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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...

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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 re 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.


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 that this could be achieved while the current Iraqi regime remains in power. US military planning unambiguously takes as its objective the removal of Saddam Hussein's regime, followed by elimination if Iraqi WMD. It is however, by no means certain, in the view of UK officials, that one would necessarily follow from the other. Even if regime change is a necessary condition for controlling Iraqi WMD, it is certainly not a sufficient one.

US Military Planning

6. Although no political decisions have been taken, US military planners have drafted options for the US Government to undertake an invasion of Iraq. In a 'Running Start', military action could begin as early as November of this year, with no overt military build-up. Air strikes and support for opposition groups in Iraq would lead initially to small-scale land operations, with further land forces deploying sequentially, ultimately overwhelming Iraqi forces and leading to the collapse of the Iraqi regime. A 'Generated Start' would involve a longer build-up before any military action were taken, as early as January 2003. US military plans include no specifics on the strategic context either before or after the campaign. Currently the preference appears to be for the 'Running Start'. CDS will be ready to brief Ministers in more detail.

7. US plans assume, as a minimum, the use of British bases in Cyprus and Diego Garcia. This means that legal base issues would arise virtually whatever option Ministers choose with regard to UK participation.

The Viability of the Plans

8. The Chiefs of Staff have discussed the viability of US military plans. Their initial view is that there are a number of questions which would have to be answered before they could assess whether the plans are sound. Notably these include the realism of the 'Running Start', the extent to which the plans are proof against Iraqi counter-attack using chemical or biological weapons and the robustness of US assumptions about the bases and about Iraqi (un)willingness to fight.

UK Military Contribution

9. The UK's ability to contribute forces depends on the details of the US military planning and the time available to prepare and deploy them. The MOD is examining how the UK might contribute to US-led action. The options range from deployment of a Division (ie Gulf War sized contribution plus naval and air forces) to making available bases. It is already clear that the UK could not generate a Division in time for an operation in January 2003, unless publicly visible decisions were taken very soon. Maritime and air forces could be deployed in time, provided adequate basing arrangements could be made. The lead times involved in preparing for UK military involvement include the procurement of Urgent Operational Requirements, for which there is no financial provision.

The Conditions Necessary for Military Action

10. Aside from the existence of a viable military plan we consider the following conditions necessary for military action and UK participation: justification/legal base; an international coalition; a quiescent Israel/Palestine; a positive risk/benefit assessment; and the preparation of domestic opinion.

Justification

11. US views of international law vary from that of the UK and the international community. Regime change per se is not a proper basis for military action under international law. But regime change could result from action that is otherwise lawful. We would regard the use of force against Iraq, or any other state, as lawful if exercised in the right of individual or collective self-defence, if carried out to avert an overwhelming humanitarian catastrophe, or authorised by the UN Security Council. A detailed consideration of the legal issues, prepared earlier this year, is at Annex A. The legal position would depend on the precise circumstances at the time. Legal bases for an invasion of Iraq are in principle conceivable in both the first two instances but would be difficult to establish because of, for example, the tests of immediacy and proportionality. Further legal advice would be needed on this point.

12. This leaves the route under the UNSC resolutions on weapons inspectors. Kofi Annan has held three rounds of meetings with Iraq in an attempt to persuade them to admit the UN weapons inspectors. These have made no substantive progress; the Iraqis are deliberately obfuscating. Annan has downgraded the dialogue but more pointless talks are possible. We need to persuade the UN and the international community that this situation cannot be allowed to continue ad infinitum. We need to set a deadline, leading to an ultimatum. It would be preferable to obtain backing of a UNSCR for any ultimatum and early work would be necessary to explore with Kofi Annan and the Russians, in particular, the scope for achieving this.

13. In practice, facing pressure of military action, Saddam is likely to admit weapons inspectors as a means of forestalling it. But once admitted, he would not allow them to operate freely. UNMOVIC (the successor to UNSCOM) will take at least six months after entering Iraq to establish the monitoring and verification system under Resolution 1284 necessary to assess whether Iraq is meeting its obligations. Hence, even if UN inspectors gained access today, by January 2003 they would at best only just be completing setting up. It is possible that they will encounter Iraqi obstruction during this period, but this more likely when they are fully operational.

14. It is just possible that an ultimatum could be cast in terms which Saddam would reject (because he is unwilling to accept unfettered access) and which would not be regarded as unreasonable by the international community. However, failing that (or an Iraqi attack) we would be most unlikely to achieve a legal base for military action by January 2003.

An International Coalition

15. An international coalition is necessary to provide a military platform and desirable for political purposes.

16. US military planning assumes that the US would be allowed to use bases in Kuwait (air and ground forces), Jordan, in the Gulf (air and naval forces) and UK territory (Diego Garcia and our bases in Cyprus). The plans assume that Saudi Arabia would withhold co-operation except granting military over-flights. On the assumption that military action would involve operations in the Kurdish area in the North of Iraq, the use of bases in Turkey would also be necessary.

17. In the absence of UN authorisation, there will be problems in securing the support of NATO and EU partners. Australia would be likely to participate on the same basis as the UK. France might be prepared to take part if she saw military action as inevitable. Russia and China, seeking to improve their US relations, might set aside their misgivings if sufficient attention were paid to their legal and economic concerns. Probably the best we could expect from the region would be neutrality. The US is likely to restrain Israel from taking part in military action. In practice, much of the international community would find it difficult to stand in the way of the determined course of the US hegemon. However, the greater the international support, the greater the prospects of success.

A Quiescent Israel-Palestine

18. The Israeli re-occupation of the West Bank has dampened Palestinian violence for the time being but is unsustainable in the long-term and stoking more trouble for the future. The Bush speech was at best a half step forward. We are using the Palestinian reform agenda to make progress, including a resumption of political negotiations. The Americans are talking of a ministerial conference in November or later. Real progress towards a viable Palestinian state is the best way to undercut Palestinian extremists and reduce Arab antipathy to military action against Saddam Hussein. However, another upsurge of Palestinian/Israeli violence is highly likely. The co-incidence of such an upsurge with the preparations for military action against Iraq cannot be ruled out. Indeed Saddam would use continuing violence in the Occupied Territories to bolster popular Arab support for his regime.

Benefits/Risks

19. Even with a legal base and a viable military plan, we would still need to ensure that the benefits of action outweigh the risks. In particular, we need to be sure that the outcome of the military action would match our objective as set out in paragraph 5 above. A post-war occupation of Iraq could lead to a protracted and costly nation-building exercise. As already made clear, the US military plans are virtually silent on this point. Washington could look to us to share a disproportionate share of the burden. Further work is required to define more precisely the means by which the desired endstate would be created, in particular what form of Government might replace Saddam Hussein's regime and the timescale within which it would be possible to identify a successor. We must also consider in greater detail the impact of military action on other UK interests in the region.

Domestic Opinion

20. Time will be required to prepare public opinion in the UK that it is necessary to take military action against Saddam Hussein. There would also need to be a substantial effort to secure the support of Parliament. An information campaign will be needed which has to be closely related to an overseas information campaign designed to influence Saddam Hussein, the Islamic World and the wider international community. This will need to give full coverage to the threat posed by Saddam Hussein, including his WMD, and the legal justification for action.

Timescales

21. Although the US military could act against Iraq as soon as November, we judge that a military campaign is unlikely to start until January 2003, if only because of the time it will take to reach consensus in Washington. That said, we judge that for climactic reasons, military action would need to start by January 2003, unless action were deferred until the following autumn.

22. As this paper makes clear, even this timescale would present problems. This means that:

(a) We need to influence US consideration of the military plans before President Bush is briefed on 4 August, through contacts betweens the Prime Minister and the President and at other levels;

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

FedSpeak

Kevin Drum writes:

The Washington Monthly: JUDGING THE ECONOMY.... Max Sawicky enters the fever swamp of mainstream economics and produces the following anecdote:

An econ professor I know likes to tell a story of his days as a Fed employee. At some kind of meeting new numbers were reported, to the effect that real wages had declined in a recent period. He recalls that a cheer went up among those present.

Business reporters do the same thing. Whether this is because they're equally clueless or because they're just following the crowd, I couldn't say.

There's a broad basket of economic indicators that we'd all like to see going in the right direction. We all want high GDP growth, low unemployment, a rising stock market, low inflation, etc. etc. But if you put a gun to my head and told me I could judge the health of an economy by only one statistic, my choice would be median income. If it's going up in real terms, the odds are good that the economy is in fine fettle. If it's stagnant or dropping, trouble is brewing. After all, what's the point of all the other stuff if 80% of the country isn't getting any benefit from it?

If I had been among those cheering when disappointing real wage growth was announced, it would have been because of the following chain of reasoning:

  1. Real wages are still lagging behind productivity.
  2. That means unemployment is still above the natural rate.
  3. That means the Federal Reserve can pursue policies to expand employment without worrying about accelerating overall inflation.
  4. It can cut interest rates.
  5. And so allow employment to expand rapidly.

When real wages start rising faster than trend productivity growth, it's a sign that inflationary pressures are or are about to start building. It's a sign that--as long as the Fed wishes to maintain its credibility as the guardian of effective price stability--it isn't going to be able to let employment grow rapidly for much longer.

So if I were to cheer at receiving news of disappointing real wage performance, it would be because I thought it told me that the natural rate of unemployment was lower than I had thought, and that the economy had more room to boom than I had thought.

Of course, bond traders don't think that far: they cheer at falling real wages and rising unemployment because the Fed's response to them is to cut interest rates and so elevate bond prices, and they are long bonds.

Posted by DeLong at 09:23 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 09:21 PM | Comments (0) | TrackBack

Stock, Housing, and Bond Market Bubbles

Greg Ip writes about the housing bubble. In my view, the housing bubble is secondary--it is the bond market conundrum (the continuance of very low long-term interest rates) that is central. Housing prices, after all, are not *that* out of line if current long-term interest rates were likely to continue. I don't think that long-term interest rates at current rates are likely to continue. There will have to be "adjustments" in many markets other than the housing market. How to finesse them is an interesting and unanswered question: a "research topic."

Let me turn the microphone over to Greg Ip:

WSJ.com - In Treating U.S. After Bubble, Fed Helped Create New Threats: By many yardsticks, the Federal Reserve's response to the bursting of the stock and tech-spending bubbles in 2000 has been a remarkable success. The 2001 recession was mild and economic growth since has been brisk. Employment is up and inflation remains within the Fed's hallowed zone of price stability.

But five years after the stock market's peak, the economy faces other threatening imbalances: a potential housing bubble, rock-bottom personal saving rates and a gargantuan trade deficit. And the Fed's post-bubble prescription bears some responsibility for all three. Fed officials acknowledge as much but say the alternatives were worse.

By slashing short-term interest rates to 45-year lows, the Fed encouraged Americans to borrow more, gave them little reward for saving and helped ignite a surge in housing prices.... All that spending contributed to a growing U.S. economy, a steady increase in imports and... a mountain of foreign debt. This is pleasant for Americans as long as it lasts. But Fed officials, international financial watchdogs and private economists say it can't.... After treating a bubble, how does the Fed manage the side effects of its medicine?...

[A] minority of economists warn of a more damaging scenario. Some say the Fed has simply replaced the stock-market bubble with one in housing, which could burst.... Accused by some of fostering excess, Fed officials responded that the alternative was worse: a deeper recession and the risk of deflation -- a period of generally falling prices, which can worsen a downturn by making it harder for workers and companies to repay debts....

"If I were a biologist I'd call this a perfect example of symbiosis," former Fed Chairman Paul Volcker mused in a February speech at Stanford University. "Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can't go on indefinitely." Almost every economist agrees. The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession? Mr. Volcker thinks a crisis is likely. Investor confidence could fade "at some point," he said, with "damaging volatility in both exchange markets and interest rates."...

Fed staff research shows that in the past, when a big, rich country has a large current account deficit, it usually narrows without crisis.... That benign scenario has yet to unfold. Business investment is growing but by less than the Fed had expected....

Posted by DeLong at 09:19 PM | Comments (0) | TrackBack

Stock, Housing, and Bond Market Bubbles

Greg Ip writes about the housing bubble. In my view, the housing bubble is secondary--it is the bond market conundrum (the continuance of very low long-term interest rates) that is central. Housing prices, after all, are not *that* out of line if current long-term interest rates were likely to continue. I don't think that long-term interest rates at current rates are likely to continue. There will have to be "adjustments" in many markets other than the housing market. How to finesse them is an interesting and unanswered question: a "research topic."

Let me turn the microphone over to Greg Ip:

WSJ.com - In Treating U.S. After Bubble, Fed Helped Create New Threats: By many yardsticks, the Federal Reserve's response to the bursting of the stock and tech-spending bubbles in 2000 has been a remarkable success. The 2001 recession was mild and economic growth since has been brisk. Employment is up and inflation remains within the Fed's hallowed zone of price stability.

But five years after the stock market's peak, the economy faces other threatening imbalances: a potential housing bubble, rock-bottom personal saving rates and a gargantuan trade deficit. And the Fed's post-bubble prescription bears some responsibility for all three. Fed officials acknowledge as much but say the alternatives were worse.

By slashing short-term interest rates to 45-year lows, the Fed encouraged Americans to borrow more, gave them little reward for saving and helped ignite a surge in housing prices.... All that spending contributed to a growing U.S. economy, a steady increase in imports and... a mountain of foreign debt. This is pleasant for Americans as long as it lasts. But Fed officials, international financial watchdogs and private economists say it can't.... After treating a bubble, how does the Fed manage the side effects of its medicine?...

[A] minority of economists warn of a more damaging scenario. Some say the Fed has simply replaced the stock-market bubble with one in housing, which could burst.... Accused by some of fostering excess, Fed officials responded that the alternative was worse: a deeper recession and the risk of deflation -- a period of generally falling prices, which can worsen a downturn by making it harder for workers and companies to repay debts....

"If I were a biologist I'd call this a perfect example of symbiosis," former Fed Chairman Paul Volcker mused in a February speech at Stanford University. "Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can't go on indefinitely." Almost every economist agrees. The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession? Mr. Volcker thinks a crisis is likely. Investor confidence could fade "at some point," he said, with "damaging volatility in both exchange markets and interest rates."...

Fed staff research shows that in the past, when a big, rich country has a large current account deficit, it usually narrows without crisis.... That benign scenario has yet to unfold. Business investment is growing but by less than the Fed had expected....

Posted by DeLong at 08:59 PM | Comments (0) | TrackBack

The Iraqi Civil War Approaches...

Eric Umansky writes:

Eric Umansky: Ugly in Iraq: This from Today's Papers:

A former member of the Wolf Brigade, an elite Iraqi commando unit, entered the brigade headquarters in eastern Baghdad and detonated explosives strapped to his body, killing three soldiers and one other person.

Here how the Times described the Brigade in a recent Q&A:

The most feared and effective commando unit in Iraq, experts say. Formed last October by a former three-star Shiite general and SCIRI member who goes by the nom de guerre Abu Walid, the Wolf Brigade is composed of roughly 2,000 fighters, mostly young, poor Shiites from Sadr City. Members of the group reportedly earn as much as 700,000 Iraqi dinars, or $400, per month, a large sum in Iraqi terms. They dress in garb--olive uniform and red beret--redolent of Saddam Hussein's elite guard; their logo is a menacing-looking wolf.

Meanwhile, it looks like Iraqi government forces can get some things done, such as moving sectarian violence moving toward a boil. From the NYT:

Also in the morning, the police found the bodies of three Iraqi civilians in Baghdad, the Interior Ministry said. The men, who belonged to the Sunni-dominated Dulaim tribe in rebellious western Iraq, had been handcuffed and blindfolded, and there were signs of torture on their bodies, a ministry official said. The victims were Saadi Khalaf, an Oil Ministry employee; Muhammad Khalaf, a reporter for Al Majd, a newspaper; and Esam Fadhil, their cousin. The three men were taken from their homes in southern Baghdad on Friday night, reportedly by men wearing police uniforms and riding in Interior Ministry vehicles, the official said. Their kidnappers told people in those houses that they were intelligence officers with the Interior Ministry, the official added.

Posted by DeLong at 08:40 PM | Comments (0) | TrackBack

Wolfowitz Math: $208 Billion < $30 Billion

Unqualified Offerings writes:

: "Walter Pincus of the Post, writing about the memo prepared in advance of the famous July 2002 Downing Street meeting, gets droll:

Testimony by then-Deputy Secretary of Defense Paul D. Wolfowitz, one of the chief architects of Iraq policy, before a House subcommittee on Feb. 28, 2003, just weeks before the invasion, illustrated the optimistic view the administration had of postwar Iraq. He said containment of Hussein the previous 12 years had cost %u201Cslightly over $30 billion,%u201D adding, %u201CI can%u2019t imagine anyone here wanting to spend another $30 billion to be there for another 12 years.%u201D As of May, the Congressional Research Service estimated that Congress has approved $208 billion for the war in Iraq since 2003.

The rest of the article is stuff you already knew, just more official-like.

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

Payoffs From Globalization

Gary Clyde Hufbauer and Paul L.E. Grieco say:

The Payoff From Globalization: There is no question that trade liberalization creates winners and losers. Affected citizens and companies have every right to plead their case. But Congress should consider how freer trade affects the nation as a whole. Since World War II the United States has led the international quest to liberalize world trade and investment. With leadership from the White House, Congress has slashed the simple average tariff rate from 40 percent in 1946 to 4 percent today, and other industrial nations have done much the same. After a half-century of steady liberalization it is fair to ask, what do Americans have to show?

As it turns out, quite a lot. Using four different methods, we estimate that the combination of shrinking distances -- thanks to container ships, telecommunications and other new technologies -- and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household.... Americans do not receive this money as a check marked "payoff from globalization." Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices....

First, we... correlate the expansion of international trade with economic growth... the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP.... [S]econd... we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices... 8.6 percent of GDP. Third, we draw on a computable general equilibrium model... 7.3 percent more in GDP.... Finally, we calculate the productivity benefits arising from use of imported components... 9.6 percent of GDP....

[O]ur estimates of future policy liberalization alone (excluding likely benefits from better communications and transportation) indicate that a move from today's commercial environment to global free trade and investment could produce an additional $500 billion in U.S. income annually, or roughly $5,000 per household each year... services, agriculture, transportation and trade with developing countries.... Despite the huge payoff to the United States, maintaining political support for trade liberalization has never been easy. Poli Sci 101 gives the explanation: Large gains are widely dispersed, and much smaller private losses are highly concentrated... 225,000 trade-related job losses per year... some are unemployed for an extended period. Even workers who are re-employed may face significant pay cuts... lifetime costs... $240,000 per affected worker. This is a huge loss on a personal level, but only about 5 percent of the annual national gains.... [S]trident opposition to CAFTA from sugar barons....

The federal government spends less than $2 billion per year helping trade-dislocated workers. Over the past decade, the Organization of Economic Cooperation and Development estimates that U.S. government policy has boosted domestic farm incomes by an average $40 billion per year.... Given the enormous dividends from international trade, more should be done for workers forced to bear the burden of economic adjustment...

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

A Big Hole in Michael Kinsley's Knowledge Base

Michael Kinsley appears never to have learned that high officials of foreign governments use the word "Washington" as a shorthand for "The U.S. government." For them, "Washington" does not mean "freelance chatterboxes."

How has he managed to avoid learning this?

