanding officers said the men would have lived had their vehicle been properly armored. "Most of the shrapnel wounds were to their heads." Among those killed were Rafael Reynosa, a 28-year-old lance corporal from Santa Ana, Calif., whose wife was expecting twins... Company E during its six-month stint last year in Ramadi... more than one-third of the unit's 185 troops were killed or wounded, the highest casualty rate of any company in the war, Marine Corps officials say.... The saga of Company E, part of a lionized battalion nicknamed the Magnificent Bastards, is also one of fortitude and ingenuity. The marines, based at Camp Pendleton in southern California, had been asked to rid the provincial capital of one of the most persistent insurgencies, and in enduring 26 firefights, 90 mortar attacks and more than 90 homemade bombs, they shipped their dead home and powered on. Their tour has become legendary among other Marine units now serving in Iraq and facing some of the same problems.... Sergeant Valerio and others had to scrounge for metal scraps to strengthen the Humvees they inherited from the National Guard.... But while most of Company E's work in fighting insurgents was on foot, the biggest danger the men faced came in traveling to and from camp: 13 of the 21 men who were killed had been riding in Humvees that failed to deflect bullets or bombs.... Toward the end of their tour when half of their fleet had become factory-armored, the armor's worth became starkly clear. A car bomb that the unit's commander, Capt. Kelly D. Royer, said was at least as powerful as the one on May 29 showered a fully armored Humvee with shrapnel, photographs show. The marines inside were left nearly unscathed.... Marine Corps officials disclosed last month in Congressional hearings that they were now going their own way and had undertaken a crash program to equip all of their more than 2,800 Humvees in Iraq with stronger armor.... Defense Department officials acknowledged that Company E lacked enough equipment and men, but said that those were problems experienced by many troops when the insurgency intensified last year, and that vigorous efforts had been made to improve their circumstances.... In parceling out Ramadi, the Marine Corps leadership gave Company E more than 10 square miles to control, far more than the battalion's other companies. Captain Royer said he had informally asked for an extra platoon, or 44 marines, and had been told the battalion was seeking an extra company.... Lt. Sean J. Schickel remembers Captain Royer asking a high-ranking Marine Corps visitor whether the company would be getting more factory-armored Humvees. The official said they had not been requested and that there were production constraints, Lieutenant Schickel said...

http://www.thecarpetbaggerreport.com/archives/4069.html: Good things come to Dems who wait: Rep. Alan Mollohan, the ranking Dem on the House Ethics Committee, probably knew he was taking something of a risk. The GOP had gutted the chamber's ethics rules in January and he knew his committee would be a joke unless the changes were scrapped altogether. He led other Dems on the panel in blocking the committee from organizing and conducting business unless Republicans agreed to reverse course and bring back the stronger, more effective, ethics rules. Mollohan didn't know if holding the committee hostage would work. Would he shut down the process for the entire two-year Congress? Would he get blamed for the impasse? Fortunately, we now see that Mollohan's efforts are paying off in a big way.... Lawmakers and other senior officials said that Speaker J. Dennis Hastert and other leaders had concluded that the only way out of the ethics impasse was to abandon the rules changes opposed by Democrats who have refused to allow the committee to get to work...

http://www.economist.com/agenda/displayStory.cfm?story_id=3908700&fsrc=RSS: Economist.com | Internet advertising: THIS year the combined advertising revenues of Google and Yahoo! will rival the combined prime-time ad revenues of America's three big television networks, ABC, CBS and NBC, predicts Advertising Age.... A 30-second prime-time TV ad was once considered the most effective--and the most expensive--form of advertising. But that was before the internet got going. And this week online advertising made another leap forward.... Both Google and Yahoo!, along with search-site rivals like Microsoft's MSN and Ask Jeeves (recently bought by Barry Diller's InterActiveCorp), are developing much broader ranges of marketing services. Google, for instance, already provides a service called AdSense. It works rather like an advertising agency, automatically placing sponsored links and other ads on third-party websites. Google then splits the revenue with the owners of those websites, who can range from multinationals to individuals publishing blogs, as online journals are known.... Other innovations in online marketing are said to be in the pipeline. Local search and its associated advertising opportunities are one huge growth area.... This week, Yahoo! appointed another top executive to its media group, fuelling industry speculation that the website may start to produce its own entertainment content. Television stations would then have a lot more to worry about than just losing ad revenue to the internet.

