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June 30, 2005

Does Financial Globalization Remove the Possibility of a Dollar Crisis? Obstfeld and Rogoff Say, "No!"

Maury Obstfeld and Ken Rogoff say that Greg Mankiw, Alan Greenspan, and others who point to increased financial globalization as a reason not to worry (much) about the U.S. current account deficit are simply wrong. Increased financial globalization has implications for the value of gross international asset positions, but has very little to do with the macroeconomics of how unsustainable trends in net international asset positions come to an end. The unwinding of unsustainable trends in net positions requires that countries' inhabitants change how much and what kinds of goods they consume. This has little to do with financial globalization, and a lot to do with exchange rates, relative goods prices, and demand elasticities:

Maurice Obstfeld and Kenneth Rogoff (2005), "Global Current Account Imbalances and Exchange Rate Adjustments" (Berkeley: University of California):

[T]he global equilibrium ramifications of an unwinding of the US current account deficit, currently running at nearly 6% of GDP [make] the potential collapse of the dollar... considerably larger (more than 50% larger) than our previous estimates [of five years ago].... [G]lobal capital market deepening... [has] accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti).... Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment.... [A]djustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar’s decline may be benign as in the 1980s... the current conjuncture more closely parallels... when the Bretton Woods system collapsed....

[...]

Given our analysis, why then do some, such as Greenspan (2004), argue that a decline in the United States current account deficit is likely to be benign? Greenspan points to the fact that capital markets are becoming increasingly integrated, and cites reductions in home bias in equities, the secular waning of the Feldstein-Horioka puzzle, and other factors.... But our calibration here is totally consistent with the current degree of integration of capital markets.... What matters... is not the depth of international capital markets, but the costs of adjusting to lower tradables consumption in the goods markets.... [N]ontraded goods account for 75% of GDP... home bias in tradable goods consumption... US current account adjustment necessarily requires a significant exchange rate adjustment.... [E]ven a closing up of the US current account from 6% to 3% would require very substantial exchange rate adjustments, especially if one takes the likely effects of exchange rate overshooting into account....

The real question is not whether there needs to be a big exchange rate adjustment.... The real question is how drastic the economy-wide effects are likely to be. This is an open question.... [W]hereas US markets may have achieved an impressive degree of flexibility, Europe (and to a lesser extent Japan) certainly has not. The rest of the world is not going to have an easy time adjusting to a massive dollar depreciation.... With the increasing diversity of banks’ counterparty risk... a massive dollar movement could lead to significant financial problems that are going to be difficult to foresee before they unfold....

[T]he optimists can point to the dollar’s relatively benign fall in the late 1980s (though arguably it was a critical trigger in the events leading up to Japan’s collapse in the 1990s). But perhaps the greatest concern is that today’s environment has more parallels to the dollar collapse of the early 1970s than to the late 1980s....

Posted by DeLong at 01:05 PM | Comments (0) | TrackBack

Kudos to Ryan Nunn of the Brookings Institution

Kudos to Ryan Nunn of the Brookings Institution. He has saved us from an embarrassing (and substantive) mindo in "Asset Returns and Economic Growth."

Because I forgot in the Diamond model to adjust the capital stock per capita for population growth, I wrote down the wrong equation (21):

where I should have written:

And this error propagated to give the wrong expression for the real interest rate along the economy's steady-state growth path:

which should have been:

and this led us to the erroneous conclusion that in the Diamond model slowdowns in population growth have smaller effects on asset returns than do slowdowns in labor productivity growth, while in fact the effects are equal.

We are very grateful to Ryan for his sharp eyes...

Posted by DeLong at 11:39 AM | Comments (0) | TrackBack

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

Looks like the New York Times's Eric Schmitt was snookered. Schmitt writes:

Army Recruiting Improves in June - New York Times: WASHINGTON, June 29 - For the first time since January, the Army met its monthly recruiting goal in June, but still faces what some senior Army officials say is a nearly insurmountable shortfall to meet the service's annual quota. The chairman of the Joint Chiefs of Staff, Gen. Richard B. Myers, told a town-hall meeting at the Pentagon today that the Army had exceeded its June quota, but gave no details. Senior Army officials said in interviews earlier in the day that the Army had exceeded the goal of 5,650 recruits by about 500 people. The Army Reserve also made its first monthly quota since last December, the official said...

But earlier this month CBS News told us:

CBS News: Army Recruiting Continues To Lag: [T]he Army... fell about 25 percent short of its target of signing up 6,700 recruits in May, officials said Wednesday. The gap would have been even wider but for the fact that the target was lowered by 1,350. The Army said it lowered the May target to "adjust for changing market conditions," knowing that the difference will have to be made up in the months ahead....

Lt. Col. Bryan Hilferty, spokesman for the Army's chief of personnel, said... the Army remains cautiously optimistic that it will make up the lost ground this summer — traditionally the most fruitful period of the year for recruiters — and reach the full-year goal of 80,000 enlistees. "One number matters: 80,000," Hilferty said....

With only four months left in the budget year, the Army is at barely 50 percent of its goal. Recruiters would have to land more than 9,760 young men and women a month, on average, to reach the 80,000 target by the end of September.

People graduate from high school in June, not May. Yet the June goal of 5,650 is 2,400 smaller than the original May goal of 8,050? When we were told before that the summer is "traditionally the most fruitful period of the year for recruiters"? An 80,000 a year target is 6,667 a month on average--and more in the "fruitful" summer months.

Wotisitgood4 gives his opinion:

wotisitgood4: ten bucks says someone is lying: [W]e know from last month that the May target was 8050, and now we are expected to believe that the june target was always 5650? is there a journo on the planet with access to the internet and an abacus?... [W]hen they reduced the May target, they maintained the full year target [of 80,000] and were just "re-allocating" the 1350 across the remaining months -- June, July, August and Spetember -- some of which were presumably stuffed into the June recruiting budget...

It's possible that it is CBS News that is significantly in error. It seems unlikely--the CBS News story is based in large part on talking to people who are not part of the official spin machine.

Looks like Eric Schmitt of the New York Times needs to do some digging. It would have been easy for him to ask the question: "Why is your June target of 5,650 so much lower than your original May target of 8,050?" He didn't.

Posted by DeLong at 11:33 AM | Comments (0) | TrackBack

Brad Setser Has Lots to Say--All of It Interesting

Brad Setser is happy with Martin Wolf:

Brad Setser's Web Log: Martin Wolf makes sense (the Economist does not) : Martin Wolf's FT column makes a number of crucial points:

1. Asia has let undervalued exchange rates (and reserve accumulation) substitute for policies to promote domestic demand. The (growing) backlash in the US toward these policies hardly should be a surprise: "So long as exports remain competitive and trade balances strong, the need to promote domestic demand, thereby reducing the surplus of savings over investment, is diminished. Net exports support demand instead. This is modern mercantilism. The adverse reaction now seen in the US congress is predictable and understandable."
2. Continuing this system is risky: "They [the US deficit and emerging market surpluses] generate growing protectionist pressure in the US; they force the US into monetary and fiscal policies whose consequence is growing indebtedness, both domestic and externally, they are likely to end in a brutal correction, and that correction is likely to be more brutal the longer it is delayed."
3. China's scale constrains its ability to continue to rely on exports to substitute for a lack of domestic demand: "A country with a population of 1.3 billion cannot grow at 10% a year and remain as dependent on trade as one with 50m without provoking a backlash from its trading partners."
4. Adjustment ultimately hinges on China's willingness to adopt policies -- exchange rate adjustment, stimulus to domestic demand -- that will reduce its current account surplus significantly: "A world in which emerging market economies not only run vast current account surpluses but also recycle the capital investors want to place in their economies is unprecedented, undesirable and unsustainable." "China, for example, has foreign currency reserves almost as big as annual imports. With current policies, those reserves are likely to continue to grow rapidly for indefinite future. This is not a reasonable pattern of development in the medium term.

The IMF estimates China's 2005 current account surplus [at] $80 billion. That... is low... $120 billion this year (even with oil at $60). That current account surplus combines with net FDI inflows of $70 billion... to generate a basic [financial] balance of close to $200b, or above 10% of China's GDP. To quote Wolf, that "is enormous by any standards."

Brad Setser is unhappy with the Economist:

[It] manage[s] to argue that a country with a large and growing current account surplus even in the face of a massive investment surge is not really undervalued. The Economist article argues that... it makes sense to look at a country's behavioral equilibrium exchange rate... Using work from Stephen "Current account deficits do not matter" Jen, the Economist concludes that yuan is only modestly undervalued. Let's repeat that. The Economist looks at a country with a current account surplus of 6-8% of GDP in the midst of an investment boom, and says its currency is NOT undervalued.

I am not sure what the "behavioral" exchange rate measures in the context of a country whose government is spending more than 10% of its GDP to manage its exchange rate.... We all know that they have fixed their exchange rate to the dollar, and have spent huge sums -- over $150 b in 2003, over $200 b in 2004, and probably over $250 b in 2005 -- to keep that peg....

The other argument made by the Economist is that "internal balance" in China -- keeping China's workers employed -- requires an undervalued exchange rate.... It is hard to dispute the fact that China's undervalued exchange rate is stimulating employment in China's export sector.... Wolf... argues that it is neither politically or economically sustainable for a country as large as China to offset the absence of internal demand with a huge-- at least 5% of GDP and perhaps closer to 8% of GDP this year -- current account surplus. I agree....

[U]nprecedented deficits in one key part of the global economy, and unprecedented reserve accumulation and current account surpluses in another. But you would never know that there was a real problem in the world just from reading the Economist...

Brad Setser is puzzled by the Federal Reserve:

Brad Setser's Web Log: How does the Fed imagine the US current account deficit will adjust?: Greenspan does not think a revaluation of the RMB would have a major impact on the US trade balance. The Fed does not think that reducing the fiscal deficit would generate a major reduction in the current account deficit. Bernanke thinks a smaller fiscal deficit would just produce a bigger housing boom. Empirically, work from the Fed staff -- work summarized by Roger Ferguson in his current account deficit speech -- suggests that changes in private savings and investment offset a rising (or falling) budget deficit, so a $1 fall in the fiscal deficit only reduces the current account deficit by 20 cents.

If you take "Houthakker-Magee" seriously... the Bush Administration's preferred solution... faster growth abroad... won't do much either.... According to Menzie Chinn, one percentage point faster growth abroad increases exports by 1.7-2%.... Given that exports have to grow something like 60% faster than imports to keep the trade deficit from expanding, faster growth abroad only works if accompanied by slower growth in the US. Remember, the world as a whole grew extremely rapidly in 2004 -- and the US current account deficit still expanded significantly.... Plus, wouldn't faster growth abroad just push up oil prices and hte US oil import bill even more?...

My own view? The US deficit is now so large in relation to the US export base that... [no] individual action in isolation [will] have an enormous impact.... Get rid of China's current account surplus of $120b (projected 2005) through increased US exports to China and the US current account deficit would fall from an enormous $820b (projected 2005) to an only slightly less enormous $700b. The only thing guaranteed to bring about a big adjustment fast is just what no one wants. A hard landing.

Bringing down a 7% of GDP current account deficit (that is where we are heading, fast) and 7% of GDP trade and transfers deficit without a crash will take time, and a bit of everything. Exchange rate adjustment. Steps to stimulate domestic-demand led growth abroad. Fiscal adjustment in the US. Lower oil prices would be a nice bonus. Slower consumption growth in the US.

Exchange rate moves matter. Bringing down the trade deficit won't necessarily be a lot of fun -- living beyond your means usually is nicer than living within your means. But a fair amount of evidence suggests that a weak exchange rate can make the external adjustment process a bit more pleasant...

Posted by DeLong at 11:31 AM | Comments (0) | TrackBack

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

Mark Thoma's jaw drops:

Economist's View: WSJ Commentary: Monetary Policy Does Not Affect Core Inflation: The Wall Street Journal can do better than this. This article by Alan Reynolds of Cato claims that monetary policy has no effect on prices and inflation, a claim that is just plain dumb:

The Fed's Crude Policy, By Alan Reynolds, The Wall Street Journal: … It is commonly assumed that the Fed "leans against" inflation -- raising interest rates when inflation accelerates and lowering rates when inflation slows. Yet the graph nearby proves it is difficult to discover any coherent relationship between the funds rate and the "core" deflator for personal consumption expenditures (PCE), or any other measure of inflation not distorted by energy prices. … The only way to link the fed-funds rate to inflation is to assume the Fed suffered from "energy illusion" -- focusing on fluctuating energy prices rather than the impressive stability of other consumer prices. Perhaps the best way to show this is to look at the consumer price index with and without energy, so there can be no doubt that food prices (which are also excluded from core inflation) were irrelevant…

Here’s the problem with this.... Suppose that monetary policy perfectly controlled inflation.... [Then inflation] would be a flat line with no variation... and it would be uncorrelated with any other variable. The fact that there is no correlation between inflation and the ff rate would be an indication of the success of the policy, not that inflation and monetary policy are unrelated.... [T]he [right] conclusion is exactly the opposite of what [Reynolds] author claims. Finding a correlation between the ff rate and inflation including energy prices means, if policy is successful, that policy does not target energy prices, not that it does.... This does not belong in the Wall Street Journal.

I presume Mark has noticed that almost nothing on the editorial pages of the Wall Street Journal belongs anywhere.

This would make a good easy question for this summer's macroeconomics field exam, however.

Posted by DeLong at 11:29 AM | Comments (0) | TrackBack

Joseph Ferrie and Werner Troesken Go to 19th Century Chicago

What a hellhole! Another thing to add to the very top of the pile:

Joseph P. Ferrie and Werner Troesken (2005), "Death and the City: Chicago's Mortality Transition, 1850-1925" (Cambridge: NBER Working Paper 11427).

Abstract: Between 1850 and 1925, the crude death rate in Chicago fell by 60 percent, driven by reductions in infectious disease rates and infant and child mortality. What lessons might be drawn from the mortality transition in Chicago, and American cities more generally? What were the policies that had the greatest effect on infectious diseases and childhood mortality? Were there local policies that slowed the mortality transition? If the transition to low mortality in American cities was driven by forces largely outside the control of local governments (higher per capita incomes or increases in the amount and quality of calories available to urban dwellers from rising agricultural productivity), then expensive public health projects, such as the construction of public water and sewer systems, probably should have taken a back seat to broader national policies to promote overall economic growth. The introduction of pure water explains between 30 and 50 percent of Chicago's mortality decline, and that other interventions, such as the introduction of the diphtheria antitoxin and milk inspection had much smaller effects. These findings have important implications for current policy debates and economic development strategies.

Posted by DeLong at 10:58 AM | Comments (0) | TrackBack

Le Grand Blond Aardvark avec Une Chasseure [Ahem! Chaussure] Noire

Abu Aardvark sends coded messages through his choice of footwear:

Abu Aardvark: Observations on visiting DC : (1) If you have two young kids and you're really exhausted, pay extra attention to what you pack. Maybe even do it the night before instead of waiting until the last minute. That way, you might not find yourself with two different shoes when you go to put on your work clothes. Because of all the things which might impress a high-powered government panel, wearing two different shoes - both black, but not even a little bit similar in design - probably is not one of them.

(2) Starbucks is getting out of hand. Down in the GWU / Foggy Bottom area, I swear to god there really is a Starbucks on every single corner. So when your friend says "let's meet at the Starbucks down by GW", it might be a good idea to get more details in advance...

Posted by DeLong at 07:24 AM | Comments (0) | TrackBack

June 29, 2005

Department of "Huh?" (Iraqi Casualties Edition)

Rising Hegemon tries to make sense of Veterans Affairs' claim that it projects a need to provide care for 103,000 patients who are veterans of the wars in Afghanistan and Iraq. That seems a very large number indeed:

Rising Hegemon: Holy Shite!: Jim Nicholson is a GOP shill who has been known to tell a lie or two to say the least. And I think there is a solid lie within this as well, but still WOW, just WOW, this is disturbing:

As the numbers of U.S. war injured in Iraq and Afghanistan soared, the Bush administration admitted to lawmakers on Tuesday it had underestimated funds to cover health care costs for veterans and Congress would have to plug a $2.6 billion hole. "The bottom line is there is a surge in demand in VA (health) services across the board," said Veterans Affairs Secretary James Nicholson.The Veterans Administration assumed it would have to take care of 23,553 patients who are veterans from the wars in Iraq and Afghanistan but that number had been revised upward to 103,000, Nicholson told a House of Representatives panel.Nicholson told a House Appropriations subcommittee that his agency's estimate of Iraq and Afghanistan veterans in need of health care services was now four times greater than thought.

The updated figures underscored how the costs of the Iraq war, approaching $300 billion, were rippling through other parts of a federal budget already under tight spending limits. Nicholson's testimony, coming after his assurance to Congress in April that veterans' health programs were being adequately funded, angered some lawmakers.

They estimated 23,000 in APRIL 2005 --- Two months later it turned out to be 103,000!!! The lie of Nicholson is undoubtedly the "across the board" reference to the use of services. It's unlikely that Vietnam and peacetime vets are running to the VA in a huge surge. I'm not a conspiracist on the unreported deaths issue -- but something unreported is obviously going on when it comes to "wounded". Sure would be nice if the media looked into this before Atrios has to call for another conference on blogger ethics.

Posted by DeLong at 09:15 PM | Comments (0) | TrackBack

I, Too, Want My Technorati Back

Let me join those complaining about the quality of the free ice cream that is Techorati http://www.technorati.com/ these days:

Making Light: Baby, pull yourself together: Technorati... gives me the same set of outdated incoming links over and over again, reshuffling their order, sometimes swapping one out only to swap it back in again an hour later. I wrote my post about the giant popsicle meltdown yesterday morning. By early evening I learned that it was picking up considerable linkage. How? Not from Technorati... it gave me the same old reshuffled links it'd been showing me all week. The links it had missed, at least the ones I know about, included BoingBoing, Metafilter, Crooked Timber, Majikthise, and Sisyphus Shrugged.... When Technorati can't tell you that you've been simultaneously BoingBoinged and Metafiltered--an event that can shut down a low-bandwidth site--it is formally useless.

Bummer. I am definitely in the market for a replacement....

Patrick Nielsen Hayden... (My experience with the beta site is that large parts of it, like "sort incoming links by 'most authority,'" simply don't work at all; you wait forever for no result.) (We both realize this is arguably a variety of complaining about the free ice cream, and yet.)

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

Unusual Juxtapositions

Note to self:

Turning the "shuffle" function on on an iPod that has Bach's St. Matthew Passion loaded onto it can produce some interesting juxtapositions:

Then saith Caiaphas... "Didn't I make you feel like you were my only man?"

Posted by DeLong at 09:12 PM | Comments (0) | TrackBack

June 28, 2005

Ben Bernanke Holds the Fort Alone

I didn't know that Kristen Forbes had left the CEA:

Council of Economic Advisers: Ben S. Bernanke is Chairman of the Council of Economic Advisers (CEA). Two positions on the council are currently vacant. The CEA was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues. The CEA includes three members who are appointed by the President, by and with the advice and consent of the Senate. The President shall designate one of the members as Chairman...

No news as to successors to her, or to Harvey Rosen.

Posted by DeLong at 05:45 PM | Comments (0) | TrackBack

Gourinchas and Rey on Exorbitant Privilege

Pierre-Olivier Gourinchas and Helene Rey say some very smart things:

Gourinchas and Rey: "From World Banker to World Venture Capitalist: The US External Adjustment and The Exorbitant Privilege": Does the center country of the International Monetary System enjoy an “exorbitant privilege” that significantly weakens its external constraint, as has been asserted in some European quarters? Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return has increased after the collapse of the Bretton Woods fixed exchange rate system. It is mainly due to a “return discount”: within each class of assets, the total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also find evidence of a “composition effect”: the US tends to borrow short and lend long. As financial globalization accelerated its pace, the US transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of the current global imbalances.

In my view, the "exorbitant privilege"--in the words, it turns out, not of Charles de Gaulle but of Valery Giscard d'Estaing, as transmitted by Raymond Aron via Le Monde--of the U.S. as international financial linchpin has four components:

1. Seigniorage: The Federal Reserve and the Treasury can issue a lot more high-powered money than other countries, and thus effectively borrow interest-free on a not insubstantial scale.
2. Returns: The U.S. and its citizens can borrow in any given asset class for less than other countries can because of the dollar's key role and thus superior liquidity--according to Gourinchas and Rey, 1.7% per year in excess returns.
3. Composition: Because the U.S. does not have to worry (much) about a collapse of its currency's raising the real value of its foreign debt, it and its citizens can safely hold international asset positions whose composition would be ludicrously risky for any other country--worth, according to Gourinchas and Rey, 0.5% per year in excess returns.
4. Policy: By virtue of the first three, the U.S. has much more macroeconomic policy running room than anyone else.

Gourinchas and Rey focus on (2) and (3), but (1) and (4) are also important. Especially (4).

Posted by DeLong at 05:44 PM | Comments (0) | TrackBack

Unexpected Email of the Day

Well. This is certainly the unexpected email of the day:

Why is the pricey sleepaway summer camp in Santa Cruz we are sending the kids to sending us an email with the following subject:

Circus Trapeze Arts Liability Waiver

?

Posted by DeLong at 05:41 PM | Comments (0) | TrackBack

Why Are We Ruled by These Fools? (Duty, Honor, Country Edition)

Lucian Trucott points out that the Bush administration has not been loyal to the army:

The Not-So-Long Gray Line - New York Times: My class, that of 1969, set a record with more than 50 percent resigning within a few years of completing the service commitment.... And now, from what I've heard from friends still in the military and during the two years I spent reporting from Iraq and Afghanistan, it seems we may be on the verge of a similar exodus of officers.... The Los Angeles Times reported on "an undercurrent of discontent within the Army's young officer corps that the Pentagon's statistics do not yet capture."

I'm not surprised.... [M]y classmates were disillusioned with more than being sent to fight an unpopular war.... [W]e were taught that the academy's honor code was what separated West Point from a mere college.... We were taught that in combat, lies could kill.... [S]oldiers are given few rights, grave responsibilities, and lots and lots of power. The honor code serves as the Bill of Rights of the Army, protecting soldiers from betraying one another and the rest of us from their terrifying power to destroy....

[T]he honor code broke down before our eyes as staff and faculty jobs at West Point began filling with officers returning from Vietnam... bogus medals... inflating body counts... drug abuse... racial discrimination, and worst of all, telling everyone above them in the chain of command that we were winning a war they knew we were losing. The lies became embedded in the curriculum of the academy, and finally in its moral DNA.... The mistake the Army made then is the same mistake it is making now: how can you educate a group of handpicked students at one of the best universities in the world and then treat them as if they are too stupid to know when they have been told a lie?...

In the fall of 2003 I was embedded with the 101st Airborne Division in northern Iraq, and its West Point lieutenants were among the most gung-ho soldiers I have ever encountered, yet most were already talking about getting out of the Army. I talked late into one night.... "I feel like politicians have created a difficult situation for us," he told me. "I know I'm going to be coming back here about a year from now. I want to get married. I want to have a life. But I feel like if I get out when my commitment is up, who's going to be coming here in my place? I feel this obligation to see it through, but everybody over here knows we're just targets. Sooner or later, your luck's going to run out."

At the time, he was commanding three vehicle convoys a day down a treacherous road to pick up hot food for his troops from the civilian contractors who never left their company's "dining facility" about five miles away. He walked daily patrols through the old city of Mosul.... The Army will need this lieutenant 20 years from now when he could be a colonel, or 30 years from now when he could have four stars on his collar. But I doubt he will be in uniform long enough to make captain....

A couple of weeks ago, I got an e-mail message from another West Point lieutenant.... "I'm getting out as soon as I can," he wrote. "Everyone I know plans on getting out, with a few exceptions. What have you got to look forward to? If you come back from a tour of getting the job done in war, it's to a battalion commander who cares more about the shine on your boots and how your trucks are parked."...

If you keep faith with soldiers and tell them the truth even when it threatens their beliefs, you run the risk of losing them. But if you peddle cleverly manipulated talking points to people who trust you not to lie, you won't merely lose them, you'll break their hearts.

Posted by DeLong at 05:22 PM | Comments (0) | TrackBack

Intellectual Garbage Pickup

Yes, it's time for our once-every-three months websurf over to Donald Luskin. Why? As a public service: somebody needs to lay down a marker that he simply does not know what he is talking about, and that anyone who believes anything he writes without very careful verification is asking for big trouble.

And it is unbelievable. You don't have to read a dozen paragraphs before you run across something so bats--- ignorant that it should cause every National Review editor and writer to resign in shame, move to Rwanda, and take up a life of anonymous service to others.

This time Luskin denies the existence of the entire discipline of statistics--the idea that a properly designed random sample can tell you important things aout a much, much larger population:

The Conspiracy to Keep You Poor and Stupid: The Times and the Journal cite many authoritative-sounding studies.... But to get an accurate picture... you'd have to track hundreds of millions of individuals.... [N]one of this is reliable... the Panel Study of Income Dynamics... tracks only 8,000 families out of a U.S. population of 295 million individuals.

And then goes on to reveal that he has never eyeballed the time series on growth and inequality:

Times of great prosperity have been associated with greater income inequality (for example, the 1920s), and conversely times of economic decline have been associated with greater equality (the 1930s). The lines of causality here are complex, and no doubt run in both directions: Prosperity is both the cause and the effect of inequality, and decline is both the cause and the effect of equality. So ideological advocates of income equality for its own sake ought to be careful what they wish for...

The relationship between growth and inequality in the U.S. in the twentieth century? None--neither positive nor negative: inequality is high in the fast-growing 1920s and low in the faster-growing late 1950s and 1960s; inequality is not low but high in the depressed 1930s.

http://www.j-bradford-delong.net/movable_type/2005-3_archives/001040.html

Stupidest man alive.

Posted by DeLong at 05:20 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Idiots? (The Italian Situation Edition)

Robert Waldmann tells us what is going on in Italy:

Robert's Stochastic Thoughts: Hassan Osama Nasr was kidnapped in Milan on February 17 2003. On the 23rd of June the Italian GIP Chiara Nobile issued 13 arrest warrents for CIA agents who participated in the kidnapping.... [P]olice and magistrates in Italy are furious with the CIA and the Bush administration.... [T]he person doing [the leaking] (cough Armando cough Spataro) knows that he or she will not be able to bring the agents to trial, and is determined convince the court of public opinion to inflict as much punishment as possible... campaign of leaks... likely to be devastating. In particular, the leakers are... stressing that the CIA has sabotaged the war against terror... CIA agents... incompetent and self indulgent....

Some key nuggets.... "The abduction of Abu Omar forced Italian authorities to abort an extensive case they were building against him. His arrest had been imminent, they said, and formal charges against him are pending." "Abu Omar's disappearance angered several officials who thought they had always cooperated fully with U.S. anti-terrorism efforts, only to be trampled on in this operation." "'Kidnapping Abu Omar was not only a crime against the state of Italy, but also it did great damage to the war on terrorism,' said Spataro, the prosecutor. 'We could have continued the investigation and found evidence on other people. He would be on trial by now instead of missing.'"...

Spataro is going for blood. He also clearly understands which arguments are effective in convincing people in the US who are not convinced already. The next day, anonymous sources opened a new line of attack... CIA agents... incompetent and corrupt.... "[T]abs of thousands of dollars at some of Milan's best hotels and restaurants. They chatted easily on their cellular telephones and gave out passport, frequent-flier and driver's license numbers when booking flights or renting cars. And now they are fugitives....

Note that it is a crime for officials in the prosecutorìs office to talk to the press (it is like revealing grand jury testimony). [The Italian police and prosecutors[ are angry enough not to mind the NY Times reporting the detail that people both with the police and at the procura are talking.... [T]he Italians... had leads useful for an investigation of an international network... this investigation was sacrificed for a chance to torture the one key player who had been identified and placed under surveilance but seems not to have known that he wa giving the Italian police invaluable information until the CIA ruined everything by kidnapping him...

Posted by DeLong at 05:12 PM | Comments (0) | TrackBack

A Fan of Ayatollah Sistani (Why Oh Why Can't We Have a Better Press Corps? New York Times Edition)

My college roommate Robert Waldmann is a fan:

Robert's Stochastic thoughts: I'm back in the Sistani fan club. Ayatollah Sistani just argued in favor of provincial lists for future parliaments as opposed to a national list. This would mean that predominantly Sunni areas will be represented proportional to population even if turnout was low. I argued that, of course, the election of the constitutional assembly should have been on a provincial basis. So, I just learned did Ayatollah Sistani. Unfortunately the crack UN elections team considered the national system easier to set up and the rest is in the daily papers....