Kevin Drum comments:

The Washington Monthly: I've read Michael Kinsley's latest column on the subject.... [H]ere is the wording of the original DSM:

C [the head of MI6] reported on his recent talks in Washington. There was a perceptible shift in attitude. Military action was now seen as inevitable.

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

....The Foreign Secretary said he would discuss this with Colin Powell this week. It seemed clear that Bush had made up his mind to take military action, even if the timing was not yet decided.

Got that? The head of MI6, the defense secretary, and the foreign secretary all reported that military action was a foregone conclusion.

Here's how Kinsley reports this:

The key passage summarizes 'recent talks in Washington' by the head of British foreign intelligence (identified, John le Carre-style, as 'C'). C reported that 'military action was now seen as inevitable.'

....But even on its face, the memo is not proof that Bush had decided on war. It states that war is 'now seen as inevitable' by 'Washington.' That is, people other than Bush had concluded, based on observation, that he was determined to go to war. There is no claim of even fourth-hand knowledge that he had actually declared this intention. Even if 'Washington' meant administration decision-makers, rather than the usual freelance chatterboxes, C was only saying that these people believed that war was how events would play out.

So: three high level officials from our closest military partner came to Washington for high level talks. All three came to identical conclusions. What's more, the balance of the DSM is a discussion of military plans and legal justifications that assumes military action as a given. The only question mark is the exact date.

Yet Kinsley treats this as if these guys were just some bloggers who were shooting the breeze about the DC rumor mill. Is he serious?

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

The Gadflyer Is as Annoyed as I Am at Toner and Rosenbaum

Jonathan Weileer writes:

The Gadflyer: Fly Trap: One of the most frustrating aspects of the debate about social security is how often treatments of the issue demonstrate what seems like willful ignorance of the intensive ways in which the issues involved have already been addressed. So it goes in Sunday's New York Times, where Robin Toner and David Rosenbaum make the shocking discovery that expected increases in life expectancy need to be addressed in securing the finances of the program over the next seventy five years. They write: 'Americans turning 65 this year can expect to live, on average, until they are 83, four and a half years longer than the typical 65-year-old could expect in 1940. And government actuaries predict that American life spans will just keep growing. This demographic trend - by 2040, the average 65-year-old will live to about 85 - has major financial implications for Social Security and major political implications for the lawmakers now trying to overhaul the system.'

Incredibly, in an article which is entirely devoted to the impact of life expectancy increases on social security's finances, the authors do not, one single time, mention the fact that the Social Security Trustees (and the Congressional Budget Office) factor life expectancy increases into their assessment of the program's long-term well-being. Now, there is a debate about whether the trustees have over- or under-estimated the increase in life expectancy going forward. Robert Pear, for example, in an article written last December, marshalled evidence suggesting that the trustees have under-estimated the likely increase.

However, he provided room for experts who disagree with that assertion.... [T]here is not a single mention of that debate in the Toner/Rosenbaum piece or even, as I mentioned, an acknowledgment that the trustees have already accounted for life expectancy increases in their projections. Instead, the Toner/Rosenbaum article comprises a litany of quotes from Republicans about the dire realities facing the program, presumably counter-balanced by quotes from a representative of AARP and a democratic representative from North Dakota on why it's inappropriate to raise the age limit for drawing benefits, and from a democratic pollster about why age is a dicey political issue...

Posted by DeLong at 04:54 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Life Expectancy and Social Security Edition)

Roughly, if you take the Congressional Budget Office's forecasts, to close the expected 75-year Social Security deficit requires one of (a) raising the share of payroll subject to Social Security taxes from 85% to 95%, (b) raising the Social Security tax rate from 12.4% to 13.6% on its current tax base, (c) cutting benefits by a tenth, (d) raising the retirement age at which you can start collecting Social Security by 18 months, or (e) some combination of things. (Of course, this would be expected to leave the system in considerable deficit after 2080.)

Today Robin Toner and David Rosenbaum have a front page New York Times article about rising life expectancy and Social Security. Yet they manage to convey only four pieces of information: (i) people are living longer, (ii) that means that Social Security has to pay out more money to them over their lifetimes, (iii) Social Security's payouts could be reduced by raising the retirement age, but (iv) raising the retirement age is politically unpopular.

No useful numbers at all--not even a clue about the *size* of the increase in the Social Security retirement age that Republican committee chairs are contemplating.

No placing of the "longevity issue" in the context of the other factors affecting Social Security finances--the population growth issue, the population aging issue, the productivity growth issue, the income distribution issue, et cetera. No hint in the article that if you don't raise retirement ages, you are committed thereby to either (a) hoping that economic growth will speed up by a lot, or (b) tax increases or some other form of benefit cuts.

Why oh why can't we have a better press corps?

In Overhaul of Social Security, Age Is the Elephant in the Room - New York Times by ROBIN TONER and DAVID E. ROSENBAUM: WASHINGTON, June 11 - Americans turning 65 this year can expect to live, on average, until they are 83, four and a half years longer than the typical 65-year-old could expect in 1940... by 2040, the average 65-year-old will live to about 85.... Policy experts... have told Congress... adjusting benefits, raising the retirement age, increasing taxes or creating new incentives to work longer.... Senator Charles E. Grassley, Republican of Iowa, the chairman of the Finance Committee, says the retirement age will be addressed in the solvency plan.... 'We've got to deal with reality,' said Senator Trent Lott, Republican of Mississippi.

But the politics are treacherous.... The most direct way to deal with the financial strain of greater longevity is simply to raise the retirement age.... But... in a New York Times/CBS News Poll earlier this year, nearly 8 out of 10 respondents said they would oppose raising the age when people are eligible for Social Security benefits. Political strategists say this issue is viewed very differently by policy experts, who may see nothing wrong with working longer, and average Americans, with jobs that may be uninteresting, stressful or physically demanding, who are often eager to retire and doubtful of their employment prospects in their mid-to-late 60's....

'In Washington, the focus is on the demographic reality that people live longer, and most of the people who are having this conversation wouldn't mind working well into their 70's and 80's,' said Geoff Garin, a Democratic pollster.... Glen Bolger, a Republican pollster, agreed: 'Forty might be the new 30, but they don't necessarily believe that 70 is the new 65.'

Lawmakers in both parties have acknowledged that many people not only want to but also need to retire at 62 or 65. Representative Bill Thomas, Republican of California, the chairman of the Ways and Means Committee, recently reflected, 'I know my father, in terms of his plumbing activities, was pretty - the phrase, I guess, would be pretty used up by the time he was 65.' Representative Earl Pomeroy, Democrat of North Dakota, a committee member, said, 'I represent a lot of people doing some pretty hard labor out there on those farms.'... protections for low-income workers in physically taxing fields.... Workers can take earlier retirement at 62, as most do, but their benefit checks are reduced as a result - 20 percent or more every month for the rest of their lives, depending on how early they retire....

C. Eugene Steuerle, a senior fellow at the Urban Institute and a former official in the Reagan administration, notes that Americans already retire, on average, for close to one-third of their adult lives, and argues that Social Security 'has morphed into a middle-age retirement system.'... Edward M. Gramlich, a governor of the Federal Reserve Board and an authority on Social Security, says that if the architects of Social Security 'had known about the explosion in life expectancy, they would have put in some adjustment in the retirement age.'...

For individuals... indexing for longevity, would be little different from a direct increase in the retirement age or a specified reduction in benefits, said Douglas Holtz-Eakin, director of the Congressional Budget Office. But for the system, Mr. Holtz-Eakin said, it would make a big difference because the changes would be automatic.... It might also be politically attractive because politicians would be relieved of the responsibility of periodically voting to raise the retirement age or to cut benefits.... [O]ver 75 years and longer, he said, it would have an important effect...

Posted by DeLong at 04:42 PM | Comments (0) | TrackBack

June 11, 2005

The Honor of Marse Robert

Somebody needs to stand up for Robert E. Lee. After having him win the Battle of Gettysburg decisively, William Forstchen and Newt Gingrich have him lose the entire Army of Northern Virginia--the entire army--to U.S. Grant before the end of 1863.

No way. No how. Even though he did order Pickett's Charge, Marse Robert was a *very* good general. Unless outnumbered more than five-to-one (as Lee was at Appomattox), it takes a John Bell Hood or a John Pemberton or a Simon Buckner to lose an entire army under Civil War conditions.

Never Call Retreat: Lee and Grant: The Final Victory (New York: Thomas Dunne: 0312342985).

But we should never forget what the power elite of the South was fighting for. Here it is in their own words:

The Address of George Williamson, Commissioner of Louisiana, to the Texas Secession Convention.

Posted by DeLong at 08:50 PM | Comments (0) | TrackBack

Why Oh Why Are We Ruled by These Liars? (And We Could Use a Better Press Corps...)

The Downing Street Memo acquires more steam:

Ministers were told of need for Gulf war "excuse" - Britain - Times Online: Michael Smith: MINISTERS were warned in July 2002 that Britain was committed to taking part in an American-led invasion of Iraq and they had no choice but to find a way of making it legal. The warning, in a leaked Cabinet Office briefing paper, said Tony Blair had already agreed to back military action to get rid of Saddam Hussein at a summit at the Texas ranch of President George W Bush three months earlier... since regime change was illegal it was “necessary to create the conditions” which would make it legal. This was required because, even if ministers decided Britain should not take part in an invasion, the American military would be using British bases....

The paper was circulated to those present at the meeting, among whom were Blair, Geoff Hoon, then defence secretary, Jack Straw, the foreign secretary, and Sir Richard Dearlove, then chief of MI6.... The document said the only way the allies could justify military action was to place Saddam Hussein in a position where he ignored or rejected a United Nations ultimatum.... But it warned this would be difficult. “It is just possible that an ultimatum could be cast in terms which Saddam would reject,” the document says....

The suggestions that the allies use the UN to justify war contradicts claims by Blair and Bush, repeated during their Washington summit last week.... There has been a growing storm of protest in America, created by last month’s publication of the minutes in The Sunday Times. A host of citizens, including many internet bloggers, have demanded to know why the Downing Street memo (often shortened to “the DSM” on websites) has been largely ignored by the US mainstream media. The White House has declined to respond to a letter from 89 Democratic congressmen asking if it was true — as Dearlove told the July meeting — that “the intelligence and facts were being fixed around the policy” in Washington.

The Downing Street memo burst into the mainstream American media only last week after it was raised at a joint Bush-Blair press conference....

The complaints of media self-censorship have been backed up by the ombudsmen of The Washington Post, The New York Times and National Public Radio, who have questioned the lack of attention the minutes have received from their organisations.

Posted by DeLong at 08:12 PM | Comments (0) | TrackBack

Astroturf

One of the most effective rhetorical moments I can see in my mind's eye--although, alas, I have forgotten the context--is that of Treasury Secretary Lloyd Bentsen icily glaring across the conference table at somebody and saying: "I am old enough to know the difference between 'grassroots' and 'astroturf'."

This morning Teresa Nielsen Hayden tells us to go read Rational Grounds:

Making Light: More astroturf: In "Deceiving Us Has Become an Industrial Process," the weblog Rational Grounds has far exceeded the old post of mine he quotes, Common Fraud, in examining how pervasive corporate-sponsored fake grassroots organizations have become:

Josh Marshall is currently beating the drum against Koch Industries... reading his comments I was bowled over by the number of astroturf groups involved in this little network. You've got Social Security for All, who are actually Americans for Prosperity, who are actually the Independent Women's Forum.... Citizens for a Sound Economy (now merged with Empower America to become Freedom Works)... they also had a hand... lobbying for the tobacco companies going back to 1994.... The bizarre advocacy network the government has worked up for No Child Left Behind is probably more famous... Armstrong Williams and the illegal fake-news blocks the Bush administration put out.... The Medicare and Armstrong parts of this saga are run through a PR and marketing firm named Ketchum.... Democracy, Data & Communications... oodles of DDC fronts.... All those stories about wacky lawsuits and outrageous settlements? Lies.... I have to wonder - how many of my opinions about my world are bought and paid for?

Answer: a lot of them, unless you've gone through and cleaned out every compartment. I don't want to give myself undue credit for precocity, but I started noticing there was something funny going on when I was a kid reading my grandparents' copies of Readers Digest. That was where I first heard about juries making ridiculous awards in personal-injury cases. It made interesting reading, but after a while it occurred to me that I never saw articles about reasonable and justifiable personal injury awards. Surely there had to be some? Likewise articles in which the IRS wasn't a monster, and labor unions had some good reason to exist, and politicians weren't all windbags, layabouts, and snake oil salesmen.

I doubt we'll ever know the whole history of astroturf. I suspect it goes back further and spreads wider than most sane people have ever imagined.

(Via .)

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

George W. Bush Is an Unpopular President

Could it be because he's incompetent?

Daniel Froomkin writes:

The Increasingly Unpopular President: "the just-out Associated Press/Ipsos poll, Bush's job approval ratings and the public's confidence in the direction he's taking the nation are both at their lowest levels ever. A whopping 55 percent of those polled actually disapprove of the job he's doing, compared to 43 percent who approve.... This week's Washington Post/ABC News poll finds that 51 percent of respondents said they had an unfavorable impression of the president.... And the more you dig into the results, the worse it gets. Will Lester writes for the Associated Press: 'While Bush has gotten generally low scores for his handling of domestic issues for many months, most Americans have been supportive of his foreign policy. Not any more. 'In fact, as with The Post's poll, the AP poll shows there is no longer a single area in which the public approves of the job Bush is doing. On the economy, the approve/disapprove split in the AP poll is 43/54; on health care, education and the environment, 40/57; on foreign policy issues and the war on terrorism, 45/52; on the situation in Iraq, 41/56; and on Social Security, 37/59.

When is it time to start referring to Bush as an unpopular president? When his approval ratings are solidly below 50 percent for at least three months? Check. When his approval ratings on his signature issues are in the red? Check. When a clear majority of Americans say he is ignoring the public's concerns and instead has become distracted by issues that most people say they care little about? Check.

And a Reality CheckHere's how Bush described his plan for Iraq, at his joint press availability with Prime Minister Tony Blair on Tuesday: 'We'll support Iraqis as they take the lead in providing their own security. Our strategy is clear: We're training Iraqi forces so they can take the fight to the enemy, so they can defend their country. And then our troops will come home with the honor they have earned.' Anthony Shadid and Steve Fainaru write from Baiji, in northern Iraq, with a chilling and gripping tale about the U.S. military's attempt to train the Iraqi army's Charlie Company. They put it bluntly: 'The reconstruction of Iraq's security forces is the prerequisite for an American withdrawal from Iraq. But as the Bush administration extols the continuing progress of the new Iraqi army, the project in Baiji, a desolate oil town at a strategic crossroads in northern Iraq, demonstrates the immense challenges of building an army from scratch in the middle of a bloody insurgency.' Here's what one of the training officers -- Lt. Kenrick Cato, 34, of Long Island, N.Y., who sold his share in a database firm to join the military full time after the Sept. 11, 2001, attacks -- tells Shadid and Fainaru:

'I know the party line. You know, the Department of Defense, the U.S. Army, five-star generals, four-star generals, President Bush, Donald Rumsfeld: The Iraqis will be ready in whatever time period. . . . But from the ground, I can say with certainty they won't be ready before I leave. And I know I'll be back in Iraq, probably in three or four years. And I don't think they'll be ready then.'

Time to Level with the Public? Carl P. Leubsdorf writes in the Dallas Morning News: 'A top congressional Democratic supporter of U.S. action in Iraq said Thursday that President Bush should make a nationally televised speech and 'level with the American people' about the long road ahead there. 'Faced with declining public support, Mr. Bush needs to tell Americans 'it's going to take a lot more time . . . at least through the end of 2006,' and explain what still has to be done there, Sen. Joe Biden told reporters after returning from his fifth visit to Iraq.' The Delaware senator, senior Democrat on the Foreign Relations Committee, said he gave his suggestion Tuesday to Stephen Hadley, Mr. Bush's national security adviser, after finding 'a total disconnect' between the situation in Iraq and optimistic statements by Mr. Bush and his top aides. . . .

Posted by DeLong at 08:12 AM | Comments (0) | TrackBack

Notes: URAP Project 1: Fall 2005: Noise Traders

URAP Project: Toward a Taxonomy of Noise Trader-Generated Financial Market Failure

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

Here's one possibility: one that requires somebody with good algebra and simulation skills:

Start from: J. Bradford DeLong, Andrei Shleifer, Lawrence Summers, and Robert Waldmann (1990), "Noise Trader Risk in Financial Markets, Journal of Political Economy 98, 703-738.

The idea is to use the model of DSSW (1990), related models, and simulations, to try to make progress on the circumstances under which we would expect to see financial markets perform well and badly as social capital allocation mechanisms that feed prices to the rest of the economy.

The first question to be approached would be the effect of increasing fundamental uncertainty on the ability of a financial market to "weed out" peole who trade on bad information. The market, after all, aggregates information--and it cannot give reliable price signals if the information that it aggregates is bad, can it? Implicit in DSSW is the prediction that increasing fundamental uncertainty can destroy a financial market's abiity to weed out or even keep a lid on bad information. But how robust is this prediction? And what other predictions are there?

This URAP project would jump off from DSSW (1990), a twenty-page background memo that sketches out the connection between the ability of a DSSW-type financial market to keep a lid on noise trading and the amount of fundamental risk, and an old Excel spreadsheet used to do a little algebra and simulations.

http://www.j-bradford-delong.net/movable_type/pdf/Noise_Trader_Background.pdf
http://www.j-bradford-delong.net/movable_type/pdf/Noise_Traders_Main.pdf
http://www.j-bradford-delong.net/movable_type/xls/Noise_Trader_Risk.xls

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

The State of the Labor Market

PGL at Angry Bear writes that he is:

Angry Bear: updat[ing] my chart on why I put less stock in the unemployment rate than the population ratio. Notice, however, that the employment-to-population ratio did rise a bit last month as the Household Survey showed a much larger employment increase than the Establishment Survey (which was also picked up by one of the National Review%u2019s pseudoeconomists who only think they know more economics than Paul Krugman). Note also that this ratio is still far below the levels enjoyed five years ago. While I can understand the FED%u2019s reasoning for tight money five years ago (although why George W. Bush and Lawrence Lindsey were proposing fiscal stimulus back then puzzled me), I%u2019m in the camp of those who would argue against tight money now as the labor market still appears weak to me.

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

Matthew Yglesias *Is* the Media Lobby

He argues that TV is good--or at least not bad--for you. His chances of persuading me and my wife to let our children watch more TV is about as great as his chances of persuading us to let them play "Grand Theft Auto."

There is one annoying thing about Yglesias's post. I am going to have to go read the study it refers to before I can figure out what the study's claim that "although kids reporting the lowest grades also tend to report the highest levels of media exposure . . . this relationship is not statistically significant" means. "This relationship is not statistically significant" can mean one of two things:

  1. It's not important.
  2. We don't have enough data.

When in the future I am pleased to be among the first to welcome our new statistically-sophisticated overlords, anyone who writes the phrase "not statistically significant" without immediately adding "(it's not important)" or ("we don't have enough data") will be sent to the agonizer.

TPMCafe || Politics, Ideas & Lots Of Caffeine: Kaiser found that 'although kids reporting the lowest grades also tend to report the highest levels of media exposure . . .this relationship is not statistically significant.' This contradicts earlier research, and what's changed is that high-achieving children nowadays consume more media than they used to. It appears that 'as media become more and more integrated into the lives of young people, the differences once located by academic performance are attenuating.'...