http://highclearing.com/index.php/archives/2005/04/24/4176: Kidnap Nation: You're soaking in it: "One document in particular contained references to both the detention of suspects' relatives and the use of torture by US interrogators.... The sergeant, whose name was redacted from the released documents by military censors, explained that the detainees "are normally arrested by Coalition Forces because they are family of individuals who have been targeted" by US forces. He added that many such detainees have been transferred to Abu Ghraib prison where they "become lost in the Coalition detention system" regardless of whether their targeted relative surrenders himself." The rest of the story is just a bunch of ho-hum! torture details, like: "Other documents released Monday by the government included a report investigating the mock execution of a teenage Iraqi boy conducted by US soldiers in front of the boy's father... two Iraqis who were severely beaten by US soldiers... contrasted with a statement by an Army captain who reported those same Iraqis were only "roughed up a bit." I remember when the first hostage-taking stories broke a year and a half ago, and hawks fell all over themselves to assure us there must be more to the story. Indeed there was: more hostage-taking. I don't think that was what they meant...

http://www.discourse.net/archives/2005/04/a_publicly_displayable_level_of_venom.html: Discourse.net: Scrivener's Error has had a little redesign and now is a little easier on the eye than it used to be; the content remains great. Today's is especially worth your while:... "Phil Carter... has penned a remarkably even-tempered (if ultimately condemning) response to the whitewash over command responsibility at Abu Ghraib... he concludes: '...none of the officers responsible for facilitating these abuses will face criminal charges. Or, put another way, the Army IG has wholly disregarded the record evidence before him to arrive at an arbitrary and capricious decision that the senior Army leaders involved should face no legal consequences for their actions. What kind of message does that send to our junior military leaders? What kind of message does that send to the world?This is a lot more generous than I would have been.' It's taken me three days to keep the venom in this message to a publicly displayable level. The IG's report presents a truly disturbing contrast with other recent international-law and law-of-war activities, particularly including the ongoing trial of Slobodan Milosevic.... What this really says, more than anything else, is that our whitewashes are morally and ethically acceptable, but nobody else's are, and most particularly that anyone else who ever questions the results of our disciplinary process (or the lack thereof) has no right to do so--primarily because they're not Murikans. There are more horrible historical examples of the consequences of this attitude than I can begin to name.... When I resigned my commission, I stated that 'I have lost confidence in the senior military and civilian leadership of the Air Force; I believe that my oath of commissioning requires me to tender my resignation in these circumstances.'

http://www.liberalsagainstterrorism.com/drupal/?q=node/943: Who is Wafiq al-Samarrai? | Liberals Against Terrorism: Helena Cobban noticed after reading the newly-revived IWPR Iraqi Press Monitor that Jalal Talabani has his own security advisor, a man named Wafiq al-Samarrai. He had been the head of Iraqi military intelligence under Saddam during the first Gulf War.... Al-Samarri defected to England in 1994, and I believe he was somehow involved with the INC's various foiled coup attempts that were launched from Kurdish territory.... A very interesting character, this Wafiq al-Samarrai. His current position would help explain, incidently, why Talabani is now warning about Ba'athist purges going too far.