Oddly.... Sabina Tavernise repeats the line that Sistani's efforts have been focused on maximizing power of Shi'ites. The logic of this is that Sistani had the crazy idea that Democracy involves elections. Since Shi'ite Arabs are the majority, this exposed him to claims that he wanted absolute power of the majority. The evidence is that he opposed fake Democracy in which Paul Bremer would appoint the people who appointed the people who elected the people who would claim to represent The People.

The latest evidence would tend to undermine this theory, since Sistani is advocating a change... which would give Shi'ites less overwhelming power. One could argue that this is a... concession... [to] the insurgency.... Tavernise manages to argue this:

The statements by Ayatollah Sistani are the latest foray into Iraqi politics by the Shiite leader. Pressure from him was a major factor in establishing an accelerated timetable for the elections in January. That pace, however, largely dictated the election's countrywide system, because United Nations organizers considered it the simplest and quickest way to organize the vote. When United Nations officials met with the ayatollah in March, he chastised them for choosing the system, and said he favored setting assembly seats aside district by district, a preference he reiterated Monday. Mr. Yasiri, the Shiite politician, said Ayatollah Sistani had characterized the January election as flawed. In the past, the ayatollah has reserved his efforts to pushing for measures, like nationwide elections, that were likely to enhance the power of Iraq's Shiite majority.

Try to make sense of that quote. In particular try really hard not to notice that the last two sentences directly contradict each other. I am correct that "March" is currently "in the past". Weird. Also the idea that it is Sistani's fault that after the CPA stalled for months the UN organizers had to rush and so needed to make a national list because... they "considered it the simplest and quickest way to organize the vote." Odd I thought the problem was the census, not ballots and such.

Unhappy is the country that needs heroes. Especially the country that needs foreign born, reclusive clerical heroes with bad hearts. Still I say buy that man some Caspian Sturgeon Caviar (and remind him who explained that it is halal).

Posted by DeLong at 05:09 PM | Comments (0) | TrackBack

Paul Krugman Says Defense Is More Important than Opulence

He says that control of oil resources, possibly very scarce in the future, is more important than the value of the Chinese Communist Party as an agency of corporate control. As I read Paul, he says that if we did not need Chinese help on North Korea and if we were not very vulnerable to a cut-off of capital inflows, then it would be a no-brainer. In fact, he says, it's a close call. But he still would argue against allowing the Chinese bid for Unocal on the grounds that there are possible future states of the world in which control of oil flows will turn out to be very important indeed.

But we do need Chinese help on North Korea, and we are very vulnerable to a cut-off of capital inflows

The Chinese Challenge - New York Times : Maytag is a piece of American business history, [but] it isn't a prestige buy for Haier, the Chinese appliance manufacturer. Instead, it's a reasonable way to acquire a brand name and a distribution network to serve Haier's growing manufacturing capability.... Maytag's stockholders will gain, and the company will probably shed fewer American workers under Chinese ownership than it would have otherwise....

The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources - which makes last week's other big Chinese offer more than just a business proposition.

The China National Offshore Oil Corporation, a company that is 70 percent owned by the Chinese government, is seeking to acquire control of Unocal, an energy company with global reach. In particular, Unocal has a history -- oddly ignored in much reporting on the Chinese offer -- of doing business with problematic regimes in difficult places, including the Burmese junta and the Taliban....

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.

If it were up to me, I'd block the Chinese bid for Unocal. But it would be a lot easier to take that position if the United States weren't so dependent on China right now, not just to buy our I.O.U.'s, but to help us deal with North Korea now that our military is bogged down in Iraq.

Posted by DeLong at 05:04 PM | Comments (0) | TrackBack

June 27, 2005

Why Oh Why Can't We Have a Better Press Corps? (Google at $300 a Share Edition)

In order for anybody to believe that it is worth paying $300 a share for Google, they must believe that:

Google's profits will quadruple from current levels in the next several years, and thereafter it will continue to grow at a very healthy pace--a healthy enough pace to earn a rate of return of 5% per year or more on reinvested profits.

Or:

Google stock can be sold in a couple of months to a greater fool who will pay more than $300 a share.

If you were a newspaper reporter writing a story intended to inform those concerned about making profitable investments, your story would lay out the current high price-earnings ratio of Google--70--and sketch out the likelihood of various scenarios for Google's future sales and earnings growth. It would talk about the likelihood of Google's erecting powerful enough barriers to entry to preserve its current high margins--35% of revenues. It would talk about the plans of potential competitors to grab some of this high-margin search gravy train, and whether Google's margins might be forced down as a result.

Gary Rivlin of the New York Times tells us absolutely nothing about this. He doesn't care enough about informing his readers to even get the most important and interesting measure of Google's current valuation--its price-earnings ratio--into his article. It wouldn't be hard. All he'd have to do is to say that Google is valued at as much as Time-Warner although Google has less than one-third the profits, less than one-eighth the sales, and something over three times the profit margins, and ask his interviewees to assess the likelihood of scenarios in which Google's profits are as big as Time-Warner's.

But that's not even a minimal priority for Mr. Rivlin and his editors:

At $300 a Share, Google Looks Pricey and Still Irresistible - New York Times: By GARY RIVLIN: [H]ow do you embrace a stock that has more than tripled in 10 months and cracked the $300-a-share barrier so quickly since going public that much of its growth potential seems already built into the price? In early May, when Google was trading for $236, Mr. Edwards sent a note to clients of his firm, a group that includes wealthy individuals and money managers, recommending that they buy Google stock. But Mr. Edwards, who has been analyzing publicly traded stocks for two decades, acknowledges that Google has him flummoxed now.... [M]any of his counterparts, including those working for more prominent investment banks, continue to recommend the stock.

Heath P. Terry... Credit Suisse First Boston... raised his target price to $350.... Mr. Edwards... describes himself as stumped.... He does not have the conviction to advise clients to buy the stock, nor is he pessimistic enough to advise them to sell. "Let's just say if I was owning Google stock right now, I'd be selling some," he said....

[E]venome of those who were bullish on Google when it went public in August, at $85 a share, wonder if investors have forgotten some of the lessons of the 1990's.... John Tinker... ThinkEquity... uses the "B" word - bubble - when describing the market's giddy embrace of Google, even as he has a price target of $330 on Google....

Comparisons are also being made between Google and Time Warner, another company deriving the bulk of its revenue from advertising. Time Warner had a market capitalization of $79.19 billion at the close of the market on Monday, below Google's though it posted first-quarter revenue eight times that of Google, and profits about three times as large....

Any number of theories might explain the most recent run-up in Google's stock, which has risen 67 percent since April 1. Those range from data suggesting that Internet advertising revenue is rising by as much as 40 percent a year - a trend sure to benefit Google - to a herd mentality among mutual fund managers ready to declare that resistance is futile: to post the kind of returns that would put them in the upper echelons of performance tables, they need to own shares in Google....

Mr. Terry of Credit Suisse thinks that even at its current price, Google is still worth buying, noting the company's aggressive moves to extend its core search business. On Monday, for example, it announced a new bit of software called the Google Video Viewer, complementing its effort to encourage users to submit their own video to its database and adding a "search within the video" feature.

John Battelle, the author of a book on Google called "The Search," to be published in September by Portfolio Hardcover, says it is only natural that people want to believe in Google.... "If you really believe in something, you're looking for a place where you can prove you were right the first time," he said. "And Google is such a place."

Posted by DeLong at 10:18 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Republican Party?

A real Republican economist on the DeMint Social Security plan: Andrew Samwick:

Andrew Samwick: But I Can't Follow the Money: A group of Republicans... Chairman McCrery and Representatives Johnson, Shaw, and Ryan... Senators Sununu and DeMint, have offered a proposal to do... something .. with the Social Security surplus.... Let's start with the summary. It begins with three principles:

1. Social Security taxes should only be used for Social Security.
2. The Social Security surplus should not be used to fund other government programs.
3. The surplus should not be used to mask the true size of the national deficit.

I don't know if we have three unique principles here, but we get the idea. The presence of surpluses in the Social Security system should not facilitate higher expenditures elsewhere in the government's budget. One way to do that would be to proactively announce and adhere to a policy that balances the budget--measured excluding the Social Security surplus--over the business cycle. I noted this in my testimony to the Subcommittee on Tuesday. This proposal... [i]nstead... requires that all Social Security surpluses be used to fund accounts invested in Treasuries. Here's where my confusion comes in. It cannot simultaneously be the case that:

1. Actual money goes into these accounts.
2. The trajectory of the Trust Fund is not lowered.
3. The reported budget deficit is not increased.
4. And government expenditures are not lowered.

The hope is the #4 is the one that won't hold--government expenditures should fall.... If they [do], I will applaud very loudly. But I remain confused.... For example, about 15 minutes into the press conference, a reporter asks McCrery (the key question of) how he will fund the programs that are now being funded by the Social Security surplus once the SS surplus is channeled to these accounts. He gives a non-answer and then says that "there is no change in the deficit whatsoever as a result of this legislation" but that "there will be an increase in the debt." That seems like a gimmick to get around #3 above.... If anyone working at the Subcommittee would like to explain what I am missing, I would be happy to post a follow-up.

Time to take back your party, guys.

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

The Bush Administration Clown Show Continues

Michael Froomkin reports:

Discourse.net: Back to Normal at the VA:

I missed the news that Anthony Principi, the only member of the Bush cabinet I respected, had resigned as VA Secretary. It seems he went on the chair the base closure commission.

Meanwhile, it's back to the bad old days at the VA. Last week they revealed they are facing a $1 billion health funding shorfall, which you would think is something of crisis -- two months after the new Secretary, Jim Nicholson, told Congress "I can assure you that VA does not need [additional funds] to continue to provide timely, quality service...." Now, the Washington Post reports that the VA Deputy Undersecretary told VA hospitals and clinics that their "highest priority" should be--wait for it%--to make sure that Principi's picture is replaced with Nicholson%u2019s. (spotted via The Carpetbagger Report)

Posted by DeLong at 09:41 PM | Comments (0) | TrackBack

Stephen Roach on Bubble-World

Stephen Roach writes:

Morgan Stanley: Long ago, when America’s Asset Economy was in its infancy, Alan Greenspan worried about “irrational exuberance.” But he quickly changed his mind and went on to champion the equity culture spawned by the New Economy. In my view, that was a policy blunder of monumental proportions.

The rest is history -- and a sad history at that. By electing to condone the greatest equity bubble since the late 1920s, the Fed has been snared in a low real interest rate trap -- in effect, locking itself in to a serial bubble-blowing strategy. To counter post-equity bubble aftershocks, the Fed slashed its policy rate by 550 basis points to 1% -- vowing that it had learned the tough lessons of Japan (see the now-seminal research report by the Fed’s research staff, “Preventing Deflation: Lessons From Japan's Experience in the 1990s” by Alan Ahearne; Joseph Gagnon; Jane Haltmaier; Steve Kamin, et. al., June 2002). And then in the face of a full-blown deflation scare -- a classic and predictable symptom of a post-bubble shakeout -- the Fed maintained an uber-accomodative policy stance that is still in place today. It pushed the real federal funds rate into negative territory for three years (2002-04) before finally taking it up to the zero threshold, where it remains today...

But what is the appropriate real interest rate for America--and the world--today? It's not as if the United States or the world has a large demand for investment. Would we really wish that investment worldwide be lower? Investment in America?

Stephen Roach asks good questions. But I'm not sure what the answers are.

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

Full Communism!

Eric Umansky watches the news from Cuba:

Eric Umansky: Cuban Coke Factory Raided: Yes yes, as in Coca-Cola:

SANTA CLARA, Cuba - June 23 (Ramón González Abreu, Cubanacán Press / www.cubanet.org) - Special police forces here raided a clandestine soft-drink factory operating out of a home in the El Condado neighborhood, arrested the occupants and seized products and equipment.

Forces of the Interior Ministry Special Brigades found cases of soft drinks, a bottle-filling machine, carbonation equipment and other tools.

The occupants were charged with possession of equipment in pursuit of an illegal economic activity, but they claimed the equipment was all lawfully acquired in hard-currency stores.

Ahhh the joys of entrepreneurship in Cuba. Here's what I wrote last year during my trip to the island:

Walk around downtown and there appears to be at least a smattering of private enterprise. There are multiple car rental companies, even seemingly competing fast food joints (El Rapido and Burgui). Some are run by one government ministry, others by another (for example, some car rental companies are overseen by the tourist department; others are overseen by the ministry of transportation), but in the end all the businesses are owned by the state. "It's the Duff Beer economy," says one expat. "It might all look different, but it's all coming from the same spout."

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

Ezra Klein on the Incapacity of the Press (Why Oh WHy Can't We Have a Better Press Corps?)

Ezra Klein writes about the incapacity of the Washington press corps to cover the real story of American governance:

Ezra Klein: The Survivor : John Harris, author of the Clinton assessment The Survivor... a fun read.... Harris's insights, though, are more interesting for what they say about him than the Administration he's discussing.

Harris was the Washington Post's lead reporter on Clinton during the President's second term.... Harris's focus is the same now as then: process, personalities, and politics all come before policy. No one reading the book could count themselves uninformed on how the administration's internal debates played out, but the flip side is that no one reading could call themselves experts on the policies that drove those debates....

A budget surplus and a strong job market only become stories when they change. Otherwise, they don't fill newspaper pages that need to keep coming out.... Liberals today rage that Bush's legion of f* ups lack the lavish coverage given to Clinton's. They shouldn't be surprised. Bush's f* ups are substantive. They simply exist. They can be told in a sidebar, with numbers, in an article. They require little investigation and less detective work. They... remain substantively the same a week, a month, a year later, with only the numbers showing ....

Funnily enough, however, the public is less insipid than the press.... Americans, it would seem, like peace and prosperity, are happy with job growth, are content without invasions. That's not to say they're particularly unforgiving when those things aren't around, but they don't ignore the good news, either....

Harris's book in a nutshell [is] stories, tales, drama, plot. Gingrich's machinations, Clinton's jokes, Morris's eccentricities... past 440 pages. Policy... takes up only a smidge... it's well hidden amidst all the color.... [The] book... gives surface insight into the Clinton presidency, offers deep insight into the media's mind. Read as an example of what catches the press's attention, it's well worth the time spent and surprisingly relevant to the largely successful press management practiced by the Bush Administration. And that's not meant as bitter or judgmental, merely realistic. The world works a certain way, and though we'd all like for it to run different, we might as well read the rulebook while we wait.

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

Daniel Gross Reads the FT

He writes

Daniel Gross: June 26, 2005 - July 02, 2005 Archives: Christopher Brown-Humes and Gillian Tett of the FT report: "A big increase in corporate saving explains the current global savings glut and has been more important than emerging market savingsi n driving bond yields to ultra-low levels, a study by JPMorgan, the US investment bank, has found. Having gone on a spending spree in the late 1990s, companies have hoarded an extra $1,091 bn during the past four years -- a shift five times larger than the $208bn change in emerging market savings between 2001 and 2005, according to the study. In explaining the low bond yield conundrum, "higher corporate savings have had twice as much impact as high emerging market savings," said Jan Loeys, global markets strategist at JPMorgan.

I suspect there's some apples and oranges here: companies have been hoarding $250 bn a year, about the same order of magnitude as the growth in emerging-market savings.

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

Why Oh Why Can't We Have a Better Republican Party?

A real Republican economist on the DeMint Social Security plan: Andrew Samwick:

Andrew Samwick: But I Can't Follow the Money: A group of Republicans... Chairman McCrery and Representatives Johnson, Shaw, and Ryan... Senators Sununu and DeMint, have offered a proposal to do... something .. with the Social Security surplus.... Let's start with the summary. It begins with three principles:

1. Social Security taxes should only be used for Social Security.
2. The Social Security surplus should not be used to fund other government programs.
3. The surplus should not be used to mask the true size of the national deficit.

I don't know if we have three unique principles here, but we get the idea. The presence of surpluses in the Social Security system should not facilitate higher expenditures elsewhere in the government's budget. One way to do that would be to proactively announce and adhere to a policy that balances the budget--measured excluding the Social Security surplus--over the business cycle. I noted this in my testimony to the Subcommittee on Tuesday. This proposal... [i]nstead... requires that all Social Security surpluses be used to fund accounts invested in Treasuries. Here's where my confusion comes in. It cannot simultaneously be the case that:

1. Actual money goes into these accounts.
2. The trajectory of the Trust Fund is not lowered.
3. The reported budget deficit is not increased.
4. And government expenditures are not lowered.

The hope is the #4 is the one that won't hold--government expenditures should fall.... If they [do], I will applaud very loudly. But I remain confused.... For example, about 15 minutes into the press conference, a reporter asks McCrery (the key question of) how he will fund the programs that are now being funded by the Social Security surplus once the SS surplus is channeled to these accounts. He gives a non-answer and then says that "there is no change in the deficit whatsoever as a result of this legislation" but that "there will be an increase in the debt." That seems like a gimmick to get around #3 above.... If anyone working at the Subcommittee would like to explain what I am missing, I would be happy to post a follow-up.

Time to take back your party, guys.

Posted by DeLong at 09:08 PM | Comments (0) | TrackBack

Bush Has a Difficult Job?

Daniel Froomkin writes:

Just More of the Same?: Dana Milbank highlights Bush's new rhetorical device in his Washington Post column: "It's 'a difficult chore, and it's hard work' in Iraq, Bush asserted. 'It's hard to stop suicide bombers, and it's hard to stop these people that, in many cases, are being smuggled into Iraq from outside Iraq. It's hard to stop them.'"Bush alluded to high levels of difficulty no fewer than 19 times in his 33-minute appearance. The Iraqi government faces 'monumental tasks,' he said. 'The way ahead is not going to be easy.' In case somebody napped through that, he repeated: 'It's difficult. . . . It's tough work, and it's hard.'

It's hard work to fight risk death in Iraq. It's not hard work to send a third of the troops needed to Iraq. It's not hard work to misuse the finest high-tech soldiers in the world as military policy in a country where they don't speak the language. It's not hard work to lie.

Posted by DeLong at 09:04 PM | Comments (0) | TrackBack

June 26, 2005

Glenn Hubbard on the Global Investment Deficiency

The core argument of Glenn Hubbard's recent Wall Street Journal op-ed is another of those extremely rare pieces in that space that is both coherent and insightful. Its core argument seems a definite possible factor at work:

WSJ.com - A Paradox of Interest : [T]the large increase in the U.S. current account deficit in recent years has mirrored large increases in current account surpluses in the rest of the world, principally in Asia. Over the same period, world real interest rates have declined.... The rise in the global saving rate is more than accounted for by a higher saving rate in emerging economies, particularly in Asia. I say "more than accounted for" because the U.S.... reduced its national saving....

[M]aking the transition from a global savings glut to a policy prescription requires delicacy. Taken seriously, this argument can be used to justify fiscal "pump priming"... [i]ncreases in public spending or temporary tax cuts... absorbing excess saving while increasing aggregate demand.... [But a] weak financial system -- reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets -- yields a high cost of financial intermediation.... In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds -- the U.S., for example....

The efficient financial system of the U.S., liquid bond markets, and a stable nominal anchor have attracted large international capital flows. These inflows have financed large U.S. current account deficits. And this arrangement has been particularly strong between emerging Asian economies and the U.S.

While the U.S. needs to raise domestic saving gradually to fund entitlement promises in Social Security and Medicare, getting America's fiscal house in order provides little short-term solution to global saving and investment imbalances. Increases in U.S. saving, with unchanged investment opportunities or financial system efficiency around the world, puts further downward pressure on the world real interest rate.

To address the global saving and investment imbalance meaningfully, domestic financial systems must be able to shift capital where it can be most profitably employed.... Mercantilist trade policies in emerging Asian economies have played a large role in sustaining high domestic saving.... Official sector acquisition of dollar assets... strategies to promote export growth combined with direct intervention in credit markets have limited the domestic economy's ability to absorb its own savings....

[S]uch policies sacrifice long-term growth. Essentially, relatively poor citizens of China and other emerging Asian economies are lending funds to the more affluent U.S., where lower interest rates can facilitate a property boom.... The U.S. financial system stands as a beacon for the possibility of a virtuous relationship between capital markets and sustainable economic growth.... [T]he bigger immediate challenge is to address the imbalance of saving and investment in international capital markets by encouraging the development of efficient banking and securities markets.... [S]ustainable improvements in living standards require a financial system as modern as one of the region's new airports.

Glenn Hubbard's argument is roughly this: Emerging Asia is now big enough that its savings are weighty, but who can its savers entrust their money to? "Underdeveloped financial systems"--a euphemism for "it's not obvious the people you entrust your money to will give it back"--make investments in dollar assets housed in the United States seem very attractive, even with the long-run expectation that the real value of the dollar vis-a-vis other countries will fall. The best way to fix this is to work on institution building in emerging Asia: securities regulation, accounting rules, honest courts, clear lines of corporate control. Don't worry so much about soaking up excess saving. Worry instead about how to create modern financial institutions to boost the financial system's ability to boost investment, and so fix deficient investment in the rapidly-growing emerging market economies.

This may well be an important piece of the puzzle.

Posted by DeLong at 08:04 PM | Comments (0) | TrackBack

Yes, Virginia, Demand Curves for Bonds Slope Down

On the Wall Street Journal editorial page, Glenn Hubbard writes that if the U.S. budget deficit were not so big--i.e., if domestic savings were higher--that would put downward pressure on interest rates:

> WSJ.com - A Paradox of Interest : While the U.S. needs to raise domestic saving gradually to fund entitlement promises in Social Security and Medicare, getting America's fiscal house in order provides little short-term solution to global saving and investment imbalances. Increases in U.S. saving, with unchanged investment opportunities or financial system efficiency around the world, puts further downward pressure on the world real interest rate...

In the fall of 2002, you will remember, Glenn Hubbard had a different view--that changes in the budget deficit had little or no effect on interest rates. Let me quote from Bob Davis:

Bob Davis: To sell a package of tax cuts that will further deepen the budget deficit, the White House says that deficits don't matter. Is that true? Certainly, says Glenn Hubbard, chairman of the White House's Council of Economic Advisers. He derides the "current fixation" with budget deficits, and labels as "nonsense" and "Rubinomics" the view espoused by former Clinton Treasury Secretary Robert Rubin that higher deficits lead to lower growth.... By labeling the deficits-matter argument as "Rubinomics," the White House hopes to give a partisan edge to the fight...

And let me quote from Brookings's Bill Gale:

Bill Gale: Glenn Hubbard recently stated, "I don't buy that there's a link between swings in the budget deficit of the size that we see in the United States and interest rates. There's just no evidence." This is not an isolated comment on Hubbard's part. In a series of speeches, articles and interviews he's ridiculed the notion that deficits matter. He's called it Rubinomics, called it nonsense, and so on. So this is part of what appears to be a pretty concerted Administration effort to downplay the cost of budget deficits... [argue] that the change in fiscal status is not a concern...

The ever-gullible Washington Post even wrote big articles giving prominent place to all the economists saying that the effects of changes in U.S. budget deficits on interest rates were small and unimportant:

washingtonpost.com: Reagan Policies Gave Green Light to Red Ink : By Jonathan Weisman Washington Post Staff Writer. Wednesday, June 9, 2004; Page A11: [W]hen Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.... [S]ome economists... [say] [t]he argument against deficits is more about self-righteous moralism than economics.... With rising global prosperity, even a federal deficit as large as the United States' would present little competition for would-be investors.... Eric M. Engen and Columbia University economist R. Glenn Hubbard.... "The world's capital markets are lot more sophisticated and flexible than they were then," said N. Gregory Mankiw, the current chairman of Bush's economic council. "That probably means that other things being equal, changes in domestic fiscal situations have less impact."...

Still, it is nice to see that there are still some economists who call themselves Republicans who will admit that demand curves for bonds slope down.

Posted by DeLong at 08:01 PM | Comments (0) | TrackBack

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

Paging Gail Collins: today having this clown show on your op-ed page cost you 25 of your limited supply of reputation points.

Henry Farrell deals with David Brooks in the appropriate way:

Crooked Timber : David Brooks on the merits of Bush's Africa policy.

The Bush folks, at least when it comes to Africa policy, have learned from centuries of conservative teaching -- from Burke to Oakeshott to Hayek -- to be skeptical of Sachsian grand plans. Conservatives emphasize that it is a fatal conceit to think we can understand complex societies, or rescue them from above with technocratic planning. ... The Bush folks, like most conservatives, tend to emphasize nonmaterial causes of poverty: corrupt governments, perverse incentives, institutions that crush freedom. Conservatives appreciate the crooked timber of humanity -- that human beings are not simply organisms within systems, but have minds and inclinations of their own that usually defy planners. You can give people mosquito nets to prevent malaria, but they might use them instead to catch fish.

The crucial... disingenuous... qualifier is "at least when it comes to Africa policy." Even Brooks doesn't have the chutzpah to defend Bush's overall foreign policy approach as an exemplar of Burkean prudence....

But even on Brooks' chosen turf -- the Bush administration's Africa policy and the Millenium Challenge Account initiative -- there'9s little positive to be said from a principled conservative stance.... [T]he Millennium Challenge Account has yielded plenty of airy rhetoric, but no practical results... for the simple reason that it still scarcely exists.... [T]he Bush administration has obligated only 2% of the Millennium Challenge funds. Nor has the administration requested the $5 billion that Bush promised.... As of April 29 not one dollar of Millennium Challenge Account money had reached a developing nation....

While an appreciation... [of the limits of] technocratic planning% is a fine... place to begin thinking about... development aid, it can also be a highly convenient excuse for doing nothing. For all the bluster about Burke, Hayek and Oakeshott, the development-aid-as-vaporware approach seems at the moment to be well explained by a simpler theory... [conservatism's] primary characteristic is "the search for a superior moral justification for selfishness."

Posted by DeLong at 07:59 PM | Comments (0) | TrackBack

The New Yorker Archive

This will be fun:

Boing Boing: All 4000 issues of the New Yorker on DVD set: $100: All 4000 issues of the New Yorker on DVD set: $100:

The New Yorker is selling a limited edition set of 8 DVDs containing every page of the magazine from its inception in February 1925 to February 2005: 'from full-color covers to spot drawings, from poetry to Profiles, from cartoons to advertisements -- on reader friendly and highly searchable DVDs.' It'll be available in September, and will run on Windows and Macs.

Posted by DeLong at 07:58 PM | Comments (0) | TrackBack

Fareed Zakaria is making sense | Liberals Against Terrorism

Praktike writes:

From :

Fareed Zakaria is making sense | Liberals Against Terrorism : Here's a paragraph that I've probably written myself in one form or another: I realize that it feels morally righteous and satisfying to "do something" about cruel regimes. But in doing what we so often do, we cut these countries off from the most powerful agents of change in the modern world%u2014commerce, contact, information. To change a regime, short of waging war, you have to shift the balance of power between the state and society. Society needs to be empowered. It is civil society%u2014private business, media, civic associations, nongovernmental organizations%u2014that can create an atmosphere which forces change in a country. But by piling on sanctions and ensuring that a country is isolated, Washington only ensures that the state becomes ever more powerful and society remains weak and dysfunctional. In addition, the government benefits from nationalist sentiment as it stands up to the global superpower.

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

He's Got a Little List

Gregory Djerejian writes:

THE BELGRAVIA DISPATCH: B.D.'s Conscience Caucus : B.D. is thinking of compiling a list of center-right folks who are seriously and honestly grappling with the full panoply of issues presented by the torture/abuse scandals of the past several years. These would not just be bloggers, but any commentators that, you know, don't breezily describe how rosy it all is in the "tropics." I can think of Andrew Sullivan, Jon Henke, John Cole, and Tacitus right off the top of my head. Who else? Both in the blogosphere and outside in academia, business, law, journalism? Thanks for your help.

P.S. These kinds of transparently reluctant, weak-kneed and so ministerial denunciations of Abu Ghraib etc. don't fit the bill. I consider the deaths of detainees in U.S. captivity "serious torture", after all. Don't you?