Posted by DeLong at 08:04 AM | 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?"

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

Posted by DeLong at 07:44 AM

When Threads Leak Into Each Other

In comments, Brian C.B. writes:

Brad DeLong's Semi-Daily Journal: Another Welcome New Recruit to the Order of the Shrill: You know, I think take the dramatic rise in Arkham house prices as a solid sign of a real estate bubble. I mean, $750,000 for a 'starter cottage with 3BR, 2B, carport, and inhabitation by ritually-murderous Native American deities at each new moon' seems a bit much, proximity to shopping and schools notwithstanding...

Posted by DeLong at 07:28 AM

June 10, 2005

Free Trade

Max Sawicky writes:

MaxSpeak, You Listen!: POSTCARDS FROM THE EDGE, II: Second in our series on economic notions heretical to mainstream liberal economics.

Free trade is an issue where better-off liberals and writers for publications that cater to them look down their noses at criticism of laissez-faire economics. For some reason, markets that straddle national borders are sacrosanct, while those that do not are fair game for modest regulation, such as the minimum wage, child labor, etc. Trade unionists who agitate for social clauses in trade agreements are called protectionists by people who now say the U.S. should pressure China to revalue its currency. EPI and CEPR are trade-bashing central.

A free trader might argue that effective trade regulation is hard to do and inevitably polluted by politics. We could say the same about free trade, witness the current administration.

Among bloggers, there is a dearth of alternative commentary on this issue. DeLong is fanatically pro-trade liberalization, but at the same time among the most candid in acknowledging the vulnerabilities of his position. (For instance.) General Glut, Globalize This!, and oldman.

Well, free trade is a very important pie-growing mechanism--and, as a way of boosting growth in poor parts of the world, an important step toward a truly human world and a secure world.

Plus there are much better tools for repairing the income distribution than tariffs and quotas. If only we could assemble a political coalition behind any of them...

And effective trade regulation is hard to do and inevitably polluted by politics.

Posted by DeLong at 09:31 PM

June 09, 2005

Paul Krugman Denounces the Politics of Greed and Deception

Paul Krugman writes:

Losing Our Country - New York Times: In the 1960's America was a place in which very few people were extremely wealthy, many blue-collar workers earned wages that placed them comfortably in the middle class, and working families could expect steadily rising living standards and a reasonable degree of economic security. But as The Times's series on class in America reminds us, that was another country.... Adjusted for inflation, the income of the median family doubled between 1947 and 1973. But it rose only 22 percent from 1973 to 2003, and much of that gain was the result of wives' entering the paid labor force or working longer hours, not rising wages. Meanwhile, economic security is a thing of the past: year-to-year fluctuations in the incomes of working families are far larger than they were a generation ago. All it takes is a bit of bad luck in employment or health to plunge a family that seems solidly middle-class into poverty.

But the wealthy have done very well indeed. Since 1973 the average income of the top 1 percent of Americans has doubled, and the income of the top 0.1 percent has tripled.... [F]or now let me just point out that middle-class America didn't emerge by accident. It was created by what has been called the Great Compression of incomes... sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation. Since the 1970's, all of those sustaining forces have lost their power. Since 1980 in particular, U.S. government policies have consistently favored the wealthy at the expense of working families - and under the current administration, that favoritism has become extreme and relentless.... It's not a pretty picture - which is why right-wing partisans try so hard to discredit anyone who tries to explain to the public what's going on.

These partisans rely in part on obfuscation: shaping, slicing and selectively presenting data in an attempt to mislead. For example, it's a plain fact that the Bush tax cuts heavily favor the rich, especially those who derive most of their income from inherited wealth. Yet this year's Economic Report of the President, in a bravura demonstration of how to lie with statistics, claimed that the cuts 'increased the overall progressivity of the federal tax system.' The partisans also rely in part on scare tactics, insisting that any attempt to limit inequality would undermine economic incentives and reduce all of us to shared misery....

Above all, the partisans engage in name-calling. To suggest that sustaining programs like Social Security, which protects working Americans from economic risk, should have priority over tax cuts for the rich is to practice 'class warfare.' To show concern over the growing inequality is to engage in the 'politics of envy.'

But the real reasons to worry about the explosion of inequality since the 1970's have nothing to do with envy. The fact is that working families aren't sharing in the economy's growth, and face growing economic insecurity. And there's good reason to believe that a society in which most people can reasonably be considered middle class is a better society - and more likely to be a functioning democracy - than one in which there are great extremes of wealth and poverty.... [W]e can make a start by calling attention to the politicians who systematically make things worse in catering to their contributors. Never mind that straw man, the politics of envy. Let's try to do something about the politics of greed.

Posted by DeLong at 10:29 PM

Political Invective

From the Valve:

The Valve - A Literary Organ | Ferocious Goat, or the Decline of Political Invective: Posted by Sean McCann on 06/09/05 at 01:13 PM: Ayjay worries about the declining quality of web calumny and asks us to study the masters.

Just came across this passage today, Eugene Debs on Teddy Roosevelt, January 1918:

This political pet of the plutocrats, this bogus reformer, this shreiking charlatan, this raving mountebank, this crazy-horse of Oyster Bay ranch, this blood and thunder prophet, this opera bouffe ghostdancer, this blatant quack hero, this freak of froth and foam and buncombe, this nauseating moralizer, this dysenteric scold, this chattering midwife and meddler and all-around nuisance has buncoed the people long enough and they at last know him for what he is, at least those of them who have mentality above a shell-fish, and who can tell a jibbering fraud after he has exhibited himself to them daily for a score of years.

I particularly liked "crazy-horse of Oyster Bay ranch." O, for a Debs now.

Posted by DeLong at 10:11 PM

The Bush Economic Policy Clown Show: The China Ring

David Wessel scratches his head as he contemplates U.S. economic policy toward China:

WSJ.com - Capital: How's China to Make Sense of U.S. Signals?: Imagine what it must be like to be a Chinese leader listening to the U.S. government. The Treasury plays the good cop, relying not on threats but reasoned economic argument: Let your currency rise, it tells the Chinese, not for our sake but for yours. Flexibility is your friend, the market your ally. Act like the economic superpower you have become.

The Commerce Department plays the pragmatist: Free trade is a nice slogan, but you Chinese know that slogans aren't policies. What matters is jobs. Either find a way to restrain your exports of clothing and textiles to us, or we will find a way to block them. If you don't like it, sue us in world-trade court. The U.S. trade representative prefers the high ground: Steal our factory jobs if you must, but stop stealing our ideas, the intellectual property that is our best hope of prospering in the global economy.

The Congress, keenly aware of Americans' anxiety about losing jobs, plays the heavy: You Chinese are "cheating," some, though not all, members of Congress shout. If the Bush administration doesn't do something about it soon, we will. How do you say "tariff" in Chinese? Actually, how do you say "cacophony" in Chinese?

Newspaper columnists sometimes take contradictory and uncoordinated government policies, discern the glimmer of a coherent framework and then describe that trenchantly.... I would gladly perform this public service -- if I could. Since I can't, I asked... economic-policy wonks....

Nicholas Lardy.... "The Chinese are probably baffled," he says. "There's no coherent strategy. Every executive-branch agency plus Congress has their own policy," he says. "The Chinese will pick and choose or ignore everything."... Kenneth Rogoff... "The message is very strong. As China grows into a superpower, the U.S. is expecting more from it." But he, too, is puzzled: The U.S. tells China to act like a superpower, and then treats it as a pipsqueak.... Mr. Rogoff agrees... [that the] yuan [should] rise to help bring the Chinese and global economies into better balance. But... the administration isn't offering to do its part... aggressive deficit reduction....

Daniel Tarullo... speculates that Chinese leaders draw one of two conclusions... U.S. policy... marks a shift to... containing China... [or] the Chinese... see all this as pandering to American public opinion....

Chinese leaders and the U.S. public deserve more than divergent talking points from cabinet secretaries...

Well, yes, the U.S. public (and Chinese leaders) deserve more than the Bush Administration Economic Policy Clown Show. But how to get it for them?

Posted by DeLong at 10:05 PM

The Medium Lobster on Global Warming

It writes:

Fafblog! the whole worlds only source for Fafblog.: There are precious few matters in the world which are black and white - at least, precious few matters which do not involve killing Arabs and banning icky gay people. In between there are a multitude of complex shades of gray, as in the question of global warming. Is the planet heating up, and if so, are we responsible, and if so, how many years should we spend humming loudly over anyone who informs us that we are responsible until we determine that we are not responsible?

Yesterday the New York Times revealed that a former lobbyist for the American Petroleum Institute and current chief of staff for the White House Council on Environmental Quality had made substantial edits to a series of reports on climate change in order to play down links between greenhouse gases and global warming. The usual leftist quarters are fired up again, calling for America to join a veritable science jihad, worshiping at the altar of fact when we've yet to hear what fiction has to say about the situation.

One can't be too careful when deliberating over the shifting and byzantine web of confusion and doubt that is so-called 'climate' 'change.' Whom should we believe: the unruly mob of every reputable climatologist on the planet, or the selfless sages at Exxon-Mobil? Uncertainty abounds, even among higher beings like the Medium Lobster. We must examine all sides of the issue, take input from all corners: from the side of science, and from the side of oil industry whores paid to lie about science. Someday, somehow, between these complex and opposing points of view, we may just find an answer.

Posted by DeLong at 10:03 PM

Even Count Potemkin No Longer Pretends His Creations Are Villages

National Review says things are not going well in Iraq. Why oh why do they hate America so much?

Steven Vincent on Iraq on National Review Online: Steven Vincent: Basra, Iraq — It’s been a little over a year since I was last in Basra, and at first glance little has changed. The buildings are just as dilapidated, livestock still periodically cross the rubble-strewn streets, and the once beautiful canals remain clotted with trash.... Beneath the surface, though.... I can no longer wander the streets, take a cab, or dine in restaurants for fear of being spotted as a foreigner: Kidnapping, by criminal gangs or terrorists, remains a lucrative business. Instead, for safety’s sake, I’m tied to my hotel, dependent on expensive drivers, unable to go anywhere without Iraqi escort. “You really shouldn’t be here at all,” a British-embassy official warned me....

Gone are the glamorous posters of those Shia icons.... The reason for this apparent diminution of religious fervor is the mainstreaming of Shia political organizations. “After the elections, the Islamic parties seized control of Basra,” Layla explains. “Now they want to appear more respectable.” Indeed, all but six of the 41 seats on the province’s Governing Council are filled by a cluster of Islamic groups, such as Dawa Islamiyya, the Supreme Council for Islamic Revolution in Iraq (SCIRI), and the up-and-coming Fadillah party — affiliated with Moqtada al al-Sadr — which scored a coup when one of its members became the provincial governor.

Another change is the number of abiyas you see around town. As the religious parties flex their muscles, their various sheikhs and imams exert a steady, if unlegislated, pressure on women to cover themselves in hejab.... “This has become an Iranian city,” contends Salaam Wendy, a Basra native who recently returned to his hometown.... The shadow of religious fundamentalism falls across other areas, too. Take, for instance, Basra Province’s “elected” council, the first such body in the long history of the region. I put “elected” in quotes in deference to the cynicism of numerous Iraqis, who claim that the religious parties fixed the balloting.... “Before the elections, the Governing Council was appointed by educated elites who chose capable people,” former Basra governor Hassan Alrashidi griped to me at the meeting. “The elections have brought in people whose main qualifications are their loyalty to the religious parties.” ...

This Basran equanimity even extends to that huge bone of Iraqi contention: foreign troops. True, you can find pro-Sadr graffiti that reads, “WAIT...WAIT...BRITISH JEWISH ARMY AL MAHDI WILL DESTROY,” and numerous residents complain of summary arrests, imprisonment, and physical abuses of civilians by U.K. forces. Generally, though, the Brits — who patrol the city in lightly armored vehicles — are tolerated, and in some quarters, liked.... As for America, the general feeling is gratitude for the removal of Saddam, tempered by disappointment in the slow progress of Iraq’s reconstruction. “America rid of us of one tyrant, only to give us hundreds more in the form of terrorists”.... Still, I’ve encountered some odd pockets of pro-American sentiment....

I spent an afternoon in a mosque in Old Basra, listening to a Sunni sheikh denounce America. The insurgents, he informed me, are patriots.... The U.S. has long hungered to dominate Iraq and steal its oil.... Do the Iraqi people not share some responsibility for these catastrophes? “No,” replied the sheikh. “They are America’s fault. Before America meddled in our affairs, Iraqis were warm, peace loving people.”

Few people here go that far in ascribing blame to the U.S. or its allies. Still, there is a feeing of helplessness, bordering for some on a sense of futility... water is still bad, electricity spotty, gas lines intolerable. “How can this be? We should be rich!” Saad, a former translator for the British army exclaimed to me. “Where is the money going, why is nothing happening?"... Basrans can almost see the arrival a better and more prosperous tomorrow, but for now, that bright future is frustratingly, inexplicably, just beyond their reach.

So we've reached the stage where even Count Potemkin will no longer pretend that his creations were villages.

Posted by DeLong at 09:43 PM

Thank God I'm Not a Republican!

If I were, I would have to pretend that somebody like this is a respected elder statesman:

Pandagon: There's no time like never, says Jesse Helms: Senator Helms, did you ever backtrack on your anti-integrationist beliefs, now that your memoirs are coming out?

'We will never know how integration might have been achieved in neighborhoods across our land, because the opportunity was snatched away by outside agitators who had their own agendas to advance,' according to the uncorrected proof. 'We certainly do know the price paid by the stirring of hatred, the encouragement of violence, the suspicion and distrust.'

Yes, a bunch of black people had the nerve--the nerve I tell you!--to demand equality during the inconvienent period of history known as Jesse Helms' life. How dare they. How 'having an agenda' and 'not being patient'--civil rights activists apparently should have waited for Helms and every other entitled white a****** on the planet to pass before asking quietly to be treated with dignity as is your right. Granted, that means wait forever, but that's better than making poor Senator Helms vaguely uncomfortable, isn't it?

Posted by DeLong at 09:41 PM

Grownup Republican Watch: Alan Greenspan

He tells the Joint Economic Committee:

Latest News and Financial Information | Reuters.com: "Greenspan calls for pay-go, U.S. budget restraint: Thu Jun 9, 2005 11:01 AM ET: WASHINGTON, June 9 (Reuters) - Federal Reserve Chairman Alan Greenspan on Thursday called for budget restraint, saying the United States will face severe fiscal pressure as the huge post-World War II baby boom generation retires. Greenspan, in comments to the congressional Joint Economic Committee, reiterated his call for the renewal of pay-as-you-go, often called pay-go, provisions that compel lawmakers to show how they will fund any spending initiatives or tax cuts. 'I have argued ... that fiscal policy as it moves into the early part of the next decade is going to run into very severe problems unless we restore pay-go and other means of restraint on the system,' Greenspan said. 'Something very unusual is about to happen to this country in that we're going to get a huge exodus from the labor force and remember that the baby boom generation was followed by the baby bust generation, which means we have fewer workers on average ever increasingly as we move into the next decade and beyond, to produce the goods and services that are required, not only for the workers and their families but for the huge increase in retirees,' Greenspan said.

Posted by DeLong at 07:31 PM

A Short Dialogue on the Price of the Long Treasury Bond

Alan Greenspan says:

FRB: Speech, Greenspan--Central Bank panel discussion--June 6, 2005 : The pronounced decline in U.S. Treasury long-term interest rates over the past year despite a 200-basis-point increase in our federal funds rate is clearly without recent precedent. The yield on ten-year Treasury notes currently is at about 4 percent, 80 basis points less than its level of a year ago.... The unusual behavior of long-term rates first became apparent almost a year ago.... [W]hat are those forces? Clearly, they are not operating solely in the United States.... A number of hypotheses have been offered as explanations of this remarkable worldwide environment of low long-term interest rates.

One prominent hypothesis is that the markets are signaling economic weakness....

A second hypothesis involves the behavior of pension funds.... But world demographic trends are hardly news, and recent adjustments to funding shortfalls do not seem large enough to be more than a small part of a complete explanation.

The heavy accumulation of U.S. Treasury obligations by foreign monetary authorities is yet another hypothesis.... But, given the depth of the market for long-term Treasury instruments, the Federal Reserve Board staff estimates that the effect of foreign official purchases has been modest....

A final hypothesis takes as its starting point the breakup of the Soviet Union and the integration of China and India into the global trading market.... The enlargement of global markets for goods, services, and finance has contributed importantly to the favorable inflation performance that we are witnessing in so many countries. That improved performance has doubtless contributed to lower inflation-related risk premiums, and the lowering of these premiums is reflected in significant declines in nominal and real long-term rates. Although this explanation contributes to an understanding of the past decade, I do not believe it explains the decline of long-term interest rates over the past year despite rising short-term rates....

[L]ow risk-free long-term rates worldwide seem to be one factor driving investors to reach for higher returns, thereby lowering the compensation for bearing credit risk.... The search for yield is particularly manifest in the massive inflows of funds to private equity firms and hedge funds. These entities have been able to raise significant resources from investors who are apparently seeking above-average risk-adjusted rates of return, which, of course, can be achieved by only a minority of investors.... I have no doubt that many of the new hedge fund entrepreneurs are embracing a strategy of pinpointing temporary market inefficiencies, the exploitation of which is expected to yield above-average rates of return. For the time being, most of the low-hanging fruit of readily available profits has already been picked.... [C]ontinuing efforts to seek above-average returns could create risks for which compensation is inadequate. Significant numbers of trading strategies are already destined to prove disappointing....

Admetos: I'm not sure I understand what Greenspan is saying. What academic model do you think he is relying on?

Thrasymakhos: You think Greenspan relies on economic models? Whoo boy, do you have a lot to learn!

Admetos: What important economic forces does he think are at work?

Thrasymakhos: You're asking me? I'm just a cardboard cut-out--a literary fiction--a stand-in for the author who says cynical things that the author does not quite say in his proper persona.

Glaukon: Greenspan mentions four factors--pessimism, demography, Asian central bank purchases, and global integration--and says that none of them account for the strange behavior of long-term interest rates.

Thrasymakhos: He does.

Glaukon: He then goes on to talk about a fifth factor--hedge funds chasing yields that "seek above-average returns... risks... trading strategies destined to prove disappointing." But he does not say that they are responsible.

Thrasymakhos: He does not.

Glaukon: But he does not say that they are not responsible either. Can we infer from his silence that he believes that they are responsible?

Thrasymakhos: He's named Alan Greenspan, not Leo Strauss.

Glaukon: Nevertheless, it is an interesting idea. How would it work out?

Khrematistikos: Let rT be the interest rate on long-term Treasury bonds, and let r be the interest rate on short-term cash. Consider a hedge fund that believes that bond prices will not move by much in the near future--or that, if bond prices do move, its location in Manhattan and the quick fingers at the keyboards of its traders will let it be one of the first out the door. Let R be the rate of return target of the hedge fund. And let L be the leverage of the hedge fund--the amount of dollars per dollar of capital that it borrows short in order to engage in the carry trade. Am I clear?

Sokrates: Clear as daylight, Khrematistikos.