http://markschmitt.typepad.com/decembrist/2005/04/frists_blackber.html: The Decembrist: Frist's BlackBerry Spring: I am sort of a connoisseur of leadership in the U.S. Senate. It's a particular kind of skill, very different from executive leadership, because everyone you're trying to lead is an equal, and most of them are prima donnas in one way or another.... I suspect that we are witnessing the first real mismatch in leadership skills in a long time, in Harry Reid vs. Bill Frist. I think Reid might have pulled off something amazing yesterday, holding out the card of compromise on the Nuclear Option at just the moment when he knew that Frist could least accept it -- because he put himself so far out on the limb by making it a theological matter -- and knowing that there are any number of Republican Senators who would desperately love to see some sort of compromise, and simultaneously making clear that if the trigger is pulled, Democrats will not 'shut down the Senate,' but instead try to force votes on issues in the Democratic agenda that Republicans would like to be protected from voting on. That's a pretty powerful one-two punch.... You can overanalyze Frist's inadequacies, but I think it's very simple: He doesn't know where his votes are. He doesn't quite know where his votes are on Bolton, he doesn't quite know where they are on the Nuclear Option. Knowing where your votes are doesn't just mean knowing how your members would vote if it happened today, it's knowing which ones might be shaky if any of a dozen other events occurs and what's going on with Senators on the other side. It's a matter of keeping hundreds and hundreds of pieces of constantly changing information in your head. And you can only do that if you're talking face to face with every single one of your own members and many of the others, all the time. And Frist doesn't do that. Nina Easton of the Boston Globe recently quoted political scientist Sarah Binder: "'He's a BlackBerry addict,' Binder noted, referring to his electronic communications with senators. 'That's not how Lyndon Johnson got it done. It takes face-to-face interaction.'"...

http://angrybear.blogspot.com/2005/04/health-care-intelligence-failure.htmlAngry Bear: Health Care Intelligence Failure?... Arnold Kling... is challenging the suggestion from AB and Kash that we do not get that much from all the money we spend on health care as compared to other nations: "I believe that it is likely that, for the most part, Americans receive significantly better health care than their counterparts in other advanced countries... the indicators available on comparative health care quality send only weak and contradictory signals. Much better research is required.".... The difference of opinion seems to be whether this increase represents more and/or better services.... Arnold, on the other hand, is arguing that the increase in real health care spending represents an outward shift the demand curve.

(Via .)

http://www.markarkleiman.com/archives/_/2005/04/but_is_it_good_for_the_jews.php: Mark A. R. Kleiman: But is it good for the Jews?: Jonathan Zasloff writes:

According to Ha'aretz, Syrian troops will be out of Lebanon by tomorrow. Regardless of the timing, many in Jerusalem and Washington are celebrating. In particular, it will be seen as a vindication of George Bush's call for democracy. But in Israel, the situation can always get worse, and this will be no exception. If Bush has any more vindications like this, we'll start hankering after the failures. Hizbullah made little secret of its desire to have Syrian troops stay. But now, who exactly is supposed to clamp down on Hizbullah terrorists now that the Syrians are gone? Beforehand, we knew where to put pressure on Hizbullah--through Damascus. Now, the Syrians can say with a good deal of justification that they have no responsibility for the matter. With all the talk about the Syrian exit, hundreds of Iranian intelligence agents remain in Lebanon, and they will give Hizbullah all the guidance it needs straight from Tehran. The Syrians might have feared an Israeli strike--the mullahs will not. But doesn't this show the success of people power, and the Cedar Revolution? Again, be careful what you wish for.... [I]f you've got democracy, you've got to have a census. Hizbullah could very well find that it can get a majority to the polls. And this will hasten the creation of a pro-Iranian Shiite crescent across the Middle East...

http://www.warandpiece.com/blogdirs/001946.html: War and Piece: Bolton Pulled by White House from Libya Team. Bolton had to be taken out of the Libya negotiating chain of command at Tony Blair's insistence, Newsweek reports, for it to succeed. Bolton's supporters cite two meagre successes of his on the job he was supposed to be performing when he wasn't running his own ideologically-driven counterintelligence ops against US negotiators and intelligence underlings at State and CIA. That job was supposed to be nonproliferation, and the two successes cited are Libya's decision to abandon its WMD program and Bolton's pet Proliferation Security Initiative. Well, scratch Libya:

On several occasions, America's closest ally in the war on terror, Britain, was irked by what U.S. and British sources say were efforts by Bolton to undermine promising diplomatic openings. Perhaps the most dramatic instance took place early in the U.S.-British talks in 2003 to force Libya to surrender its nuclear program, NEWSWEEK has learned. The Libya deal succeeded only after British officials 'at the highest level' persuaded the White House to keep Bolton off the negotiating team. A crucial issue, according to sources involved in the affair, was Muammar Kaddafi's demand that if Libya abandoned its WMD program, the U.S. in turn would drop its goal of regime change. But Bolton was unwilling to support this compromise. The White House agreed to keep Bolton 'out of the loop,' as one source puts it. A deal was struck only after Kaddafi was reassured that Bush would settle for 'policy change'--surrendering his WMD.