Posted by DeLong at 07:56 PM | Comments (0) | TrackBack

The Godfather, Part II

Note to self: "The Godfather, Part II" is truly an amazing, amazing film:

The Godfather DVD Collection (2001): The first film remains a towering achievement.... And it turned out to be merely prologue; two years later The Godfather, Part II balanced Michael's ever-greater acquisition of power and influence during the fall of Cuba with the story of his father's own youthful rise from immigrant slums. The stakes were higher, the story's construction more elaborate, and the isolated despair at the end wholly earned. (Has there ever been a cinematic performance greater than Al Pacino's Michael, so smart and ambitious, marching through the years into what he knows is his own doom with eyes open and hungry?)...

Posted by DeLong at 07:55 PM | Comments (0) | TrackBack

Karl Rove Is Right! The U.S. Army Has Been Stabbed in the Back

The U.S. army has been stabbed in the back. It has been stabbed in the back by those who assigned the finest high-tech mechanized force in the world a mission--that of being military police in an Arabic-speaking country--that it is not designed to fulfill, by sending only one-third of the troops necessary for the mission if they did speak Arabic, and by dragging their feet at getting the troops on the ground the tools and protection they need.

The U.S. Army has been stabbed in the back by those--George W. Bush, Richard Cheney, Karl Rove, Donald Rumsfeld, Paul Wolfowitz, Condi Rice, and company--who pretend that the forces in Iraq are ample, and that their equipment and capabilities are adequate:

Safer Vehicles for Soldiers: A Tale of Delays and Glitches - New York Times : By MICHAEL MOSS: When Defense Secretary Donald H. Rumsfeld visited Iraq last year to tour the Abu Ghraib prison camp, military officials did not rely on a government-issued Humvee to transport him safely on the ground. Instead, they turned to Halliburton, the oil services contractor, which lent the Pentagon a rolling fortress of steel called the Rhino Runner. State Department officials traveling in Iraq use armored vehicles that are built with V-shaped hulls to better deflect bullets and bombs. Members of Congress favor another model, called the M1117, which can endure 12-pound explosives and .50-caliber armor-piercing rounds.

Unlike the Humvee, the Pentagon's vehicle of choice for American troops, the others were designed from scratch to withstand attacks in battlefields like Iraq with no safe zones. Last fall, for instance, a Rhino traveling the treacherous airport road in Baghdad endured a bomb that left a six-foot-wide crater. The passengers walked away unscathed. "I have no doubt should I have been in any other vehicle," wrote an Army captain, the lone military passenger, "the results would have been catastrophically different." Yet more than two years into the war, efforts by United States military units to obtain large numbers of these stronger vehicles for soldiers have faltered - even as the Pentagon's program to armor Humvees continues to be plagued by delays.... [T]he M1117 lost its Pentagon money just before the invasion, and the manufacturer is now scrambling to fill rush orders from the military. The company making one of the V-shaped vehicles, the Cougar, said it had to lay off highly skilled welders last year as it waited for the contract to be completed... paid only enough to fill half the order. And the Rhino.... The company said it provided the Army with testing data that demonstrate the Rhino's viability, and is using the defense secretary's visit as a seal of approval in its contract pitches to the Defense Department....

Nearly a decade ago, the Pentagon was warned by its own experts that superior vehicles would be needed to protect American troops. The Army's vehicle-program manager urged the Pentagon in 1996 to move beyond the Humvee, interviews and Army records show, saying it was built for the cold war. Its flat-bottom-chassis design is 25 years old, never intended for combat, and the added armor at best protects only the front end from the heftier insurgent bombs, military officials concede.... Today, commuting from post to post in Iraq is one of the deadliest tasks for soldiers. At least 73 American military personnel were killed on the roads of Iraq in May and June as insurgent attacks spiked.... Last winter, 135 convoys were attacked on the Baghdad airport road alon....

The Pentagon has repeatedly said no vehicle leaves camp without armor. But according to military records and interviews with officials, about half of the Army's 20,000 Humvees have improvised shielding that typically leaves the underside unprotected, while only one in six Humvees used by the Marines is armored at the highest level of protection. The Defense Department continues to rely on just one small company in Ohio to armor Humvees.... The Marine Corps, for example, is still awaiting the 498 armored Humvees it sought last fall....

By the time an Army National Guard member complained to Mr. Rumsfeld in December that troops were still scrounging for steel to fortify their Humvees, the Pentagon's troubles with armoring vehicles had been years in the making.... "This decision is based upon budget priorities," Claude M. Bolton Jr., an assistant Army secretary, wrote to Congress in 2002. Existing vehicles, he added, can be used instead "without exposing our soldiers to an unacceptable level of risk."... "We never intended to up-armor all the Humvees," said Les Brownlee, who was the acting Army secretary from 2001 until late last year. "The Humvee is a carrier and derives its advantage from having cross-country mobility, and when you load it down with armor plating, you lose that."...

Asked why the Marine Corps is still waiting for the 498 Humvees it ordered last year, O'Gara acknowledged that it told the Marines it was backed up with Army orders, and has only begun filling the Marines' request this month. But the company says the Marine Corps never asked it to rush. The Marine Corps denies this, but acknowledges that it did not get the money to actually place the order until this February. Officials now say they need to buy 2,600 to replace their Humvees in Iraq that still have only improvised armor....

Labock Technologies, which makes the Rhino Runner in Israel, thought it had the best advertising ever. Besides posting photographs of Mr. Rumsfeld aboard the Rhino at Abu Ghraib, the company has pictures of a shackled Saddam Hussein going to court last summer, with the headline: "So safe. ... some V.I.P. won't ride anything else." The Defense Department says some military personnel are using the privately owned Rhinos that run the gantlet of bombs on the airport road. But with the Army not accepting the company's test results, and Labock not wanting to destroy a Rhino on the chance of getting orders...

Posted by DeLong at 07:54 PM | Comments (0) | TrackBack

The Greenspan Era

In this morning's mail. And drat--it happens after school starts for the kids:

The Greenspan Era: Lessons for the Future

A Symposium Sponsored by the Federal Reserve Bank of Kansas City

Jackson Hole, Wyoming, August 25-27, 2005

Friday August 26: Chair: Roger Ferguson (FRB)

Alan Blinder (Princeton) and Ricardo Reis (Princeton), "Economic Performance in the Greenspan Era: The Evolution of Events and Ideas." Discussants: Alan Meltzer (Carnegie-Mellon), John Taylor (Stanford).

Robert Hall (Stanford), "Business Cycle Dynamics and Monetary Policy." Discussants: Charles Bean (Bank of England), Greg Mankiw (Harvard).

Sebastian Edwards, "Current Account Imbalances: How Will They End?" Discussants: Barry Eichengreen (Berkeley), Catherine Mann (IIE).

Robert Rubin (Citigroup), Lunch.

Saturday August 27: Chair: Malcolm Knight (BIS)

Raghuram Rajan (IMF), "Financial Marketws, Financial Fragility, and Central Banking." Discussants: Donald Kohn (FRB), Hyun Hong Shin (LSE).

Michael Woodford (Princeton), "Central Bank Transparency and Monetary Policy." Discussant: Tiff Macklem (Bank of Canada).

Kazumasa Iwata (Bank of Japan), Mervyn King (Bank of England), Jean-Claude Trichet (ECB), "Monetary Policy Strategies: A Central Bank Panel."

Alan Greenspan (FRB), "Reflections on Central Banking."

Posted by DeLong at 07:51 PM | Comments (0) | TrackBack

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

Hilzoy has convinced me that National Review is not fit for birdcage liner: parakeets deserve much better:

Obsidian Wings: Stop Me Before I Spend Again! : By a strange coincidence, the National Review had an article yesterday advocating the same approach to Social Security that the Republican Congressional leadership just adopted. It's too completely disingenuous to merit fisking, but it does contain one crucial falsehood that it's important to point out:

"The gradual phase-in of personal accounts funded by the surplus would force Congress to cut spending by the amount it currently takes from the surplus %u2014 about $85 billion a year, or roughly 3 percent of the total $2.5 trillion federal budget."

Taking the Social Security surplus and using it to create personal accounts does not force Congress to cut spending by one dime. The Republicans in Congress have rescinded the PAYGO rules, which would have required any new spending to be paid for. There is no other law or rule that requires that any new spending be matched either by tax hikes or spending cuts. So adding a trillion dollars' worth of new spending over the next ten years would not in any way require corresponding cuts in other government spending.... [T]he only thing that could... cut spending is... fiscal responsibility. If members of Congress were unwilling to charge their spending to the national credit card... they would... make up the costs.... But if they had a sense of fiscal responsibility... they would exercise restraint all by themselves.... [I]f one wants to reduce the size of government, cutting spending is a much better way to do it than cutting taxes in the hopes that eventually you will be "forced" to cut spending.... It's like trying to lose weight by giving up on exercise, hoping that once you are no longer able to eat much of anything without gaining weight, your weight will shoot upwards, you'll develop serious health problems, and then you'll finally develop enough motivation to go on a diet. That's a stupid thing to do to yourself, and an even more stupid thing to do to your country...

Posted by DeLong at 07:50 PM | Comments (0) | TrackBack

Market Expectations of the FOMC

Mark Thoma quotes from the Chicago Board of Trade:

From :

Economist's View: The CBOT's Fed Funds Rate Target Probabilities : "[T]he CBOT 30-Day Federal Funds futures contract for the July 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3 percent to 3 1/4 percent at the FOMC meeting on June 30. In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 3-1/2 percent (versus a 96 percent probability of just a 25-basis point rate increase)."

Posted by DeLong at 07:48 PM | Comments (0) | TrackBack

Eminent Domain

I don't know whether the Supreme Court's eminent domain decision was, substantively, a good thing or a bad thing. I don't know whether there are too few obstacles in the way of regional development and redevelopment (and that there should be more obstacles to reduce the impact of corrupt ties between local governments and developers) or whether there are too many obstacles (and too little gets done because opportunities for hold-up are just too great).

I do know that the reasoning of the majority opinion seems to be really dumb.

A correspondent writes:

Re: footnote 6:

And while the City intends to transfer certain of the parcels to a private developer in a long-term lease--which developer, in turn, is expected to lease the office space and so forth to other private tenants--the identities of those private parties were not known when the plan was adopted. It is, of course, difficult to accuse the government of having taken A's property to benefit the private interests of B when the identity of B was unknown.

Well, I guess that proves that anyone who takes the time to read the chapter of Robert Caro's The Power Broker assigned in American History doesn't have enough time to suck up to law school con law professors and deans to get a Supreme Court clerkship; for it seems self-evident that no one with a hand in this opinion has ever read The Power Broker.

I mean, I like retail productivity as much as the next guy. But it does seem a bit fetishistic to sacrifice the Bill of Rights for it. Somebody needs to tell Justice Breyer and his merry band of statists that New Dealers don't control the government any more. This is the Second Gilded Age. And aspiring Robber Barons will parse the decision with care, after first summoning and taking counsel with the shade of Leland Stanford, Sr.

Posted by DeLong at 05:47 PM | Comments (0) | TrackBack

Henry Farrell on Rick Perlstein

Someday, someday, I swear, I will reliably and correctly distinguish Rick Perlstein from Steve Pearlstein.

Henry Farrell already does. Here he writes about the first:

: I just finished reading Rick Perlstei's The Stock Ticker and the Super Jumbo yesterday (an earlier version of the essay and the various responses is available here). It's a great read, and a smart essay.... Perlstein tells the Democratic party that it needs to be like Boeing in the 1960s and 1970s, and not like Boeing in the 1990s.... In the 1960s and 1970s... Boeing won incredible profits through building the 747, but... had its shares trade at a... discount.... In the 1990s, it signalled its willingness to kow-tow to the short term demands of the stock market, by refusing to... build a new super-jumbo. The stock market loved it... Boeing also missed out on a crucial opportunity....

Thus, the main contrast that he draws in the essay is between short term thinking and long term thinking... hiring Dick Morris... [and] muddying the Democrats' appeal... [vs] building a set of coherent policies that build on... strengths.... Perlstein is using the right metaphor... is also right on the main underlying argument. But short term thinking versus long term thinking is the wrong way to connect.... What Perlstein is really trying to get at, I think, is what one might call the difference between market making and market taking....

What was important about... the jumbo-jet... [was] that it was an act of market making.... [N]ew technologies provided it with the opportunity to... summon customers... out of thin air. And... [b]ecause it had created the market, it... secure[d] a long term advantage. In contrast, most firms most of the time are market takers.... The Democratic Party, at the moment, is a market taker.... But Perlstein's key point (and again, you need to read his book on Goldwater [Before the Storm] to properly understand this) is that the current conservative bias of US politics is itself a political artefact... [an] initiative by right wing Republicans to reorient the political debate around a set of ideas that once seemed bizarre and unnatural to most Americans.... They set the rules... (protecting the poor becomes "class warfare")....

Barry Goldwater's people changed the rules of American politics.... Ever since, the Democrats have been fighting a holding action.... Perlstein's prescription -- a return to economic populism -- seems to me to be the right and obvious way for Democrats to start remaking politics on their own terms.

Rick Perlstein--see! I can get it right--replied:

Damn, Farrell, you're not supposed to tell them they can get the preliminary version for free on the Internets!

Great points. I should have talked to you in 3/04 when I wrote the thing.

It's REALLY important to understand the ways in which the notion of conservative dominance is in itself a political artifact. I did a reading in Chicago yesteray and someone asked me about a point by Woolridge and Micklethwaite's (bad) recent book on American conservatism The Right Nation that Dennis Hastert's district is "normal" America, and Nancy Pelosi's, the urban Democrat's, is not.

I said: My, have those conservatives punked the media elite. I pointed out that many of the most popular national radio sitcoms that took place in teeming cities were moved to suburbs when they moved to TV. And now people buy the notion that conservatives have been selling: that cities aren't really American.... Buy the book... when uttering the phrase "culture war" is as illegitimate as uttering the phrase "class war," the Republicans can not possibly win.

Posted by DeLong at 05:46 PM | Comments (0) | TrackBack

And Steve Pearlstein writes...

...about what's going on over there in Yurp:

Two Economies, Two Mind-Sets: Germany Gets It, France Doesn't : The Germans are better off than they fear, while the French are in worse shape than they smugly presume.... [W]hat growth there is in Germany comes from a growing and competitive export sector, while France's growth comes from private consumption, with almost no contribution from exports. Several factors are at work here, among them lower benefit costs, tamer inflation and higher productivity growth.... And while hand-wringing Germans might be better off in the short run if they stopped saving so much and splurged on a sporty new Ford coming off the assembly line just outside Cologne, they are likely to be better off in the long run than the profligate French, many of whom believe their country can spend its way out of double-digit unemployment.

The industrialized world, as we know, is moving toward a service economy.... Germans... take pride in providing efficient service.... In France... it's all about producers rather than consumers, whether the consumers are visitors renting a car at the Lyon train station, or thousands of Lyon residents forced to pass up the annual music festival this week because of a transit strike. It tells you a lot that local airport authorities and Air France have made sure that low-cost airlines have made few inroads in France. Or consider that the great triumph of French marketing in recent years has been to persuade the rest of the world to get excited about drinking foul-tasting Beaujolais nouveau....

At the Lyon chamber of commerce, the new, young director general, Jean Martin Jaspers, outlined the city's aspirations to be a player in global markets and a center of biotech, venture capital and nanotechnology. Then, when he almost had me convinced there might indeed be a "new France," Jaspers announced confidently that Lyon would be a big winner when the French government announced its new industrial policy next month, designating the clusters deserving of government subsidies, encouragement and protections. "We don't make the distinctions you do between government and markets," Jean-Paul Giraud, president of Grenoble's gas and electric utility, explained to me later that day.

But while France may not have broken free from its dirigiste roots, Germany is noticeably further along toward much-needed market reform.... Martin Welcker, president of... a maker of complex tooling machines.... "The companies and workers are way ahead of the politicians.

On the other hand, it's been twenty-five years since I first read--in a book by Jeffrey Sachs and the late Michael Bruno, Economics of Worldwide Stagflation--that the corporatist economic system built up in the first post-WWII generation in Western Europe had awful weaknesses and could not cope with the shocks of the present and future without economic and then political catastrophe. The Western European corporate-social-democratic model has taken plenty of lickings, but it keeps on ticking--so far.

Posted by DeLong at 05:44 PM | Comments (0) | TrackBack

Brad Setser's Web Log: The joys of being a creditor nation

From :

Brad Setser's Web Log: The joys of being a creditor nation : The joys of being a creditor nation China is on track to add between $250 and $300 billion to its reserves this year. That is a lot of money. Enough to have an impact on global bond markets. Enough to buy several oil companies. As the FT notes, most of the financing for CNOOC's bid for Unocal is coming from inside China. The more energy companies -- or appliance makers -- that China buys, the smaller the increase in its reserves. Rather than the People's Bank of China buying "reserve" assets like Treasuries, agencies and mortgage backed securities, state-owned companies (and perhaps some private Chinese firms as well) are interested in buying equity in US firms. From a "balance-of-payments point of view, one external asset -- a low-yielding Treasury -- is replaced by another -- an oil firm with ownership stakes in several Asian oil and gas fields. The US can add to its external assets too. But since the US is running a current account deficit, it can only do so, in aggregate, by taking out a loan from one set of foreigners to buy )or build) other foreign assets. China also is attracting large inflows from abroad -- both FDI and hot money. But even in the absence of these inflows, China's external assets would be increasing. China, unlike the US, has a large and growing current account surplus, or, put differently, spare savings to invest abroad. The Economist mentions two reasons for China's new aquisitivness: China%u2019s move for Unocal neatly sums up the two forces driving the country%u2019s ongoing bid to acquire foreign assets: the thirst for raw materials to feed and maintain its booming economy, and the desire to obtain western brands to help market Chinese exports I would add a third: oil fields are likely to offer China a better return than Treasuries. China has all the liquid dollar reserves it needs, and oil may hold its value better than a long-term unsecured dollar-denominated loan to the US government. No doubt, China's demand for oil -- and its interest in investing in future oil production is a emerging as a potential source of friction between the US and China. Chinese analysts say that once the country became a net importer of crude in the early 1990s, tensions with the United States were inevitable. "China is a late-comer and the U.S is entrenched and dominates the market... Collisions, and frictions are unavoidable when we try to enter," said Chen Fengying of the China Institute of Contemporary International Relations. China clearly is willing to invest in places -- like Iran -- that the US is not. And the US government may have to decide whether it is willing to allow a state-owned Chinese firm to control a small part of the US domestic oil industry. Note the Bob Kerrey quotes in this FT article, and the Thomas Donnelly quote here. I suspect that we will here a lot about CFIUS in the near future. But it is worth remembering that 70% of the top three US oil firms' reserves are outside the US, while only 10% of the top three Chinese firms' reserves are outside the China (credit for this point goes to an anonymous source). China's oil firms have cash and customers but not enough oil: their current interest in stretching their wings abroad makes a certain amount of commercial sense. (continues) There are lots of "China prices" in the world economy these days. There is the China price for US treasuries and mortgages -- all the money China invests in these markets keeps prices up and interest down. Haier's big for Maytag, Lenovo's bid for IBM's PC business and CNOOC's bid for Unocal combine to less than $25 billion. That is far less than China's roughly $70 billion in recorded purchases of US debt in 2004, and far, far less than a reasonable estimate of the real purchases of US debt by China's central bank -- which would total around $145 billion in 2004 if it invested 75% of its new reserves in US assets (assuming all those funds flowed into the capital market and were not used to build up China's overseas bank accounts). But even if the dollars that China has invested in "oil" pale in comparison with the dollars China has invested in Treasuries, there is little doubt that China is changing the world's oil balance, not just the world's savings and investment balance. Many have noted that the surge in Chinese demand -- particularly pronounced in 2004 -- is one reason why oil markets are tight. New Chinese drivers are bidding against American drivers and their fuel-hog SUVs for an increasingly scarce commodity. But that is not the only way China is changing the oil market. China increasingly is a major source of investment capital, not just a source of demand. And since China's oil industry is state-controlled, that means state firms are playing a bigger role in the oil business. That is happening for another reason as well. The Economist survey of the oil industry accurarely noted that most of the world's remaining oil reserves are now in countries where a local national firm has a monopoly on the exploitation of the country's oil. Think Saudi Aramco. The future world may be one where state-owned national production companies in the oil states interact with Chinese state owned companies that will market their oil. Incremental supply can be brought online to meet incremental demand without the involvement of the Western oil majors. State-owned oil companies are emerging as a new aggressive force on world markets once dominated by two main sets of investors -- producing countries and Western majors such as Chevron, BP and ExxonMobil China's national firms, sourcing fuel for the world's fastest growing major economy, are among the most voracious. "In the past several years, a new force has emerged in the global oil business -- the national oil companies," said Kang Wu, a research fellow at the East-West center in Hawaii. "Their overseas push in upstream is quite aggressive.... They can offer terms which the other majors do not think justifiable in terms of economics," he added. From one point of view, it matters little whether Chinese firms or US firms or European firms invest in the actual production of oil. Once the oil has been found, any commercial firm will sell it to the highest bidder, regardless of nationality. China may not see it that way. It may believe Chinese investment will increase the security of China's oil supply -- even if the oil is still shipped to China through sea lanes controlled by the US Navy. Or it may be acting for purely commercial reasons. Better oil than Treasuries yielding 4% nominal, particularly since the dollar is likely to fall against the renminbi. Most likely, China's motives are mixed. What is clear is that this is but one of many ways that China's emergence will change the world. The US has grown used to Chinese demand for Treasuries. It is a bit less comfortable with the result ($60 a barrel) of Chinese demand for oil. It remains to be seen if the US is ready for a Chinese bid for a much broader range of assets.

Posted by DeLong at 05:42 PM | Comments (0)

Rich Santorum on Karl Rove

According to Santorum's Office:

TAPPED: June 2005 Archives : Karl Rove speaks for himself. He doesn't speak for the senator. On 9-11, there was no such thing as a Republican or a Democrat, and that's what the senator believes.

It's nice to see at least one Republican senator who is willing to say that Rove is an embarrassment.

Posted by DeLong at 05:40 PM | Comments (0) | TrackBack

June 24, 2005

Advice for Substance People

Max Sawicky has some very good Dutch-uncle advice for those of us who care primarily about the substance of government policy:

MaxSpeak, You Listen!: COMMON SENSE: Determine the major policy challenges to come, fasten on the best solutions, and hammer away in the confidence that time will validate your message.... Three examples:

• The U.S. has to get out of Iraq, ASAP.
• The U.S. must have national health insurance.
• The Federal Gov will need to increase taxes -- over the next 75 years -- by about ten percentage points of GDP.

I think the arguments supporting these are very solid. If nobody makes them, we'll never get there. I don't have to run for public office, so I can make them. Politics is beyond me...

Posted by DeLong at 12:25 PM | Comments (0) | TrackBack

Oil Supply

Another piece of bad news:

FT.com / Markets data & tools / Funds - Crude oil prices touch $60 a barrel: US oil futures on Thursday rose above $60 a barrel amid high demand for petrol and diesel in the US and market worries about lack of spare refining capacity.The Dow Jones Industrial Average slid more 100 points as transport shares fell. Delta Air Lines was down 4 per cent, Continental Airlines slipped 3 per cent, and FedEx, which warned on Thursday about rising fuel costs, fell 7 per cent.

The new nominal all-time high was supported with futures contracts for delivery later this year and in the beginning of 2006 trading between $60 and $61. The US Department of Energy reported a jump in consumption in spite of high oil prices. Diesel consumption is up 6.9 per cent in the last four weeks compared with the same period a year ago. Petrol demand is 2.5 per cent up. "Those numbers are incredible strong considering the high prices for both petrol and diesel," said Phil Flynn of Alaron Trading in Chicago.The strong demand has dented US crude oil inventories, which fell last week for the third time in a row, in spite of the Organisations of the Petroleum Exporting Countries pumping at its highest rate in 25 years. 'No buffer stock has been built up during the second quarter and robust demand continues to reinforce our view of the likelihood of further price increases,' said Kevin Norrish, of Barclays Capital in London. The price spike would put pressure into Opec to consider an increase it its production ceiling, only a week after the rising it by 500,000 barrels a day, to 28m b/d...

Posted by DeLong at 12:25 PM | Comments (0) | TrackBack

Hope for the Future

Barack Obama is a class act:

Commencement Address: Today, on this day of possibility, we stand in the shadow of a lanky, raw-boned man with little formal education who once took the stage at Old Main and told the nation that if anyone did not believe the American principles of freedom and equality, that those principles were timeless and all-inclusive, they should go rip that page out of the Declaration of Independence....

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

When You Look into the Abyss...

Body and Soul writes:

Body and Soul: "Tactics reminiscent of Saddam":

Can you tell... which group of torturers is on our side? From today's New York Times:

He was having a lunch of lettuce and cucumbers in the kitchen of his home in the small desert village of Rabot with his mother and brother. An Opel sedan pulled up. Two men in masks carrying machine guns got out, seized him, and, leaving his mother sobbing, put him in the trunk of their car.The drove to the house here. They taped his face, put cotton in his ears, and began to beat him.

The men tended to talk in whispers, he said, telling him five times a day, in low voices in his ear, to pray, and offering him sand, instead of water, to wash himself. Just once, he asked if he could see his mother, and one of them said to him, 'You won't leave until you are dead.'Mr. Fathil did not know there were other hostages. He found out only after the captors left and he was able to remove the tape from his eyes.

The routine in the house was regular. Because of the windows, it was always dark inside. Mr. Fathil said he was fed once a day, and allowed to use a bathroom as necessary in the back of the house.

Marks from beatings criss-crossed his back, and deep pocks, apparently from electric shock burns, were gouged in his skin.The shocks, he said, felt 'like my soul is being ripped out of my body.' But when he would start to scream, and his body would pull up from the shock, they would begin to beat him, he said.

From the Los Angeles Times:

There are beatings, punching, electric shocks to the body, including sensitive areas, hanging prisoners upside down and beating them and dragging them on the ground

[T]hey lashed him with cables, broke his nose and promised to soak their uniforms with his blood.

'I stayed there with 19 other people in a very small room with no windows,' said Guheithi, who added that he was often blindfolded and beaten.

The New York Times, in the first piece, writes about the 'torture houses' of Iraqi insurgents. The LAT fronts a mirror image article on how Iraq's police and security forces are beating and torturing the majority, perhaps as much as 60%, of its prisoners. The security units' tactics, the LAT notes, are similar to those used by Saddam Hussein's secret intelligence squads, which is not surprising since, according to Saad Sultan, the head of a board overseeing the treatment of prisoners at Iraq's Human Rights Ministry, most of the police officers 'come from a culture of torture' that they imbibed while working for Saddam."...

Posted by DeLong at 12:07 PM | Comments (0) | TrackBack

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

Now the Republicans have stopped pretending that even they think their Social Security proposals would be good for the country. Matthew Yglesias reports:

TAPPED: June 2005 Archives: THROUGH THE LOOKING GLASS. Well, the House leadership... a variant of Social Security privatization whose irresponsibility is so prodigious as to beggar the imagination... private accounts... but only out of the Social Security surplus... bizarre... slightly horrifying. Every American will get an account, but the amount of cash in it will be tiny -- $400 to $600 a year... administrative fees... an enormous percentage of account value... by 2018 or so the accounts will just go away along with the surplus.

In the meantime... massive increase in the government's unified deficit... adverse impact on economic growth...

As Jason Furman says, it's 'the worst of all worlds,' with 'all the problems of any private accounts proposal with none of the benefits for solvency.'

Republican strategists... open... ploy to try and force Democrats to negotiate some kind of deal... putting something... catastrophic on the table in the hopes that Democrats will thereby agree to a pernicious but non-crazy plan.... It'll also be interesting to see if the... press who've spent the past 15 years greasing the skids for privatization... wake up and realize the folks they've been supporting are out of their minds. I won't be holding my breath...

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

A Battle of Wits: Yuppie Grocery Store vs. Unarmed Man

I detoured to Andronicos on the way home, thinking I should take advantage of their corn offer: 8 local ears for $1.

The total at the cashier: $45.24. And that was after I had seen which way the wind was blowing, and ditched the Medjool dates and the Ducktrap River smoked salmon.

u'(c) must be very high today...

Advantage: Andronicos!

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

Do Berkeley Professor Spend too Much Time Reading Weblogs?

When I walk out of the north door of Evans Hall, and the first person I see says, "I hear you're about to get a thorough remedial education in Bentham!"...