Khrematistikos: Then the relationship between these variables for this hedge fund is:

R = L(rT - r)

Which tells us that the hedge fund's demand for long-term Treasuries (and its supply of short-term cash) is:

L = R/(rT - r)

Is everybody with me?

Glaukon: We are, Khrematistikos.

Khrematistikos: Now what happens when the Federal Reserve raises short-term interest rates r? That narrows spreads between short- and long-term interest rates, and induces the hedge fund to increase its demand L for long-term Treasuries. That means that increases in short-term rates are associated with increased demand--higher prices--lower interest rates--on long-term bonds. In other words, hedge-fund demand for long-term Treasuries slopes the wrong way: when prices rise, demand does not fall but increases.

Admetos: And?

Thrasymakhos: And when Treasury prices start to fall, hedge-fund demand for securities will fall too. Falling prices do not reduce excess supply but produce an even bigger excess supply.

Admetos: That doesn't sound good.

Thrasymakhos: Indeed, it is not. Big air pockets. Large price declines. Financial panic.

Glaukon: Is this a scenario to worry about?

Thrasymakhos: How would I know? Do I look like New York Federal Reserve President Tim Geithner?

Posted by DeLong at 07:29 PM

June 08, 2005

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 06:19 PM

June 07, 2005

David Wessel on Equal Opportunity and the Meritocracy

He writes, relying on the work of the excellent Joe Ferrie among others:

WSJ.com - As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls: The notion that the U.S is a special place where any child can grow up to be president, a meritocracy where smarts and ambition matter more than parenthood and class, dates to Benjamin Franklin. The 15th child of a candle-and-soap maker, Franklin started out as a penniless printer's apprentice and rose to wealth so great that he retired to a life of politics and diplomacy at age 42. The promise that a child born in poverty isn't trapped there remains a staple of America's self-portrait....

But the reality of mobility in America is more complicated... the gap between rich and poor has widened... the odds that a child born in poverty will climb to wealth -- or a rich child will fall into the middle class -- remain stuck.... Americans are no more or less likely to rise above, or fall below, their parents' economic class than they were 35 years ago. Although Americans still think of their land as a place of exceptional opportunity... the evidence suggests otherwise....

As recently as the late 1980s, economists argued that not much advantage passed from parent to child, perhaps as little as 20%. By that measure, a rich man's grandchild would have barely any edge over a poor man's grandchild.... [Today a] substantial body of research finds that at least 45% of parents' advantage in income is passed along to their children, and perhaps as much as 60%.... [E]conomists and sociologists say that in recent decades the typical child starting out in poverty in continental Europe (or in Canada) has had a better chance at prosperity. Miles Corak... 'The U.S. and Britain appear to stand out as the least mobile societies among the rich countries studied,' he finds....

Even Karl Marx accepted the image of America as a land of boundless opportunity, citing this as an explanation for the lack of class consciousness in the U.S. 'The position of wage laborer,' he wrote in 1865, 'is for a very large part of the American people but a probational state, which they are sure to leave within a longer or shorter term.' Self-made industrialist Andrew Carnegie, writing in the New York Tribune in 1890, catalogued the 'captains of industry' who started as clerks and apprentices and were 'trained in that sternest but most efficient of all schools -- poverty.'

The historical record suggests this widely shared belief about 19th-century America was more than myth. 'You didn't need to be told. You lived it. And if you didn't, your neighbors did,' says Joseph Ferrie, an economic historian at Northwestern University, who has combed through the U.S. and British census records that give the occupations of thousands of native-born father-and-son pairs who lived between 1850 and 1920.... The biggest factor, Mr. Ferrie says, is that young Americans could do something most British couldn't: climb the economic ladder quickly by moving from farm towns to thriving metropolises. In 1850, for instance, James Roberts was a 14-year-old son of a day laborer living in the western New York hamlet of Catharine. Handwritten census records reveal that 30 years later, Mr. Roberts was a bookkeeper -- a much higher rung -- and living in New York City at 2257 Third Ave. with his wife and four children.

As education became more important in the 20th century -- first high school, later college -- leaping up the ladder began to require something that only better-off parents could afford: allowing their children to stay in school instead of working. 'Something quite fundamental changed in the U.S. economy in the years after 1910 and before the Great Depression,' says Prof. Ferrie....

Why aren't the escalators working better? Figuring out how parents pass along economic status, apart from the obvious but limited factor of financial bequests, is tough. But education appears to play an important role. In contrast to the 1970s, a college diploma is increasingly valuable in today's job market. The tendency of college grads to marry other college grads and send their children to better elementary and high schools and on to college gives their children a lasting edge....

In the U.S., race appears to be a significant reason that children's economic success resembles their parents'.... 17% of whites born to the bottom 10% of families ranked by income remained there as adults, but 42% of the blacks did....

Posted by DeLong at 10:19 PM

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 10:17 PM

An Historical Document: Long-Term Capital Management CEO John Meriwether Asks for Money

I believe this to be authentic. Meriwether was right in what he wrote on September 2, 1998: LTCM's portfolio and trading strategies promised very high returns. But, as Andrei Shleifer and Robert Vishny say in their "Limits to Arbitrage", the moments when your expected returns from "convergence" strategies are highest are the moments when you have just taken a huge bath--and few are willing to add to your stake when the past month's results suggest that you aren't in control.


Date: September 2, 1998
To: Investors in the Investment Vehicles of Long-Term Capital Portfolio, LP
From: John W. Meriwether
Subject: Impact on Net Asset Value of August Market Conditions

Dear Investor:

As you are all too aware, events surrounding the collapse in Russia caused large and dramatically increasing volatility in global markets throughout August, capped by a last-day decline in the Dow Jones Industrial Average of 5123 points. The resulting dislocations in markets and greatly increased uncertainty have driven investors to safer and more liquid assets. With increases in both risk and liquidity premia--investment funds widely, many Wall Street firms, and money-center banks have reported large trading losses with resulting sharp declines in their share prices. Investors everywhere have experienced large declines in their wealth.

Unfortunately, Long-Term Capital Portfolio ("Fund") has also experienced a sharp decline in net asset value. As you know, our formal procedure for releasing our official net asset value normally takes about ten days after month end. Following our usual practice to give you an early estimate of the Fund's performance, it is down 44 percent for the month of August, and 52 percent for the year to date. Losses of this magnitude are a shock to us as they surely are to you, especially in light of the historical volatility of the Fund. The losses arising from the event-driven major increase in volatility and the flight to liquidity were magnified by the time of year when markets were seasonally thin.

The losses in August occurred in a wide variety of strategies, distributed approximately 82 percent in relative-value trades and 18 percent in directional trades. Emerging markets across both trade categories accounted for 16 percent of the month's total losses in the Fund. Within emerging markes, holdings involving Russia accounted for less than 10 percent of total losses.

A distinguishing characteristic of the Fund's invetment philosophy has always been that its returns are generally expected not to exhibit systematic correlation with the returns on global bond, stock, and currency markets. August saw an accelerating increase in demand for liquidity in nearly every market around the world. Consequently, Government bonds have been the best performers, while small-cap common stocks and other relatively illiquid and risky instruments such as high-yield bonds have performed poorly. Many of the Fund's investment strategies involve providing liquidity to the market. Hence, our losses across strategies were correlated after the fact from a sharp increase in the liquidity premium.

The majority of the Fund's risks are in our core investment strategies; that is, convergence, relative-value, and conditional convergence trades in the U.S., Japan, and in the larger markets of Europe. Although we have hedged risk-exposure components that were not expected to add incremental value to performance, large divergences in August occurred in many of our key trading strategies that resulted in large losses. The use of leverage has accentuated these losses.

With the large and rapid fall in our capital, steps have been taken to reduce risks now, commensurate with our level of capital. We have raised the risk-return tradeoff requirements for positions. Risk and position reduction is occurring in some strategies that do not meet the new standard. This is a prudent step given the level of capital and uncertainties in the marketplace.

On the other hand, we see great opportunities in a number of our best strategies and these are being held by the Fund. As it happens, the best strategies are the ones we have worked on over many years. We will focus on these high expected return-to-risk positions and, thereby we can manage them more aggressively.

A cornerstone of our investment management philosophy is the availability and efficiency of financing to support the long horizon for many of our investment strategies. Our capital base is over $2.3 billion, and it is quite liquid. Our financing is in place, including secured and unsecured term debt and long-dated contractural arrangements. These term arrangements provide time to reduce our positions, if needed, as markets become more settled. We continue to work closely with counterparts.

Investors in the Fund proviDeLong-term equity capital that can only be withdrawn in multi-year stages at each year-end. This capital allows the Fund to secure stronger term financing and contractual agreements. It also provides greater flexibility to adjust positions, given changes in the level of its capital. The first date that any investors can withdraw capital is year-end 1998 and that potential withdrawal is less than 12 percent of the capital of the Fund. The principals of LTCM represent over a third of the capital of the Fund. To provide a solid foundation for the Fund and to capitalize on the materially richer investment opportunity set, LTCM is in the process of seeking to raise additional capital.

The poor performance of the Fund, year-to-date and especially in August, has been very disappointing to all of us. However, I would ask in assessing performance going forward, that you keep in mind that the Fund's relative-value strategies may require a relatively long convergence horizon. The expected horizon for convergence on our trades range from six months to two years, or even longer. Implementation of these strategies involves large positions that take significant time to accumulate and to reduce efficiently. The convergence return pattern of these core trades normally implies that the day-to-day volatility is much greater in proportion to time than the month-to-month or year-to-year volatility of their performance. This does not imply, however, that the reported short-term performance of the Fund is in any way an inaccurate or invalid measure of actual returns. The mark-to-market valuations on positions in the Fund reported to you are always derived from actual dealer and broker quotations.

The Fund returned approximately $2.7 billion of its capital at year-end 1997 when it appeared that the existing investment opportunities were not large and attractive enough to warrant its retention. Many of the trades had converged producing profits and were unwound. Over the past several months, however these trades that had converged once again diverged. The Fund added to its positions in anticipation of convergence, yet largely because of last month's market events, the trades diverged dramatically. As a result, the opportunity act in these trades at this time is believed to be among the best that LTCM has ever seen. But, as we have seen, good convergence trades can diverge further. In August, many of them diverged at a speed and to an extent that had not been seen before. LTCM thus believes that it is prudent and opportunistic to increase the level of the Fund's capital to take advantage of this unusually attractive environment.

With limited expectations, the Fund has been closed to new investment since July 1995. Many of you have asked to add to your investment in the Fund. Since iti s prudent to raise additonal capital, the Fund is offering you the opportunity to invest in the Fund on special terms relating to LTCM fees. If you have an interest in investing, please contact Richard Leahy at LTCM (203-552-5511) for additional information.

I cannot close without telling you about the remarkable performance of the LTCM employees during this particularly difficult month. Over the first four years of the Fund, we had the great good fortune of consistent return performances resulting in larger-than-expected returns with lower-than-expected volatility. We expected that sooner or later that this good fortune could not continue uninterrupted and that we as a firm would be tested. I did not anticipate, hoever, how severe the test would be. I am happy to report the magnificent performance of our employees operating as a team--administration, technology, operations. legal, and strategies--coordinated across the Greenwich, London, and Tokyo offices during this extreme period. August has been very painful for all of us, but I am confident that as a consequence LTCM will emerge a stronger and better firm.

Sincerely,

John W. Meriwether
CEO
Chairman of the Management Committee

Posted by DeLong at 10:15 PM

Another Welcome New Recruit to the Order of the Shrill

Joe Gandelman is a professional voice. His schtick on the internet is that of a professional moderate voice, someone who is reasonable, who avoids the excesses of partisanship, who takes a deep breath and realizes that there are two sides to every story and that we need to be... calm, reasonable, and thoughtful always.

He reads Peggy Noonan.

His brain explodes.

Now he is one of us! Embrace your destiny! Feel the power of Shrillness!

Welcome to the Ancient and Hermetic Order of the Shrill, Mr. Gandelman--those of us who have been driven into shrill unholy madness by the mendacity, stupidity, incompetence, recklessness, and idiocy of the Bush administration and its allies. Your personal copy of the Krugmanomicon (along with additional promotional material containing many valuable offers) is on its way. Do not read more than ten pages a day, under pain of falling even further into shrill unholy madness. Your rank is Palaeozoic Tentacled Swamp-Dweller, 2nd Class. When in your non-human form, remember not to devour any endangered amphibians. Pray vainly to the dead, uncaring stars at least once a month, preferably when the moon is in the second decant.

Clear the weekend of July 37 for the annual Miskatonic University summer conference, barbecue (don't ask), and wine-tasting. Driving directions to picturesque Arkham, Massachusetts will follow. A side-trip to Tanglewood for the concerts is recommended, but beware Shoggoths on the road near South Campus at moonrise. And remember: Yog-Sothoth is the Gatekeeper!

Joe Gandelman: Peggy Noonan's latest Wall Street Journal column reads as if it's a satire piece— but, no, folks it is 100 percent for real. It's truly hard to believe it is. Before we even discuss it we MUST say a few things:

  1. This is the last column of her's we'll read. We already subscribe to Mad Magazine and although her writing is a bit funnier, we get more variety in Mad. And we suspect if the column below was submitted as a satire, Mad would reject it for being too off-the-wall. The Onion? Her column isn't quite cutting edge enough.
  2. In all seriousness, her newest column echoes the bitter, angry, attack-mode words of former Nixon speechwriter Ben Stein and overall near-hysteria on the part of far right conservatives, Watergate-era officials and talk show hosts who are using the revelation of key source Deep Throat as a chance to rebattle Nixon's impeachment, argue it was all liberal plot, a media plot and suggest that the REAL villains weren't the people in the administration abusing the American people's trust by misusing the government and lying (the word is ACCURATE here because the tapes proved it) but those who dared to bring Nixon down. These GOPers convieniently forget the Republican PATRIOTS such as Barry Goldwater who let Nixon know it was time to go.

...Here are a few excerpts for the latest attack on the 91-year-old former second in command at the FBI who we now know was Deep Throat:

Was Mr. Felt a hero? No one wants to be hard on an ailing 91-year-old man. We're SURE, Ms. Noonan was shedding tears as she began to start her part of the parade of GOPers seeking the equivilent of revenge on Felt for his role in the Watergate stories. MORE:

Mr. Felt no doubt operated in some perceived jeopardy and judged himself brave.

No, Ms. Noonan: MILLIONS of Americans even today consider him brave. That includes many in the Republican party who, to judging by our emails, are aghast at the spectacle of fellow GOPers going after Felt and defending Nixon's Watergate behavior. It's GOP hacks — those who put loyaly to their party and to one man before the country's sacred democracy — who are out there using every argument possible to go after Felt and try to polish up the buried corpse of Nixon...

He had every right to disapprove of and wish to stop what he saw as new moves to politicize the FBI. But a hero would have come forward, resigned his position, declared his reasons, and exposed himself to public scrutiny. He would have taken the blows and the kudos. (Knowing both Nixon and the media, there would have been plenty of both.) Heroes pay the price. Mr. Felt simply leaked information gained from his position in government to damage those who were doing what he didn't want done. Then he retired with a government pension. This does not appear to have been heroism, and he appears to have known it. Thus, perhaps, the great silence.

A hero who was President... wouldn't have put the country through the agony that Nixon put the US through — until patriotic Democrats and REPUBLICANS had to march into his office to his office to tell him there was no hope due to the "smoking gun" tapes that had just come out.... Doesn't she and Stein realize what they're saying? Republican Gerald Ford REPLACED Nixon. So she and Stein are suggesting Ford was incompetent. Henry Kissinger was Secretary of State under Ford. She she's suggesting Kissinger was an incompetent. The fallacy of this argument is so stupifying it defies description.... The GOP has many thoughtful people, who cooly make their party's arguments with logic. Noonan, Stein and Buchanan, in particular, now deserve a room on Mars with Dennis Kucinich and Alan Keyes. They are entertaining but truly not to be taken seriously as thinkers or analyists anymore. They have become self-parodies.

But HERE is where Noonan has made yours truly decide pass on reading anything she writes in the future (of course, she may threaten to stop reading The Moderate Voice, but we will press on with life somehow):

Were there heroes of Watergate? Surely many unknown ones, those who did their best to be constructive and not destructive, those who didn't think it was all about their beautiful careers. I'll give you a candidate for great man of the era: Chuck Colson. Colson functioned in the Nixon White House as a genuinely bad man, went to prison and emerged a genuinely good man. He told the truth about himself in "Born Again," a book not fully appreciated as the great Washington classic it is, and has devoted his life to helping prisoners and their families. He paid the price, told the truth, blamed no one but himself, and turned his shame into something helpful. Children aren't dead because of him. There are children who are alive because of him.

So COLSON is the hero [of Watergate]. Note that Colson went to prison FIRST and was born again, wrote a book, etc. Colson didn't do anything in the White House to come forward with what he knew. Nor did he do anything to halt the unfolding scandal. Nor did he march into Nixon's office and tell him the proper thing was to resign.... [Colson] is a Republican, worked for Nixon and isn't a liberal. He is on Noonan's "team" while Felt was working against her "team."

Do THINKING conservatives realize how badly this makes people in their camp look?.... Hero? Maybe Felt wasn't perfect. But, no, Peggy and Ben, don't blame Felt for genocide, since Ford and Kissinger WERE THE ONES running foreign policy when Nixon resigned.... No matter what charges you throw at this 91-year-old man, he proved more of a patriot in the Watergate era than the people who were abusing government power, lying to Congress and in front of television cameras and who eventually had to go to jail because they were CONVICTED of crimes — or who didn't go to jail because they were pardoned...

Ph'nglui Mglw'nafh Gandelman R'lyeh Wagn'nagl Fhtagn!! Ganelman Fhtagn!! Gandelman Fhtagn!!

Posted by DeLong at 10:13 PM

More Alan Furst Blogging

More Alan Furst blogging, this time from Unqualified Offerings:

Unqualified Offerings: Henry Farrell got me into a to-do for novelist Alan Furst at GWU this evening. The food was fabulous and the author did not disappoint. Controversial GWU President Stephen Joel Trachtenberg did the introduction, and it was good - the kind of informed appreciation a writer can get, if lucky, from a very smart fan. See previous Furst-blogging on this site and current Furst-blogging from Brad DeLong. Furst read a few pages from The Foreign Correspondent, which will be out in time for Father's Day - 2006. I have to say, the excerpt completely hooked me...

Now excuse me while I turn green with envy.

Posted by DeLong at 10:11 PM

Trade

The SanityPrompt worries:

The SanityPrompt: The Myth of Comparative Advantage: But it rests on the idea that, like people, each country can do one thing best and should do that. But what if countries are not like people? Some may be if they are small and endowed with limited (or like the Mideast, abundant) natural resources. But what about the large nations? I say this because increasingly it is becoming clear that China, India, Singapore and other places are not going to compete with us just in the area of unskilled labor. As Friedman shows in a NYT Magazine piece, they will compete with us in almost everything. This means that countries, unlike people, might be able to do a lot of different things at once. In fact, as globalization increases apace, and technology shrinks distances further, it seems clear that some countries like India will be able to do everything we can do. Soon, there will be almost nothing that we do in this country that cannot be done in India for less.