Read the Newsweek piece which is testimony to the fact that the US's most significant ally, Britain, refuses to work with Bolton because of the destructive role he has played in sensitive negotiations to persuade countries like Libya and Iran to abandon their nuclear programs. We already have the principal US negotiators on North Korea coming forward to say Bolton was a dangerous disaster on North Korea -- and the proof is in the pudding. These are substantive policy failures, where the combination of Bolton's inability to work with others who don't share his ideological worldview, and gross misuse of intelligence made him a danger and a hindrance for US policy goals...

Posted by DeLong at 11:55 AM

Why Oh Why Can't We Have a Better Press Corps (Yet Another New York Times Edition)

Mark Schmitt assesses David Brooks as the true heir of William Safire. Don't trust. Verify. And even then don't trust:

The Decembrist: Brooks Channels Disinformation: "I remembered that when I said something nice about Brooks, I was bombarded with e-mails and comments attempting to demonstrate his essential dishonesty. I think this is proof of that -- either dishonesty or simply gullibility in channeling plain old disinformation....

[I]magine how unlikely it is that [Reid] would have offered to grease the way for the next Supreme Court nomination: He doesn't know who the nominee is, unlike most of the other judicial nominations at issue. He can't make such a promise because he can't know whether he can deliver on it. And making such a promise would be an invitation to bring on the worst possible nominee.... [I]f Judge Janice Rogers Brown is a little scary, folks, meet Justice Janice Rogers Brown, here to repeal that 'socialist revolution' that put us all in 'slavery' about 70 years ago.

If Reid were forced to actually deliver on such a promise, it would not just be an ill-advised squishy compromise, it would be the end of his leadership of the Democratic minority, and a debacle for the party. As disinformation, however, it makes sense. It undermines Reid at a moment when he's riding high. It helps spin the rightwing storyline that the Democratic Party is in thrall to interest groups that take a harder line than the elected members do. And it helps stir up tensions between those outside groups and the congressional party.

It's an interesting tactic, worthy of the master, but Brooks either should have been able to see through it, or chose not to.

Posted by DeLong at 11:54 AM

Bob Hall Corrects the Record...

He writes, apropos of this:

Of course you are right that I have roots in programming. However, it was on a decimal machine, the 1620, that occupied most of the basement of the Sloan building in the 1960s. The internal name of the 1620 at IBM was Cadet, which was rumored to stand for Can't Add, Doesn't Even Try, because it used a table for addition rather than having addition hardware.

Thus 1023 was just a random choice. Unless...

--Bob

Charles Babbage must have been spinning in his grave...

Posted by DeLong at 11:47 AM | Comments (0)

The Clown Show Continues

White House Chief-of-Staff Andrew Card says that Bush's plan is not Bush's plan:

Carpetbagger Report: White House Chief of Staff Andy Card said yesterday that the Pozen model, touted by the president on national television just a few days ago, isn't the president's plan. When told that the nonpartisan chief Social Security actuary analyzed the proposal laid out by the president and found sweeping cuts to everyone who makes more than $25,000 annually, Card said:

Now, the plan that you put on the table is really not necessarily the president's plan; it's directionally consistent with the president's plan. And we'd like to see Congress start to work taking a look at the plan proposed by Mr. Pozen, for example, where the statistics that you just cited come from, and see if they might make for a better system.

I don't think Card was trying to distance the White House from the Pozen policy so much as distance the president from the idea of having a concrete plan for Social Security. The Pozen plan is "directionally consisten" with what the president wants, but it's not the same thing. What is the White House plan? No one knows. It doesn't appear to exist.