Posted by DeLong at 07:52 AM | Comments (0) | TrackBack

Professor Burke on Zimbabwe

He writes:

: Don’t Pet the Hyena: The main question with Zimbabwe now is the question we used to ask about Sani Abacha’s regime in Nigeria: namely, how bad can it get? As low as Zimbabwe has sunk lately, there are still further depths to mine. It is depressingly possible, even plausible, that events will continue to that point: mass starvation of the people lately forced out of the cities is conceivable. At the very least, many of them will redefine the standard of rural wretchedness if they are compelled to remain in rural areas.

One of my major jobs for this summer is to finish work on the chapter of my manuscript that deals with African nationalism and sovereignty in Zimbabwe. As I write, I continue to be haunted by the foreseeable nature of the current disaster. The mass evictions of recent weeks are no surprise at all to anyone familiar with Zimbabwe: they are neither a sudden or unanticipated development. Since the mid-1980s, before important international events, including the state visit of Queen Elizabeth II, the government has evicted or harassed squatters in Harare’s townships. Traders active in the informal sector have often been the target of arbitrary police action and confiscation of their property.

When I was working at the National Archives of Zimbabwe in 1990, another researcher asked me why maize was growing wild in so many parts of the city. I suppressed the urge to roll my eyes and replied that it wasn’t growing wild, that people were cultivating it in open fields and vacant areas as a cash crop or for food. The other scholar vehemently objected: “That can’t be: I’ve seen city workers burning the corn! Why would they do that?”

At the time, I just thought that response was an individually naïve one—-and that the abusive actions of officials in the case of maize burnings or squatter harassment were largely idiosyncratic activities of brutal, inefficient or rule-bound bureaucrats. I should have known better, not just because there was already ample evidence of the nature of the ruling elite of Zimbabwe but also because government mistreatment of urban populations and informal sector traders was a part of life in other postcolonial African nations.

The truly depressing thing is watching individual men and women who have previously simulated some degree of decency or political conviction sell that away so easily: people like former academic Jonathan Moyo, who sold away his soul so he could declare that a free press is undesired in Zimbabwean society and otherwise act the fool in his shameless pursuit of power. Now the scales have fallen from his eyes after he was cast aside for showing his political ambition openly. Mugabe pegged Moyo pretty well in a mocking speech after the minister’s fall: “Jonathan, you are clever, but you lack wisdom”. That sums up not just Moyo, but almost all of the scholars who wrote about the nationalist struggle and ZANU-PF in the 1970s and 1980s. Norma Kriger and a precious few others come out looking like they understood what was going on: the rest of us clever, not wise...

I understand the logic of state-building: reward your supporters, punish your enemies, make it clear that enthusiastic support for the government is the road to personal wealth and prosperity, and make it clear that opposition makes you poor, imprisoned, or dead. This is the way it worked under Henry IV or--in a much kinder, gentler way--George III. And it is clear that an era of state-building is not likely to be one of rapid economic growth: too many of the enterprising and entrepreneurial will not be supporters, and their wealth is one of the things that can be plucked and transferred to make supporters happy. Only states that are strong enough not to need to strain every nerve to assemble the coalition needed to survive can afford "soft rule," can relax control of resources now in order to provide incentives for growth that will produce a much more prosperous economy in a generation.

But what's going on in Zimbabwe today does not look anything at all like the logic of authoritarian state-building. Robert Mugabe is not Henry IV or George III or Pyotr the Great or even Dread Ivan. He's a character out of "Apocalypse Now":

Kurtz: "What did they tell you?"

Willard: "They told me that you had gone totally insane, and that your methods were unsound."

Kurtz: "Are my methods unsound?"

Willard: "I don't see any method, at all, sir."

Posted by DeLong at 07:50 AM | Comments (0) | TrackBack

Dean Baker on the Administrative Costs of Private Social Security Accounts

From his June 16 Ways-and-Means testimony:

A single centralized system of accounts (which does not exist in any of the countries that have opted for privatization) could in principle lower costs, especially if it minimized workers’ choices in selecting investments and switching between investments. President Bush’s Social Security commission estimated that a bare-bones centralized system would cost roughly ten times as much as the current system. (There has been considerable confusion about this point because of how the commission framed its cost estimate. The commission estimated that the administrative cost would be 0.3 percent of the stock of money in an account. This means that the fee on a dollar placed in an account would be 0.3 percent for each year that dollar is in the account. Some dollars will be in an account for forty years, while some dollars placed, in the account just before a worker retirees, will be there for just a short time. If a dollar is a worker’s account for an average of twenty years, then this 0.3 percent fee will be paid twenty times, making a total administrative cost of 6.0 percent, compared to a cost of just 0.5 percent on the dollar placed in the Social Security...

Add in the risks beneficiaries bear and the trading losses from price pressure (unless they are prohibited from switching from bonds to stocks and back again), and it becomes hard to think of private accounts as in any way a good deal.

Posted by DeLong at 07:48 AM | Comments (0) | TrackBack

June 23, 2005

Rumsfeld vs. Rumsfeld (I Can't Stand It! Department)

I'll stop calling the Bush administration Orwellian when they stop using 1984 as an operations manual:

ThinkProgress:

RUMSFELD: "We know for a fact, I know for a fact that no one in the Administration lied about weapons of mass destruction." -- Fox News Radio, 6/21/05

VERSUS

RUMSFELD: We know where they [Saddam Hussein's weapons of mass destruction] are. The're in the area around Tikrit and Baghdad and east, west, south and north somewhat. -- ABC's This Week With George Stephanopoulos, 3/30/03

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

June 22, 2005

DeLong Smackdown Watch

Professionally administered by Brian Weatherson:

Thoughts Arguments and Rants: Happiness is a Warm Book: Brad DeLong has two posts up defending Richard Layard's defence of Benthamism against criticism from Fontana Labs and Will Wilkinson. I think Brad is misinterpreting Bentham, so while his defence might be a defence of something interesting (say, preference utilitarianism) it isn't much of a defence of Bentham....

The problem with interpreting [Bentham] is that "advantage, pleasure, good, or happiness" do not really come to the same thing. At the very least, it is clear that advantage and pleasure do not come to the same thing, and which (if either) of these good and happiness are is part of what's at dispute. But for interpreting Bentham, it's very important to realise that he did view them as the same thing....

What matters for [Brad] is "what people would choose for themselves", i.e. preferences, and preference satisfaction isn't a kind of experience. If people choose different kinds of experiences, or even things that do't maximise their own chances for good experiences (as when people take life-endangering jobs so as to provide goods for their children) they are getting what they choose, but not maximising utility as Bentham saw it. In principle my preferences can be satisfied by things that happen after I die, even if I don't get any extra experiences after I die, in which case we certainly couldn't identify preference satisfaction with any kind of experience.

As I said, I don't want to get into the pros or cons of the moral view Brad is espousing here. I just want to make an historical point, that it's a mistake to think Bentham viewed preferences rather than experiences as the core of utilitarianism. It was a great advance over Bentham (I think) when later philosophers made this move.

Touche.

Posted by DeLong at 09:30 PM | Comments (0) | TrackBack

Yes, Bentham Got It Pretty Much Right

The philosophical sharks are circling the swimming Richard Layard. Their dorsal fins make a sinister pattern as they cut through the waves. The top philosophical predators close in on the naive utilitarian:

Fontana Labs:

Unfogged: It would be more fun to disagree, but I'm afraid Will Wilkinson's negative evaluation of Richard Layard's Happiness is correct. This is not a good book. The results from economics and psychology are interesting (if reported elsewhere), but Layard really botches just about every philosophical discussion he attempts. On the other hand, there's some novelty in the sentiment You know who got it pretty much right? Jeremy Bentham. So props for that.

And Will Wilkinson:

Will Wilkinson / The Fly Bottle: Value Monism & Public Reason: More Layard Flogging: I think I need to stop arguing with Layard about utilitarianism because he's really just too philosophically inept to take all that seriously. The chapter at the middle of Happiness defending the principle of utility as the sole standard for judging right action and public policy is just laughably dumb. If I was still TA-ing ethical theory classes, and Layard turned this in, he'd get a solid 'B':

Why should we take the greatest happiness as the goal for society? Why not some other goal--or indeed many? What about health, autonomy, accomplishment or freedom? The problem with many goals is that they often conflict, and then we have to balance them against each other. So we naturally look for one ultimate goal that enables us to judge other goals by how they contribute to it. Happiness is that ultimate goal because, unlike all other goals, it is self-evidently good.

How is it that health, autonomy, accomplishment, and freedom are not self-evidently good? Layard will want to insist that we only want these other things for the sake of happiness. But that is just so much table pounding, and it is false. I am, in fact, willing to sacrifice some measure of happiness to ensure my autonomy, or to accomplish something of great value. I would, in fact, be willing to face suffering and death if that was required to preserve my freedom. And it's pretty easy to point out that happiness is instrumental to other values. I want happiness because I will be motivated to accomplish great things if I am happy. I am more likely to be benevolent and kind if I am happy. I am more likely to have a meaningful, successful intimate relationship. I will live longer if I am happy, and it is good to live. Etc. If we are going to admit that it makes sense to talk about things being self-evidently good, then happiness surely is one of those things. And so are all the other goods Layard mentions. He gets nowhere....

Individual moral intelligence involves weighing competing values and making judgments about their ordering according to standards that vary with context, relationship, social role, and more. It is hard to be a good person because it is hard to make out all the morally relevant characteristics of one's situation, and it is hard to know how to trade values against each other, and to be modest but resolute in the face of complexity--not because it is hard to be motivated to maximize something ridiculous like net aggregate utility....

Will no one save him?! I will!

The response--against which Wilkinson has no defense except to issue squidlike clouds of obfuscating ink--would be that Wilkinson believes that if he were to sacrifice his freedom for his happiness, that if he were to do so he would then look back on the choices he made and look ahead to his future life, and that he would be unhappy. If Wilkinson says otherwise--that he would look back on the choices he made and look ahead to his future life and be happy, but that he would still regret what he had done and wish he had done otherwise--Wilkinson is simply saying, "Baa baa buff." He would be demonstrating that he does not understand the rules of conversation using the English language.

Happiness--utility--plays a very special role in Bentham's philosophy. It is defined to be that which is maximized by the choices of a rational and reasonable person with enough time for reflection and sufficient information about the situation. To say "I would rather be unhappy and free than happy and a slave, and thus I have refuted Bentham" is to miss the point entirely.

At its core utilitarianism is two commands:

1. Respect people's choices--those made with enough information, after sufficient deliberation, when they are in possession of their faculties. You want to know what is good for someone? Watch the choices that he or she makes. Watch them carefully.

2. A good society is one in which as much of what people would choose for themselves--with enough information, after sufficient deliberation, when they are in possession of their faculties--is attained, taking care that when there is a tradeoff between one person's preferences and another's, each one counts equally.

Those seem to be obvious and unexceptionable foundations for morality. Thus: You know who got it pretty much right? Jeremy Bentham.

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

Experience Machines

Will Wilkinson criticizes Richard Layard concerning Nozick's "experience machine":

Will Wilkinson / The Fly Bottle: Value Monism & Public Reason: More Layard Flogging: Here's what [Layard] says about Nozick's famous experience machine:

If offered the chance, asks Nozick, would you plug in? Of course, many people would not, for all sorts of reasons. They would not trust the machine to deliver what it promised, so they would prefer to keep their real autonomy. Or they might have obligations to others that they could not perform if they were inert. And so on. Thus this is a weak test case, especially because it describes a situation so far from our reality that we have almost become a different animal.

That the machine perfectly delivers as promised is stipulated. Inability to entertain the counterfactual--to actually conduct the thought esperiment--is not an argument against it. And 'obligations to others they could not perform'? Well, yes. This is precisely the sort of thing people might worry about because people generally think they ought to meet their obligations, regardless of the hedonic payoff. That's part of Nozick's point, dipshit. If Layard was honest, he would bite the bullet and say, yes, plug in. And if there was an experience machine for each of us that would maximize the hedonic quality of our experience, then we would be obligated individually and collectively to forgo a real life of actual action and actual engagement, and instead climb into our pods on the Matrix pod farm, and dream sweet virtual dreams until we die. If Layard will not deign to explain to us why, despite our deep sense of revulsion, we ought to see this scenario as the happiest of all possible circumstance, he cannot expect us to acquiesce to his Benthamite Philosopher Technocrat fantasy.

I find this very interesting.

Wilkinson doesn't seem to have a clue about just how much time we already spend plugged into "experience machines."

I, for example, just spent an hour and a half lying largely motionless on my bed, plugged into a low-tech experience machine. Although my physical body was motionless and largely unstimulated, the experiences that my mind was having as I was plugged in was of going back in time to May 1979, of teleporting across an ocean to a seminar room in King's College, Cambridge, and of listening to thinkers like Michael Ignatieff, J.G.A. Pocock, Donald Winch, and Nicholas Phillipson expound their respective takes on political economy and the Scottish Enlightenment. The experience wasn't "real"--I wasn't really in King's College, it wasn't really 1979, there was no conference I was present at, et cetera. But the fact that I was jacked into a low-tech experience machine rather than present at a conference did not make my experience "bad" or second-rate or not worthwhile. In fact, it was a much better experience than I would have had at the real conference: I could fast-forward through the boring talks; I could pause and rewind the action to make sure I grasped important points. And I could speed things up.

I read, after all, perhaps five times as fast as people typically talk--ten times as fast as if they are not well prepared, and using lots of filler and recapitulation as they try to figure out what to say next.

It's much more pleasant to lie on one's bed in the cool California evening and read Istvan Hont and Michael Ignatieff, eds. (1983), Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment (Cambridge: Cambridge University Press: 0521312140) http://www.amazon.com/exec/obidos/asin/052131240/, than it would have been to have to shlepp all the way to the fens of East Anglia in the rainy month of May for the conference.

So, yes, we would choose to plug into the "experience machine." We do so every day, even though our current instantiations of the technology are very crude and extremely low tech and unconvincing. Wilkinson does too.

Of course, we don't plug into our experience machines 24/7. We are good Aristotelians as well as Benthamites: moderation in all things. But the fact that we are not jacked in all the time is not an argument against experience machines: food is good, and we don't eat 24/7 either.

Or perhaps what I am really saying is that we are already effectively completely jacked in, that the Singularity has already happened: that it in fact had happened by the time of Machiavelli's "Letter to Francesco Vettori."

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

Typepad Blogs Blocked in China

Freedom of speech:

RConversation: Confirmed: All Typepad blogs blocked in China: Asiapundit first sounded the alarm. Now it's confirmed. All Typepad blogs, including this one, cannot be seen in China. (Note that Blogger has been blocked in China for some time.) I asked some people in China to attempt accessing this blog and a long list of other random Typepad blogs (including ones that never discuss China), without using a proxy. None could be accessed. Now all Typepad blogs wanting to be seen in China will have to migrate to another blog hosting service or onto an independent server...

Which is why I should remind people that I'm still keeping a local mirror of my weblog on my office machine. Its RSS feed is: http://www.j-bradford-delong.net/movable_type/index.rdf

Posted by DeLong at 04:47 PM | Comments (0) | TrackBack

The Blue Moon Is Gone (Why Oh Why Can't We Have a Better Press Corps?)

And the Wall Street Journal editorial page has reverted to type and is once again bats--- insane. Brad Setser reports:

Brad Setser's Web Log: Fantasy based opeds in the Wall Street Journal: ...the Wall Street Journal 's Tuesday oped 'The IMF's Debt Ambitions'... is premised on the following argument:

investors were conditioned by bailouts in Mexico, Thailand and South Korea, and by the IMF's ever expanding loan portfolio in Argentina to believe that no matter how many times Buenos Aires broke its promises it would not be allowed to fail. The money poured in, not irrationally, until the Bush Administration ended the bailout habits of the IMF.

The Bush Administration ended the bailout habits of the IMF. Hmm.

Let us hold that statement up to the standards of the reality-based world.

1. In early 2001 the Bush Administration approved a $10 billion IMF loan to Turkey. That loan was augmented the fall of 2001 and again in 2002. Last I checked, the Bush Administration was in charge of the US government then. All told, Turkey got about $23 billion from the IMF -- a bailout that was far larger, in relation to Turkey's GDP (total disbursements were equal to 11.5% of pre-crisis GDP), than the Clinton Administration's bailout of Mexico (total disbursements, including direct disbursements from the US, equal to 7% of pre-crisis GDP). And Mexico paid its loan back far faster than Turkey has been able to repay.

Don't believe me? Check out the IMF's financial data, which shows it outstanding exposure to Turkey quite clearly (data in SDR). Full disclosure -- I worked for the Treasury in 2001, so I know this story quite well.

1. In the summer of 2001 the Bush Administration supported an IMF loan to Brazil in an effort to protect Brazil from 'contagion' from Argentina. That loan was expanded significantly in the summer of 2002 when Brazil came under intense pressure prior to the election of Lula. All told, Brazil received an IMF credit line of $35 billion, and most of that -- $30 billion -- was lent out. That is far more than Brazil received in 1998-99 with the backing of the Clinton Administration (peak lending then was about $17 billion). This bailout has worked pretty well -- Brazil recovered and is now making significant payments back to the Fund. But so did the bailout of Mexico. A successful bailout is still a bailout....

2. Uruguay. It got about $3 billion from the Fund in 2002, along with a (very short-term) bilateral bridge loan from the US. $3 billion does not sound like a lot, but it is about 15% of Uruguay's small GDP. That's a big bailout in my book.

3. In the summer of 2001, the Bush Administration backed a $8 billion augmentation of the Argentina's existing $15 billion IMF package -- a decision that the IIE's Mike Mussa has called one of the worst in Fund history. That $8 billion -- $5 billion of which was disbursed immediately-- effectively provided about 1/2 of the total net financing that the IMF provided to Argentina from the end of 2000 on. Look at the surge in IMF lending to Argentina in September of 2001 -- a surge that was the direct product of a decision make by the Bush Administration.

Remember that part of the initial $15 billion package just refinanced maturing IMF debt, and the $15 billion was more backloaded than the $8 billion augmentation, so not all of it was disbursed.

All in all, the Bush Administration consistently backed bigger loans to more indebted countries that the Clinton Administration. Those IMF loans have been repaid more slowly. Those are the facts. Verifiable on the IMF's web page. Or, if you trust Roubini and Setser, nicely packaged in Bailouts or Bail-ins.

Posted by DeLong at 04:12 PM | Comments (0) | TrackBack

Life on the Hinterweb

We have a Windows machine in the study, largely for playing games that do not run on the Macintosh. Yesterday it caught a virus: it kept launching large video advertisements for the Kinsey movie. After beating it with a rubber hose for about twenty minutes, the ad virus succumbed and joined the choir invisible.

I then thought that I should perhaps upgrade the McAfee virus-protection program on the machine. That turned out to be a nasty and nearly impossible process: McAfee kept throwing pop-up windows up on the screen trying to "improve" my order from $35 to $95 or $125, warning me of all the horrible things that would happen to me if I did not "upgrade" my order. Only by clever parsing of sentences and clicking the correct buttons was I able to repulse this social engineering attack. Then I noticed that the black-inkjet cartridge in the Epson printer attached to the machine was low. I replaced it--and my printer driver promptly threw a warning box up on the screen: I had installed a non-Epson print cartridge, Epson "could not guarantee print quality," and would I like to order genuine Epson print cartridges off of the Epson website? No.

I don't like it when strange movies take over my computer and use it to display adware. I don't like it when Epson lies to me about the quality of Epson-compatible inkjet cartridges. I don't like it when McAfee makes it hard to avoid spending more on virus protection than I need to.

It's a jungle out there in the Windows world. Have Microsoft and Epson and McAfee considered the long-run consequences of the reputations that they are so eagerly creating?

Posted by DeLong at 04:12 PM | Comments (0) | TrackBack

Thoughts Triggered by Pearlstein, "The Stock Ticker and the Superjumbo"

Recommended: Rick Pearlstein et al. (2005), The Stock Ticker and the Superjumbo: How the Democrats Can Once Again Become America's Dominant Political Party (Chicago: Prickly Paradigm Press: 0976147505) http://www.amazon.com/exec/obidos/asin/0976147505

That I recommend it does not mean that I agree with it. I'm a Democrat, and I believe that I will always be a Democrat: Richard Nixon's decision that the appropriate reaction to Lyndon Johnson's commitment to Civil Rights was to turn the Republican Party into The Party for People Who Don't Like Black People was a sufficiently evil action to make it next to impossible for me to think of situations in which I would vote Republican (and it may well have destroyed the soul of the Republican Party). But I would be happy to build bipartisan coalitions from the center outward, based on what policies are likely to work and achieve agreed-on long-run prosperity and security. I would, that is, if there were grownup Republicans to be found...

In my view, the Democratic Party is doing OK in an age of high income and wealth inequality. The rich are spending lots of money to brainwash the rest, and the Democrats have to hold on against that tide. The Democratic Party is doing OK given its extraordinary success over the past two generations in pushing social equality and liberty--for African-Americans, women, homosexuals, Hispanics... pretty much anyone who isn't white and male--faster and further than large components of the electorate are comfortable with. Twenty-seven percent of Americans still disapprove of interracial marriage. They aren't going to vote Democratic. That's a powerful Republican base.

The real catastrophe in today's America is what has happened to the Republican Party. Fixing that is job #1.

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

Offshoring Once Again

Offshoring is a very big deal, not for the next five years, but for the next fifty.

David Wessel writes about McKinsey's forecasts:

WSJ.com - Capital: In Spite of Offshoring, U.S. Students Can Still Engineer a Career: By 2008, more than half the jobs in engineering could be done anywhere in the world, according to an intriguing new analysis... by McKinsey & Co.'s in-house think tank. Many of them will... be done in... low-wage countries. Yet... engineering still looks like a winning profession for Americans -- in contrast to some other occupations. "There is this myth that the last thing you should do is go into engineering," says Diana Farrell, head of McKinsey Global Institute. "But the underlying growth of demand for engineers is so great that even when you consider the potential of offshoring, there will be demand in the U.S."...

There are already twice as many young university-trained professionals in low-wage countries as in high-wage countries.... India has nearly as many young engineers as the U.S.; China has twice as many.... [But] fewer than one in five engineers in low-wage countries [are] potential [multinational] hires. The others don't speak the language, don't live in the right cities or near airports, aren't practical enough or otherwise just don't fit....

McKinsey bets that the U.S. will lose 225,000 service-sector jobs a year to offshoring, but that's a very small fraction of the jobs created each year.... McKinsey expects the global supply of accountants and finance whizzes to overwhelm the demand, it doesn't expect the same for skilled engineers... demand for engineering talent from the U.S. and U.K. alone could absorb the "suitable supply" [this decade] of engineers in China, India and the Philippines, it says.... [H]igher wages for Asian engineers will bring them up to the levels of engineers in Mexico, Brazil and Poland, encouraging multinational companies to hire there.

It would be simpler for American engineers if they didn't have to worry about all those bright, ambitious folks in China and India. But as Brad DeLong, an economist and blogger at the University of California at Berkeley, puts it: "A world 60 years from now in which Chinese schoolchildren are taught that the U.S. did what it could to speed their economic growth is a much safer world for my great-grandchildren than a world in which Chinese schoolchildren are taught that the U.S. did all it could to keep China poor."

Decrying or trying to stop globalization isn't a winning strategy. Analyses like McKinsey's are a step toward more promising national -- and personal -- responses to global realities. Understand the competition, and then do something you can do better than they can.

Posted by DeLong at 04:08 PM | Comments (0) | TrackBack

Department of "Huh?"

The Economist's Buttonwood seems to think that it is a bad thing for companies to have to fund the pensions that they provide as part of compensation in the wage bargain--or at least that whether companies should be responsible for making sure pensions are funded is an open question:

Economist.com: Who should be responsible for honouring the promises that companies make to their workers?

Pension plans depend on company contributions and investment returns for their funding. Actuaries’ assessments of mortality rates give a guide to future liabilities. Bond yields provide the discount rate that broadly determines what current assets the plans must hold in order to meet those liabilities. The situation has been dire all round. Returns on investment have been lower than expected. Bond yields have been too, thus swelling the amount of current assets plans must hold. Beneficiaries are living longer than anyone thought they would.

True, companies could have spent more of their recent record profits topping up their pension plans and less of them pleasing shareholders with dividend increases and share buybacks....

[I]n America... people are speaking openly of a taxpayer bail-out to rival the rescue of America’s savings-and-loan (S&L) sector in the late 1980s. The pensions insured with the PBGC showed a shortfall... the PBGC needs an infusion of $92 billion in today's dollars to meet its future obligations....

Companies and asset managers have tended to take a laid-back approach to pension underfunding.... What is worrying about the latest numbers is that we are seeing them towards the end of a period of strong economic growth and corporate profitability, neither of which is likely to continue....

Should workers just be forced to accept the bad hand that fate dealt them? That looks rash as well as unfair: in America, the workers who would be thus left to their own devices fall disproportionately in swing electoral states.... Should a company’s current shareholders bear the brunt? If so, more firms than ever will close their defined-benefit schemes... and the investment risk inherent in saving for retirement will fall on the untrained individual. Or the taxpayer could foot the bill.... “All the choices are ugly.”

Buttonwood's general principle that it is "ugly" to make companies fulfill their contracts is capable of much wider application than just to the pension issue.

Posted by DeLong at 04:07 PM | Comments (0) | TrackBack

Where Is the Federal Reserve Heading?

Via Mark Thoma

Mark Thoma: John M. Berry reports that two Fed presidents, Gary Stern of Minneapolis and Jeffrey Lacker of Richmond, expect continued tightening in the face of robust growth:

The Fed Will Make Several More Rate Increases: John M. Berry, Bloomberg: Federal Reserve officials see U.S. economic growth continuing at around a 3.5 percent pace into 2006 with inflation pressures strong enough to merit several more increases in the Fed's target for the overnight lending rate. Gary Stern, president of the Minneapolis Federal Reserve Bank, summed up the thinking of many of his Fed colleagues when he said in a June 20 interview with a Japanese newspaper (Nihon Keizai), "Right now there's no reason to stop tightening credit"... inflation pressures -- while still "contained," in the view of Fed Chairman Alan Greenspan and other officials -- are still strong enough to be worrisome. Companies appear to have regained some of their power to pass cost increases on to their customers... And oil prices have kept rising.... "I have been happy that the pass-through to core has been less than we feared, and that the expectations embedded in the yield curve have subsided noticeably," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters on June 20 after a speech to a bankers group in Hot Springs. Virginia. Nevertheless, like Stern, Lacker said, "I think a moderate pace of continued tightening is a sensible outlook at this point and that it is too soon to say when we are going to stop."...

At least one knowledgeable observer, James Hamilton, says of the [possibility of a] 4% [medium-run] target "I hope that the market guess of a 4% fed funds rate is wrong, and think it probably will be. The Fed couldn't be that stupid, could it?" We shall see.

Posted by DeLong at 04:06 PM | Comments (0) | TrackBack

Zaibatsu Affiliation and Industry Development in Meiji Japan

Third-year Berkeley graduate students who pass their oral exams and advance to candidacy for the Ph.D. by the end of their third year in residence--i.e., by June 30--get tuition waivers and stipends for the next two years funded by the Graduate School. Those who don't, don't. Hence there are a lot of oral exams going on right now.

Today's was John Tang (2005), "Zaibatsu Affiliation and Industry Development in Meiji Japan" (Berkeley: Diss. Prospectus). He has a great data set: corporate "genealogies" well back into the Meiji Era. He has great questions: all of the Gerschenkronian late-industrialization finance-capitalism vs. the Anglo-Saxon model questions about economic and industrial development in comparative historical perspective. But there is a big problem: because of the hard deadline, the exam is taking place too early for it to be a success as an intellectual enterprise. It's too early for the data to speak in even a preliminary way, let alone for solid discussions about what questions the data might be capable of answering and how to firm up the logic and evidence behind the stories that the data turn out to tell.

(The exam was, however, a great success as a bureaucratic hurdle-jumping and fellowship-gaining exercise.)

Posted by DeLong at 04:05 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Liars? (Iraq Mission Edition)

More and more of the press corps seem willing to say that the Bush administration lies all the time, about everything--and that this habit of lying is not a good thing:

The White House spin cycle - Hardball with Chris Matthews - MSNBC.com: David Schuster writes: I don't know if things are getting better or worse in Iraq. But I do know the Bush administration is now in total panic mode over the erosion of public support for the occupation. How else could one explain the President's bizarre radio address this past Saturday or the even more surreal comments recently from other administration officials?