The reason outsourcing has become such a hot political issue is that all those skilled workers have suddenly found out that being educated and skilled in the global economy is no protection if someone can do your job for $10 an hour while you require $80. The old saw that we all need to up our skills and training may offer us no help if there is no profession to which we can upgrade because all the jobs can be done in India for less. Pretty soon our exportable industries will be movies and capital. And who is to say that India can't make movies better and more cheaply for a mostly yellow, brown and black world? What professions that are productive will be left for Americans? Remember that most American jobs are in the service sector -- even academia, law and medicine.

A good friend works for one of those Indian outsourcing companies, a rival of Infosys, sent me the Friedman NYT Magazine piece It's a Flat World After All -- having seen it first hand. I sent him this reply:

It used to be that the free traders comforted us with the notion that unskilled labor ought to go overseas so we could focus on our comparative advantage -- skilled creative work. What this means for the unskilled is they essentially have to go into service jobs to service the skilled, usually at a lower standard of living -- if they themselves can't get skilled. What India shows us is that now all labor can shift over seas. That there really isn't all that much that a Westerner can do that a person living in a less developed country can't also do for a whole lot less money. Perhaps Marx was right after all. Soon, the only advantage we will have over other countries will be our financial capital and that will be concentrated in a few hands. America will become the place where all the money is (of course, before too long, if the current account deficit persists, we won't be - China will).

America will be where the owners are and everyone everywhere, even here, will work for the owners, the capitalists, at paltry but equalized wages set to the lowest common denominator. If that doesn't sound like a race to the bottom I don't know what is. If that doesn't make you protectionist I don't know what will. Countries are not likely to be able to specialize, but people are. And unless you choose to specialize in something that few elsewhere can do, your wages will be whatever the cheapest source of that same labor is likely to be. So what will Friedman and Co. tell those Americans who fear further economic integration? How will they compete if there is nothing that could even begin to make them competitive? Any honest macro-economist will tell you that the notion that free trade represents a pareto improvement in which all are made better off is a fiction.

One--accurate--path through the swamp is to distinguish between (i) productivity improvements abroad that make foreigners more efficient at producing what we import and (ii) productivity improvements abroad that make foreigners more efficient at producting what we export.

The first set of productivity improvements is a boon for us: the prices of goods we import fall as foreigners become more efficient at producing them, and our standards of living rise. The second set of productivity improvements is a bane for us: as our exports face more competition, the prices we can charge for our exports fall, and so our exports buy less in the way of imports, and our standards of living fall. How bad can this second force be? Well, in the limit--in which foreigners become so good at making stuff that there's nothing we make they want to buy at a price at which we are willing to sell--we are as badly off as if there were no international trade at all. The worst thing that engagement with the international economy can yield is the same as... the no-trade autarky outcome. What's at stake isn't our absolute impoverishment: it's the loss of some (or most?) of what had been our gains from international trade.

This, of course, assumes competent domestic macroeconomic policy. And this assumes that we do a good job of distributing the gains and losses from trade across our society. Incompetent macro policy and a government that wages class war can cause lots of damage. But in these cases the real problem isn't trade or globalization, is it?

Posted by DeLong at 10:08 PM

Why Oh Why Can't We Have a Better Press Corps? (The Janissaries in the Bush Class War Revolt! Edition)

The New York Times editorial page is angry. At long last they have figured out that they and theirs--people with household incomes between $100K and $200K--have been played for suckers by the Bushies. I have only one question: what took them so long?

They are really angry:

The Bush Economy - New York Times: In last Sunday's Times, David Cay Johnston reported that from 1980 to 2002, the latest year of available data, the share of total income earned by the top 0.1 percent of earners more than doubled.... [T]he unheralded effect of [Bush's] tax policy is its unequal impact on the modestly well to do. By 2015, those making between $80,000 and $400,000 will pay as much as 13.9 percentage points more of their income in federal taxes than those making more than $400,000.... The divide between rich and poor is unfortunately an old story, but income-class warfare among the top 20 percent of the scale is a newer phenomenon.... [M]any families making between $100,000 and $200,000 are not exactly on easy street. They don't face choices anywhere near as stark as those encountered further down the income ladder, but they face serious tradeoffs not experienced by the uppermost crust, particularly when hit with the triple whammy of college for the children, care for aging parents, and preparing for their own retirement.

There is something deeply wrong about a system that calls into question a comfortable retirement or a top-notch education for people who have broken into the top 20 percent of income earners. It starts to seem politically explosive when you consider that in a decade, those making between $100,000 and $200,000 will pay about five to nine percentage points more of their income in federal taxes than those making more than $1 million, assuming the Bush tax cuts are made permanent.

This is not about giving wealthy people more money to invest back into the economy. At this level, it's really about giving more money to those who have nothing to do with it except amass enormous estates for their heirs. Fixing the problem will require members of Congress to summon the courage to say no to a president who wants more for the richest of the rich at the expense of everyone else. We're not holding our breath.

Hey! New York Times! Average--not median, average--gross weekly earnings of nonsupervisory workers are $540--that's $27,000 a year. Average--not median, average--gross weekly earnings of nonsupervisory workers in retail trade are $380 a week--that's $19,000 a year. Many of them face the same problems of trying to get their children the education and skills they need to have opportunities, of caring for aging parents, and of preparing for their own retirement as do those making $200K a year who are "not exactly on easy street."

That "the divide between rich and poor is unfortunately an old story" does not mean that the focus of our attention should be on how to redistribute income and wealth from the top 0.1% to the top 20%.

Posted by DeLong at 10:07 PM

Weaknesses of Collaborative Distributed Filtering, Espionage Novels, and the Trenton Train Station

Paul Krugman emails, apropos of Alan Furst:

I discovered Alan Furst at the Trenton train station, three or four years ago. And I think there's a lesson in that.

Background: Trenton station is a miserable, grimy little place that happens to be my gateway to the world, because many Amtrak trains stop there but not at Princeton Junction. The newsstand is tiny, selling at most 50 different books at any given time. But whoever decides on the book selection has eccentric, pretty good taste. And so there, circa 2002, was Dark Star, which wasn't even a new book.

The thing is that I would never have looked for Furst on my own - in fact, I wasn't even into spy thrillers at that point. And I would never ever have found him on Amazon, which only confirms your tastes, without broadening them.

Two lessons: randomize now and then, look for serendipity. And when in Trenton, do check out the train station newsstand. You'll probably be pleasantly surprised.

There's probably a connection here to sociologist Mark Granovetter's work on the strength of weak ties: Granovetter believes that you're unlikely to find out about a possible job from someone you know well--because, by and large, you know what they know and they know what you know. You're more likely to find out something useful from somebody who you know only casually, because the overlap in your respective domains of knowledge is relatively small.

Posted by DeLong at 10:05 PM

Bolton and Wolfowitz (Why Oh Why Are We Ruled by These Fools? Department)

More thuds and screams from inside the Topkapi Palace:

Here's Thomas Fingar of the State Department sticking his knife into the back of U.N. Ambassador-nominee John Bolton before Senate Foreign Relations:

PAUL FOLDI: What did Mr. Bolton say to you?

MR. FINGAR: That he was the President's appointee, that he had every right to say what he believed, that he wasn't going to be told what he could say by a mid-level INR munchkin analyst.

PAUL FOLDI: Did he actually use those terms?

MR. FINGAR: That's my recollection. He said that, one way or another, several times. Said that he wanted Westermann taken off his accounts. I said, "He's our CW/BW specialist, this is what he does." He expressed again, as I remember it, that he was the President's appointee, he could say what he wanted, I said, "John, I'm coming into this cold, let me go downstairs and find some facts." I said, "I don't even know what you're talking about in terms of a document." And I left. After I looked into it, saw the e-mail that accompanied it, I sent an e-mailed up, which re-versed two points that I made in his presence, again, which was that we had two fundamental obligations in handling material -- intelligence-derived materials to use in speeches -- one was protection of sources and methods to make sure things were properly cleared; and the other was to make sure that policymakers were aware when they were going to say something that would not be supported by the Intelligence Community. That if asked, "Do you agree with this?" that the Intelligence Community would say yes, or no. That we owed it to him to flag that, and I thought that is what Christian was doing.

PAUL FOLDI: What did you tell Mr. Westermann? Did you get a chance?

MR. FINGAR: I didn't see him until the next day, as I remember, and I told him what had transpired in the conversation. I told him that he, Mr. Bolton, wanted him taken off of those accounts. I said we had no intention of doing that, no to worry about it, he was our CW/BW analyst...

FRANK JANNUZI: Was Mr. Westermann ever disciplined, or punished for his conduct in the clearance of this language?

MR. FINGAR: No....

FRANK JANNUZI: Subsequent to this incident, it's our understanding Mr. Westermann was instructed -- perhaps by his office director, perhaps by someone else -- to essentially try to minimize his personal contact with Mr. Bolton, is that correct?

MR. FINGAR: Yes, it was in the context of -- he didn't have a particular responsibility to go to that office, to be the one carrying materials up there -- and it was sort of, why walk into a buzz saw?... I knew I was dealing with somebody who was very upset, I was trying to get the incident closed, which I didn't regard as a big deal. I knew John was mad. I assumed, when people are mad, they get over it. So, did I lean over in the direction of "Sure, we'll take responsibility"? He thanked me for it, at least as far as I'm concerned, in my dealings with Bolton, that closed it....

Here's Thomas Fingar being chosen by new intelligence czar John Negroponte as a principal deputy--as the guy who controls what Bush will see and what he will not see each morning:

Thomas Pincus: Thomas Fingar, head of State's Bureau of Intelligence and Research, will become Negroponte's deputy director for analysis and chairman of the National Intelligence Council. The intelligence reorganization legislation gives Fingar responsibility and authority for setting standards and coordinating objectives for U.S. intelligence efforts, although it leaves the analysts at their respective agencies with the goal of allowing them to present independent views. Fingar will also have what a senior intelligence official involved in the process described to reporters Friday as "governance" over the President's Daily Brief, the summary of most important items given to Bush daily....

Negroponte does not seem unhappy at Fingar's use of colorful metaphors--"walking into a buzz saw"--or at failure to soften his recollection of what dealing with Bolton was like.

One correspondent writes that the Bush administration's treatment of Bolton and Wolfowitz is best thought of as like:

...that scene in "Animal House" where the dis-favored pledges are sent off to sit with the foreign-exchange students. The Bushies are mad at Bolton and Wolfowitz: they said that Iraq would be easy, and it isn't. But the Bushies don't want to fire them--one Richard Clarke and one Paul O'Neill are enough. So the Bushies send them to the U.N. and the World Bank: getting them out of the White House decision-making loop by sending them to sit with the foreign-exchange students. These moves are sold as promotions--or at least as lateral moves--but the real upshot is that Bolton will be interminably lectured by Third World ambassadors, that Wolfowitz will rack up the miles visiting the world's un-garden spots, and that both will be out of all important loops.

The problem with this, of course, is that the Bush administration is wrong to view the World Bank and the U.N. as unimportant backwaters where nogoodniks can be safely parked.

The jobs of World Bank President and U.N. Ambassador are key to the U.S.'s foreign policy effort: they are how we deploy a great deal of our soft power.

Posted by DeLong at 10:03 PM

June 06, 2005

Alan Greenspan Is Worried

Edmund Andrews reports:

Greenspan Says Low Rates Tempt Investors to Risk More - New York Times: Alan Greenspan, chairman of the Federal Reserve, warned Monday night that the baffling persistence of low long-term interest rates was driving investors to hunt for higher returns by plowing money into hedge funds that will not be able to deliver on their promises. Speaking to a conference of central bankers in Beijing, Mr. Greenspan reiterated that he is perplexed that long-term Treasury bond rates are lower today than they were a year ago, when the Federal Reserve began systematically raising short-term rates. The persistence of cheap money is 'clearly without recent precedent' and defies simple explanation, Mr. Greenspan said.

Mr. Greenspan warned that low rates are driving investors to seek higher returns by taking on higher financial risks - particularly in hedge funds and private equity funds that hold out the prospect of higher profits through sophisticated trading strategies. He took particular aim at packages of debt known as collateralized debt obligations, which have been one of the fastest- growing businesses on Wall Street. Mr. Greenspan raised worries about the proliferation of hedge funds based on arcane but not fully tested trading strategies. 'I have no doubt that many of the new hedge fund entrepreneurs are embracing a strategy of pinpointing temporary market inefficiencies, the exploitation of which is expected to yield above-average rates of return,' Mr. Greenspan said. But, he cautioned, 'most of the low-hanging fruit of readily available profits' has already been picked.

Normally, long-term rates climb when the Fed raises short-term rates. But rates on 10-year Treasury bonds, which directly affect rates for mortgages and corporate bonds, have declined nearly one percentage point, to less than 4 percent, since the Fed began raising rates in June 2004.

Posted by DeLong at 09:26 PM

Yet Another Big Mac index

From Rising Hegemon:

Rising Hegemon: How long does it take to buy a Big Mac?: "How long does it take to buy a Big Mac? The folks at the Asian Labour News have created a Big Mac index, which asks the eternal question: How long does it take employees at McDonalds restaurants in the Asia-Pacific region to earn enough money to purchase a Big Mac at their own place of work?

The scale is quite illuminating: Australia %u201417 minutes; New Zealand %u2014 28 minutes; Hong Kong %u2014 41 minutes; Malaysia %u2014 1 hour, 26 minutes; South Korea %u2014 1 hour, 29 minutes; Philippines %u2014 2 hours, 19 minutes; Thailand %u2014 2 hours, 45 minutes; China %u2014 3 hours, 58 minutes; Sri Lanka %u2014 5 hours, 53 minutes; India %u2014 8 hours, 34 minutes; and the winner is Pakistan, where it takes a McDonalds worker 14 hours, 14 minutes to buy a lousy burger...

Posted by DeLong at 09:25 PM

External Storage Price Trends

From Paul Kedrosky:

Infectious Greed: Better to Be a Buyer than a Seller of External Storage: "Neat duelling stats in the booming external storage market (from IDC): Year-over-year revenue growth: 6.7% (to $3.8-billion). Year-over-year capacity growth: 58.6% (to 409 petabytes in Q1).

That's a 33% price decline in the price of storage in one year. In the race between processor power, bandwidth, and storage, storage is winning.

Posted by DeLong at 09:23 PM

BizarroWorld

It's official. BushLand is BizarroWorld. Eric Umansky writes:

Eric Umansky: Payrolls in Iraq: The LAT reports that the Iraqi government is considering doing serious layoffs. I have no doubt the government is full is slacker workers and plenty of others who don't show up. Still, in the midst of a growing insurgency, creating thousands of pissed-off unemployed men seems like Bad Idea Jeans. But here's what really caught my eye is this bit buried deep down:

On Sunday, members of Iraq's elite police commando units, heralded by U.S. and Iraqi officials as a key to stemming the insurgency, staged a protest outside Baghdad's heavily fortified Green Zone, saying they hadn't been paid in four months, witnesses said.

WTF? Now, there are all sorts of commando units out there. But anybody heard reports of this before? Swopa? Praktike?

Posted by DeLong at 09:17 PM

A Reasoned Reaction to Apple's CPU Choice

The Crazy Apple Rumors website:

Crazy Apple Rumors Site: Apple Switches to Intel: AAAAAAAAAAAAAGH!!! OH MY GOD! AAAAAAAAAAA!!! NOOOOOOO!!! WHAT WILL BECOME OF US?!!? WHAT WILL BECOME OF US ALL!!! WE ARE DOOMED!!! ALL OF US DOOMED!!! THERE IS NO GOD! THERE IS NO GOD! AHHH-WAHAHAHAAAAAAA!!! NOOOOOOOOOOOOOOOOOO!!!

We'll have more on this developing story later in the day.

Posted by DeLong at 09:14 PM

I Guess Nino Scalia Really Wants to Be Chief Justice

I must confess that I am surprised at how shallow Scalia's commitment to federalism is when push comes to shove:

Justices Say U.S. May Prohibit the Use of Medical Marijuana: Justice Scalia, by contrast, explained himself at length. He did not sign the majority opinion, instead offering a separate concurring opinion that was no less definite in its support for federal authority. 'Where necessary to make a regulation of interstate commerce effective, Congress may regulate even those intrastate activities that do not themselves substantially affect interstate commerce,' Justice Scalia said. He cited opinions from the early 1940's, after the Supreme Court rallied to support the New Deal and gave Congress a degree of power over national affairs that was not seriously challenged until the Rehnquist Court began invalidating federal laws in the mid-1990's.... As a prime mover of the court's federalism revolution, Justice O'Connor did not hide her dismay. The court's opinion provided a roadmap to 'removing meaningful limits on the Commerce Clause' and 'threatens to sweep all of productive human activity into federal regulatory reach,' she said....

The sharpest dispute was over the meaning of two of the core decisions of the Rehnquist Court's approach to federalism. Both struck down federal laws, the Gun-Free School Zones Act and the Violence Against Women Act, on the ground that they exceeded Congressional authority, and both were decided by five-member majorities that included Justices Kennedy and Scalia. While Justice O'Connor declared that the marijuana decision was 'irreconcilable' with the earlier ones, Justice Scalia disagreed. Neither of the earlier decisions 'involved the power of Congress to exert control over intrastate activities in connection with a more comprehensive scheme of regulation' comparable to federal drug laws, he said...

Posted by DeLong at 09:12 PM

Why Oh Why Are We Ruled by These Liars? (Bush Tax Cuts Edition)

David Corn writes:

David Corn: I know that only a few of us in the media still bother to worry about Bush's veracity and his tilted-to-the-rich tax cuts. But I was reminded yesterday of how easily Bush has gotten away with lying about his handouts to the wealthy. The New York Times, as part of its ongoing series on class in America, published a large chart on the distribution of all of Bush's tax cuts (including his current proposal to extend his tax cuts indefinitely). The numbers are amazing. The top .1 percent of taxpayers--145,000 taxpayers--receive 15.2 percent of all these tax cuts. (These folks make over $1.6 million a year). The top 1 percent--1.4 million taxpayers who bag over $383,000 a year--pocket 30.6 percent of the trillions of dollars in so-called 'tax relief.' (Is it 'relief' when you give millionaires $100,000 or more each year in tax cuts?) Looking at the other end of the ladder, we see that the bottom 60 percent--those 87 million people making less than $44,000 a year collect 15.1 percent of Bush's tax cuts, averaging a little over $300 a year in annual tax savings.

Three hundreds buck--a dollar a day--may mean something to these people. (Hey, that covers the cost of The New York Times!) But such a princely gain comes at a tremendous cost--which includes nearly $500 a day for the wealthiest.

The Times chart made me nostalgic. I remembered the days of the 2000 campaign, when Bush claimed, 'The vast majority of my tax cuts go to the bottom end of the spectrum.' It wasn't true then. And it's not true now. Does anyone care that Bush misrepresented his plan and continues to downplay his relieve-the-rich actions? Not much, it seems. I'm willing to bet my tax 'relief' that the Runaway Bride has gotten far more coverage on TV news than Bush's tax policy over the past year...

Posted by DeLong at 09:11 PM

When Household Utensils Attack!

From Crooked Timber:

: Do not, under any circumstances, heat an empty Teflon-covered nonstick pan on the range for more than two or three minutes. At temperatures above 500 degrees (beyond the range of normal home cooking), Teflon will release fumes that cause flu-like symptoms in humans and can be fatal to birds. (No birds were harmed in the preparation of this post. One human, however, feels like he%u2019s been chewed up and spit out of something big.)