Posted by DeLong at 11:40 AM

Warren Buffett and Charles Munger on Social Security

More opponents of Bush's Social Security "plans":

Bloomberg.com: Top Worldwide: Social Security: [Warren] Buffett and [Charles] Munger also told shareholders of [Berkshire-Hathaway that] they oppose U.S. President George W. Bush's plan to allow privatization of Social Security because the government has a duty to take care of the country's elderly. "The Republicans are out of their cotton-picking minds on this issue," said Munger, a self-described right-wing Republican. Social Security is "one of the most successful things that the government has ever done."

Posted by DeLong at 11:38 AM | Comments (0)

Why Is Wood So... Woody?

Wood is truly an amazing substance. Relatively light, very strong for its weight, elastic, capable of being shaped to an extraordinary degree. Why is wood so... woody?

Wood Handbook, FPL-GTR-113: Forest Products Laboratory. 1999. Wood handbook--Wood as an engineering material. Gen. Tech. Rep. FPL-GTR-113. Madison, WI: U.S. Department of Agriculture, Forest Service, Forest Products Laboratory. 463 p.

It seems clear that competition between plants has a bunch to do with it: whatever plants can get their leaves higher and wider spread has a big advantage in photosynthesis and thus in fitness. It seems pretty clear that wind has a bunch to do with it: wind can put great stresses on plants--especially those that reach high and are widely spread.

But I really do wish that by now somebody had told me why wood is so... woody.

Tomorrow: I also wish someone would tell me why doping iron with carbon atoms changes its properties so much...

Posted by DeLong at 07:53 AM

May 03, 2005

Does This Mean Anything?

In The Valve, Jonathan Goodwin writes:

The Valve - A Literary Organ | What's up with Social Text?: Ever wonder why Bombay was the bitch city [in Rushdie's Satanic Verses]? Feel as if your intuition that [the movie] Shri 420 was about smoking dope might be uninformed? Then Rashmi Varmi's 'Provincializing the Global City' is just what you need. An intriguing paragraph:

if the urgent political task is to make sense of how both the Hindu Right and transnational capital have achieved a necessarily incomplete hegemony over Mumbai's image and reality, it is equally urgent to construct alternatives. The somewhat hasty fabrication of an earlier universalism needs now to be refashioned in the context of an ever more careless celebration of the global marketplace. Our work, both political and intellectual (and across that potent divide), too, must answer to the new political configurations of our times that do not allow either for the easy recuperation and celebration of the older socialist and nationalist utopias or for an outright rejection of the possibilities of decolonization and global solidarity...

Ummm... Does this mean anything?

I think I understand what "transnational capital [has] achieved a necessarily incomplete hegemony over Mumbai's image and reality" means: it means that a lot of large businesses inside and outside India are trying--and in many cases succeeding--in finding some way to hire the people of Mumbai and sell the products they make on the world market and so make profits, and that this process is playing a powerful role in shaping both how the people of Mumbai live and how people inside and outside Mumbai think of the city, but that this is not the whole story. I think I understand what "the Hindu right [has]... achieved a necessarily incomplete hegemony over Mumbai's image and reality" means: it means that a certain political movement is playing the reactionary nationalism card, linking it to religion--we are Hindus and Indians and India is a Hindu civilization--and so trying to attain political power through shaping public memory into a revulsion of a hated "other" in their midst, and that in this case the hated other is not the African-Americans (as it was in the American Jim Crow South) and not the Jews (as in right-wing movements all across nineteenth and twentieth century Europe) but India's Muslims.

I don't understand what the "If the urgent political task is to make sense of [these two phenomena]..." means. I think we understand them pretty well. I don't know in what way the world market and National Hinduism need to be "made sense of." And I don't understand what "it is equally urgent to construct alternatives" means. Alternative economic systems to open engagement with the global market economy? Is this a call for the return to the License Raj of the Nehru Dynasty? (Varmi's text certainly suggests that as the alternative.) Alternative political movements to National Hinduism? Alternative ways of thinking about India today? But what is the purpose of this critique of critical criticism?1


1Shri 420 is supposed to be a very good movie. The Satanic Verses is a good read. The first is, in large part, a reinvocation of the very old theme of the corruption of an honest and naive young man by the city where everything is for sale, people are treated by others as means and tools, and what is sought is not love or happiness but wealth--with the interesting twist that what is exalted is not the honest conservative squires of the country (as in Tom Jones and Oliver Twist) but Jawaharlal Nehru's hopes for socialist utopia. The second is, in large part, a cry of anguish against the authoritarian use of religion to control and condemn. One purpose of Shri 420 was to support the Nehru Dynasty. One purpose of The Satanic Verses was to mobilize opposition to religious intolerance (in a manner somewhat analogous to Voltaire). I cannot discern what the purpose of Varmi's juxtaposing and writing about the two of them is.