First, the president's radio address: On Saturday President Bush defended the war in Iraq saying, "We went to war because we were attacked." Huh? In September 2003, the President himself stated, "We've had no evidence that Saddam Hussein was involved with the September 11th attacks." (For the record, the 9/11 Commission is on the side of the Sept. 2003 President Bush — The commission found there was "no collaborative relationship between Iraq and Al-Qaeda.")

On Sunday, Secretary of State Condoleezza Rice said criticism of the handling of the war isn't justified because "The administration, I think, has said to the American people that it is a generational commitment to Iraq." What? That was said... but it came from Senators pouring cold water on the administration's optimistic pre-war predictions. What were those predictions? Vice President Cheney (March 16, 2003) said, "My belief is we will, in fact, be greeted as liberators... I think it will go relatively quickly... in weeks rather than months." Secretary of Defense Rumsfeld on Feb. 7, 2003 said, "It is unknowable how long that conflict will last. It could last six days, six weeks. I doubt six months." Former Budget director Mitch Daniels (March 28, 2003) stated, "The United States is committed to helping Iraq recover from the conflict, but Iraq will not require sustained aid."

Iraq will not require sustained aid? Hmmm. Today, Congress voted to send the Pentagon another $45 billion for operations in Iraq. That brings the total amount appropriated so far, for the wars in Iraq and Afghanistan, to $322.40 billion.

The administration seems to think that by shifting the justification for the war or changing what administration officials said 3 years ago, the president's poll numbers will magically turn around. The pretzel shaped logic of this strategy is mind-boggling. And one begins to wonder if the gang that helped President Bush win a 2nd term has been stuffed into a closet.

The math on this is simple. If the war was going well, the public would support the occupation of Iraq, regardless of whatever reasons the administration gave for the invasion. The problem is, according to republican Senator Chuck Hagel, "The White House is completely disconnected from reality. It's like they're just making it up as they go along."

And now, the public is tired of this deadly trip through fantasyland — a place where White House P.R. strategies seem to matter more than holding anybody accountable for the war's mistakes and mismanagement.

Posted by DeLong at 04:03 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These [Censoreds]?

Impeach them. Do it now:

Simianbrain: Oldie but a Goodie: Tangentially tied to the Downing Street Memos, from October of last year: Ghostwriter of Bush Autobiography says:

"He was thinking about invading Iraq in 1999," said author and journalist Mickey Herskowitz. "It was on his mind. He said to me: 'One of the keys to being seen as a great leader is to be seen as a commander-in-chief.' And he said, 'My father had all this political capital built up when he drove the Iraqis out of Kuwait and he wasted it.' He said, 'If I have a chance to invade... if I had that much capital, I'm not going to waste it. I'm going to get everything passed that I want to get passed and I'm going to have a successful presidency.'"

Herskowitz said that Bush expressed frustration at a lifetime as an underachiever in the shadow of an accomplished father. In aggressive military action, he saw the opportunity to emerge from his father's shadow. The moment, Herskowitz said, came in the wake of the September 11 attacks. "Suddenly, he's at 91 percent in the polls, and he'd barely crawled out of the bunker." It's interesting how this came into play the week before the election last year (I don't think I was aware of it at the time) with that now-trademark boast of 'political capital to spend' actually coming from Bush's mouth just days later.

Posted by DeLong at 04:00 PM | Comments (0) | TrackBack

Mark Thoma Is Very Unhappy with Robert Samuelson

He writes:

Economist's View: Time to Toss Samuelson: Where do I start? I will agree with Samuelson on one point. One of us does not understand macroeconomics:

Time to Toss the Textbooks, by Robert J. Samuelson, Washington Post: Our ideas for explaining trends in output, employment and living standards -- what we call 'macroeconomics' -- are in a state of disarray.... Let me give you three examples. We once thought we understood consumer spending, the economy's mainstay. For decades, disposable income and consumption spending advanced in lock step. Americans spent a bit more than 90 percent of their after-tax income and saved about 8 to 10 percent.... But since 1990, consumer spending has changed. It has consistently outpaced income growth.... The main cause is the 'wealth effect.' In the 1990s higher stock prices caused Americans to spend more; now higher home values... are doing the same. So consumer spending increasingly depends on 'asset markets' -- stocks and homes -- and not just income...

So [Samuelson] says we don't understand consumer spending and then he explains it... [by] mak[ing] consumption a function of wealth, something we've been doing since the 1950's....

Next:

We can't determine 'full employment.'' Economists call full employment the 'natural rate of unemployment' -- the lowest rate consistent with stable inflation. Go lower and tight labor markets trigger a wage-price spiral. Unfortunately, we don't know what full employment is. The Congressional Budget Office now puts it at 5.2 percent. But past estimates have been too high and too low, because the 'natural rate'... constantly changes. It's influenced by population changes (younger workers have higher unemployment rates) and government policies, among other things....

So what's the point? Because it's hard to estimate exactly (even though he presumes to list the important factors that ought to go into a model of the natural rate) we shouldn't even try? That instead we should operate with no information at all about the target level of output?... [This isn't] a theoretical failing; this is a problem of measurement. We can't measure the ex-ante real interest rate exactly either (because it depends upon expectations), but that doesn%'t imply theory is wrong. Not at all.

Posted by DeLong at 03:58 PM | Comments (0) | TrackBack

Annals of Nature

Fourteen baby turkeys... turklings? turklets?... up on the hillside, watched by two hens. No toms in the vicinity, however.

That's impressive fecundity for a large, ugly, nearly flghtless bird.

Posted by DeLong at 03:57 PM | Comments (0) | TrackBack

The War Against the Deer

Note to self:

The deer-resistant dwarf olives... are not.

Eight-point bucks are *hungry*.

Posted by DeLong at 03:56 PM | Comments (0) | TrackBack

It's Once in a Blue Moon...

There is actually something worth reading on the Wall Street Journal editorial page. Mirabile visu:

WSJ.com - The 'Conundrum' Explained: Roger Altman: The obvious challenge is to explain these unprecedented interest rate responses. This brings us to a discussion of the relative merits of the three popular explanations mentioned earlier.

The first is simply that the bond market is wrong. All major financial markets periodically overshoot on both the upside and the downside. Now, it is argued, bond prices, which move inversely to yields, have overshot on the upside. It follows that there will soon be a typical correction which will move longer-term rates back up.

But, there is no empirical evidence of an obvious overshoot.

Another popular explanation is that the consensus economic forecast for 2006 is overly optimistic. The leading forecasters are calling for another year of steady GDP growth in the 3.0% to 3.5% range. Since a third consecutive year of such healthy growth normally will move interest rates upward, they are forecasting that result. Others dissent and envision a weaker economy next year. They see the index of leading indicators in decline, weak manufacturing data and a possible housing slowdown and thus anticipate a growth rate falling into the 2% range, especially during the latter months of 2006. Since financial markets historically discount future economic developments by at least nine months, this would explain why longer-term rates have been declining. Yet, the positive economic signs, as detailed in Mr. Greenspan's latest testimony, are far more prevalent and make this a dubious case.

The third explanation involves the so-called savings glut outside the U.S. While America is running big international deficits, much of the world is incurring surpluses. It is not uncommon for mature economies like Japan, Switzerland and Taiwan to run such surpluses. Their aging populations save at high rates and their slow economies don't offer proportionate investment opportunities.

What is uncommon is for developing regions to run positive international accounts. Historically, they have grown rapidly and consumed foreign capital on a net basis. But today the opposite is true. Remarkably, Latin America, China, Africa and the Middle East are in surplus, as shown in the chart nearby.

By definition, such unprecedented foreign liquidity must be invested, and more of such capital usually flows into fixed income instruments than equities. Believe it or not, comparable rates outside the U.S. are even lower than ours. Economic growth is so anemic in Europe and Japan, for example, that the yield on Japan's 10-year government bond is 1.3%, while the 10-year German Bund is at 3.3%. At the margin, therefore, the highest returns are realized on American bonds. That is why this excess foreign liquidity has nowhere else to go.

This is the one aspect of our overall financial picture which is both new and carries significant impact. On that basis, it is a more likely explanation of the conundrum than either a misguided bond market or an incorrect consensus economic forecast.

The final question is whether this unprecedented phenomenon will continue to suppress U.S. long-term interest rates. The logical answer is yes -- but not indefinitely. At some point, foreign investors' holdings of dollar-based assets will rise beyond any prudent standard of diversification. They will then, at minimum, stop adding to these holdings. If nothing else changes in the interim, that will end our interest-rate honeymoon.

Nevertheless, I'm not satisfied with Roger Altman's explanation. Long-term bonds are long-term assets: they should be pricing into their values today what will happen in five (or less?) years when the U.S. current account shrinks and foreigners begin to worry about their large holdings of dollar-denominated assets.

And Roger does not pay attention to the important fact that a great many of the dollar-denominated securities added to foreign portfolios in the past four years have been added not by private investors but by governments boosting their reserves beyond reason.

Posted by DeLong at 03:52 PM | Comments (0) | TrackBack

Grownup Republican Watch: Matthew Yglesias Is Shriller than Ever

This time he directs his ire at moderate Republicans who talk the talk but do not walk the walk:

TAPPED: June 2005 Archives: WHERE'S THE BEEF? I'm working on a whole article about this general theme, but Steve Clemons' post on some recent remarks by Lindsey Graham strikes me as worth highlighting. Worth highlighting for the purposes of condemning. Look, it's nice that Graham is saying smart, dissenting things about the direction of national policy. But he keeps voting for the policy. Just like Chuck Hagel, Richard Lugar, and the rest of the gang, he has done nothing -- absolutely nothing -- to correct the situation. Instead, he's actively collaborated in generating the problems he cites. The things he claims to regret would have been somewhat mitigated had Graham lost his race to become a U.S. senator. He could help improve the situation tomorrow by resigning his seat and letting Mike Easley appoint a replacement.

A smaller step might be to use his votes on various committees to help restart the process of congressional oversight. But he hasn't done anything like that and he won't. I don't know exactly what's wrong with these people, but they deserve to be attacked more, not less, harshly than your ordinary party-line Republicans. Voting for bad policies you agree with is bad. Voting for bad policies that, when asked, you say are bad is ridiculous. Liberals should direct nothing but scorn at this crew unless and until they start doing something instead of offering nice remarks to film screening audiences.

Posted by DeLong at 03:50 PM | Comments (0) | TrackBack

Department of "Urk!"

Can this be true?

Rising Hegemon: What the Hell?: Kos put up this Arizona Republic story, but perhaps someone in the mainstream media might want to give it their attention.

John Tod of Mesa had been prepared to face Father's Day worrying about his son's pending date with the war in Iraq. Then Uncle Sam stepped in with more disappointing developments. Marine Pfc. Jeremy Tod called home with news that his superiors were urging him and fellow Marines to buy special military equipment, including flak jackets with armor plating, to enhance the prospects of their survival. The message was that such purchases were to be made by Marines with their own money. 'He said they strongly suggested he get this equipment because when they get to Iraq they will wish they had,' Tod said.

Total estimated cost: $600. Tod said his son's call about two weeks ago from the Marine Corps Air Station-Yuma was a sobering reminder that the military is not prepared to equip Pfc. Tod and fellow Marines with the best equipment.... It's not the cost that concerns him, even though the self-employed home repairman will have to dig deep for the cash.'We're supposed to have a professional army,' he said, 'the best in the world. And we're not providing them with the type of gear they need to protect themselves as they do their jobs.'...

This story comes with an additional word of caution... "Told about the Marine request, U.S. Rep. J. D. Hayworth, the Republican whose 5th District includes Mesa, said he has never heard of a service person being told to buy his own equipment."

That caution, of course, is that J.D. Hayworth is perhaps the dumbest man in America.

Posted by DeLong at 03:48 PM | Comments (0) | TrackBack

More Complaints About the Economist

Fontana Labs is unhappy:

Unfogged: Did I pay too much for this content? This gives you some evidence that this week's Economist really does include a column advising 'America should stay, but stay to win.' I read this at the gym yesterday, and, if I remember it right, it says nothing substantive about what 'staying to win' might be or how to accomplish it. Really? Stay to win? I was thinking maybe we should stay to draw out the quagmire or to further our loss of international prestige. Most importantly, the column says nothing about the real problem, namely, that a satisfying outcome can be achieved only with resources (troop levels, in particular) that we simply don't have. Without that nonexisting supplement, we're only postponing disaster, at best.

I really need to rethink my subscription priorities.

Posted by DeLong at 03:45 PM | Comments (0) | TrackBack

Department of "Urrk!"

Ed Hugh catches some very alarming advice from Vicenzo Guzzo: large-scale deflation is never a good idea. Looser monetary policy at the ECB level is a good idea:

A Fistful of Euros: Italy: Devaluation or Deflation: Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said ’stuff happens’, and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley’s Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: “with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw”?).

”If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-à-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view.”

So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo’s reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930’s and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected. This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival ’escape strategy’?

Posted by DeLong at 03:44 PM | Comments (0) | TrackBack

Sweden Cuts Interest Rates

More reality-based monetary policy in Europe:

FT.com / Europe - Sweden cuts rates to 1.5% adding to ECB pressure: By Reuters: Sweden's central bank cut interest rates by a surprisingly large 50 basis points to a new historic low of 1.50 percent on Tuesday and some analysts said the door was open to further easing. The decision sent ripples through Swedish markets and beyond, into the euro zone government bond market, where traders said the Riksbank had turned the spotlight on Europe's economic woes and added to pressure on the European Central Bank to cut rates. Like the ECB, the Swedish central has been under pressure to cut rates to boost sluggish job market with inflation running low....

The bank, announcing its decision after a rate-setting meeting on Monday, said it was cutting its growth and inflation forecasts for this year, warranting a 50 point reduction. "The future direction for monetary policy will depend on new information on economic developments in Sweden and abroad and the effects this may have on inflation in Sweden. Monetary policy is now considered to be well-balanced," it said.

Posted by DeLong at 03:42 PM | Comments (0) | TrackBack

The European Central Bank Shows Signs of Facing Reality

Edward Hugh sees a first chink of light:

A Fistful of Euros: The First Chink of Light: There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB - Lucas Papademos - has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.

In a speech at an ECB conference in Frankfurt, Mr Papademos argued that economic growth and inflation differentials within the eurozone since the introduction of the euro had been similar to regional variation in the US.But Mr Papademos observed "significant and persistent divergences in measures of competitiveness between member countries". The extent and cumulative effects of such differences "raise concerns about their impact on growth...suggest the adjustment mechanisms are functioning slowly". Eurozone divergences were... "the result of structural factors."...

The entire speech can be found here. It is clear that the emphasis is on the need to force through the structural reforms, nevertheless the admissions are significant.

Posted by DeLong at 03:40 PM | Comments (0) | TrackBack

Not a Savings Glut, an Investment Deficiency

Daniel Gross writes about the "savings glut." But world savings are not that high: the swing of the U.S. federal budget from $200 billion annual surplus to $350 billion deficit alone--that's a decline in savings equal to 30% of China's entire current exchange rate GDP. It's not so much a global savings glut as a worldwide investment shortfall.

Daniel writes:

Savings Glut - The self-serving explanation for America's bad habits. By Daniel Gross: Why are there imbalances in the global economy?.... Newly emerging conventional wisdom takes the opposite view. The problem in today's global economy is that the rest of the world, in particular people in Asia, consume too little and save way too much.... The lead article in today's Wall Street Journal speaks of a global housing boom spurred by a "saving glut."... Ricardo Hausmann... notes that "excessive savings are at the root of the imbalance in China."... the FT applauds a tentative sign that the Japanese... are showing signs of spending and investing more.

The savings-glut meme, which could soon become an important part of our monetary policy, has emerged from economists' efforts to come to grips with what Federal Reserve Chairman Alan Greenspan has labeled "the conundrum."... [L]ong-term interest rates should be higher. But they've fallen...

Ben Bernanke... has come up with an explanation... a "global saving glut."... A bigger and more powerful source of excess savings, however, is found in newly industrializing countries like China.... Richard Clarida, the former assistant treasury secretary and a candidate to be a Federal Reserve Governor, advanced the meme by arguing that our twin deficits are an example of good global citizenship. When there's more savings relative to investment, he wrote in the Wall Street Journal... "not only will real interest rates be driven down, but some country or group of countries must run current-account deficits to absorb the excess saving."...

On his blog, economist Brad Setser raises some interesting questions about Bernanke's argument. More curious is what Bernanke—-and other saving-glut champions—-want us to conclude.... The savings-glut meme changes the terms of the conversation about global imbalances. It's not our fault that we rely on foreigners to fund our desire to spend in excess of our resources.... The savings glut may be an accurate and subtle take on the world's economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings...

Posted by DeLong at 03:38 PM | Comments (0) | TrackBack

Who Will Watch How the Watchmaker Works?

Alex Tabarrok writes that it would be irrational for the Prophet Isaiah to believe in evolution. For Isaiah writes:

In the year that king Uzziah died, I saw also the LORD sitting upon a throne, high and lifted up, and his train filled the temple. Above it stood the Burning Ones: each one had six wings; with two each covered his face, and with two each covered his feet, and with two each did fly. And one cried unto another, and said, "Holy, holy, holy, is the LORD of hosts: the whole earth is full of his glory." And the posts of the door moved at the voice of him that cried, and the house was filled with smoke.

Then said I, "Woe is me! for I am undone; because I am a man of unclean lips, and I dwell in the midst of a people of unclean lips: for mine eyes have seen the King, the LORD of hosts."

Then flew one of the seraphims unto me, having a live coal in his hand, which he had taken with the tongs from off the altar: And he laid it upon my mouth, and said, "Lo, this hath touched thy lips; and thine iniquity is taken away, and thy sin purged."

Also I heard the voice of the Lord, saying, "Whom shall I send, and who will go for us?"

Then said I, "Here am I; send me."

And Alex writes:

Suppose that you find a watch in the forest. If you know there is no watchmaker then the theory of evolution is a brilliant and compelling explanation for the presence of complexity without design. But suppose that you know a watchmaker exists: then surely the simplest and most compelling explanation is that the watchmaker made the watch. Any other explanation, particularly one so improbable (see extension) as evolution would seem to be preposterous and beside the point. Thus for someone who knows, really knows, that god(s) exists... creationism (see the extension) follows as a rational deduction from the premises.... If god(s) exists then evolution is almost certainly false, if not in every particular then surely in the grand claims of a undesigned nature...

But who is Alex to say how the Watchmaker makes the watch? Was he present when the foundations of the earth were laid, when the morning stars sang together? If a whole bunch of paleontological and biochemical evidence very strongly suggests that the Watchmaker uses the genetic algorithm in Her work, who are we to quibble and say that the paleontological and biochemical evidence of how the Watchmaker does business is false?

To disbelieve in evolution you need much more than to believe in a Watchmaker--much more than to have had the Vision of Isaiah (whose Seated One doesn't seem terribly concerned with issues of biological science). You need not only to believe in a Watchmaker, but also to believe in the inerrancy of Genesis and its account of creation. And there you run into big problems immediately. For example, the "where are the dinosaurs?" Ark problem.

Genesis tells us:

"And, behold, I, even I, do bring a flood of waters upon the earth, to destroy all flesh, wherein is the breath of life, from under heaven; and every thing that is in the earth shall die. But with thee will I establish my covenant; and thou shalt come into the ark, thou, and thy sons, and thy wife, and thy sons' wives with thee.

"And of every living thing of all flesh, two of every sort shalt thou bring into the ark, to keep them alive with thee; they shall be male and female. Of fowls after their kind, and of cattle after their kind, of every creeping thing of the earth after his kind, two of every sort shall come unto thee, to keep them alive.

And take thou unto thee of all food that is eaten, and thou shalt gather it to thee; and it shall be for food for thee, and for them.

Thus did Noah; according to all that God commanded him, so did he...

Genesis thus tells us--explicitly--that Noah did what God commanded: that he took two of each kind of animal into the ark with him! Including dinosaurs. (Let's not inquire how you fit even a single apatosaurus onto an ark that's only 300 cubits long.) Where are they now? This is an insuperable obstacle for a believer in biology-according-to-Genesis.

No rational and reasonable being can look upon the hipbones of a whale and the skeleton of a Tyrannosaurid, contrast them with a 2500-year-old text in which the redactor did not care enough about plausibility to notice that two of each animal could not physically fit into an Ark 300 cubits long, and conclude that there is any reason to not believe in evolution.

Posted by DeLong at 03:32 PM | Comments (0) | TrackBack

Our Central Planners at Work

Our Central Planners

Steven Pearlstein watches one of America's two most important economic central planners at work. The most important is, of course, Alan Greenspan, who sets interest rates. The second most important, however is Mark McClellan, who sets the prices at which the federal health programs pay for Medicare and Medicaid services.

It's safe to say that neither is enthusiastic about the idea of having the government decide on what the cost of capital should be, or how much health care providers should earn. Both of them are close to the "market fundamentalist" end of the spectrum of economists, and economists are at the "market fundamentalist" end of the spectrum of people.

Perhaps this is what makes both of them good central planners--that they are scared of their roles, and thus cautious and thoughtful.

Anyway, here's Steve:

Free-Market Philosophy Doesn't Always Work for Health Care: By Steven PearlsteinPostWednesday, June 8, 2005; D01: As the head of Medicare and Medicaid, Mark McClellan may be the most powerful man anywhere, in control of about 7 percent of the U.S. economy. And today was to be the deadline for him to rule on one of the most heavily lobbied issues of the past year: whether to lift an 18-month moratorium on creating new physician-owned specialty hospitals.

It's all very technical and bureaucratic, to be sure. But in deciding the issue, McClellan is being asked to choose between two competing and fundamentally irreconcilable models for the U.S. health care system. One model would rely even more on competition among self-interested providers for the business of increasingly empowered consumers to restrain prices, assure quality and spur innovation. That, after all, is how it works in nearly every other industry. The other model is based on the premise that competition in health care will always be highly imperfect, and that too much competition will have socially unacceptable consequences. This model envisions even more government regulation and stronger management by public and private health plans.

In a decision that seems only fitting for a Harvard-trained physician and MIT-trained economist, McClellan has decided to kick the can down the road, extending the moratorium until year-end.

There are about 130 physician-owned specialty hospitals, most of them focused on heart, orthopedic or other types of surgery. There is some evidence that by doing large numbers of the same kinds of operations, the tightly focused hospitals lower costs, improve medical outcomes and deliver more patient satisfaction. And, in theory, giving doctors a stake in the enterprise not only gives them greater control over their professional lives, but also offers extra incentive to innovate and improve service. General hospitals, by contrast, see the move toward specialty hospitals as nothing more than cream-skimming by self-dealing doctors that will put community hospitals into an economic death spiral. They argue that doctors referring patients to hospitals they own is an unacceptable conflict of interest. And by siphoning off the most profitable patients in the most profitable parts of medicine, the specialists rob general hospitals of the scale, scope and profit they need to operate unprofitable departments such as burn units and emergency rooms 24/7.

In truth, the arguments tend to jumble different issues that need to be pulled apart.

While specialized, high-volume units are probably a better way to provide some health services, they don't need to be owned by physicians. There are plenty of other sources of investment capital. And the experience with doctor-owned labs and MRI machines suggests that physician ownership of surgical hospitals will inflate total health care spending by increasing the number of unnecessary operations.

At the same time, community hospitals are probably right that specialty hospitals cream-skim the most profitable business. But the larger question is why the system doesn't allow hospitals to price their services so that 'hard' cases are just as profitable as 'easy' ones and emergency rooms enjoy the same operating margins as cardiac units. Eliminating cross-subsidization within hospitals would significantly reduce the amount of 'cream' available for 'skimming.'

McClellan hopes that by adjusting and refining Medicare reimbursement rates for different categories of services, and allowing general hospitals to offer 'gains-sharing' payments to doctors that could substitute for ownership of their departments, he can level the playing field enough to diffuse the specialty hospital issue. Like many conservatives, he looks to specialty hospitals, consumer-driven health savings accounts and new reimbursement schemes that pay doctors and hospitals for the quality rather than the quantity of care they provide to push the U.S. health care system toward the market model.

McClellan's crusade is likely to fail, however, if he doesn't resolve a fundamental question about the proper role of doctors in the health care system. When they are vilifying insurers and managed-care companies, physicians like to present themselves as Dr. Welby -- selfless professionals whose medical judgments would never, ever be colored by their financial interests. But in lining up behind physician ownership of specialty hospitals, the doctors essentially acknowledge that they are just like the rest of us, their behavior swayed by even modest financial incentives.

You can't have it both ways. And the way the people would have it is to pay their doctors well, put them in the central decision-making role in the health care system -- and then demand that they give up the right to invest in MRI machines or specialty hospitals or get incentive payments from drug companies.

For most Americans, providing health care ought to be different from selling soap; they won't tolerate doctors acting like commissioned salesmen and investment bankers. And if that means having less market competition and more regulation in the health care system, it seems to be a trade-off they're willing to make.

Posted by DeLong at 03:30 PM | Comments (0) | TrackBack

June 19, 2005

The Knotty Questions of Real and Relative Incomes

Fontana Labs of Unfogged calls for help!

Unfogged: In which I use the blog for (almost) scholarly purposes.

I'm teaching a class on well-being soon, and I'd like to cover some of the literature on the relationship between economic status and subjective happiness. In particular, I'm interested in a question that sometimes appears in 'Paul Krugman vs. The Corner' form: does, say, the increasing availability of cheap consumer goods make up for a decline in adjusted income? (Yes, real wages have fallen, but TVs are so much cheaper, etc.) If you know good (accessible) literature on this-- or on related issues-- and you give me references, I'll be grateful.

Hmmmm... Well, first of all, the "adjustments" to nominal wages and incomes in order to turn them into real wages and incomes are supposed to already take this into account: real wages are your nominal wages divided by the Consumer Price Index, and the CPI is supposed to be the price of purchasing a representative constant basket of commodities (a basket that they do change over time: "constant" is in conflict with "representative").

Whether the CPI actually does this or not is a disputed issue. And then there are all the other issues revolving around relative incomes...

If I were going to cover this, I would make people read:

1. Something of the Boskin Commission on the CPI's report: http://www.ssa.gov/history/reports/boskinrpt.html
2. A section of The Road to Wigan Pier where George Orwell talks about the "cheap luxuries" created by modern technologies and their effects on perceptions of well being.... My copy of Wigan Pier is at the office (if I haven't loaned it out, that is)... Ah, here we are: chapter 5: http://etext.library.adelaide.edu.au/o/orwell/george/o79r/chapter5.html
3. Something by Amartya Sen on commodities vs. capabilities... perhaps from Development as Freedom? http://www.amazon.com/exec/obidos/asin/0385720270/
4. Tibor Scitovsky's old The Joyless Economy: http://www.amazon.com/exec/obidos/asin/0195073479/.

---

Here are some of Orwell's paragraphs:

Life is still fairly normal, more normal than one really has the right to expect. Families are impoverished, but the family-system has not broken up. The people are in effect living a reduced version of their former lives. Instead of raging against their destiny they have made things tolerable by lowering their standards.

But they don’t necessarily lower their standards by cutting I out luxuries and concentrating on necessities... in a decade of unparalleled depression, the consumption of all cheap luxuries has in-creased. The two things that have probably made the greatest difference of all are the movies and the mass-production of cheap smart clothes since the war. The youth who leaves school at fourteen and gets a blind-alley job is out of work at twenty, probably for life; but for two pounds ten on the hire-purchase he can buy himself a suit which, for a little while and at a little distance, looks as though it had been tailored in Savile Row. The girl can look like a fashion plate at an even lower price. You may have three halfpence in your pocket and not a prospect in the world, and only the corner of a leaky bedroom to go home to; but in your new clothes you can stand on the street corner, indulging in a private daydream of yourself as dark Gable or Greta Garbo, which compensates you for a great deal. And even at home there is generally a cup of tea going....

[A] luxury is nowadays almost always cheaper than a necessity. One pair of plain solid shoes costs as much as two ultra-smart pairs. For the price of one square meal you can get two pounds of cheap sweets. You can’t get much meat for threepence, but you can get a lot of fish-and-chips. Milk costs threepence a pint and even ‘mild’ beer costs fourpence, but aspirins are seven a penny and you can wring forty cups of tea out of a quarter-pound packet.... And then there is the queer spectacle of modern electrical science showering miracles upon people with empty bellies. You may shiver all night for lack of bedclothes, but in the morning you can go to the public library and read the news that has been telegraphed for your benefit from San Francisco and Singapore. Twenty million people are underfed but literally everyone in England has access to a radio. What we have lost in food we have gained in electricity. Whole sections of the working class who have been plundered of all they really need are being compensated, in part, by cheap luxuries which mitigate the surface of life.