Posted by DeLong at 09:10 PM

Apple Migrates to Intel

Interesting news of the day:

Economist.com: On Monday June 6th, Mr Jobs was set to use the platform of Apple%u2019s annual developers conference to announce that the firm will switch from the chips supplied by IBM and Motorola for over a decade to products from Intel, the world%u2019s biggest chipmaker.... Apple blamed it's current chip suppliers for slow delivery last year, which held up production of some lines. And chip development has not lived up to promises Apple made for improvements in processing speed. Intel%u2019s chips are faster and run cooler than Apple%u2019s current chips. And cooler chips are important for the production of better laptops, a market growing considerably faster than that for desktop PCs. But there is much speculation that Intel can simply supply chips more cheaply than IBM and Motorola, and that Apple can use the saving to cut the retail price of its computers....

[I]n mid-April the firm announced another blistering set of quarterly results: revenues up by 70% compared with the same period the year before, and net profits 530% higher, at $290m; Apple shipped over 1m computers (a 43% rise) and a staggering 5.3m iPods (over six times more than the year before). The iPod has done wonders for Apple, providing not only profits but a positive brand image to a swathe of new young consumers... it has amassed some two-thirds of the world market for hand-held music devices.... iTunes, Apple%u2019s online music store, leads the field....

Posted by DeLong at 09:01 PM

Life in the Information Age

There are all these people I know... who don't have weblogs... and then when I run into or call them, the usual thing is to find out how each of us is doing by trading stories... but I don't have any stories to trade--they've already read them on my weblog.

It's awkward. I propose a new social custom: if you don't have a weblog, you have to pretend that you haven't been reading the weblog of the person you are talking to until you have listened patiently to at least their three best relatively-new stories.

Posted by DeLong at 09:00 PM

The Super-Rich

A pretty good article by David Cay Johnston, who writes:

Richest Are Leaving Even the Rich Far Behind: The people at the top of America's money pyramid have so prospered in recent years that they have pulled far ahead of the rest of the population, an analysis of tax records and other government data by The New York Times shows. They have even left behind people making hundreds of thousands of dollars a year.... Draw a line under the top 0.1 percent of income earners - the top one-thousandth. Above that line are about 145,000 taxpayers, each with at least $1.6 million in income... average income for the top 0.1 percent was $3 million in 2002... two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980.... The share of the nation's income earned by those in this uppermost category has more than doubled since 1980, to 7.4 percent in 2002....

The group with homes, investments and other assets worth more than $10 million comprised 338,400 households in 2001, the last year for which data are available. The number has grown more than 400 percent since 1980, after adjusting for inflation, while the total number of households has grown only 27 percent. The Bush administration tax cuts stand to widen the gap between the hyper-rich and the rest of America.... Bush said during the third election debate last October that most of the tax cuts went to low- and middle-income Americans. In fact, most - 53 percent - will go to people with incomes in the top 10 percent... more than 15 percent will go just to the top 0.1 percent, those 145,000 taxpayers....

The Times set out to create a financial portrait of the very richest Americans, how their incomes have changed over the decades and how the tax cuts will affect them.... To determine those differences, The Times relied on a computer model based on the Treasury's. Experts at organizations representing a range of views, including the Heritage Foundation, the Cato Institute and Citizens for Tax Justice, reviewed the projections and said they were reasonable, and the Treasury Department said through a spokesman that the model was reliable....

The hyper-rich have emerged in the last three decades as the biggest winners in a remarkable transformation of the American economy....

While most economists recognize that the richest are pulling away, they disagree on what this means. Those who contend that the extraordinary accumulation of wealth is a good thing say that while the rich are indeed getting richer, so are most people who work hard and save. They say that the tax cuts encourage the investment and the innovation that will make everyone better off. "In this income data I see a snapshot of a very innovative society," said Tim Kane, an economist at the Heritage Foundation. "Lower taxes and lower marginal tax rates are leading to more growth. There's an explosion of wealth. We are so wealthy in a world that is profoundly poor."

But some of the wealthiest Americans, including Warren E. Buffett, George Soros and Ted Turner, have warned that such a concentration of wealth can turn a meritocracy into an aristocracy and ultimately stifle economic growth by putting too much of the nation's capital in the hands of inheritors rather than strivers and innovators. Speaking of the increasing concentration of incomes, Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony a year ago: "For the democratic society, that is not a very desirable thing to allow it to happen."

Others say most Americans have no problem with this trend. The central question is mobility, said Bruce R. Bartlett, an advocate of lower taxes who served in the Reagan and George H. W. Bush administrations. "As long as people think they have a chance of getting to the top, they just don't care how rich the rich are." But in fact, economic mobility - moving from one income group to another over a lifetime - has actually stopped rising in the United States, researchers say. Some recent studies suggest it has even declined over the last generation.

Posted by DeLong at 08:56 PM

Deep Pockets

Brad Setser writes:

Brad Setser's Web Log: So will the proliferation of hedge funds end with a bang or a whimper: To take an example from LTCM: if you are betting on the convergence of the price of a 29 and 30 year Treasury bond -- shorting say the on-the-run 30 year and going long the off-the-run 29 year -- you are hedged against rising interest rates, but not against a widening of the differential between the price of a 29 and 30 year Treasury bond...

But--if you are well enough capitalized--a widening differential between 29 and 30 year Treasury bonds is not a risk but an opportunity. You're long the 29-year and short the 30-year because the 29-year was underpriced. If the price of the 29-year drops relative to the price of the 30-year, it's even more underpriced--and the appropriate response is to double up your position. As long as you are well enough capitalized to be able to hold them both to maturity if necessary--as long as you can wait as long as it takes for their prices to converge--you're still fine.

I have been told that the people who took over LTCM's positions in the fall of 1998 did very well with them indeed.

Posted by DeLong at 08:48 PM

Nixonites Lecture Us on Ethics

Perhaps the most bizarre thing I've seen in months: G. Gordon Liddy and Charles Colson lecturing us on ethics. Martin Schram reports:

Newsday.com: Nixon's henchmen lecture us on ethics: History's latest con happened right before our eyes Tuesday night.... [T]hose faces that just popped up in the looking-glass/screen were all the president's men, once in power and then in disgrace, more than three decades ago. Richard Nixon's ex-convicts - who did jail time for their crimes against democracy and then profited from their crimes by writing books and becoming celebrities - had returned to work one more con. Nixon's former senior White House assistant, Charles Colson, and the Nixon team's burglar-in-chief, G. Gordon Liddy, worked the cable news circuit, expressing moral indignation that the FBI's former deputy director, W. Mark Felt, was Deep Throat. He was the source who had blown their cover by feeding facts to the Washington Post's Bob Woodward - truths that helped land many in jail and drove Nixon from office.

'I was shocked because I worked with him closely,' Colson said on MSNBC. 'And you would think the deputy director of the Federal Bureau of Investigation, you could talk to with the same confidence you could talk to a priest.' Then on CNN: 'I was shocked, because ... I talked to him often and trusted him with very sensitive materials. So did the president. To think that he was out going around in back alleys at night looking for flowerpots, passing information to someone, it's . . . not the image of the professional FBI that you would expect.'

Ah, image. Conjure Colson, with Nixon and others in the Oval Office, as Nixon orders a burglary at the Brookings Institution, a Washington think tank. Meanwhile on CNN, Liddy tells Paula Zahn: 'I view him [Felt] as someone who violated the ethics of the law enforcement profession.' Then, back on MSNBC, Liddy brags that not only had he plotted the burglary of the Democratic Party's Watergate offices but, 'I planned the Brookings break-in.' It wasn't done, Liddy said - 'too expensive.'...

Lost in the wailings of Nixon's men is the one thing Americans need to know to understand Felt's dilemma. Felt couldn't go to his boss... an unqualified Nixon loyalist - L.Patrick Gray III, who proved his worth by destroying documents and slipping others to officials running the White House cover-up. Felt couldn't go to the attorney general... a Nixon loyalist not trusted by many FBI hands... the Senate Watergate Committee didn't exist yet. Felt certainly couldn't go to Nixon.... So he helped his young reporter friend, Bob Woodward.

And, three decades later, these Nixon criminals popped up on our looking-glass/screens, doing their shtick. They wailed like pro wrestlers pounding the mat in feigned pain....

Posted by DeLong at 08:47 PM

Memo to Self

Rajnish Mehra, author of:

Rajnish Mehra and Edward Prescott (1985), “The Equity Premium: A Puzzle,” Journal of Monetary Economics 15, pp. 145-61.

Rajnish Mehra (2003), “The Equity Premium: Why Is It a Puzzle?” (Cambridge: NBER Working Paper 9512, February).

and of much other brilliant work as well, spells his first name with an "i" and not an "ee".

You'd think that an ex-Latin scholar like me would be able to consistently grok this...

Posted by DeLong at 08:45 PM

David Brooks Takes Aim at Today's Young Republicans

He writes, scornfully (I don't think he has the juice to attain snarkiness):

Life Lessons From Watergate - New York Times: "Entering the world of the Higher Shamelessness, they begin networking like mad, cultivating the fine art of false modesty and calculated friendships. The most nakedly ambitious - the blogging Junior Lippmanns - rarely win in the long run, but that doesn't mean you can't mass e-mail your essays for obscure online sites with little 'Thought you might be interested' notes.

They create informal mutual promotion societies, weighing who will be the crucial members of their cohort, engaging in the dangerous game of lateral kissing up, hunting for the spouse who will look handsomely supportive during some future confirmation hearing, nurturing a dislike for the person who will be the chief rival when the New Yorker editing job opens up in 2027.

And of course they are always mentor-hunting, looking for that wise old Moses who will lead them through the wilderness and end their uncertainty. They discover that it's socially acceptable to flatter your bosses by day so long as you are blasphemously derisive about them while drinking with your buddies at night.

This is now a normal stage of life. And if Bob Woodward could get through something like it, perhaps they will too...

Perhaps somebody who knows more about Young Republicans than I do can tell me who his principal--but, alas, unnamed--targets really are?

Posted by DeLong at 08:43 PM

Hilzoy on Watergate

She writes:

Obsidian Wings: Watergate: For The Record: I haven't spent a lot of time talking about Watergate recently, but I have encountered a few people who have tried to argue that Nixon didn't do anything that LBJ and Kennedy hadn't done before him. Some, I think, were not old enough at the time to recall, and have just heard, vaguely, that he did some bad stuff and concluded: well, most politicians do bad stuff; so what? Some, like Ben Stein, ought to know better but don't:

"Can anyone even remember now what Nixon did that was so terrible? He ended the war in Vietnam, brought home the POW's, ended the war in the Mideast, opened relations with China, started the first nuclear weapons reduction treaty, saved Eretz Israel's life, started the Environmental Protection Administration. Does anyone remember what he did that was bad?

Oh, now I remember. He lied. He was a politician who lied. How remarkable."

This sort of historical revisionism bothers me, so, for the benefit of anyone here who was either not around at the time or not old enough to recall, a few quotes to indicate why, exactly, what Nixon did was neither normal nor tolerable. First, William F. Buckley:

"On January 5, 1973, Howard Hunt, an old friend and my sometime boss in the CIA, came to see me, accompanied by one of his daughters (my goddaughter, as it happened). He told me the appalling, inside story of Watergate, including the riveting news that one of the plumbers was ready and disposed to kill Jack Anderson, the journalist-commentator, if word came down to proceed to that lurid extreme."

Riveting? Not the word I would have chosen. Ask yourself how Hunt would have known that someone was willing to kill Jack Anderson had it not been seriously discussed.

Next, John Dean:

"Even by the standards of the Nixon White House, the plan to blow up Washington’s pre-eminent think tank seemed crazy, presidential counselor John W. Dean III recalled here Monday.

But there was White House aide John Ehrlichman on the phone one day in 1971, telling Dean that “Chuck Colson wants me to firebomb the Brookings (Institution).” Describing the incident Monday to several hundred presidential history junkies at the John F. Kennedy Library and Museum, Dean said he was dumbfounded.

“I said, ‘John, this is absolute insanity,’ ” he remembered. “People could die. This is absurd.” (...)

It seemed incredible, but now that he has listened to earlier tapes, Dean said he has heard Nixon “literally pounding on his desk, saying ‘I want that break-in at the Brookings (Institution).’ " "

From the Nixon tapes:

"Nixon: Did they get the Brookings Institute raided last night? No? Get it done. I want it done. I want the Brookings Institute's safe cleaned out and have it cleaned out in a way that it makes somebody else responsible."

This is not just the normal lying, cheating, and minor corruption (although Nixon had a particular flair for that.... This is planning murder, arson, and of course burglary... financial corruption.... (Nixon, from the tapes: "Please get me the names of the Jews. You know, the big Jewish contributors of the Democrats. Could we please investigate some of those c---suckers?")

This is not just "what all politicians do". This was different...

Posted by DeLong at 08:41 PM

What Did William F. Buckley Know and When Did He Know It?

William F. Buckley writes:

William F. Buckley Jr. on Mark Felt and Deep Throat on National Review Online: Nixon's overreaction to the publication of the Pentagon Papers didn't mean that his mandate to govern was for that reason forfeited.... Mr. Felt... over a period of months, was to report to two industrious journalists at the Washington Post, Bob Woodward and Carl Bernstein... the traffic of dollars to and from the Committee to Reelect the President... the background and the activities of everyone associated with the White House, from the Attorney General down to the plumbers.

As evidence accumulated of wrongdoing and crime, he reported not to the director of the FBI (his immediate superior), not to the Justice Department, but to the two journalists.... Such things happen. On January 5, 1973, Howard Hunt, an old friend and my sometime boss in the CIA, came to see me, accompanied by one of his daughters (my goddaughter, as it happened). He told me the appalling, inside story of Watergate, including the riveting news that one of the plumbers was ready and disposed to kill Jack Anderson, the journalist-commentator, if word came down to proceed to that lurid extreme.

I took what I thought appropriate measures...

So William F. Buckley, on January 5, 1973, learns that:

  1. Richard Nixon is running a criminal enterprise--a group of people who believe that their job is the burgle and assassinate at Richard Nixon's command.
  2. Former Attorney General John Mitchell is handling the cover-up.

What, exactly, were the "appropriate measures" that William F. Buckley undertook?

Posted by DeLong at 08:32 PM

The Complicated State of the Labor Market

Kash of Angry Bear writes:

Angry Bear: Samwick argues that some ancillary statistics that the BLS reports about the strength of the labor market (e.g. the numbers of discouraged workers, and those who otherwise do not have jobs but would like one) agree with the major statistics that the labor market is improving, and that there are not an unusually large number of people involuntarily out of the labor force. DeLong, on the other hand, argues that there are other types of evidence that suggest that the labor market has been very weak for years now, and that Occam's Razor therefore suggests that the labor force participation ratio is low because of this weak labor market - i.e., because people have been involuntarily excluded from the labor market.

Today's employment report gives me a chance to insert a couple of other bits of evidence into the mix. The first is the amount of work that people currently holding jobs are being asked to do by their employers: average weekly hours worked. The second is the real hourly wage that workers are earning.... Hours worked has not risen much from the low levels of early 2003, and real hourly wages have been stagnant. Both of these series therefore support the idea that the labor market has been and remains quite weak. I therefore think that it is time to accept these two stylized facts:

  1. The labor market is indeed weak, by any number of measures. The demand for labor is unusually low for this point in the business cycle.
  2. According to household surveys, relatively few people consider themselves to be 'unemployed', and surprisingly few non-working people say that they would like to work if they could.

Now we just need to reconcile these two apparently conflicting facts.

Posted by DeLong at 08:31 PM

Now He Tells Us (Why Oh Why Can't We Have a Better Press Corps?)

Shouldn't Newsweek's Baghdad bureau chief have been writing stories like this last year? Why wait until now?

Good Intentions Gone Bad - Newsweek World News - MSNBC.com: NEWSWEEK's Baghdad bureau chief, departing after two years of war and American occupation, has a few final thoughts .Scott Nelson / WPN for Newsweek: Two years ago I went to Iraq as an unabashed believer in toppling Saddam Hussein. I knew his regime well from previous visits; WMDs or no, ridding the world of Saddam would surely be for the best, and America's good intentions would carry the day.

What went wrong? A lot, but the biggest turning point was the Abu Ghraib scandal. Since April 2004 the liberation of Iraq has become a desperate exercise in damage control. The abuse of prisoners at Abu Ghraib alienated a broad swath of the Iraqi public. On top of that, it didn't work. There is no evidence that all the mistreatment and humiliation saved a single American life or led to the capture of any major terrorist, despite claims by the military that the prison produced 'actionable intelligence.'

The most shocking thing about Abu Ghraib was not the behavior of U.S. troops, but the incompetence of their leaders. Against the conduct of the Lynndie Englands and the Charles Graners, I'll gladly set the honesty and courage of Specialist Joseph Darby, the young MP who reported the abuse. A few soldiers will always do bad things. That's why you need competent officers, who know what the men and women under their command are capable of--and make sure it doesn't happen.

Living and working in Iraq, it's hard not to succumb to despair. At last count America has pumped at least $7 billion into reconstruction projects, with little to show for it but the hostility of ordinary Iraqis, who still have an 18 percent unemployment rate. Most of the cash goes to U.S. contractors who spend much of it on personal security. Basic services like electricity, water and sewers still aren't up to prewar levels. Electricity is especially vital in a country where summer temperatures commonly reach 125 degrees Fahrenheit. Yet only 15 percent of Iraqis have reliable electrical service. In the capital, where it counts most, it's only 4 percent.

The most powerful army in human history can't even protect a two-mile stretch of road. The Airport Highway connects both the international airport and Baghdad's main American military base, Camp Victory, to the city center. At night U.S. troops secure the road for the use of dignitaries; they close it to traffic and shoot at any unauthorized vehicles. More troops and more helicopters could help make the whole country safer. Instead the Pentagon has been drawing down the number of helicopters. And America never deployed nearly enough soldiers. They couldn't stop the orgy of looting that followed Saddam's fall. Now their primary mission is self-defense at any cost--which only deepens Iraqis' resentment.

The four-square-mile Green Zone, the one place in Baghdad where foreigners are reasonably safe, could be a showcase of American values and abilities. Instead the American enclave is a trash-strewn wasteland of Mad Max-style fortifications. The traffic lights don't work because no one has bothered to fix them. The garbage rarely gets collected. Some of the worst ambassadors in U.S. history are the GIs at the Green Zone's checkpoints. They've repeatedly punched Iraqi ministers, accidentally shot at visiting dignitaries and behave (even on good days) with all the courtesy of nightclub bouncers--to Americans and Iraqis alike.

Not that U.S. soldiers in Iraq have much to smile about. They're overworked, much ignored on the home front and widely despised in Iraq, with little to look forward to but the distant end of their tours%u2014and in most cases, another tour soon to follow. Many are reservists who, when they get home, often face the wreckage of careers and family.

I can't say how it will end. Iraq now has an elected government, popular at least among Shiites and Kurds, who give it strong approval ratings. There's even some hope that the Sunni minority will join the constitutional process. Iraqi security forces continue to get better trained and equipped. But Iraqis have such a long way to go, and there are so many ways for things to get even worse. I'm not one of those who think America should pull out immediately. There's no real choice but to stay, probably for many years to come. The question isn't 'When will America pull out?'; it's 'How bad a mess can we afford to leave behind?' All I can say is this: last one out, please turn on the lights.