Posted by DeLong at 09:55 PM | Comments (0)

Jason Furman on Bush's Press Conference

Jason Furman writes:

HOW WOULD THE PRESIDENT’S NEW SOCIAL SECURITY PROPOSALS AFFECT MIDDLE-CLASS WORKERS AND SOCIAL SECURITY SOLVENCY?: In last night’s press conference, President Bush endorsed a proposal that would result in substantial cuts in benefits for middle-income families and deeper cuts for higher-income families. While the proposal was described as reducing benefits for the most affluent Americans, it would result in large benefit reductions for middle-class workers, as well.

All workers with incomes above $20,000 today would be subject to benefit reductions, and the benefit cuts would escalate sharply in size as income climbed above $20,000. A worker making $35,000 today would be subject to benefit reductions more than half as large as the benefit cuts imposed on people at the highest income levels. A worker making $60,000 today would be subject to benefit reductions more than 85 percent as large as someone making several million dollars a year.

The benefit reductions for average earners would be the largest in Social Security’s history. The 1983 Social Security reform, for example, lowered benefits for average workers by 17 percent, with the reduction phased in over 46 years. The President’s plan would lower benefits for average workers by 28 percent over a period of 70 years, and by considerably more than that for middle-class workers with incomes somewhat above the average, such as those who make $60,000 today.

Social Security survivor benefits would be cut by the same magnitude. How disability benefits would be affected is unclear, although the President implied they would not be reduced.

The President’s proposed change in the Social Security benefit structure is essentially a plan known as “progressive price indexing” that has been designed by investment executive Robert Pozen. Analysis by the Social Security Administration’s actuaries shows that Mr. Pozen’s plan would reduce benefits for average earners retiring in 2075 by 28 percent, relative to the current benefit structure, and that this reduction would apply equally to retirees, survivors, and people with disabilities.[1] The actuaries also have reported that the benefit reductions under the Pozen plan would close about 70 percent of the 75-year Social Security shortfall.

The White House last night issued a fact sheet stating that its proposals, too, would close 70 percent of Social Security’s financing problems. To do that, the President’s plan either must cut disability and survivor benefits substantially — after all, one-sixth of the savings in the Pozen plan come just from reductions in disability benefits — or cut retirement benefits for middle-class workers even more deeply than the figures cited above (which are the actuaries’ estimates of the benefit reductions under the Pozen plan). If the President’s plan shields disability benefits from cuts, as the President indicated last night — and does not cut retiree and survivor benefits more sharply than the Pozen plan — then it will close 57 percent of Social Security’s 75-year shortfall, not 70 percent. (The 57 percent figure also reflects the small cost of the poverty-level minimum benefit the President proposed last night.)...

Posted by DeLong at 09:19 PM

Recipe Malfunction

It's time to admit that in the making of the Fifteen-Year-Old's birthday cake one cup of concentrated cold-process liquid--liquid that is supposed to be diluted four-to-one to make it into coffee--was added to the recipe, rather than one cup of coffee.

The cake was quite tasty...

Posted by DeLong at 09:11 PM

The Darth Side

Chad Orzel clearly needs additional college administrative responsibilities. He finds this:

The Darth Side: Memoirs of a Monster: 'Make ready the jump to hyperspace.'

'But Lord Vader,' whinnied Admiral Ozzel, 'the armada is already moving along a prescribed route...'

I withered him with a stare, my hands on my belt.

He ordered the helm to replot our course, and notified the fleet commanders. Then he turned and asked as contritely as he could manage, 'May I at least know what leads you to suspect Themoth will yield results, my Lord?'