Do you consider all this desirable? No, I don’t. But it may be that the psychological adjustment which the working class are visibly making is the best they could make in the circumstances.... The alternative would be... agonies of despair... insurrections which... could only lead to futile massacres and a regime of savage repression.

Of course the post-war development of cheap luxuries has been a very fortunate thing for our rulers. It is quite likely that fish-and-chips, art-silk stockings, tinned salmon, cut-price chocolate (five two-ounce bars for sixpence), the movies, the radio, strong tea, and the Football Pools have between them averted revolution. Therefore we are some-times told that the whole thing is an astute manoeuvre by the governing class—a sort of ‘bread and circuses’ business—to hold the unemployed down. What I have seen of our governing class does not convince me that they have that much intelligence. The thing has happened, but by an un-conscious process—the quite natural interaction between the manufacturer’s need for a market and the need of half-starved people for cheap palliatives...

Posted by DeLong at 10:48 PM | Comments (0) | TrackBack

Etext of George Orwell's "The Road to Wigan Pier"

Nice to see: The Road to Wigan Pier - George Orwell

Posted by DeLong at 10:46 PM | Comments (0) | TrackBack

The State of the Volunteer Army

The right-wing Tacitus writes:

t a c i t u s || Battle fatigue.: I just spent an evening with a friend recently back from Iraq. Her stories were depressing enough -- she was running an aid station near Baqubah -- and now that she's back in the US, she's getting to follow up with many of the soldiers whose lives she helped save. They're without legs, or arms, or significant portions of skull, for the most part. Another peculiar trauma is one that is disproportionately affecting officers -- I forget the specific name -- in which a blast basically shakes your head so violently you suffer brain damage: shaken baby syndrome in adults. Horrifying all around. That's war, and that's what war does.

As troubling are the decisions taken by people like her to leave the Army as soon as possible. She told me when her unit is going back, and it's ridiculously soon. These young people in their twenties are volunteers, well educated, and tired of rotating in and out of war. My friend is lucky -- she's only been to war once. I know others who have been to war twice, and probably a third time before the year is out. It's not that these people have no sense of duty: to the contrary. But they don't see the sense in the open-ended mission, plagued by strategic incoherence, and chronically undermanned. It's impossible to blame them. "I've read about the recruiting problems," she said, "And I think, no joke."

The volunteer soldiers have proven themselves fine warriors. But the volunteer Army has failed. This is its first war of any meaningful length, and its lessons are clear: it cannot sustain this effort, through no fault of its own, because, in the end, its discrete parts are rational actors. It is impossible to externally incentivize war. The choice is therefore between that Army's continuance and a draft. If the choice is for its continuance, then the subsequent choice will probably be between losing Iraq and losing the Army. Losing Iraq will be a strategic disaster for the United States. But losing the Army would be the end.

I think Tacitus is wrong.

I would not say that the volunteer army has failed. The volunteer army has done fine in many of its missions. We have only run into trouble when the Bushies took America's volunteer army--the finest high-tech soldiers in the world--and deploy them as military police in a country where they do not speak the language on an open-ended mission with only one-third as many forces as they need.

The volunteer army has done fine at limited-duration war-fighting missions where its high-tech strengths are useful. The volunteer army has done fine at low-risk peace-keeping missions in the Balkans and elsewhere. The volunteer army would do fine at what ought to be its principal task: holding the line while the rest of us mobilize when something truly serious happens.

It's not the volunteer army that has failed. It's the Bush administration.

Posted by DeLong at 10:43 PM | Comments (0) | TrackBack

How Far Ahead Does the Stock Market Look? Five Years

The young and brilliant Stefano della Vigna (whom I never see because he's a fifth-floor person and I'm a sixth floor person) has what looks to me like a serious finance research hit--extra bases and RBIs:

Looking Long Term? Get Your Glasses - New York Times: [F]ew investors can focus on events more than five years ahead, even when those events are very predictable and almost certainly will have a big impact on a company's earnings. The study, 'Attention, Demographics and the Stock Market,' was conducted by Stefano della Vigna, an assistant professor of economics at the University of California at Berkeley, and Joshua M. Pollet, an assistant professor of finance at the University of Illinois at Urbana-Champaign. A copy is at http://www.nber.org/papers/w11211

The study is attracting much interest because researchers for many years couldn't figure out how to disentangle the attention span of investors from other factors that could also explain their behaviors. How, for example, to interpret why investors are unimpressed with a company's announcement of a new research and development effort that it says will lead to higher profits in 10 years?.... Della Vigna and Professor Pollet solved this problem by focusing on industries whose profitability depends heavily on the age distribution of the population. Bicycle makers are a good example... people in their late 30's or early 40's bought bicycles at nearly twice the rate of the overall population, in large part because they were buying them for their children. By contrast, consumers under 27 or over 55 bought bicycles at rates far below the national average.

The professors focused on two dozen age-sensitive industries - from toy and beer makers to nursing home operators and funeral homes - from January 1935 through December 2003. For each industry, they built a model of the year-by-year changes in demand caused by shifts in the age distribution of the population. On average, they found that when their model predicted a one percentage point increase in demand for an industry's goods or services, its profits that year were 5 to 10 percent higher.

If investors conformed to the completely rational, fully informed ideal described in an economics textbook, they would immediately take into account the long-term effects of a changing population. The stock prices of age-sensitive companies would thus be bid up or down soon after major changes in the country's birth rate, for example, even if the changes' effect on companies' earnings was not felt for several decades.

The professors found, however, that virtually no investors conformed to this ideal. Instead, the study found that the price of a stock began to change only about five years before shifts in age distribution started to have big effects on that company's earnings.... [O]ver the 68 years studied, competition did not eliminate the extra profitability in age-sensitive industries. One reason, the professors suspect, is the entry barriers to at least some of them.

Posted by DeLong at 10:41 PM | Comments (0) | TrackBack

Harry Turtledove Has Another Fan

The Synecdochic Professor writes:

The Synecdochic Prof: Pleasure and alternate history: Turtledove has some interesting ideas about the other ways that North American history could have developed. Turtledove is not really a great stylist... But I still keep reading... there's something compelling about the way that Turtledove has used this alternate universe to comment on the relationships among Americans that interest me: the history of race and class, for instance; the impact of organized labor and the lack of a profound presence of socialism among the leading political parties; and the relationship of national politics to the international aspirations of the U.S.

Moreover, Turtledove is a realist at heart. He knows that his readers want the dramatic turns of his alternate history (the book I'm reading know has a Hitleresque Confederate president leading his country to war), but he's really more interested in the quotidian: how small changes in technology affect daily life, the slow evolution of spoken language; the nuanced stratification of status in supposedly egalitarian societies. I would have a hard time recommending this to someone who wasn't (as I am) a certain kind of history geek, but I think I'll slogging through the final three books (3 books x 600 pages means 1800 more to go) of this...

Posted by DeLong at 10:39 PM | Comments (0) | TrackBack

Sanam Vakil in the FT on Iran

The Belgravia Dipatch writes:

THE BELGRAVIA DISPATCH: Vakil Trumps Pletka: Underwhelmed by Danielle Pletka's boiler-plate, cliched op-ed piece in today's NYT? Have no fear! The FT--which incidentally, and for my money, produces significantly higher quality opinion journalism in its pages, day in; day out, than the New York Times--has a much more, er, nuanced Iran analysis from Sanam Vakil...:

The emergence of a reformist movement... forced the clerical elite... to acknowledge the link between demography and democracy. With 70 per cent of the population under the age of 30 and with no memory of the revolution or its nationalising ideology, the government recognised that it was sitting on a ticking time bomb. Mr Rafsanjani's re-emergence signifies an essential and often overlooked change... a weakening in the position of the rahbar or supreme leader.... Ayatollah Ali Khamenei, Iran's supreme leader, did not want Mr Rafsanjani to re-enter the political scene....

As a born-again pragmatist, Mr Rafsanjani has abandoned his revolutionary ideals for national-interest oriented objectives. Potential rapprochement with the US - an anathema for many traditional revolutionary adherents... is an idea Mr Rafsanjani has flirted with for years and is now one of the main pillars of his campaign. Increased economic liberalisation is another policy issue that reveals the ideological divide between Mr Rafsanjani and the clerical apparatchiks. Both of these issues are not only on his agenda but critical for gaining mass popular support.

It is not just in opinion journalism that the Financial Times outstrips the New York Times: the first is simply a much, much better newspaper.

Posted by DeLong at 10:37 PM | Comments (0) | TrackBack

Michael Smith of the "Sunday Times" Chats Online

Michael Smith of the "Sunday Times" chats online about the Downing Street Memos. He is particularly hard on those like Michael Kinsley who claim that the head of M.I.6 was simply reading the newspapers and listening to "the usual freelance chatterboxes," and on those like Mark Memmott who claim that saying that intelligence was "fixed" meant merely that it was "'bolted on' rather than altered." Smith finds the "self-serving nonsense from people who should know better in some, and it is now only some, of the U.S. media" to be "frankly depressing":

The Downing Street Memo: Michael Smith, Reporter, Sunday Times of London, Thursday, June 16, 2005:

Two top-secret British documents that were leaked to the press recently suggest that the Bush administration "fixed" intelligence about Iraq and that actions at the United Nations were designed to give legal cover to British Prime Minister Tony Blair before an invasion to oust Saddam Hussein .

Michael Smith, a reporter for the Sunday Times of London, has led the coverage, starting with his report of the so-called Downing Street Memo on May 1.

Smith was online Thursday, June 16, at 10 a.m. ET to discuss the Downing Street Memo and his reporting.

Michael Smith: I think it is clear from the documents themselves that the whole [Iraq] venture was widely viewed [in Britain] as being highly dubious with no certainty of what would come out of it. The administration ensured that it only got the answers it wanted... ignored the advice they were getting on the likely cost or managed to filter it out with this highly pressurized regime of come up with the right answers, or we will be on your back...

Michael Smith: ...there was a feeling of "well we said that way back when."... "We have said this before, if you the reader didn't listen well what can we do", seemed to be the attitude.... The attitude they have taken is just flat wrong.... It is one thing for the New York Times or The Washington Post to say that we were being told that the intelligence was being fixed by sources inside the CIA or Pentagon or the NSC and quite another to have documentary confirmation in the form of the minutes of a key meeting with the Prime Minister's office. Think of it this way, all the key players were there. This was the equivalent of an NSC meeting.... They say the evidence against Saddam Hussein is thin, the Brits think regime change is illegal under international law so we are going to have to go to the U.N. to get an ultimatum, not as a way of averting war but as an excuse to make the war legal, and oh by the way we aren't preparing for what happens after and no-one has the faintest idea what Iraq will be like after a war. Not reportable, are you kidding me?...

Michael Smith: I personally believe there are grounds for [impeachment of Bush] but not... in the memos we've seen.... If the Brits said that there weren't enough preparations in place for what comes after, what was the reaction back in Washington? Who was it who overruled the arguments coming out of London?...

Michael Smith: I think Blair will go.... I personally think Bush is much more at risk.... There is no doubt in my mind that the administration lied and distorted the truth, one Congress begins to realise the scale of it, Bush could be in serious trouble....

Michael Smith: [T]here are other facts you still don't know and the media should be using these public documents as a base from which to find them out because it is those facts that will really damage Bush....

Michael Smith: [T]hat meeting [is the equivalent of] an NSC meeting. That is its significance, that is its equivalent. It is highly damning and some of the self-serving nonsense from people who should know better in some, and it is now only some, of the U.S. media is frankly depressing....

Michael Smith: There are number of people asking about fixed and its meaning. This is a real joke. I do not know anyone in the UK who took it to mean anything other than fixed as in fixed a race, fixed an election, fixed the intelligence. If you fix something, you make it the way you want it.... [A]s for the reports that said this was one British official. Pleeeaaassee! This was the head of MI6. How much authority do you want the man to have? He has just been to Washington, he has just talked to George Tenet. He said the intelligence and facts were being fixed... cooked to match what the administration wanted it to say to justify invading Iraq....

Michael Smith: [L]ook I am not some mealy-mouthed left-wing apologist. I vote Conservative in elections for parliament and Liberal-Democrat (the term Liberal does not have the same connotations over here) in the local elections. I actually backed the idea of the war. I have just finished a book on an American military unit which is very admiring of that unit. I cant go into details as it is not published until March. I am just a reporter doing my job.... The information in the documents is damning enough. I don't believe that Republicans want US soldiers to die for no good cause in an insurgency that could have been avoided anymore than Democrats do. This isn't about politics. It's about common sense and honesty....

Michael Smith: Thank you for giving me the chance to answer this question. I am very pro-defence you're right. All right-thinking people should be. Saddam Hussein might not have been the threat he was painted but there are plenty out there who would be given the chance.... Bin Laden is a legitimate target, Iraq, even an Iraq led by Saddam Hussein, was not. This was an illegal war but the most criminal part of it all was the lazy, arrogant way they went into it. (British tanks crossing the start lines, in a war being fought about WMD, did not even have any chemical or biological filters fitted because the Ministry of Defence failed to buy them in time.) Just look at all those memos again.... Just look at the lack of preparation, look how right all those experts who said it would all turn out badly were and then wonder how many British and American soldiers died because those politicians were too arrogant to take the advice of the experts...

Posted by DeLong at 10:36 PM | Comments (0) | TrackBack

Oil Shocks

Oil Shock

Oil prices on their way back up:

WSJ.com - Crude Prices Hit Record Highs On Fears of Low Gas Supplies: 'This market is being driven by fear of supply shortages in the future, and fear of increased demand outstripping supply in the fourth quarter,' said Anthony Lerner, manager of energy derivatives for Arc Oil LLC, a Stamford, Conn., brokerage firm. Hedge funds led buying in crude and refined products, traders said, with many betting oil prices would keep climbing toward $60 a barrel. 'This is really being driven by hedge-fund money,' Mr. Lerner said. 'We're seeing new hedge-fund money coming in every day. Energy is the hot market and hedge funds are allocating money for it.'

Benchmark light, sweet crude oil prices for July settled at $58.47 a barrel, up $1.89 on the New York Mercantile Exchange, topping the April 1 record-high settlement of $57.27 a barrel. At its intraday high, crude touched $58.60, also beating the all-time record high. Crude's back months traded at a hefty premium to July, with the December contract hitting the highest price ever registered for a Nymex oil contract at $60.40 a barrel.... Oil prices have gained nearly $5 a barrel this week, buttressed by rising gasoline and heating-oil prices. U.S. gasoline inventories, while adequate, have fallen in the past two weeks, while distillate stocks, which include heating oil and diesel fuel, remain at below-average levels.

Posted by DeLong at 10:34 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Fools? (Special Cheney-McClellan "Last Throe" Edition)

From the Carpetbagger Report:

: When Scott McClellan can't defend Dick Cheney's comments, you know the Bush gang is having trouble.

Earlier this week, Cheney told CNN's Larry King that the insurgency in Iraq is 'in the last throes,' and insisted that violence in the country 'will clearly decline.' It's prompted some to suggest that the vice president is, unfortunately, delusional.

At yesterday's press briefing, ABC correspondent Terry Moran asked McClellan to explain what Cheney meant and why the nation should believe him. It didn't go well.

Q Scott, is the insurgency in Iraq in its 'last throes'?

McClellan: Terry, you have a desperate group of terrorists in Iraq that are doing everything they can to try to derail the transition to democracy. The Iraqi people have made it clear that they want a free and democratic and peaceful future. And that's why we're doing everything we can, along with other countries, to support the Iraqi people as they move forward%u2026.

Q But the insurgency is in its last throes?

McClellan: The Vice President talked about that the other day %u2014 you have a desperate group of terrorists who recognize how high the stakes are in Iraq. A free Iraq will be a significant blow to their ambitions.

Q But they're killing more Americans, they're killing more Iraqis. That's the last throes?

McClellan: Innocent %u2014 I say innocent civilians. And it doesn't take a lot of people to cause mass damage when you're willing to strap a bomb onto yourself, get in a car and go and attack innocent civilians. That's the kind of people that we're dealing with. That's what I say when we're talking about a determined enemy.

Q Right. What is the evidence that the insurgency is in its last throes?

McClellan: I think I just explained to you the desperation of terrorists and their tactics.

Q What's the evidence on the ground that it's being extinguished?

McClellan: Terry, we're making great progress to defeat the terrorist and regime elements. You're seeing Iraqis now playing more of a role in addressing the security threats that they face. They're working side by side with our coalition forces. They're working on their own. There are a lot of special forces in Iraq that are taking the battle to the enemy in Iraq. And so this is a period when they are in a desperate mode.

Q Well, I'm just wondering what the metric is for measuring the defeat of the insurgency.

McClellan: Well, you can go back and look at the Vice President's remarks. I think he talked about it.

Q Yes. Is there any idea how long a 'last throe' lasts for?

McClellan: Go ahead, Steve...

(Via .)

Posted by DeLong at 10:32 PM | Comments (0) | TrackBack

The Current-Account Deficit Continues to Widen

Not news, but still worth noting:

WSJ.com - U.S. Current-Account Deficit Hit $195 Billion in 1st Quarter: The Commerce Department said the current-account deficit totaled $195.1 billion in the January through March period, up from a revised $188.4 billion in the fourth quarter of 2004. The shortfall was equal to 6.4% of U.S. gross domestic product. 'Barring a growth miracle outside the U.S., or a slump in U.S. demand that does not spill over to the rest of the world (neither of which seems very likely in the near term), the U.S. current account deficit seems destined to continue to widen,' Joshua Shapiro, chief U.S. economist at MFR Inc.

Posted by DeLong at 10:30 PM | Comments (0) | TrackBack

Hog Bay Software Is Happy

It writes, about its excellent Hog Bay Notebook program:

Macworld, Four Stars: We've just had our first (I think) mention in Macworld magazine. I was just wandering through the bookstore checking out the latest issues (I mean reading my own copy that I subscribe too) when I saw an article on notebooks and outliners. I quickly browsed the article and saw the usual suspects (OmniOutliner, Circus Ponies, and NoteTaker) and grrrg... again no Hog Bay Notebook.

But yeah! I was wrong...

Hog Bay Notebook was listed in the article right along with the big boys, but with the major heading 'Notebook' since 'Hog Bay Notebook' is to hard to fit anywhere. Maybe it's been mentioned all along and I've just been missing it. Hopefully the next version 'Forest' will earn the elusive fifth star and have a more distinctive title so I recognize it when I see it.

Thanks Macworld, we will eat out tonight!

Posted by DeLong at 10:29 PM | Comments (0) | TrackBack

Offshoring: Small or Large?

These numbers look pretty large to me--not in terms of effects on the unemployment rate, but in terms of the pace of structural change and the possible effect on wages:

FT.com / World - Anxiety over offshoring: By Peter Marsh: Debate about "Coffshoring" of service jobs to low-cost countries has reached fever pitch in the past few years.... A report from the McKinsey Global Institute... says the fears are overblown. Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says. On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for.

"A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies," says Diana Farrell, director of the institute. The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend....

The degree to which individual jobs can be offshored depends on how "customer-facing" they are. In retailing... 3 per cent... in engineering and finance... 52 per cent and 31 per cent respectively. On the supply side, there is no doubt about the large number of potentially suitable candidates for service jobs done "remotely" in low-wage nations... 33m young professionals with degrees and up to seven years' work experience in fields such as engineering, finance and information technology in the 28 countries... compare[d] with just 15m in the rich countries....

The study says that in service support jobs covering fields such as administration only 2 per cent of all the notionally qualified people in the emerging economies will find work in multinationals in 2008. In analyst jobs and finance, the comparable figures are 3 per cent and 5 per cent respectively. However, the proportion is much higher in engineering, where it reaches 63 per cent.

---

McKinsey & Company - THE EMERGING GLOBAL MARKET: PART I %u2014 The Demand for Offshore Talent in Services, June 2005: Introduction: The background for the report examines the current debate on offshoring and the context for MGI's latest research effort....

Synthesis of Findings - Demand for Offshore Talent and Sector Cases: The number of service jobs offshored will remain modest compared to total employment in service activities in developed economies over the medium term. The gap between the current degree and the potential level is largely explained by internal barriers, most notably operational issues, management attitude to offshoring, and structural issues. External regulatory barriers play a small role overall. The potential for global resourcing varies depending on the industry.

The Demand for Offshore Talent in Automotive Services: The degree of adoption of offshoring in the services portion of the auto sector is low, with approximately 0.06 percent of developed world employment in the sector currently performed in low-wage countries. Although the potential for global resourcing in the sector is 11 percent, only 0.2 percent of developed world employment is projected to be performed in low-wage countries by 2008.

The Demand for Offshore Talent in Health Care: Overall, about 20,000 jobs in the health care sector will go offshore in 2008, representing 0.07 percent of developed world health care employment. The potential demand for remote labor in the sector, although low in percentage terms (8 percent), is still over 5 million jobs because of the large number of people employed in the sector.

The Demand for Offshore Talent in Insurance: Global resourcing in the insurance sector is still in its early stages. In contrast to a maximum current potential of 2.3 million jobs (19 percent of industry employment in 2008) that could be performed remotely, more than 20,000 jobs are performed offshore in low-wage countries. Offshoring will grow at 14 percent annually if the current trend continues, reaching 38,000 employees in 2008 (equal to 0.6 percent of industry employment in high-wage countries).

The Demand for Offshore Talent in IT Services: MGI projects total employment in the sector will reach 6.9 million in 2008, and 770,000 jobs (13 percent of sector employment in developed countries) will be performed offshore in low-wage countries, compared to 371,000 in 2003. In contrast, a maximum of 44 percent of all jobs in the sector could be potentially performed remotely, equivalent to 3 million employees.

The Demand for Offshore Talent in Packaged Software: The software sector will continue to see growth in offshoring, with an estimated 116,000 jobs (18 percent of sector employment in developed countries) projected to be performed by employees in low-wage countries by 2008, compared to 44,000 in 2003. Nearly half (49 percent) of the estimated 690,000 packaged software jobs in 2008 could be potentially performed remotely, the highest of the sectors MGI studied.

The Demand for Offshore Talent in Pharma Services: More than 10,000 employees in the pharma sector are globally resourced from low-wage locations today. This is expected to double to 21,000 employees in 2008 in response to declining profit margins and rising cost pressure in the sector. The potential for globally resourced labor in the sector is as high as 13 percent, indicating that 238,000 jobs could be performed remotely in 2008.

The Demand for Offshore Talent in Retail: The pace of adoption of offshoring in the large retail sector is projected to be slow relative to other industries, representing just 0.1 percent of retail employment in high-wage countries by 2008. Of the projected 156 million jobs in the retail sector in 2008, however, 3.2 percent of total sector employment in developed countries could be performed remotely, equivalent to 4.9 million employees.

The Demand for Offshore Talent in Retail Banking: Retail banking was one of the earliest sectors to adopt the global resourcing of services, and offshoring is projected to reach 2.4 percent of total sector employment in developed countries by 2008. The theoretical maximum for globally resourced labor in retail banking is 25 percent, translating into approximately 3.1 million jobs in 2008.

Posted by DeLong at 10:27 PM | Comments (0) | TrackBack

Christiano, Eichenbaum, and Evans

Mark Thoma notes the very nice Christiano, Eichenbaum, and Evans paper in the February Journal of Political Economy:

Economist's View: The Dynamic Adjustment to Monetary Shocks: A paper in the February 2005 issue of the Journal of Political Economy by Lawrence J. Christiano and Martin Eichenbaum of Northwestern University, the NBER, and Federal Reserve Bank of Chicago, and Charles L. Evans of the Federal Reserve Bank of Chicago entitled "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy" provides evidence on this issue:

Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, JPE: This paper seeks to understand the observed inertial behavior of inflation and persistence in aggregate quantities. To this end, we formulate and estimate a dynamic, general equilibrium model that incorporates staggered wage and price contracts. The model does a very good job of accounting quantitatively for the estimated response of the U.S. economy to a policy shock. Specifically, the model generates an inertial response in inflation and a persistent, hump-shaped response in output after a policy shock. In addition, the model generates hump-shaped responses in investment, consumption, employment, profits, and productivity, as well as a small response in the real wage. Also, the interest rate and the money growth rate move persistently in opposite directions after a monetary policy shock. A key finding of the analysis is that stickiness in nominal wages is crucial for the model's performance. Stickiness in prices plays a relatively small role.

The only problem I find with the paper--and it's not one that one can fix at all easily or well--is that it is not completely clear what a "monetary shock" really is.

Posted by DeLong at 10:26 PM | Comments (0) | TrackBack

Yes, Kevin, the Bush Family Are Scum

Kevin Drum finally realizes that the Bush family are scum:

The Washington Monthly: JEB BUSH'S CHRISTIAN CHARITY.... I wasn't going to blog about this, but I can't myself. This is truly beyond belief:

Gov. Jeb Bush said Friday that a prosecutor has agreed to investigate why Terri Schiavo collapsed 15 years ago, citing an alleged time gap between when her husband found her and when he called 911.

.....In a letter faxed to Pinellas-Pasco County State Attorney Bernie McCabe, the governor said Michael Schiavo testified in a 1992 medical malpractice trial that he found his wife collapsed at 5 a.m. on Feb. 25, 1990, and he said in a 2003 television interview that he found her about 4:30 a.m. He called 911 at 5:40 a.m.

'Between 40 and 70 minutes elapsed before the call was made, and I am aware of no explanation for the delay,' Bush wrote. 'In light of this new information, I urge you to take a fresh look at this case without any preconceptions as to the outcome.'The Bush children have always been distinguished by a fiery unwillingness to back down combined with an almost bestial pursuit of revenge against anyone who has ever crossed them. They don't want to beat their opponents, they want to destroy them.

This, though, simply beggars the imagination. What kind of human being would keep a vendetta like this alive at this point?

A member of the Bush family, Kevin.

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

Germany's Revealed Comparative Advantage in High-End Front-Loading Washing Machines

Louis Uchitelle reports:

Globalization: It's Not Just Wages - New York Times: Who is the biggest exporter of German-made washing machines to the United States?.... Whirlpool... pays high-wage workers to produce expensive front-loading washing machines.... Never mind the higher labor cost - $32 an hour, including benefits, versus $23 in the United States. The necessary technology existed in Germany when Whirlpool decided to sell front-loading washers to Americans. So did a trained work force and a Whirlpool factory already making a European version of the front loader. 'We were able to expand the capacity in Germany at a very incremental investment,' said Jeff M. Fettig, Whirlpool's chairman and chief executive. 'It was the fastest way to the American market.'

Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries. But the issue is more complex... a relatively new form of globalization that emphasizes first-rate centers of production and design in various countries - including the United States. Whirlpool's global network... microwave ovens engineered in Sweden and made in China for American consumers; stoves designed in America and made in Tulsa, Okla., for American consumers; refrigerators assembled in Brazil and exported to Europe; and top-loading washers made at a sprawling factory in Clyde, Ohio, for American consumers, although some are sold in Mexico....

At the moment, the job growth and the expansion are mainly abroad. As its turns out, more than 40 percent of the nation's imports are from the overseas subsidiaries of American companies.... The 'global production footprints,' as Ms. Farrell calls them, draw on a growing network of first-rate suppliers in Mexico, China and elsewhere that allow manufacturers to go beyond mere assembly overseas into complex production. And the investment, once made, becomes an ancho... its factory in Schorndorf, Germany, which Whirlpool acquired in 1991 with the purchase of the appliance operations of Philips N.V. for more than $1 billion. Almost two million of the front loaders have been sold in the United States since 2001, at $1,200 apiece....

Whirlpool's executives take issue with analysts who declare that low foreign wages... will keep the global production networks mobile.... [T]he manpower required to make its appliances is declining.... One hour of labor, for example, goes into each of the 20,000 top-loaders coming off the line daily at Clyde, down from 2.5 hours five years ago.'We may pay $23 an hour in Clyde, including benefits, versus $3 in Mexico versus $1 in China,' Mr. Fettig said. 'But for one hour of labor, the difference won't begin to cover the shipping costs, let alone the investment it would take to build a new factory in Mexico or a new factory in China.'

The Clyde factory, which employs 2,000 people, is billed as a jewel in Whirlpool's production network - an efficient, partly automated operation whose experienced workers possess a 'tribal knowledge' of their product that pays off in quality and cost saving. But if the Clyde factory did not already exist, Mr. Fettig would not put it there. 'I'd probably put it in Mexico,' he said....