Posted by DeLong at 08:25 PM

Yes, It's Back!

The machine to end all machines:

Posted by DeLong at 08:24 PM

Richard Nixon = Moses

Andrew Sullivan reads the American Spectator so the rest of us do not have to:

www.AndrewSullivan.com - Daily Dish: [Mark Felt's] posterity is now dragging out his old body and putting it on display to make money. (Have you noticed how Mark Felt looks like one of those old Nazi war criminals they find in Bolivia or Paraguay? That same, haunted, hunted look combined with a glee at what he has managed to get away with so far?) And it gets worse: it's been reported that Mark Felt is at least part Jewish. The reason this is worse is that at the same time that Mark Felt was betraying Richard Nixon, Nixon was saving Eretz Israel. It is a terrifying chapter in betrayal and ingratitude. If he even knows what shame is, I wonder if he felt a moment's shame as he tortured the man who brought security and salvation to the land of so many of his and my fellow Jews...

Yes, this is Ben "I Want a Crook for President" Stein writing...

Posted by DeLong at 08:22 PM

June 04, 2005

Lawrence Eagleburger on Richard Nixon

From what I hope was the very last "Crossfire":

CNN.com - Transcripts: And joining us from Charlottesville, Virginia, the distinguished, superb former secretary of state, former Nixon administration official, Lawrence Eagleburger.

LAWRENCE EAGLEBURGER, FORMER SECRETARY OF STATE: You had to say that, didn't you?

CARVILLE: It was on the prompter, Mr. Secretary. And I might add Reagan administration and Bush administration and every other administration, too.

WATKINS: OK. Secretary Eagleburger, this is the million dollar question. I mean, folks have been waiting for three decades to know who Deep Throat was or is. Is Mark Felt, in your opinion, Deep Throat?

EAGLEBURGER: Probably.

WATKINS: Do you think he's Deep Throat?

EAGLEBURGER: Probably. You know, President Nixon once suspected him. I'm surprised he didn't end up dead somewhere because of that...

Posted by DeLong at 10:23 AM

Ed Kilgore on American Social Democracy and the Information Age

He writes from the Josh Micah Marshall Imperium:

TPMCafe || Politics, Ideas & Lots Of Caffeine: The Golden Age of Social Democracy By Ed Kilgore Section: Politics: Matt Yglesias has posed, and Mark Schmitt has elaborated on, a central question about the relationship between the progressive vision and our understanding of where were are as a society in the broader sweep of history. I'll have more to say about the general issue at a later date, but for now, I wanted to immediately respond to a comment Mark made about the transformation we've experienced in the last few decades. "Again and again, we have traded, voluntarily or involuntarily, the security of the 1950s middle class for greater opportunity, but also greater risk."

This axiom captures a major source of the communications breakdown that has long affected discussions between Democrats from different regions and different social backgrounds.

It took me a while to figure this out, but after wondering for years about the strong resistance of many traditional Democrats from the midwest and northeast to economic change, I finally began to understand that the 1950s and 1960s represented for them a sort of social democratic "golden age." It was, if you were a unionized industrial worker in, say, Michigan, an era in which you could graduate from high school, get your union card and go on the line, work your way up, buy a house, raise kids on one salary, maybe even send some or all of them to a state college, and eventually, retire and move to Florida to bask in the sun and maybe bet modest amounts at the greyhound track. Sure, there might be bumps in the road, and periods when you had to rely on strike funds. But this basically secure existence was a reality for many members of what the Marxists called America's "labor aristocracy."

Well, where I come from, in the Deep South, this golden age never existed, and the 1950s in particular were a pretty crappy time, especially if you were black, but so, too, if you were white (per capita income in the South was barely more than half of the national average well into that decade).... Precisely because the South (with the exception of a few heavy industry and unionized pockets) only marginally enjoyed the fruits of the industrial age, southerners, and particularly rural southerners, have a peculiar openness to post-industrial economic opportunities and policies.

If you paid any attention at all to Mark Warner's successful 2001 gubernatorial campaign, you had to be struck by the fact that this stereotypical urban tech magnate actually won in southwest (i.e., Appalachian) Virginia (the same region where Al Gore and John Kerry just got killed in 2000 and 2004) with an economic message based on technology, education and worker training as the salvation for the "backwards" regions of the state. And this same approach is generally accepted in economic development circles elsewhere in the South: people and communities who were basically "losers" in the industrial economy might catch up with, or even leapfrog their urban kin with a combination of distance-shrinking technology, skills-focused education and training, and a superior quality of life.

I make this point for two reasons: (1) I think it's important to understand why the politics of social-democratic nostalgia doesn't work very well in less-industrial parts of the country; and (2) we all need to get over the stereotype that "information-age" economic strategies, including a focus on technology, training, and quality of life, are just a latte-class relic of the 90s tech boom that we should now acknowledge as a partial betrayal of the economic interests of working Americans.

But who knows: maybe my perspective is colored by the fact that I am posting from a cheap motel in eastern North Carolina that nonetheless has an ethernet connection in every room. Or perhaps I am feeling especially southern because I have a belly full of barbecue and brunswick stew.

Posted by DeLong at 10:16 AM

June 03, 2005

Why Oh Why Are We Ruled by These Idiots? (Urinating on the Koran Edition)

Just what in Jeebus's holy name is going on in there?!:

Guantanamo Detainees Full Coverage on Yahoo! News: AP - 1 hour, 41 minutes ago: WASHINGTON - The Pentagon on Friday released new details about mishandling of the Quran at the Guantanamo Bay prison for terror suspects, confirming that a soldier deliberately kicked the Muslim holy book and that an interrogator stepped on a Quran and was later fired for 'a pattern of unacceptable behavior.'... [W]ater balloons thrown by prison guards caused an unspecified number of Qurans to get wet; a guard's urine came through an air vent and splashed on a detainee and his Quran; and in a confirmed but ambiguous case a two-word obscenity was written in English on the inside cover of a Quran...

Posted by DeLong at 07:23 PM

A Bad Mistake at the Bookstore

I follow the custom of buying book with "Alan Furst" on the cover as soon as I see them. They're all good, but the best is the truly great Dark Star--in my judgment the best espionage novel ever written. So when I saw Alan Furst's name on the cover of The Book of Spies I snatched it up immediately.

It was only when I got home that I discovered:

  1. It is not a new espionage novel by Alan Furst.
  2. It is not a new collection of espionage short stories by Alan Furst.
  3. It is not even a collection of Alan Furst's favorite espionage stories by other writers.
  4. It is a collection of excerpts chosen by Alan Furst from espionage novels by other writers.

There's nothing worse than novellitus interruptus when the novel is a good one. I can see that this is in the end going to prove to have been a very expensive and very time consuming purchase indeed.

Novels excerpted are:

Eric Ambler, A Coffin for Dimitrios
Anthony Burgess, Tremor of Intent
Joseph Conrad, Under Western Eyes
Maxim Gorky, The Spy
Graham Greene, The Quiet American
John le Carre, The Russia House
W. Somerset Maugham, Ashenden
Charles McCarry, The Tears of Autumn
Baroness Orczy, The Scarlet Pimpernel
John Steinbeck, The Moon Is Down
Rebecca West, The Birds Fall Down

Alan Furst writes:

The characters... work at the blurred edge of the Manichean Universe, where Good struggles with Evil for the destiny of humankind. Work... plagued by moral uncertainty, and always in secrecy... foreign lands, living the sort of independent and adventurous existence that may lead to love or lechery or both. There were two standards for the selections... good writing... and the pursuit of authenticity.... Taken as a subgroup, the former intelligence officers... sophisticated, cynical, and mordant... write with a kind of cloaked angst... the world is a place where political power is maintained by means of treachery and betrayal.... [L]et us being Chapter One and put a good person--at least one who is trying--into this hell and watch him do even worse. By the final paragraph, it's evident that victory is not moral triumph, and, with a few turns of the globe and changes in politics, no longer victory. Not good.

But not always. Clandestine conspiracy is always good when the opposition is evil.... Steinbeck's... Orczy's.... Clandestine conspiracy is always bad, on the other hand, when initiated by the secret police.... Conrad and Gorky, who knew what they were writing about... West....

For humor... I've included the magnificent Tremor of Intent by Anthony Burgess. Burgess may have started out with the idea of writing a send-up... but what seems to have happened next is extraordinary. He seems to have become fascinated by the genre... produced a fruity and seductive spy fiction where passages meant to skewer the conventions... don't so much satirize them as do them better, a lot better....

Posted by DeLong at 07:14 PM

One If By Land, and Two If By Sea...

Tom Burka is a national treasure:

Opinions You Should Have - June 2005 Archives: Republicans today criticized Paul Revere for his famous ride, saying that he had violated professional colonial ethics by divulging military secrets in violation of his duty to his lord, the King of England. 'These were sensitive informations about military troop movements with which he had been entrusted,' said G. Gordon Liddy, an expert on ethics in government and a professor at several unaccredited law schools.

'Paul Revere was a traitor and a law breaker,' said Anakin Skywalker in a confidential interview shortly before his limbs were lopped off and he burst into flame.

Conservatives all over America pointed out that Revere also endangered people's lives by riding willy nilly all over Massachusetts at a full gallop in the dark of night. 'He could have trampled someone,' said Bill O'Reilly. 'Paul Revere was a reckless and irresponsible nazi,' he added.

Pat Buchanan derided Revere as a 'coward' and a 'snake' who was unwilling to be direct with the British government regarding his complaints about the monarchy. 'There were channels,' he said.

Peggy Noonan shook her head. 'There's nothing sadder than Americans who have no respect for the rule of law,' she said.

Posted by DeLong at 04:31 PM

When Track Coaches Have Fun...

"What's really fun is to take the sprinters to the Piedmont Distance [Running] Festival and enter them in the 800 meters!"

Coach Brady-Smith,
at the track
awards banquet.

He didn't say why it was fun. The reaction of the other contestants at the pace set by the sprinters in the first 100 meters? The reaction of the sprinters when they realize what they are in for?

Posted by DeLong at 04:31 PM

News From Arkham, Massachusetts

It's time to post this again, a variant on the Nigerian 419 scam:

Scam o Rama: It's all here, friends. An urgent plea for help. A living human head, the victim of a 'failed body transplant.' Loneliness. Friendship. Trust. Life. Betrayal. Death. Lawyers. Returns from the dead. More lawyers, Western Union, mothers who 'collarpse,' and so much more!

Posted by DeLong at 03:45 PM

Was the Euro a Bad Idea?

Now they tell us. The Economist suggests that the euro was a bad idea:

The Economist: Even before the euro was adopted, in 1999, it was clear that neither the EU nor the 12-member subset that has joined the monetary union was an optimal currency area. Ideally, currency zones should be compact and homogenous enough to show little regional variation in business cycles—otherwise a one-size-fits-all monetary policy will leave some regions lingering in recession, while others grow so fast they overheat. Many argue that this is what is happening in Europe, where a few countries, like Ireland, are experiencing rapid growth while big economies, like Germany and Italy, stagnate.

There are ways to mitigate imbalances within big currency areas.... America has important features that temper the problems of unified monetary policy. Federal programmes act as automatic fiscal stabilisers, siphoning off tax revenues from booming areas and transferring them to ailing regions as unemployment insurance or health benefits for the poor. America’s labour market is also highly flexible... capital flows freely as well.... In Europe, by contrast, few mechanisms exist to bring the euro area’s widely divergent business cycles into sync. The ECB has been trying to chart a middle course between slow- and fast-growing countries while establishing its credibility as an inflation-fighter. The result has been a monetary policy that is too “hot” for some, too “cold” for others, and “just right” for almost no one.

The lack of adjustment mechanisms means that “ever closer union” is not just a glowing ideal; it is a matter of survival. Language and cultural barriers-—not to mention wide differences in social insurance and retirement programmes-—encourage workers to stay in their own country, no matter how bad the economy, closing off one of the easiest avenues of convergence. If Europe’s economies do not drive forward towards... labour markets that are more flexible (and international), there is a growing risk that some of its members will eventually find the gulf between their economies and their monetary policies too wide to endure....

[R]ecent policy moves have all been in the wrong direction. Not only has the stability and growth pact, which was supposed to help force fiscal policies into rough alignment, been weakened... stalled... EU’s services directive... fierce public resistance to eroding generous worker and consumer protections... governments unwilling, or unable, to implement... deep structural reforms.... [T]he euro will probably be able to limp along, at least for a while—-particularly if the ECB cuts interest rates.... But if nothing is done, the instability will mount. Already Italy is being compared to Argentina.... At this point such comparisons are scary possibilities, not likely outcomes...

Posted by DeLong at 02:45 PM

Thank God I'm Not a Republican!

If I were a Republican, I would have to support candidates whose staffs do things like this:

Separated at Birth: Bret Schundler and Howard Dean:

One photo was taken at a 2004 Dean for President rally sponsored by the American University College Democrats in Washington, D.C.

The other photo comes from Bret Schundler's campaign website, advertising Schundler's Reform Gear

Photo Copyright John Pettitt 2003, courtesy CloudView.com

Photo Copyright John Pettitt 2003, courtesy CloudView.com

\\

Click hear to see the song written by American University College Democrat Laura Reznick -- she's the one wearing the Schundler hat and holding up the Schundler sign, and the one wearing the Dean hat and holding up the Dean sign.

All Schundler needed was ten enthusiastic young supporters and a camera. And he couldn't find them?

Posted by DeLong at 02:35 PM

In Praise of Ken Duberstein

Robert George writes:

The Huffington Post | The Blog: Ken Duberstein is a mensch.

Who's he and why say that?

Duberstein, for those who don't know... was Ronald Reagan's chief of staff after Nancy sacked Don Regan. And, it is because of that position that he has a unique perspective on the Mark Felt/'Deep Throat' saga....

[O]therwise smart Republicans... in lashing out at the liberal/media lionization once more of Woodward and Bernstein's greatest moment, they feel the need to character assassinate Mark Felt and portray a Richard Nixon that never existed.... For... them, presidential lying is no big thing... what's wrong with a few 'dirty tricksters' in the White House?...

The answer to that sentiment and that question can be found in the words of Ken Duberstein.... I called Duberstein's office. He graciously took my call and said, that his statement was that 'Felt is a hero.' In not-exactly-easy circumstances, 'He put America first.' (I eventually found the original quote; it's right here.) Duberstein said that, in reading all the media reports of the last few days, he put himself back in his shoes as White House chief of staff. He thought, with the information Felt had in front of him, 'What options did he have?' 'He couldn't go to the White House Chief of Staff (Haldeman or Ehrlichman); he couldn't go to the Justice Department (John Mitchell); he couldn't go to the White House Counsel (John Dean). He did something responsible. The congressional committees hadn't been formed yet. What do you do? Felt put America first.'...

What Watergate should still tell us -- but Stein, Noonan and Buchanan appear to willfully ignore -- is that a corrupt administration is dangerous.... This was a high-level criminal conspiracy, whose members were willing to destroy personally and professionally any and all who crossed them.

How much did the president know? We may never know. But the fact is that a criminal enterprise was run out of the West Wing of the White House.... Are Felt's motives suspect because he was upset that he was passed over to succeed J. Edgar Hoover? Perhaps, but it wasn't just that Felt wanted the top job. It was also that he believed that someone coming from the White House would be more likely beholden to the White House than to the Bureau -- which is exactly what happened with Nixon's pick L. Patrick Gray, who ended up resigning for destroying evidence.

Ken Duberstein has very strong Republican Party ties. He is a self-described 'Nixon loyalist.' Yet, he can still recognize what was at stake in 1972 and why Mark Felt did what he did.

And that's why Ken Duberstein is a mensch. Stepping above party, he, too, can put America first.

Posted by DeLong at 02:09 PM

White House Personnel

Praktike writes:

Priorities | Liberals Against Terrorism: I don't usually go in for cheap shots these days, as they're so easy ... but what's up with the Bush administration rushing to name the pro-Enron Chris Cox as the new SEC Chair when AFAIK there's been no similar rush to fill long-vacant counterterrorism slots and top Treasury jobs, the State Department is still waiting for Karen Hughes to do whatever she's doing, and there's been no US ambassador in Iraq for some months now?

Posted by DeLong at 02:05 PM

Funniest Thing I've Read All Week

Majikthise catches this one:

Majikthise: Neil Pollack has written the definitive satire the of 'inept, entitled, but reflective parent' essay.... Pollack pushed all the buttons, from 'Our marriage suffers' to 'Did I mention my mental illness?' to 'I feel like a bad mother when my negligence ends in disaster.' You might have to watch an ad to read "When Toddlers Get Fired," but it's worth it...

Posted by DeLong at 02:01 PM

June 02, 2005

No to a Market Society!

The French left's complaint with Jacques Chirac is that he is too neoliberal for their taste:

French Workers Greet New Prime Minister With Rail Strike - New York Times: French workers greeted the new government of Prime Minister Dominique de Villepin today not with a show of solidarity, but with a national transportation strike.... The protest came as the popularity of President Jacques Chirac has plunged to the lowest level of his ten-year presidency. A poll conducted by TNS Sofres after French voters decisively rejected a Constitution for Europe on Sunday - a vote that was also a rebuff of Mr. Chirac's presidency - said 74 percent of voters did not trust him. Only 24 percent said they had confidence in President Chirac.

Fifty-eight percent of those polled said that unemployment, at a five-year high of 10.2 percent, was their primary concern. The strike... forced the cancellation of up to 75 percent of commuter trains between Paris and its suburbs, and disrupted rush-hour traffic. Some 65 percent of national-line trains and 40 percent of the country's high-speed TGV trains were also out of service. "With the nomination of Dominique de Villepin as prime minister, the president does not seem to have understood," said the CGT - the Confédération Générale du Travail - one of the striking unions, in a communiqué today. It added that it was awaiting "concrete actions" to "eradicate unemployment, misery and poverty."...

Posted by DeLong at 12:58 PM

Alberto Gonzales Is a Bad Man (Why Oh Why Are We Ruled by These Liars? Department)

In comments, JR writes:

Gonzales'references to athletic uniforms and scientific equipment was a classic rhetorical tactic - find some minor thing in the Convention to ridicule and thereby invite your reader to conclude with a sneer that the whole thing needs to be junked.... Gonzales' references... are lies. There is no requirement that POWs be "afforded" athletic uniforms and scientific instruments. There IS a requirement that prisoners be allowed to receive mail, including packages, which may include such things as "foodstuffs, clothing, medical supplies and articles of a religious, educational or recreational character which may meet their needs, including books, devotional articles, scientific equipment, examination papers, musical instruments, [and] sports outfits..." (Geneva Convention III, Art. 72).

So in order to ridicule the Geneva Convention, Gonzales had to lie about it.

And why are we not surprised to find Okrent repeating Gonzales' lies in his parting column?

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

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

I do not like the work of Maureen Dowd--I think that she exemplifies a lot of what is wrong with American journalism today. Nevertheless, I would like to note on her behalf that Danny Okrent is being grossly unfair when he complains that:

13 Things I Meant to Write About but Never Did: Maureen Dowd was still writing that Alberto R. Gonzales "called the Geneva Conventions 'quaint'" nearly two months after a correction in the news pages noted that Gonzales had specifically applied the term to Geneva provisions about commissary privileges, athletic uniforms and scientific instruments.... No one deserves the personal vituperation that regularly comes Dowd's way.... But that doesn't mean that their boss, publisher Arthur O. Sulzberger Jr., shouldn't hold his columnists to higher standards...