'You may ask,' I told him, turning away to the glass. 'As an ant may ask the sun why it shines. It is beyond you, Admiral. See to your duty.'

Ozzel hesitated. 'Sir,' he said crisply and turned on heel.

Do you want to know what the worst part is? My left leg is still on the fritz. Whose trachea do you have to crush with your mind to get a little service around here?

Posted by Darth Vader

Posted by DeLong at 08:34 PM

It's the Circular Firing Squad of Flying Attack Monkeys!

Once again, that is the *only* way to describe the Bush administration's policy development process.

I read Bush's opening statement at his press conference last night:

Text of Bush's Press Conference-Part I: The money from a voluntary personal retirement account would supplement the check one receives from Social Security.

In a reformed Social System, voluntary personal retirement accounts would offer workers a number of investment options that are simple and easy to understand. I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government.

Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses.

The "build a nest egg" part... The "invest in Treasury bonds" part... Let's mosey on over to the Federal Reserve and look at the safest long-term investment the U.S. Treasury offers: the twenty-year inflation-protected TIP:

FRB: H.15--Selected Interest Rates, Web-Only Daily Update--April 28, 2005: Inflation-indexed: 20-year 1.83 1.86 1.87.

What the Federal Reserve is telling us is that the 20-year TIP is currently providing a real yield of 1.87% per year. What Bush is not telling you is that, under the Bush plan, if you divert $1000 from your Social Security to private accounts, that amount is clawed back--charged to an account associated with your normal Social Security benefit, that amount is then compounded at 3% per year plus the rate of inflation, and then after you retired deducted over time from your normal Social Security benefit.

If you are 45 and if Bush's plan were available today...

Follow George W. Bush's advice, divert $1,000 into your private account, invest it in TIPS, and at the 1.85% per year interest rate you will indeed by able to collect an extra amount worth $10.11 a month in today's dollars when you retire at 65...

But the clawback would reduce your normal Social Security benefit by $14.16 a month. You're $4.05 a month behind.

"Building a nest egg." Feh!


Did nobody inside the White House bother to run the numbers? Did nobody care?

And now I am told that the White House is wheeling out, to explain the details of his plan... Cathie Martin, Deputy Assistant to the President for Communications, will answer your questions about Strengthening Social Security and Future Generations. Are all the substance people in the White House fleeing from this? Where are they?

Posted by DeLong at 08:20 PM

Ben Bernanke's Views on Global Economic Policy

He writes:

FRB: Speech, Bernanke--U.S. current account deficit--April 14, 2005 : I disagree with the view... that balancing the federal budget by itself would largely defuse the current account issue.... [E]ven if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP. [More likely 1.5-2%, IMHO.]

Although I do not believe that plausible near-term changes in the federal budget would eliminate the current account deficit, I should stress that reducing the federal budget deficit is still a good idea. Although the effects on the current account... would likely be relatively modest, at least the direction is right. Moreover, there are other good reasons to bring down the federal budget deficit.... Similar observations apply to policy recommendations to increase household saving in the United States.... Although the effect of saving-friendly policies on the U.S. current account deficit might not be dramatic, again the direction would be right. Moreover, increasing U.S. national saving from its current low level would support productivity and wealth creation and help our society make better provision for the future.

However, as I have argued today, some of the key reasons for the large U.S. current account deficit are external to the United States... purely inward-looking policies are unlikely to resolve this issue. Thus a more direct approach is to help and encourage developing countries to re-enter international capital markets in their more natural role as borrowers... improve their investment climates by continuing to increase macroeconomic stability, strengthen property rights, reduce corruption, and remove barriers to the free flow of financial capital. Providing assistance to developing countries in strengthening their financial institutions--for example, by improving bank regulation and supervision and by increasing financial transparency--could lessen the risk of financial crises and thus increase both the willingness of those countries to accept capital inflows and the willingness of foreigners to invest there....

Other changes will occur naturally... the pace at which emerging-market countries are accumulating international reserves should slow.... Domestic investment in East Asia and in other emerging markets will eventually recover.... The various factors underlying the U.S. current account deficit--both domestic and international--are likely to unwind only gradually, however. Thus, we probably have little choice except to be patient...