In the last 15 years, suppliers have set up shop in growing numbers near the new production centers in China, India, Southeast Asia and Latin America. Without their presence, Whirlpool says, it would not have been able to concentrate the manufacture of microwave ovens in southern China. 'It is much more difficult to operate outside of an industrial country without that supplier base,' said Mark Brown, senior vice president at Whirlpool for global sourcing. The concentration of suppliers in northern Mexico helps explain why Whirlpool has decided to produce a less-costly front-loading washing machine at its existing manufacturing complex in Monterrey. The high-end, $1,200 model will continue to come from Schorndorf. The smaller Mexican front loaders, on the other hand, will be for the majority of American consumers and will be priced several hundred dollars less, too low to absorb the $50 in freight to cross the Atlantic, the company says.... Because of the shipping cost, we knew we had to make them in Mexico or America, and since the suppliers were already in Mexico, we thought we might as well go there.... Mexican engineers, foremen and supervisors have gone to the German plant for 18 months of training....

Whirlpool differentiate[s] between skills that can be taught in a few weeks or months, and those that take longer to acquire. The harder-to-acquire skills anchor the one last Whirlpool factory in Benton Harbor, where the company got its start in 1911 and still has its headquarters... kept open a parts factory that makes the steel gears that are the heart of the washing machine's agitation mechanism. The machining to make the gears, and the nickel plating to prevent corrosion require a skill level not easily duplicated. 'You can find lots of machine shops and some plating operations, but you rarely find the two together,' Jim F. Spicer, the plant manager, said. 'And when you do find them together, you almost never find the volumes that we require.'...

Posted by DeLong at 10:22 PM | Comments (0) | TrackBack

Reasons to Be Cheerful

Currently at the top of the pile:

Charles Kenny (2005), "Why Are We Worried About Income? Nearly Everything that Matters is Converging," World Development 33:1, pp. 1–19.

Summary. — Convergence of national GDP/capita numbers is a common, but narrow, measure of global success or failure in development. This paper takes a broader range of quality of life variables covering health, education, rights and infrastructure and examines if they are converging across countries. It finds that these measures are converging as a rule and (where we have data) that they have been converging for some time. The paper turns to a discussion of what might be driving convergence in quality of life even as incomes diverge, and what this might mean for the donor community.

Posted by DeLong at 10:21 PM | Comments (0) | TrackBack

Notes: URAP Project 2: Fall 2005: Analyzing Marty Weitzman, "A Unified Bayesian Theory of Equity 'Puzzles'"

Time to start setting out potential projects for undergraduate research assistants for the forthcoming fall...

Here's another possibility: one that requires somebody with enough statistics to not be scared of moment-generating functions, enough math to not be scared of stochastic Taylor expansions, and enough programming skills to run a number of Monte Carlo simulations:

Over the past century in the United States, the equity premium has been on average 5% per year. Over the past century in the United States, the standard deviation of a diversified portfolio of equities has--accounting for apparent mean reversion--compounded at a rate corresponding to about a 10% standard deviation per year.

This means that if you buy-and-hold stocks for sixteen years, you have a "t statistic" of 2: under a normal distribution, your portfolio will outperform the alternative risk-free portfolio 97.5% of the time. If you buy-and-hold stocks for thirty-six years, you have a "t-statistic" of 3: 99.5% of the time your portfolio will outperform the risk-free portfolio.

This is the asset market version of the equity-premium puzzle. Why don't agents--at least agents with secure other forms of wealth that they can pledge--borrow at nearly the risk-free rate and invest in stocks? Why don't they do this on a large enough scale to drive the risk-free rate up and the return on equities (and the equity premium) down, and so avoid the paradox of a market where it looks like there is a thirty-six-year portfolio strategy that earns you a sixfold profit on your original long position (and a sixty-fold profit if you were able to borrow 90% of your original investment)?

Now comes Marty Weitzman (2005) with a very impressive and well-worked out paper on the importance of taking into account our ignorance of the structure of the economy. His is the observation that investors do not know but have to estimate the parameters of the economy's structure, and that under Constant Relative Risk Aversion utility this structural uncertainty adds fat tails to the subjective return distribution and could easily account for the equity premium and for related puzzles.¹

• Is this a reformulation of Rietz (1988)--and thus subject to the same critiques?
• Is this a reformulation of Geweke (2001)--and thus primarily a statement about the limited usefulness of CRRA utility (with its asymptote at Wealth = 0) in addressing economic questions?
• Or is this a statement about the way the world works--a successful assertion that our ignorance about the true structure of the economy is such that rational investors with reasonable preferences are right to be at least somewhat shy of equities?

Rietz's (1988) answer to the equity premium puzzle was this: a long, fat lower tail to the return distribution. A small probability of very bad things happening to stock returns could support both (a) a relatively small sample variance of returns, and (b) rational aversion to large-scale stock ownership large enough to produce the observed equity premium. The question that Rietz was unable to answer was: "What exactly are these very bad things?" Remember that the equity premium is a premium relative to the return on relatively short-period U.S. Treasury securities. Any macroeconomic factor to drive the equity premium must therefore be a factor that leaves the real value and real return on short-period U.S. Treasury securities unaffected. But almost all true macroeconomic disasters that could halve or do worse to the real value of equities are likely to produce at the very least rapid and substantial inflation, if not confiscatory taxes on or outright repudiation of government bonds.

Geweke's (2001) observation was that the CRRA utility function is an extraordinarily fragile tool when confronted with alternative distributions than the Gaussian Normal. We use CRRA utility because it buys us extraordinary analytical simplicity at the price of accepting:

lim(x->0) U(x)=-∞, U'(x)=+∞

but we are not thereby committed to riding the taxi of this vertical asymptote at Wealth=0 to its final destination. The CRRA implication that investors limit the size of their leveraged equity positions because bankruptcy is seen as infinitely painful does not appear to correspond with our world.

The third possibility is that Weitzman (2005) really is a profoundly powerful statement about the world: that structural uncertainty, even conditional on the requirement that whatever bad news comes does not materially affect the real rate of return on relatively short-term U.S. Treasury securities, combined with plausible preferences and risk aversion would lead us to expect a considerable equity premium.

It is pretty clear to me that Weitzman (2005) is saying considerably more than Rietz (1988)--that it is either the second or the third. It's clear to me that it's both, but I'm not sure of the weights. I'm not at all sure whether it's primarily the second (in which it is a very useful illustration of the fragility of CRRA-based models, and thus in most part, as Daniel Davies puts it, "a fact about applied math"), or primarily the third (in which case it is the solution to a puzzle that has stood effectively unanswered for a generation).

---

¹Note: Weitzman's paper does not seem to me to deal with leverage properly. The r_e in the Consumption CAPM isn't the return on equities, but a return on a portfolio that is a claim on output as a whole--say, 60% labor income, 10% real estate, 20% bonds, 20% stocks... an equity premium of 2-3% per year instead of 5-6% per year...

How fat do the tails have to get to generate a large equity premium for preferences that do not regard bankruptcy as infinitely painful? I need somebody to run some simulations and calculate a bunch of Taylor moment expansions for different distributions

---

John Geweke (2001), "A Note on Some Limitations of CRRA Utility," Economics Letters 71, 341-345.

Rajnish Mehra and Edward Prescott (2003), "The Equity Premium in Retrospect," chapter 14 in Constantinides, Harris, and Stulz, eds., Handbook of the Economics of Finance (Amsterdam: Elsevier B.V.).

Rajnish Mehra and Edward Prescott (1985), "The Equity Premium: A Puzzle," Journal of Monetary Economics.

Tom Rietz (1988), "The Equity risk premium: a solution." Journal of Monetary Economics 21: 117-132.

Martin Weitzman (2005), "A Unified Bayesian Theory of Equity 'Puzzles'" (Cambridge: Harvard).

Posted by DeLong at 10:19 PM | Comments (0) | TrackBack

Mel Martinez Is the Chief Clown Today in the Republican Clown Show

Sadly, No! notes:

Sadly, No!: Pretty much as I predicted, except that the other party won Senator Mel Martinez, the Florida Republican who pressed the case most, said he has since had second thoughts about Congress's involvement: "'I really probably come to the view this has to be more resolved at the state level, seems like the kind of issue the state courts deal with,' Mr. Martinez said."

Senator Martinez, March 16, 2005: "[M]any media reports have indicated that she is in a persistent vegetative state. There is evidence to the contrary. She is not on a respirator or other 24-hour-a-day medical equipment. She responds to voices, touch, and the presence of people. She can smile, cry, and establish eye contact. Last week, I introduced my first piece of legislation in the Senate: The Incapacitated Person's Legal Protection Act of 2005. This bill would ensure that incapacitated individuals -- like Terri Schiavo -- would have their due-process rights of habeas corpus when a court orders their death.... In essence, this legislation would give incapacitated individuals like Terri, who have been given what amounts to a death sentence by the courts, federal habeas corpus protections..."

Think of it: the first bill he ever introduced, and now he thinks the issue should never have been made a federal case at all.

Posted by DeLong at 10:18 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Glen Justice of the New York Times Edition)

Paul McLeary of CJR Daily is annoyed:

CJR Daily: Archives: This morning the New York Times' Glen Justice... writes that:

Expenses began increasing in 2004, when Mr. DeLay was admonished by the House ethics committee, and three of his political operatives were indicted in Texas. They face charges that include money laundering and raising illegal corporate contributions for a political action committee created by Mr. DeLay. The prosecutor, a Democrat, has not ruled out charges against Mr. DeLay

The prosecutor, Ronnie Earle, is indeed a Democrat, and an elected official -- a relevant part of the story... his record shows that he has prosecuted far more Democrats than Republicans in his 27-year tenure as Travis County, Texas, District Attorney.

The Christian Science Monitor pointed this out in December 2004, writing that 'Earle has prosecuted 12 Democrats and three Republicans' during his tenure. Earle... told Lesley Stahl of CBS's 60 Minutes... '15 cases involving elected officials, that my office has prosecuted. ... Of the 15, 12 were Democrats; three were Republican.'... [T]he Times is hardly alone in fingering Earle as a Democrat, while omitting his record.

In the final analysis, a little perspective is in order. One sentence in a news story isn't going to tilt the case one direction or the other, but significant omissions like this may well influence the court of public opinion -- and they don't reflect well on the basic reporting skills of those involved.

So does Glen Justice lack basic reporting skills? Or does he think that hinting that Ronnie Earle is on a positive witch hunt will gain him more cooperation from administration sources in the future? I would genuinely like to know which it is.

Posted by DeLong at 10:17 PM | Comments (0) | TrackBack

Charlie Stross's Extremely Well-Received Novel "Accelerando!"

Is here Accelerando!

This free ebook edition is made available by kind consent of my publishers, Ace and Orbit, under a Creative Commons license with certain restrictions attached. In particular, you may not create derivative works or use the work for commercial gain. (We hope that if you enjoy the ebook you'll consider buying a copy of one of the paper editions, but this is the only reminder you'll get. I'm not into shareware with nag screens ...)

Formats: The book is available for reading in HTML, with minimal markup (to make it easier for web clipping utilities to digest it). In addition, zip archives are provided for download in a variety of formats. The primary formats are RTF and conformant HTML 4.0. For direct reading on PDAs and smartphones, a Plucker database is provided. Finally, there are (deprecated) plain text and Palm DOC versions %u2013 these lack typographic markup.

To save my bandwidth and your time, please use BitTorrent in preference to HTTP (web) for downloading, if you know how. (And please consider keeping your BT feed running as a seed for a while afterwards.) Also, please consider grabbing a zip archive of your preferred file format rather than reading the uncompressed HTML version directly off my server. Thanks...

Posted by DeLong at 10:15 PM | Comments (0) | TrackBack

Variable Interest Rate Mortgages

David Leonhardt and Motoko Rich write:

The Trillion-Dollar Bet - New York Times: This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted. But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis. The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred....

'I'm not sure that people are being counseled on really how big of a risk they are taking,' said Amy Crews Cutts, deputy chief economist at Freddie Mac, the mortgage company. Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years. The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle....

This year's fashionable model, known as an 'option ARM,' allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent. During the first quarter of 2005, 40 percent of mortgages over $360,000 issued to people with good credit were option ARM's, said David Liu, a mortgage strategy analyst with UBS in New York. Very few borrowers used option ARM's before 2003.... All of these loans come with the risk of a spike in payments sometime in the future. In particular, borrowers who have taken out an interest-only loan will see a jump in payments simply because they will start to owe principal after the interest-only period lapses. If rates rise, the payments will go even higher. Borrowers whose incomes have not risen enough or who have not planned for the higher payments could find themselves shocked....

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

Grownup Republican Watch

Matthew Yglesias writes:

TPMCafe || Off The Hook: It isn't written into the fabric of the universe that congressional Republicans need to operate as White House stooges and block all oversight of the executive branch. There's such a thing as doing the right thing, and the fact that zero members of the GOP on the Hill are doing it is worthy of notice.In the Senate, especially, it would only take a handfull of the people who pride themselves on their reputation for high-minded statesmanship and independence to actually demonstrate high-minded statesmanship and independence to make a world of difference...

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

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

Rising Hegemon comments:

Rising Hegemon: Meanwhile...: Another busy backtracker at the Intersection of Freedom Marching Street & Rose Colored Sky Avenue is Rich Lowry. On May 8, 2005, Rich, as I never tire of pointing out had this cover story published: "We're Winning: How the U.S. Learned the Art of Counterinsurgency in Iraq."

Well today, a little bit of oops and excuse making.... "The other problem is that conditions have taken a downturn over the last couple of months. The insurgency and the fight against it is about adjustments--and the fact is that the insurgents have adjusted to our adjustments that had culminated in the success of the elections and the immediate aftermath."

I've finally woken up to the fact that National Review is composed of very scarce raisins in the middle of a large pile of Luskin-quality ****.

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

Fat Tails and Constant Relative Risk Aversion

Marty Weitzman says to go read:

Geweke, John (2001), "“A note on some limitations of CRRA utility.”" Economics Letters, 71, 341-345.

Posted by DeLong at 10:08 PM | Comments (0) | TrackBack

Senator Durbin on Guantanamo

He says:

TalkLeft: Sen. Durbin's Guantanamo Statement: If I read this to you and did not tell you that it was an FBI agent describing what Americans had done to prisoners in their control, you would most certainly believe this must have been done by Nazis, Soviets in their gulags, or some mad regime -- Pol Pot or others -- that had no concern for human beings. Sadly, that is not the case. This was the action of Americans in the treatment of their prisoners....

I almost hesitate to put them in the record, and yet they have to be added to this debate. Let me read to you what one FBI agent saw. And I quote from his report: "On a couple of occasions, I entered interview rooms to find a detainee chained hand and foot in a fetal position to the floor, with no chair, food or water. Most times they urinated or defecated on themselves, and had been left there for 18-24 hours or more. On one occasion, the air conditioning had been turned down so far and the temperature was so cold in the room, that the barefooted detainee was shaking with cold.... On another occasion, the [air conditioner] had been turned off, making the temperature in the unventilated room well over 100 degrees. The detainee was almost unconscious on the floor, with a pile of hair next to him. He had apparently been literally pulling his hair out throughout the night. On another occasion, not only was the temperature unbearably hot, but extremely loud rap music was being played in the room, and had been since the day before, with the detainee chained hand and foot in the fetal position on the tile floor."

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

Dan Tarullo and Dan Restrepo on CAFTA

I believe their views are trustworthy:

Dominican Republic-Central America Free Trade Agreement-Center for American Progress:
To: Interested Parties
From: Daniel Tarullo, Professor of Law, Georgetown University and Dan Restrepo, Director of Congressional Affairs, CAP

[T]the Administration is now trying to deflect attention from the economic shortcomings of DR-CAFTA by arguing that its rejection would be a foreign policy setback for the United States.... [H]aving ignored the needs of U.S. workers and failing to engage in bipartisan consultation on trade policies for four years, the Administration has no one but itself to blame.... Opposition to DR-CAFTA need not, and should not, signal opposition to trade agreements generally. Both the foreign policy and economic interests of the United States are well served by trade liberalization....

[L]ike most recent trade agreements, DR-CAFTA affects much more than "trade" - it reaches far beyond import policies into domestic economic and social policy, by imposing, for example, obligations to provide certain forms of intellectual property protection.... Judged against the standards of a smart trade policy, DR-CAFTA is badly flawed....

The other six countries in DR-CAFTA will see some benefits in this agreement, likely in the form of an improved investment climate.... [T]he rule of origin in the textile provisions is sufficiently restrictive that it may impede the ability of industries in the DR-CAFTA countries to remain competitive.... The refusal of the Administration to include enforceable labor standards in the agreement, despite the well-documented absence of basic international labor protections in some of the DR-CAFTA countries, is a missed opportunity.... Respecting the environment and securing progress on development are essential to rebuilding public confidence and congressional support for trade agreements. Regrettably, the Administration is not dedicating the long-term resource and financial commitments necessary to realize the environmental goals of the agreement. The Administration's insistence on a provision that forbids DR-CAFTA countries from using test data submitted by one pharmaceutical company to approve a similar drug of another pharmaceutical company could increase the cost of much-needed drugs in the region....

[T]rade policy does not exist in isolation from other economic policies.... The sluggish job and wage growth of the last four years have created an unfavorable situation for displaced workers.... Existing safety net programs such as extended unemployment insurance and trade adjustment assistance (TAA) already fall far short of needed support. Yet... the Administration has tightened the eligibility requirements....

Most presidents since the end of World War II have tried to pursue a bipartisan trade policy. The current Administration has broken radically with this tradition.... On DR-CAFTA, as with each previous trade agreement, the Administration has failed to engage in bipartisan consultation.... Members of Congress who want to support trade expansion through smart policies have grown increasingly frustrated.... [T]his trade agreement, and the policies surrounding it, fall so far short of a much-needed smart trade policy.

Posted by DeLong at 10:05 PM | Comments (0) | TrackBack

Grading AP Exams

Robert Farley of Lawyers, Guns, and Money reports:

Lawyers, Guns and Money: Fort Collins Blogging: DJW and I are currently in Fort Collins, Colorado reading AP exams. What does this entail, you may ask? AP exams are developed by the College Board and given to thousands of high school seniors at the end of each school year. Successful completion of the exams often means college credit, although the requirements differ by institution. Like any tests, AP exams must be graded. In June, close to 600 high school and college teachers converge on Fort Collins to grade the many thousands of US Government and Comparative Government exams that come in. The cadre is divided roughly evenly between high school and college teachers in order to give a diverse set of viewpoints on the exams, to give each group a stake in the success of the project, and to ensure both sides that the exams will be evaluated fairly and competently

We grade. And we grade. And we grade. For seven straight days, from 8am to 5pm, we grade. Usually the first day is spent on training, because while we are each supposed to bring a level of expertise to our field, we are absolutely not allowed to grade according to our personal knowledge and tendencies. Rather, there is the rubric. The rubric specifies that certain points are to be given to specific responses. The rubric is law.

Do not question the rubric. Do not challenge the rubric. Do not defame the rubric.Do not disparage the rubric. Do not poke the rubric. Do not taunt the rubric. The rubric is our holy writ, and is developed before the graders arrive.

The above may sound draconian, but it is absolutely necessary to the success of the project. We are grading questions about politics, and knowledgeable people disagree about the effect of the third parties in American politics or the impact of the Algerian War on French domestic politics, for example. Without a defined set of acceptable answers, chaos would ensue, and the Republic would be endangered. Thus, the rubric. So, we grade. And they feed us. We eat. And we grade. And we eat. We eat breakfast, then grade for two hours. Then they provide us with a tasty snack. We grade for two hourse, then go to lunch. We grade for two hours, then receive another tasty snack. We grade for two hours, then go to dinner. After that, many of us drink beer. It is a simple life.

The best exams, the ones that lighten our day, are those of the students who just don't care. Some students get to take the exams for free. Many of these haven't the faintest about the topic at hand. A subset of these spend their 100 minute period writing about their lives. Writing for people you'll never meet seems to be liberating. I've read bitter tirades directed against the entire male gender. I've read multiple loss-of-virginity accounts. I've read about drug use, crushes, future plans, baseball, football, cats, parents and whatever else you can imagine seventeen year olds caring about. All of these get zero points, but I always read them with great care. We get paid a decent salary, and as I mentioned the work isn't terribly difficult. Fort Collins is a nice place to visit, and Colorado State has a good campus. There is a fair amount of free time, and I've been able to finish some of my own academic work. Tomorrow, we get to go to Rocky Mountain National Park for a few hours. With luck, I'll be able to post some photos.

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

Optimal Decision-Making Strategies for Sergeant Schultz

What should you do when all you can say is: "I know nothing. Nothing!"?

I'm reading Michael Schwarz's very interesting "Decision Making under Extreme Uncertainty", with its fascinating result that "invariance restrictions alone are sufficient to pin down the agent’s choices in some decision problems":

Suppose an agent... has no information relevant for estimating the variable. In this case her actions in decision problems where payoff is contingent on different dimensional variables are the same, i.e., in this case the name of a variable is merely an uninformative label. (Effectively, provided that an agent has never heard of either tugric or dugric her strategy for selecting a guess from an interval [1,4] is the same regardless if she is guessing the value of a ”tugric” or the length of a “dugric”.) This imposes a sever restriction on an agent’s choices. For instance, if an agent is asked to “guess” exchange rate between currencies A and B conditional on the rate being between a and b, a “guess” of (a + b)/2 is not “reasonable” because, if this decision problem is reformulated in terms of exchange rate between B and A the range becomes 1/b to 1/a and the “guess” in the mirror decision problem (1/b+1/a)/2 is not a reciprocal of the guess in the original problem. A remarkable property of invariant decision problems is that a strategy in the “image game” must be reciprocal of the strategy in the original game.

Surprisingly, in an information vacuum the invariance consideration along are sufficient to uniquely pin done the strategy of an agent in some decision problems. We showed that if the payoff relevant range in an invariant decision problem is given by [a, b], then an agent’s strategy in such a decision problem is approximated by the geometric mean given by √ab. Combining the results of this section with expected utility axioms one can show that the prior of an agent in an information vacuum corresponds to the Jeffreys’ prior 1/x...

I find myself wondering if there isn't a connection between Schwarz's idea of "invariance" and the "Grass Is Greener" Switching-Envelopes Problem, but I'm not smart enough to see clearly why I have a hunch that there is a connection.

Posted by DeLong at 10:02 PM | Comments (0) | TrackBack

Mysteries of the iPod

From Boing Boing:

Boing Boing: 21 iTunes sold per iPod -- where's the rest of the music come from?: Andru... sez, 'Very interesting look at the number of songs sold on iTunes versus the number of iPods sold. It does the math and shows what it would look like if you split all purchased songs onto every iPod sold, and how small of a percentage iTunes music is.'

APRIL 28, 2004 - Today is the one year anniversary of the iTunes Music Store. As of April 15, Apple had sold roughly 60 million iTunes and 3 million iPods (sources below). That's about 21 songs per iPod. For perspective, the smallest iPods hold 1,000 songs, and some hold 10,000 songs. So, when people fill up those iPods, where does all the music come from?

Posted by DeLong at 10:00 PM | Comments (0) | TrackBack

Investor Behavior for Beginners

Barry Ritholtz writes:

Apprenticed Investor: Know Thyself: Statistical evidence suggests a high probability that you underperformed the broader market last year, and most investors will likely underperform again this year. But it's not just retail investors. The pros are barely any better. In fact, four out of five investors will do worse than the S&P 500 this year.

The problem, it seems, is a design flaw.

Indeed, many classic investor errors -- overtrading, groupthink, panic selling, marrying positions (i.e., refusing to sell), chasing stocks, rationalizing, freezing up -- are mostly due to our genetic makeup. Humans have evolved to survive in a harsh, competitive landscape. To do well in the capital markets, on the other hand, requires a skill set that is very often the antithesis of those innate survival instincts.... [W]hen it comes to investing, humans just ain't built for it....

Humans have a tendency to see order in randomness. We find patterns where none exist. While that trait might have helped a baby recognize its parents (thereby improving the odds for its survival), seeing patterns where none exist is counter-productive when it comes to investing. We also selectively perceive data, hoping to find something that confirms our prior views. We ignore data that contradicts those prior views. We even reinterpret old evidence so it is more in sync with our perspective. Then, we only selectively remember those things that support our case. Last, we overuse Heuristics, which is defined as simple, efficient rules of thumb that have been proposed to explain how people make decisions, come to judgments and solve problems, typically when facing complex problems or incomplete information (call them mental short cuts). These short cuts often generate "systematic errors" or blind spots in our analytical reasoning....

The vast majority of human history has been spent learning to survive, not analyze P/E ratios. Learning to fight nature won't be easy. To outperform, you sometimes must go against the crowd, despite the appeal and seeming safety in numbers. You must be humble and willing to admit error; meaning you'll have to overcome your ego's predisposition to avoid embarrassment, so as to maintain status amongst your tribe (and thereby enhance survival probabilities).

Most investors are overconfident to a fault. Don't believe me? Consider the following anecdote: A man was terrified to fly, yet thought nothing of roaring down the street -- sans helmet, no less -- on his Harley. That reveals a high degree of confidence in his own skills vs. a highly trained pilot's. That's some risk-analysis engine you got there, bub. That blind faith in our own abilities... is hardly beneficial when to comes to picking stocks. And that's before we even get to the "flight or fight" response. Our natural instinct during periods of volatility is to stop the pain, not to endure it with patience. The natural reactions to discomfort or threat -- coupled with a natural inability to be patient -- doesn't serve us well in the market. During market bottoms, most of the herd is selling. To buy during periods of intense selling means leaving the safety of the crowd, standing out, risking humiliation.

We simply were not designed for that.

This overconfidence leads to the optimistic yet misguided belief that most of us can beat the market. We must believe we can outperform the major indices. Otherwise, the rational thing to do would be to simply buy a major index and forget about it.... Most investors -- the 80% who underperform -- would probably be better off going the index route. If you're still interested in trying to outperform -- despite all we discussed today -- then I admire your gumption....

Posted by DeLong at 09:58 PM | Comments (0) | TrackBack

Is Inequality a Concommitant of Rapid Growth?

Greg Mankiw writes to the New York Times:

To the Editor:

Your chart about the percentage of income earned by the top 0.1 percent of taxpayers was fascinating, but "Richest Are Leaving Even the Rich Far Behind" failed to draw the obvious conclusions from it.

The data show that the rich take a rising share of income when the economy is booming, such as during the 1920's and 1990's. Their share declines when the economy hits hard times, such as during the Great Depression and the most recent recession.

The rich took their smallest slice of the economic pie during the 1970's - a period when productivity growth was low and unemployment and inflation were rising.

Here's the lesson: If policy makers' primary goal is to reduce income inequality, they should put the economy through the wringer. But if they want economic prosperity for all, they should avoid focusing on the politics of envy.

N. Gregory Mankiw

Cambridge, Mass., June 5, 2005

The writer, a professor of economics at Harvard University, was chairman of President Bush's Council of Economic Advisers, 2003-2005.

Well, let's see. Let's take the state-of-the-art data on income inequality from Emmanuel Saez and Thomas Piketty (2003), "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics 118:1 (February, pp. 1-39) (http://emlab.berkeley.edu/users/saez/pikettyqje.pdf), and plot it against the previous ten years' growth in GDP per capita from eh.net (http://eh.net/hmit/gdp/gdp_question.php):

The rich do take a rising share during the 1920s and 1990s, but growth income per capita was no faster in the 1990s as a whole than in the 1980s and 1970s--it was only the last half of the 1990s that saw rapid growth. And the fastest-growth decades of all are the 1960s--with a low share of income inequality--and the 1940s (driven by recovery from the Depression and the high-pressure economy of World War II).

The correlation between economic growth--defined as ten-year growth in GDP per capita--and income inequality that Greg Mankiw asserts exists? I certainly cannot see it in the data.

But maybe I'm wearing the wrong-colored glasses :-).

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

James Hamilton from UCSD Joins the Party...

He is incredibly smart and incredibly hard working: we eagerly look forward to lots of refreshments:

Econbrowser:

June 09, 2005

Oil futures and the future of oil

Commodity traders can have as hard a time as any of us trying to predict oil prices. But it's interesting to see what the current price structure tells us about what traders believe brought about the current high prices and what may be in store for us next.