Posted by DeLong at 08:17 PM

Why Oh Why Are We Ruled by These Fools? (Republican Congress Edition)

Kevin Drum notes the Republican Congress in action:

The Washington Monthly: A SHINY NEW BUDGET....Here's your new Republican budget:

The House and Senate broke a lengthy impasse over federal spending Thursday night, narrowly adopting a $2.56 trillion federal budget for 2006 that aims to trim the growth of Medicaid by $10 billion over five years, add $106 billion in tax cuts and clear the way for oil drilling in an Alaskan wildlife refuge.

Attaboy! Reduce the deficit $10 billion by cutting back on healthcare for the poor, and then turn around and increase the deficit $106 billion by approving additional tax cuts for the rich. Moral values, baby, moral values.

Posted by DeLong at 08:15 PM

Mark Thoma Is on Intellectual Garbage Pickup (Another Why Oh Why Can't We Have a Better Press Corps? Edition)

Mark Thoma of the University of Oregon is performing this thankless task.

Here's Thoma on John Tierney:

Economist's View: Tierney on Social Security Privatization: Seeing the Tree: John Tierney looks at the case of a single individual and concludes that privatization in Chile is a success. Success stories are easy to find when the focus is on a single individual, in this case an economist at the University of Chile: "...Pablo, who grew up to become an economist %u2026 called up his account on his computer and studied the projected retirement options for him. 'I'm very happy with my account,' he said to me after comparing our pensions. He was kind enough not to gloat. When I enviously suggested that he could expect not only a much heftier pension than mine, but also enough cash to buy himself a vacation home at the shore or in the country, he reassured me that it would pay for only a modest place..."

But what if we look at the whole forest, not just a single tree? This is... from earlier in April: "In Chile: A Safety Net With Some Holes, By Monte Reel, Washington Post Foreign Service, Monday, April 11, 2005; Page A11.... Given the pace of contributions, more than half of the workers who retire in the next 30 years will not have enough money in their plans to receive the minimum payout..." [T]he forest is much less healthy than the single tree Tierney examined...

And here's Thoma on Robert Samuelson:

Economist's View: Samuelson's One-Sided Scissors: Robert Samuelson... excused the U.S. from any responsibility for the current account deficit.... "[W]hat if the problem of today's global economy is that people elsewhere... are saving too much and spending too little?... Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery (now 3 1/2 years old); and (c) the difficulty of doing anything about (a) and (b).... [T]he flow of surplus global savings to the United States has caused Americans to spend more and save less.... Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result.... Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States...."

The argument is that high foreign saving caused low U.S. saving.... But isn't it equally logical... to argue the reverse, that the low saving rate, particularly public saving (the deficit) in the U.S. caused funds to flow in from abroad? Would that then mean, under Samuelson's definition, that the main cause lies within the U.S.?... As Marshall reminded us long ago in a slightly different context, "We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper." Yes, the high foreign saving rate played a role, but that is only one side of the scissors. The U.S. public and private saving rates played a role as well.

And, of course, Mark is right. A global savings glut that generated a two or three percent of GDP trade deficit for--capital inflow into--the U.S. would not be a bad thing. But overlay the Bush deficits on top of that, and the trade deficit gets worrisome. Have the trade deficit further amplified by China's and Japan's desires for export-led growth--and have foreign private investors decide that they don't want to hold any more U.S. bonds--and the situation becomes terrifying.

Samuelson, however, is no longer in the economic analysis business: you learn nothing about why Bernanke sees the current situation as dangerous. Samuelson, instead, is in the business of laying down a marker saying that anything bad that happens in the future is not George W. Bush's fault--"[Bernanke's] contribution is to show that [the deficits'] main causes lie outside the United States." Tierney never was in the economic analysis business: he can't truthfully say that Bush's private accounts are a good deal for beneficiaries, and he can't truthfully say that Chile's system has prefunded adequate pensions for its population, but he can misdirect with one personal case.

As I said, it's intellectual garbage collection. Mark Thoma is performing a thankless but necessary task, for which we should be grateful.

Posted by DeLong at 08:15 PM