Continue reading "Oil futures and the future of oil"

Posted by econbrowser at 09:42 PM | Comments (2) | TrackBack (1)

June 08, 2005

Predicting the Fed's next move

Fed-watching can be something of an arcane sport. Will the subtle disappointments in the May employment and automobile sales figures persuade the Fed to hold back on another interest rate hike? And what would someone who's really "in the know" infer from how high Alan Greenspan raised his right eyebrow at his last public appearance? Although playing that game can be fun, it's actually quite easy for anybody to have a very well-informed belief about what we can expect next from the Federal Reserve.

Continue reading "Predicting the Fed's next move"

Posted by econbrowser at 11:09 AM | Comments (2) | TrackBack (1)

June 06, 2005

Economic consequences of the high price of oil

All but one of the U.S. recessions since World War II have been preceded by a dramatic increase in crude petroleum prices. Recent turbulence in energy markets has some analysts speculating that, in the immortal words of Yogi Berra, it could be deja vu all over again. But this oil price shock differs significantly from earlier episodes, leading me to believe that the economy will be able to adapt to the new pricing environment without a major economic slowdown.

Continue reading "Economic consequences of the high price of oil"

Posted by econbrowser at 03:20 PM | Comments (1) | TrackBack (1)

June 04, 2005

Disappointing job statistics?

The May employment figures released by the Bureau of Labor Statistics yesterday sent mixed signals, revealing that U.S. job creation slowed in May even as the unemployment rate edged slightly lower.

Continue reading "Disappointing job statistics?"

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Posted by DeLong at 09:54 PM | Comments (0) | TrackBack

Jefferson Morley on the "Thin" Coverage of the Downing Street Memo

Everyone read the elite media's cover of the "Downing Street Memo"--i.e., Walter Pincus in that prominent spot on page A-18? In an online chat, Jonathan Morley muses about why elite media coverage has been so "thin":

World Opinion Roundup: Blair and The Downing Street Memo:

Jefferson Morley: I think some combination of cynicism, complacency and insulation has stifled the instincts of very good reporters. I also think there is also a failure of leadership at the senior editorial level. The issues raised by the Downing Street minutes are very serious. To pursue them is to invite confrontation. This means that 'beat' reporters cannot realistically pursue the story.I say all this way of explanation, not rationalization. There are several natural follow up stories to the Downing Street memo that we should be pursuing right now...

I think its because the Washington press corps is oriented around 'news' as generated by the White House and the executive branch. When it comes to Iraq's non-existent weapons of mass destruction, the White House and the Congress have settled on the following narrative: that the U.S. government had every reason to fear the nexus of Al Qaeda and Saddam Hussein, that the intelligence community agreed that Hussein had WMD and therefore war was not only justified but necessary.The Downing Street Memo invites the thought that maybe that was illusory, that in fact people in the Bush administration were having meetings dedicated to figuring how, as Richard Dearlove said, 'fix the facts and the intelligence.' I think its hard to journalist's born and bred in the ways of Washington to contemplate the implications...

I've given some reasons, focusing on the responsibility of the media.But a big part of the problem is that there are no voices in the majority party demanding accountability. Remember, no small part of the growth of the opposition to the Vietnam war were the very serious and informative hearings that Sen. William Fulbright had in 1965-66. It was here that the American people heard policymakers explain and defend their policies. There is no such venue for accountability today...

I understand the temptation of cynicism. News organizations in Washington have lost their bearings but I have to believe that they can recover them. This is a story about credibility and accountability. To me the Downing Street Memo is directly related to the military's recruiting problems. There have been a lot of good stories about parents trying to thwart military recruiters. Once proud to send their kids into post-September 11 action against the country's deadliest enemies, mothers and fathers now hesitate because they don't believe the government's statements on the war.The Downing Street Memo is one reason why...

The Senate Intelligence Committee did not interview Richard Dearlove and they didn't interview many of the U.S. policymakers with whom he was dealing, so we really don't know why he came away from consultation with the administration saying that 'the facts and the intelligence' would be fixed to meet the policy. If Dearlove was fantasizing about the intentions of U.S. policymakers, then the minutes of his meetings kept by the U.S. side should show that. On the other hand, such minutes might confer Dearlove's account. Those minutes, needless to say, are highly classified...

I have shared my view that the story can and should be pursued.If Post reporters don't ask Blair about the memo, they have abdicated responsibility in my view...

There is no dispute about the authenticity of the Downing Street memo.Reporters need to assess its accuracy. Who is Richard Dearlove? Is he a reliable reporter? Does he have an animus against Bush policy or policymakers? What was said in the meetings he attended that gave him the idea that the Americans were seeking to 'fix' the policy. questioning other people who attended the same meetings as Dearlove...

Talk about it with your friendsWrite a letter to your Congressman asking for his/her explanation. Write a letter to the editor of your local newspaper asking them to print the Downing Street Memo and comment on its significance...

I think Congress is unlikely to investigate until the story is better understood. I hope Blair is asked about it. My two-fold question would be, 'Mr. Prime Minister why do you think your intelligence chief came away from meetings with U.S. officials in July 2002 seeming to believe that they were seeking to 'fix' facts and intelligence to justify an invasion of Iraq? And in your experience was Mr. Dearlove a reliable reporter of U.S. government policy deliberations?'...

The reason that the Downing Street Memo story is so potentially big and politically difficult to address is because it radically challenges the Bush administration's account of the 'intelligence failure' on Iraqi WMD...

No one questions the authenticity of the memo and the administration has provided no accounts of its meetings with Richard Dearlove in July 2002 that dispute his account. If the administration supporters are correct in their claims that there is no story here, then the minutes of the U.S. meetings with Dearlove should confirm their viewpoint...

What's new is Richard Dearlove's statement that Bush policymakers were seeking to 'fix the facts and intelligence' to justify a U.S. attack on Iraq. No Bush administration official has ever said this. No intelligence official, American or British, has ever said this. The question is, Is Dearlove a reliable reporter?Asking this question is not 'trashing the war effort' and it is not undermining the troops. People who are risking and losing their lives on our behalf deserve the whole truth, not just the truth preferred by elected officials...

Well, Fox News is hostile to the story so I wouldn't expect Fox outlets to pursue but, no, I have not noticed a pattern of ownership shaping coverage. It is something worth keeping track of. The problem here is that the normal journalist impulses seem to be checked: Any editor knowledgeable in the ways of the national security bureaucracy can come with follow up stories on the Downing Street Memo that would have nothing but readers. It is time for us to start doing a couple of those stories and see where they lead us. If the President's partisans are correct that there is no story here, then good reporting should show that...

I did read that piece and it doesn't change my point of view that further reporting is warranted. Indeed Robbins raises a useful question that needs to be answered: Did Dearlove talk to the President? (Or Vice President Cheney) And he asks another useful question Maybe Rycroft or Dearlove could elaborate; by 'fixed around' did they mean that intelligence was being falsified or that intelligence and information were being gathered to support the policy? There is nothing wrong with the latter - it is the purpose of the intelligence community to provide the information decision-makers need, and the marshal their resources accordingly. So I read Robbins and I come away more convinced than ever that we need to do more reporting...

The questions raised by the Downing Street memo are very specific to run-up to the Iraq war in 2002. The memo doesn't concern the Clinton administration. It is true that Clinton pursued a policy of regime change against Iraq and used military force and it is clear that he and his advisers used U.S. intelligence sources in making that policy. But no senior intelligence official has said that Clinton and aides were fixing facts and intelligence to pursue their policy. If you have such information, that would be a good story. Please send such information to jeff.morley@wpni.com. All information will be held in strictest confidence...

My job is covering the foreign media, not the White House or the intelligence community. I am conveying to as many editors as possible my own belief that there are stories worth pursuing here. I don't talk about the stories that I am or am not pursuing...

The Downing Street memo was published in the Times of London on May 1. The Times did not identify its source (of course) but made clear that it came from forces critical of Blair's war policy in the senior level of the British government. The story received front page treatment on the Sunday before the British elections, so it go major coverage, even from The Time's competitors. The British government responded by saying there was 'nothing new' in the memo. The authenticity of the memo was not disputed...

We should be very concerned about the implications of the memo. If facts and intelligence were deliberately altered to magnify threats and justify war, then U.S. soldiers who risk their lives on our behalf were deceived. If this is a possibility, the press needs to investigate. A decent sense of patriotism requires it...

O'Neill was talking about pre-9/11 planning. Clark was talking about post 9-11 planning. The Downing Street minutes document the war planning in the summer of 2002. But there does seem to be a continuum there...

The Downing Street Memo has gotten very little attention in the Arab press. I think this is in part because of a wide consensus in the Arab world that, of course, the Bush administration acted in bad faith. I also think it is based on lack of knowledge about how the Western national security bureaucracies truly function...

Let's not romanticize the past. No one regarded Woodward and Bernstein or their sources as heroes when they were reporting on Watergate in 1972 and early 1973. They were out on a limb and much criticized by the White House. Its not a pleasant place to be and reporters are understandably reluctant to go there...

I think it does clarify it. It may be that one of the ways to 'fix' the intelligence, was to remove from positions of responsibility people who might put forward intelligence that impeded the war policy. We need to know more about Bolton's actions in 2002 to know if this is the case. I would like to know: Did Dearlove or his deputies meet with Bolton in 2002?...

What are they afraid of?I don't think Post reporters are afraid of this story.In general, I think reporters are afraid of being used by the President's opponents. I think they're afraid of a secret document that they don't have. I think they are afraid of losing access to high-level sources. Such fears are entirely justified. The reporter who doesn't think about them isn't doing the job right. Of course, acknowledging fears does not require succumbing to them...

I'm puzzled. Charles Deulfer and David Kay of the CIA investigated and concluded that Saddam Hussein did not have weapons of mass destruction in 2003. They were not trying to destroy this country. Nor am I. I love this country and love that free speech is one of its foundations. I am trying to say there's a real story worth perusing here. If Richard Dearlove was way off base in his reporting on the Bush administration's policies in mid 2002, then U.S. government and officials should be able to demonstrate that with more accurate recollections and documents. Your notion that there was consensus in the West on Iraq's WMD is not historically supported. The British officials who met with Blair said the case for war to remove Saddam's alleged WMD was 'thin.'...

Posted by DeLong at 09:45 PM | Comments (0) | TrackBack

June 17, 2005

Nasty, Brutish, and Short

Susan Madrak writes:

Fooled: I was following some Google link to a post on a Motley Fool message board. In order to read it, you had to register, so I did. Big mistake. Ever since then, I've been swamped with penny-stock emails -- over 100 a day. Be warned.

There has been a big change on the Internet in the past decade. A decade ago, the Internet seemed to be a place that exemplified the left-anarchist utopian doctrines of Prince Kropotkin--friendly and helpful people coming together to create things for the common good, expecting that their contributions would be more than matched by those of others and that all would benefit.

Today? Today the Internet seems dominated by people like--well, like the proprietors of the Motley Fool, who don't care how much of Susan Madrak's time their clients' emails waste as long as they can make a few ¢¢¢¢ by selling her registration info. It is, to me, surprising how *many* people there are out on the Internet who do not care how large a burden their actions impose on others as long as they hold some promise of gaining them a trivial advantage. It's the State of Nature out there.

And so today it teaches a different lesson: not Prince Kropotkin but instead Joseph de Maistre, who in his Soirees from St. Petersburg wrote that behind every stable and peaceful social order stands the shadow of the executioner.

Posted by DeLong at 03:53 PM | Comments (0) | TrackBack

June 16, 2005

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

Arthur Silber channels what Thomas Friedman really thinks:

: Tommy Friedman: I am the only person in the entire world who will talk honestly and intelligently about the disaster in Iraq. Conservatives are brainless Bush cheerleaders. Liberals are really traitors, and want Bush to lose. And no one else in the entire United States sees what I see.

We never had enough soldiers. I like soldiers, and ours are trying to do an impossible job. But those Iraqi insurgents seem much more motivated than our people. Maybe it's because they're defending their own country. I don't understand that part too well. Then there's the Iraqi political class. What a terrible disappointment all those people are--well, except for the Kurds. The Kurds are great. But wha's wrong with all the rest of them? Such an awful disappointment to me. They don't seem to understand what's in their own best interest nearly as well as I do. They must be confused because they live there.

I don't actually know if a self-sustaining and united Iraq is even possible. But this is still winnable! That only seems like it might be a contradiction to smaller minds than mine, which is all of yours. But to win, we need to double our troops! And we need to kill a lot more people.

Where are twice the number of troops going to come from? That's not my job. My job is to tell everyone what to do. It's someone else's job to figure out how to do it. Of course I%u2019m not volunteering my services for anything, and I'm not going to encourage anyone I know to volunteer either. Do you think I'm crazy? People are getting killed every day over there!

Besides, there isn't anyone else at all to explain this to you. I'm unique and irreplaceable. No one else offers my wisdom, or even comes close. You should thank God for me. I know I do, every single day.

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

June 14, 2005

Mark Thoma and Barry Ritholtz on Interest Rates

They write, in an Econoblog:

WSJ.com - Where Will Rates Go From Here? Experts Consider the Fed's Path: Mark Thoma, of the University of Oregon, and Barry Ritholtz, of Maxim Group, consider the possibilities....

Mark Thoma: ...as I look at unit labor costs, core PPI, core CPI, inflationary expectations, productivity, output and employment relative to potential, housing markets, and energy costs and ignore the inevitable month-to-month blips, I see trends that indicate rising inflation. Thus, heading off potentially destabilizing inflation and keeping inflationary expectations anchored requires continued tightening at the measured pace established by the Fed....

Barry Ritholtz: Inflation targeting is a nice idea in theory, but... the Fed has been much more active, undertaking a far broader set of policy initiatives.... many of the Fed's action... can be viewed as the central bank careening from one Fed-created problem... to the next... inflation fighters and deflation vigilantes, bubble enablers and now bubble deflaters... tax policy... deficits that policy created... money-supply junkies... the "conundrum" of the yield curve or the "irrational exuberance" of investors... Social Security privatization.... The Fed's authority has led them into battles where they have little influence and less authority, and where they end up doing far more harm than good...

Mark: Those in the "old school"... are not in favor of explicit inflation targeting... because it reduces the Fed's flexibility....

Barry: The chairman's job is extremely difficult, and that -- regardless of what he does -- some wonk somewhere will label him incompetent. That said, calling the Fed's actions a "mistake" is quite an understatement.... The Fed has... tried to moderate the impact of normal market cycles.... But... the longer we wait to pay the bill, the worse it ultimately will be.... While I am not convinced that the housing market is a bubble -- yet -- the negative impacts of too much easy money will be increasingly unstable structural imbalances...

Mark: James Hamilton... makes the case that in the past the Fed has lowered interest rates past the time when it's appropriate on downside, and increased rates for too long on the upside.... This is a delicate balancing act for the Fed.... I'm not convinced that evidence of weakness in output growth or in price pressures have subsided enough to justify a change in the current path of measured increases in the federal-funds rate.

Barry: Mark, I see your expectations for two more hikes .. And as long as we are making predictions, I will raise you a new series of rate cuts (yes, cuts), beginning mid-2006. Why? 'Cause the Fed will... careen from one "situation" of their own creation to another.... [N]early half of the private sector jobs created since the Recession ended in 2001 have been in housing and related industries. That makes them a direct product of the ultra-low rates we've had, thanks to the Fed overshoot to the downside...

Posted by DeLong at 04:11 PM | Comments (0) | TrackBack

Social Security Once Again: A Debate

Powerpoints for tonight's Social Security Debate:

http://www.j-bradford-delong.net/movable_type/ppt/Social_Security_20050614.htm

John Shoven (Stanford), Brad DeLong (Berkeley), Jim Wilcox (Berkeley).

7:00 PM
AP Giannini Auditorium
555 California St.
San Francisco, CA.

Shoven and Wilcox are both very thoughtful, and always fun. I must say I'm not sure how much we'll disagree on...

Posted by DeLong at 02:48 PM | Comments (0) | TrackBack

Open-Source Economics

Mark Thoma is trying an interesting experiment. It would be very nice if it works:

Economist's View: Open-Source Models in Economics: "From Wikipedia, which seemed appropriate for this post, a definition and an English lesson: "Open source denotes that the origins of a product are publicly accessible in part or in whole. When used as an adjective, the term is hyphenated: 'Apache is open-source software.' When used as a noun, there is no hyphen: 'Netscape released its Navigator source code as open source.'" Will the same model work in economics? On the sidebar of this site there is a section entitled "Open-Source" models (I added the hyphen this evening). There are four models there, one by Mark Thoma (me), one by Alex Tabarrok, and two from Brad DeLong. The models are on a variety of topics, in different stages of development, and have both classroom and research orientations...

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

How to Explain China's Success?

Brad Setser sees:

Brad Setser's Web Log: How to explain China's success?: four potential explanations for China's growth.

1) State intervention in the economy (or certain forms of state intervention at certain stages in the development process) is less of an impediment that is often argued.... Joe Stiglitz argues that China's success demonstrates the limits of 'Washington Consensus' politics.... Foreign businessmen operating in China generally don't object to massive government intervention to keep the RMB from rising.... I don't hear real estate developers here in the US complaining about the intervention by foreign governments in US credit markets... that is contributing to low interest rates and the real estate boom.... In China, state intervention often seems to help at least certain types of business at the expense of Chinese labor, and other interests inside China.

2) China's markets are far more flexible than they seem. Internal migration is controlled in theory but not in practice, so China has its own 'undocumented' internal migrants, migrants who cannot generally work in the state sector and thus are available for private employment. In addition to the formal banking system, informal networks help growing private firms obtain credit.

3) High savings rates and high investment rates can overcome a multitude of other sins.... China is defined above all by very high rates of domestic savings and domestic investment (something it shares with other Asian 'tiger' economies)....

4) High savings, high investment rates and undervalued exchange rate can overcome other sins. The undervalued exchange rate creates an incentive for domestic firms to test themselves in foreign markets... foreign firms to use the country as a base for production to serve their home markets. In the process they bring access to key distribution networks, and needed technology and know-how. An undervalued exchange rate that keeps local labor 'cheap' on a global scale is in effect the bribe the country pays to attract foreign expertise.

Personally, I suspect high savings rates and high investment rates are the most important factors. Avoiding major currency overvaluations is also important -- though I am not sure China's current undervaluation (explanation 4) is as necessary as many argue.... [Is] China's current model is sustainable. My strong sense is that the answer is no. 30% y/y export growth implies that China's exports would more than double every three years.... China now has become big enough that it needs to contribute to global (consumption) demand, not just global supply. How and when that transition will come, however, remains a huge question.

Posted by DeLong at 10:22 AM | Comments (0) | TrackBack

Republican House Member Randy Cunningham Takes Bribe, Pockets $700,000

Paul Kedrosky reports:

Infectious Greed: Best/Worst Real Estate Broker in California: Rep. Randy Cunningham apparently has the best real estate broker in California. He sold his Del Mar, California, house in November of 2003 for a tidy $1,675,000. A month later, however, the person who bought the house from Cunningham put the house back on the market, but it took eight months to sell the house, and the price fell $700,000. It seems the buyer's agent was the worst broker in California. Too bad.

Then again, there are some puzzles here. The man who bought the house from Cunningham was Mitchell Wade, a defense contractor doing business as MZM, Inc. Wade's company had received millions of dollars in defense business, and Cunningham sits on the House Intelligence Committee. These are things that make you go 'Hmmmm.'

Is is possible that Del Mar's beachside prices fell precipitously during the biggest real estate boom ever in southern California? As the figure here shows, no, it's not likely at all. So we're left with believing that either the buyer & seller had the most bizarre yin/yang experience in real estate history, or there is more to this than meets the eye.

Why hasn't Cunningham been indicted, and expelled from the House of Representatives yet?

Posted by DeLong at 10:18 AM | Comments (0) | TrackBack

June 13, 2005

The Economic Sociology of Asset Market Efficiency

Brayden King asks:

Pub Sociology: A sociology of market efficiency: According to orthodox views of market efficiency, smart money should be able to correct for the irrationality of bad investors, bringing prices back to fundamentals even when the majority of investors over- or undervalue certain stocks. This is the role of arbitrage. Yet, we often see that markets still produce inefficient outcomes. Why?... Our sociological intuition tells us that market structure - the social relations between actors, practices, and meaning - ought to mediate the extent to which markets operate more or less efficiently. This is one of the most important insights that economic sociology has to offer, I think (and one of the primary conclusions in my dissertation). We should be able to show that the structure of relations in a market has a real impact on the efficiency of market pricing and choice.

Ezra Zuckerman, who I think is one of the brightest and most interesting scholars in the field, has a lot to say about this. In his 2004 piece* on structural coherence and market valuation, he argues the very this very point:

I challenge the assumption made by the [efficient market hypothesis] that the social structural environment typical of financial markets always has the necessary features to support the highly sophisticated social learning necessary for incorrect models to valuation to be driven from the market...

*Zuckerman, Ezra. 2004. “Structural Incoherence and Stock Market Activity.” American Sociological Review 69: 405-32.

Well, it is explicit in DeLong, Shleifer, Summers, and Waldmann (1990), "Noise Trader Risk in Financial Markets," Journal of Political Economy, that as a matter of economic theory rational, sophisticated investors are not guaranteed to earn higher expected returns on their portfolios than are noise traders if rational investors have short horizons, and if noise traders on average concentrate their long positions in the assets about which their opinions irrationally fluctuate.

It is implicit in DSSW (1990) that as a matter of economic theory incorrect models of valuation are not only not driven from the market but exist happily in it and can come to dominate it if:

1. Rational investors have short horizons.
2. Noise traders on average concentrate their long positions in the assets about which their opinions irrationally fluctuate.
3. New entrants into the market look back at recent realized returns to decide what valuation strategies to adopt.

Perhaps it is time to make this explicit as well: here's a memo.

And I am still waiting for my copy of Braydon King's dissertation...

Posted by DeLong at 10:42 PM | Comments (0) | TrackBack

The Wall Street Journal Editorial Page Is More of a Joke than Ever (Why Oh Why Can't We Have a Better Press Corps? Department)

kevin Drum reports:

The Washington Monthly: SUPPLY SIDE BUFFOONERY.... [I]t's Stephen Moore's maiden outing as a member of the WSJ editorial board. A friend emailed to tell me that 'knowing how much you enjoy shooting fish in a barrel,' I should take a look. He was right! Moore's sermon today is about the wonders of supply side economics:

In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion.

Tax revenue doubled!... [But f]irst, we should adjust for inflation.... In 1980 dollars, $1,032 billion is actually $670 billion.... [P]opulation increased... tax revenue was $2,283 per person in 1980 and $2,694 per person in 1990. That's not double. It's an increase of 18%... a lot of that is due to consistent tax increases throughout the 1980s (details here).... [W]e can play this game with any decade.... Adjusting for inflation and population growth... [70S] 70s produced an increase... OF 25%. The Clinton 90s produced... 40%.... Reagan produced the slowest growth in... any decade since World War II. That's a real supply side triumph.

Welcome to the Journal, Steve. You guys deserve each other

Posted by DeLong at 09:30 PM | Comments (0) | TrackBack

Eric Umansky Is Also Unhappy with David Sanger

He writes:

Iraq's Training Daze By Eric Umansky: That brings us to No. 1. A day after the Post broke word of another prewar British memo, the NYT hops onboard. Presumably not content to simply repeat the WP's angle--'MEMO: U.S. LACKED FULL POSTWAR IRAQ PLAN'--the Times gets creative: 'PREWAR BRITISH MEMO SAYS WAR DECISION WASN'T MADE.' That headline hangs on a single clause of a single sentence in the 2,300-word memo:

Although no political decisions have been taken, US military planners have drafted options for the US Government to undertake an invasion of Iraq.

As it happens, the memo was first obtained by the Rupert Murdoch-owned Sunday Times (U.K.). Its headline: 'MINISTERS WERE TOLD OF NEED FOR GULF WAR 'EXCUSE.'

It's not just the headline: it's the entire lead: "A memorandum written by Prime Minister Tony Blair's cabinet office in late July 2002 explicitly states that the Bush administration had made 'no political decisions' to invade Iraq..."

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

David Sanger of the New York Times Takes a Dive (Why Oh Why Can't We Have a Better Press Corps? Department)

David Sanger leads his article in this morning's New York Times with:

Prewar British Memo Says War Decision Wasn't Made - New York Times: A memorandum written by Prime Minister Tony Blair's cabinet office in late July 2002 explicitly states that the Bush administration had made 'no political decisions' to invade Iraq...

Nico of ThinkProgress points out that Sanger has "misread" his document:

Sanger presumes that "political decisions" refers to the actual decision to go to war.... [H]e concludes that the memo shows the Bush administration hadn't [then] decided whether or not to invade Iraq. This is both sloppy journalism, and factually incorrect.... "[P]olitical" [as] used in the memo... [has] a very different sense... the shaping of public opinion and the construction of a legal edifice that would justify Britain's participation in the U.S. attack....

[T]he other four references to "political" in the document.... [P]age 1, the author speaks of the desire to "engage the US on the need to set military plans within a realistic political strategy," which includes "creating the conditions necessary to justify government military action, which might include an ultimatum for the return of UN weapons inspectors to Iraq."... [P]age 1: "The US Government... as yet... lacks a political framework. In particular, little thought has been given to creating the political conditions for military action, or the aftermath and how to shape it."... [P]age 3: "An international coalition is necessary to provide a military platform and desirable for political purposes."

All of these uses suggest that "political decisions" had little or nothing to do with the actual decision to go to war.... Now... read again the paragraph from which Sanger quotes... (and remember, he didn't even include this sentence -- just the phrase 'no political decisions'): "Although no political decisions have been taken, US military planners have drafted options for the US Government to undertake an invasion of Iraq."

Frankly, this sounds like another way of saying: the U.S. has decided to go to war, is planning military strategies to do it, but has not figured out a way to sell it to the people or justify it legally.

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http://www.timesonline.co.uk/printFriendly/0,,1-524-1648758-524,00.html

The paper, produced by the Cabinet Office on July 21, 2002, is incomplete because the last page is missing. The following is a transcript rather than the original document in order to protect the source.

PERSONAL SECRET UK EYES ONLY

IRAQ: CONDITIONS FOR MILITARY ACTION (A Note by Officials)

Summary

Ministers are invited to:

(1) Note the latest position on US military planning and timescales for possible action.

(2) Agree that the objective of any military action should be a stable and law-abiding Iraq, within present borders, co-operating with the international community, no longer posing a threat to its neighbours or international security, and abiding by its international obligations on WMD.

(3) Agree to engage the US on the need to set military plans within a realistic political strategy, which includes identifying the succession to Saddam Hussein and creating the conditions necessary to justify government military action, which might include an ultimatum for the return of UN weapons inspectors to Iraq. This should include a call from the Prime Minister to President Bush ahead of the briefing of US military plans to the President on 4 August.

(4) Note the potentially long lead times involved in equipping UK Armed Forces to undertake operations in the Iraqi theatre and agree that the MOD should bring forward proposals for the procurement of Urgent Operational Requirements under cover of the lessons learned from Afghanistan and the outcome of SR2002.

(5) Agree to the establishment of an ad hoc group of officials under Cabinet Office Chairmanship to consider the development of an information campaign to be agreed with the US.

Introduction

1. The US Government's military planning for action against Iraq is proceeding apace. But, as yet, it lacks a political framework. In particular, little thought has been given to creating the political conditions for military action, or the aftermath and how to shape it.

2. When the Prime Minister discussed Iraq with President Bush at Crawford in April he said that the UK would support military action to bring about regime change, provided that certain conditions were met: efforts had been made to construct a coalition/shape public opinion, the Israel-Palestine Crisis was quiescent, and the options for action to eliminate Iraq's WMD through the UN weapons inspectors had been exhausted.

3. We need now to reinforce this message and to encourage the US Government to place its military planning within a political framework, partly to forestall the risk that military action is precipitated in an unplanned way by, for example, an incident in the No Fly Zones. This is particularly important for the UK because it is necessary to create the conditions in which we could legally support military action. Otherwise we face the real danger that the US will commit themselves to a course of action which we would find very difficult to support.

4. In order to fulfil the conditions set out by the Prime Minister for UK support for military action against Iraq, certain preparations need to be made, and other considerations taken into account. This note sets them out in a form which can be adapted for use with the US Government. Depending on US intentions, a decision in principle may be needed soon on whether and in what form the UK takes part in military action.

The Goal

5. Our objective should be a stable and law-abiding Iraq, within present borders, co-operating with the international community, no longer posing a threat to its neighbours or to international security, and abiding by its international obligations on WMD. It seems unlikely t