It is true that Gonzales does not think the whole Geneva convention is "quaint": he thinks that it is obsolete, and that the restrictions it places keep Americans from doing what must be done by opening the possibility of their being put on trial for war crimes. Given what Gonzales does think of the Geneva Conventions, accusing him of calling them "quaint" seems a very minor sin indeed.

Here is Gonzales in context:

As you have said, the war against terrorism is a new kind of war. It is not the traditional clash between nations adhering to the laws of war that formed the backdrop for GPW. The nature of the new war places a high premium on other factors, such as the ability to quickly obtain information from captured terrorists and their sponsors in order to avoid further atrocities against American civilians, and the need to try terrorists for war crimes such as wantonly killing civilians. In my judgment, this new paradigm renders obsolete Geneva's strict limitations on questioning of enemy prisoners and renders quaint some of its provisions requiring that captured enemy be afforded such things as commissary privileges, scrip (i.e., advances of monthly pay), athletic uniforms, and scientific instruments.

Although some of these provisions do not apply to detainees who are not POWs, a determination that GPW does not apply to al Qaeda and the Taliban eliminates any argument regarding the need for case-by-case determinations of POW status. It also holds open options for the future conflicts in which it may be more difficult to determine whether an enemy forcea s a whole meets the standard for POW status.

By concluding that GPW does not apply to al Qaeda and the Taliban, we avoid foreclosing options for the future, particularly against nonstate actors.

Substantially reduces the threat of domestic criminal prosecution under the War Crims Act (18 U.S.C. 2441).

That statute, enacted in 1996, prohibits the commission of a "war crime" by or against a U.S. person, including U.S. officials. "War cime" for these purposes is defined to include any grave breach of GPW or any violation of common Article 3 thereof (such as "outrages against personal dignity"). Some of these provisions apply (if the GPW applies) regardless of whether the individual being detained qualifies as a POW. Punishments for violations of Section 2441 include the death penalty. A determination that the GPW is not applicable to the Taliban would mean taht Section 2441 would not apply to actions taken with respect to the Taliban...

Posted by DeLong at 12:24 PM | Comments (0) | TrackBack

Why Are Auto Dividends So Low?

Dan Bill Gross is surprised that GM and Ford are paying so much in dividends--a 6.33% dividend yield for GM, and a 4% dividend yield for Ford. I, by contrast, am surprised that they are paying so little. According to Gross, Ford has $23 billion in cash and yet a stockholder's total equity value of only $18 billion. If that is true, why not spend $18 billion on a special cash dividend? They will then have gotten their entire current investment out. And they will still own the company, and have their equity claim on whatever future profits it will make. That would do more for shareholder value than the managers' current strategy is doing. And managers do have a fiduciary duty to pursue shareholder value wherever they find it, right?

Ford's dividends are so low precisely because its managers are not concerned solely with shareholder value, but also with the long-term survival of the company, and do balance off the interests of other stakeholders against the interests of the shareholders who supposedly elect them. And Ford's dividends stay low because the perceived political risks to Wall Streeters who mount a takeover of the company and then pump out its cash are very high.

Here's Dan Bill Gross's column:

The Poisonous Gift - Ford and GM are in big trouble. So, why do they keep paying fat dividends? By Daniel Gross: The stocks of GM and Ford may be slumping. But investors can take solace in the healthy dividends they pay: $2.00 per share annually for GM, representing a 6.33 percent yield; and 40 cents per share annually for Ford, representing a 4 percent yield.

But why do these struggling companies still spend cash on dividends when they could use it for R&D or to meet pension obligations? After all, many analysts believe that if current trends continue, GM may be headed for bankruptcy. Standard & Poor's in early May downgraded GM's debt to junk status. GM has acknowledged that it might not be able to meet the pension and health-care obligations it has made to employees and retirees. Ford, in somewhat better shape, is still clinging to its investment-grade credit rating. There's substantial doubt as to whether GM and Ford can meet the financial commitments to which they are legally obligated, which makes these discretionary dividend payments seem all the more baffling. Dividends are a means of sharing profits with shareholders and of encouraging investors to hold on to stocks--both worthwhile and sensible goals. With the passage of the dividend tax cut in 2003, dividends are an even stronger tool. When companies make money and can easily cover their debt payments and pension obligations, dividends are a no-brainer way to please shareholders.

But the calculus should change when losses pile up and when long-term mismatches between resources and obligations start to take shape. As Ford's most recent quarterly report shows, the company has about $23 billion in cash and $161 billion in debt. In the quarter, it spent nearly $2 billion on interest payments. Ford, which has already reduced profit projections for the year, hopes that its auto unit will scratch out a pre-tax profit in 2005. And yet the company plans to pay out more than $732 million in dividends this year.... In the first quarter of 2005 alone, GM spent nearly $3.7 billion on interest on its $291 billion in debt. Yes, GM has $52 billion in cash and marketable securities, and much of the debt rests on the company's profitable financing arm. But as the quarterly report notes, the company owes more than $37 billion in pension and other post-retirement benefits to employees. Worse, it's hemorrhaging cash. GM's automotive operations lost $1.3 billion in the first quarter of 2005. And yet GM plans to spend $1.13 billion on dividends this year....

At both companies, the dividend payments are tiny compared to revenues, overall debt loads, and outstanding pension and health-care obligations. But if every dollar counts, so does every billion. There may well come a time in the not-too-distant future when $1 billion could mean the difference between bankruptcy and solvency for one of the carmakers. Both companies are facing intense pressure to make the best use of their cash. GM could take the money it spends on dividends and pay down a chunk of the debt on its auto operations or chip away at its mountain of liabilities--things it's required to do by contracts and that would enhance its long-term solvency.

Of course, were they to eliminate the dividend, Ford and GM would give the institutions that hold most of their stock an incentive to flee. And to the extent shareholders automatically reinvest the dividends in GM and Ford stock, it can allow the companies to issue new stock continuously without going to the trouble of making large offerings. Dividends are also a great tool for compensating executives on the sly. Shareholders might look askance at large bonuses and salaries for executives when the company is floundering. But dividends--which are paid to all shareholders--are less likely to raise hackles. According to GM's proxy statement, CEO Rick Wagoner owns about 200,000 shares, making the dividend worth about $400,000 annually to him. (His base salary and cash bonus in 2004 totaled $4.66 million.) At Ford, members of the founding Ford family still own huge slugs of stock, detailed in Ford's proxy statement. The 26.28 million shares owned by William Clay Ford Sr. throw off $10.5 million in cash in dividends annually. Bill Ford, the current CEO, owns nearly 8.7 million shares. So, he can make highly public symbolic belt-tightening statements--like agreeing to give up his salary until the car business starts making money again, as he did last week--without forgoing compensation. Bill Ford will take home about $3.5 million in dividends in 2005, taxed at a rate far lower than his wage income would be.

Ford and GM pay dividends because they are obsessed with the goodwill of shareholders. This solicitous attitude contrasts sharply with the generally antagonistic attitude they take toward their unions. Faced with a slow-growing business and difficulty in making profits, management each quarter has to decide whether it will meet its obligations to capital (dividends and interest payments) or its obligations to labor (pension and health-care benefits). Every quarter, as GM and Ford dole out their dividends while contriving ways to shirk promises made to employees and retirees, capital wins another battle.

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

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

I suppose that this is Jonah Goldberg trying to be nice. But that still doesn't keep it from being painful to read:

The Corner on National Review Online: "SOCIAL SECURITY [Jonah Goldberg]Because I'm so cool, I watched a big chunk of some Senate hearings on Social Security on C-Span last night. It seemed to be a Democratic deal -- there were no Republican Senators asking questions when I tuned in and the panel seemed to be wildly overstocked with opponents. There was a woman who barely said a word (so I don't know if she's pro or con). And there was an economist from Yale, the Brookings gu, Peter Orszag, and Brad Delong the blogger and economist. The only outspoken witness in favor was my old friend Derrick Max. I thought Derrick did a great job, especially given the odds. But I have to say that I thought the liberals made some very strong arguments, including DeLong (who, to date, has never had a kind word for yours truly). I'm still in favor of reforming the system and I'm still in favor of private accounts, but I thought the arguments were pretty persuasive that there are serious downsides to the idea too. I'd get into specifics, but that would give Ramesh all weekend to sharpen his scalpel. So, I'll keep pondering and start in again on Monday.

Yes, in a *Democratic* Policy Committee Hearing the senators doing the questioning will be Democrats. The fact that it is apparently news to Goldberg that people like defined-benefit pensions, and that it's hard to make private accounts with a 3% real interest rate clawback a good deal for beneficiaries--that's depressing.

So this doesn't make me more predisposed to say kind words about Goldberg. Especially when you combine it with last week's Exhibit A, Jonah Goldberg's insightful comments on stem cell creation via replacement of the egg nucleus:

I HOPE [Jonah Goldberg] Dr. Woo Suk Hwang didn't go to high school in the States. That'd be one hard name to carry around.

And with last week's Exhibit B:

ATTENTION... [Jonah Goldberg] Gun nuts, second ammendment enthusiasts, military tech-geeks and keepers of the faith that the arsenal of democracy could always use a little more oomph: The DREAD weapon system:

DREAD WEAPON SYSTEM: Devastating, Jam-Proof, and Silent: Imagine a gun with no recoil, no sound, no heat, no gunpowder, no visible firing signature (muzzle flash), and no stoppages or jams of any kind...

The phrase "no recoil" is the giveaway. From elementary school physics we know that there is no such thing as a "no recoil" projectile weapon in any universe in which Newton's Third Law of Motion holds. And we do have good reason to believe Newton's Third Law holds in *this* universe.

Nevertheless--in the absence of anyone who knows any elementary school physics--it becomes a topic of heated debate at the National Review:

THE DREAD WEAPON SYSTEM [Warren Bell]: France just surrendered...

DREAD: IT'S REAL [Jonah Goldberg ]: I feel sorry for the French. It must be like doing calisthenics what with the posts saying it's real and then it's not real. Each time they hear it's real they gotta drop to the ground in surrender. Anyway, stay down Frenchies. It's real. Here's the Patent.... Here's an explanation how it works from a reader...

DREAD [Jonah Goldberg]: Email is split so far... from a military guy: "Military.com is a reputable site. I cant vouch for the artists conception of the weapon but for the most part they are too savvy to be duped by scammers."

DREAD: ARGGGHHH [Jonah Goldberg]: I've been inundated with email from physicists. I really don't want to be the clearinghouse for this....

Remember: Newton's Third Law: Gun initially stationary. Bang. Projectile moves forward. Gun moves back.

Posted by DeLong at 12:22 PM | Comments (0) | TrackBack

The Global Savings Glut Argument

Brad Setser has musings on Ben Bernanke's "global savings glut" argument:

Brad Setser's Web Log: Bernanke's global savings glut: Bernanke's global savings glut argument is quite subtle, more subtle than I perhaps have recognized in the past. Bernanke's argument goes beyond the 'US current account deficits don't matter since there is a global savings glut' headline that I occasionally push.

Bernanke takes his argument that there is a global savings glut to its logical conclusion. He argues that without a federal budget deficit, the global savings surplus that was invested in US government debt over the past few years would instead have been invested in other US assets. Real interest rates would be even lower, housing prices would be higher, investment in housing would be higher, and consumption in the US would be even stronger. As a result, the US current account deficit would not be much different:

The weakening of new capital investment after the drop in equity prices did not much change the net effect of the global saving glut on the U.S. current account. The transmission mechanism changed, however, as low real interest rates rather than high stock prices became a principal cause of lower U.S. saving. In particular, during the past few years, the key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices. Indeed, increases in home values, together with a stock-market recovery that began in 2003, have recently returned the wealth-to-income ratio of U.S. households to 5.4, not far from its peak value of 6.2 in 1999 and above its long-run (1960-2003) average of 4.8. The expansion of U.S. housing wealth, much of it easily accessible to households through cash-out refinancing and home equity lines of credit, has kept the U.S. national saving rate low--and indeed, together with the significant worsening of the federal budget outlook, helped to drive it lower. As U.S. business investment has recently begun a cyclical recovery while residential investment has remained strong, the domestic saving shortfall has continued to widen, implying a rise in the current account deficit and increasing dependence of the United States on capital inflows...

I find it easier to think about these issues if we formalize them. Start with the savings-investment side of the national income identity:

I = Sp - DG + DT

Investment I is necessarily equal to private savings Sp minus the government deficit DG plus the trade deficit DT. And start with the premise that savings outruns investment elsewhere in the world, and this shows us as a large U.S. trade deficit as savers abroad soak up the dollar earnings of foreign exporters and invest them in the United States.

As long as investment is still high--as long as we are still in the dot-com boom--then, Bernanke says, U.S. private savings can be normal. But after the dot-com boom ends and investment falls, the savings-investment identity no longer balances: with lower-than-normal investment (especially business investment) as a share of GDP and a large capital inflow associated with the trade deficit, something else has to change in order to keep the savings-investment identity in balance. One thing that changes is the government deficit. But the rise in the government deficit is not sufficient--the private savings term Sp has to fall as well.

What makes Sp fall? Well:

Sp = Y - T - C = Y - T - (C0 + Cy(Y-T) + CwW(r)) = (1-Cy)(Y-T) - C0 - CwW(r)

Private savings, in Bernanke's implicit model, is equal to a fraction (1-Cy) of disposable income (Y-T), minus a term C0 that depends on consumer confidence, minus a term CwW(r) that tells us that private savings drops when household wealth W increases--and household wealth increases when the interest rate falls.

Thus the chain of causation in Bernanke's model runs roughly like this:

After the end of the dot-com boom, U.S. domestic investment falls as a share of GDP and the capital inflow rises. Excess savings thus appear in the flow-of-funds market. These excess savings push down interest rates. As real interest rates fall wealth--especially household real estate wealth--rises. Rising wealth induces households to cut their savings until the flow-of-funds is back in balance.

In this model the federal budget deficit is a minor player. As Brad Setser says, the implicit prediction is that it does not affect the trade deficit. Had the Bush administration pursued a balanced-budget policy there would still have been a fall in investment and there would still have been a rise in the capital inflow. With a balanced budget, excess supply of savings in the flow-of-funds would have been greater. Interest rates would have fallen further. Housing prices would have risen further. And private savings would have fallen further. After all:

I - DT = Sp - DG

And if DG does not grow as DT grows, then Sp must fall by more--and the only thing that can make Sp fall is an increase in household wealth W, which is the result of falling interest rates r.

This is Bernanke's argument. What do we think of it?

I'm very skeptical. It is of a brand of macro that I think of as one-identity-economics. You take an accounting identity. You assume that certain terms of it are fixed. And you then derive conclusions--in this case, that the growth of the budget deficit has moderated the fall in private savings.

The problem with one-identity-economics lies with the assumption that certain terms in it are fixed. There are lots of channels of adjustment in the world economy, and it is a safe bet that with different levels of interest rates and different levels of wealth we would see different levels of corporate investment and of net exports.

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

Danny Okrent of the New York Times Jumps the Shark (Why Oh Why Can't We Have a Better Press Corps?)

Danny Okrent writes:

13 Things I Meant to Write About but Never Did - New York Times: Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.... [S]ome of Krugman's enemies are every bit as ideological (and consequently unfair) as he is. But that doesn't mean that their boss, publisher Arthur O. Sulzberger Jr., shouldn't hold his columnists to higher standards...

May one ask Danny Okrent for an example? He doesn't give one. I was taught in middle school English that the first requirement was to support one's points with examples.

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

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

Does Ben Stein really think that Alan Greenspan does not know that there is a large and ongoing inflow of capital to the United States from Asia?

Ben Stein: To: Alan Greenspan, Chairman, Federal Reserve Board, Washington, D.C.

Dear Mr. Greenspan:

You have always been a great friend to the little Stein family. You invited us to your viewing of the Fourth of July fireworks for many years. You spoke warmly and kindly of my father on his 80th birthday and after his death.... In the same spirit of friendship that you have shown to my family and to the nation and world, I hereby offer you some possible mental and emotional relief on two perplexing economic and monetary policy issues.... [Y]ou recently pronounced that you were puzzled by what you called the 'conundrum' of why long-term interest rates were so low, as the economy gathered steadily more strength and as inflation heated up, albeit to a lukewarm temperature.

May I suggest a reason for the low long-term rates? It has to do with a certain circularity in the world flows of capital. American consumers and businesses buy far more from the Japanese and the Chinese than the United States sells to them. The difference is in the hundreds of billions of dollars annually. The Asians do not respend this money in America by buying Big Macs. Instead, they use a large chunk of it - again, hundreds of billions - to buy Treasury bonds.

That creates a floor under the dollar, keeps their own currencies low and makes their products very competitive. But this voracious buying of Treasury bonds - at varying lengths of maturity - keeps a high floor under bond prices as well. That, in turn, keeps the interest rate low, because interest rates move inversely to bond prices.

In other words, interest rates are suppressed at very low levels by the recycling of the trade deficit into Treasury bonds. It may be just that simple. In turn, this keeps the mortgage rates low.... Maybe I am missing something here, but this is at least a possible answer to your conundrum...

Greenspan does not think there is a "conundrum" because he fails to understand that Japan's and China' central banks are purchasing U.S. bonds. Greenspan thinks that there is a conundrum because he believes that those who are selling U.S. bonds to Japan's and China's central banks should be more eager to sell them and should be selling them at lower prices. It is highly likely that the value of the dollar will decline by 30% sometime over the next ten years. That means that people holding dollar denominated bonds are taking a big risk of serious capital losses, and should be eager to sell them until their prices fall so far that they are yielding about 3% per year more than assets of equivalent riskiness denominated in other currencies. U.S. short-term interest rates are headed higher--perhaps by one percentage point, perhaps by two, perhaps by more--over the next year or two. People should be very eager to sell long-term bonds when their yields aren't equal to expected short-term yields plus an allowance for risk. Yet market prices tell us that they are not eager to sell at all.

Investors holding U.S. bonds at current prices and yields are taking on huge amounts of exchange rate risk and interest rate fluctuation risk for no extra return relative to what they could get in other assets. That's the conundrum: the relationships of asset prices are out of whack.

Those who know no economics often focus on the actions of one single group and use that to account for what's going on in markets. That's a mistake. It's a common mistake. But it's an elementary mistake. What's going on in markets is the result of everybody's actions: some people are eager to buy, some people are eager to sell, and the result is an equilibrium market price and volume. You can't get an economist's license (except at the American Enterprise Institute) if you pretend to explain things by looking at just demand. You have to look at supply too--and it is the low supply of long-term bonds by those eager to sell that is at the heart of Greenspan's conundrum.

Posted by DeLong at 12:19 PM | Comments (0) | TrackBack

A Guy with a Truly Thankless Job...

White House Social Security substance person Andrew Biggs gets whomped by Democrats:

Wonkette - Strunk & White House: SSA Official Proofs Independent Lobbyist Report: The Pentagon? Not so responsive on the fact-checking, according to Michael Isikoff. The Social Security Administration? Maybe a little too responsive:

From Congress Daily: 'Senate Democrats are investigating whether Social Security Administration Assistant Commissioner Andrew Biggs violated a federal ban on congressional lobbying by federal employees when he edited the prepared testimony for a lobbyist [named Derrick Max] appearing before a recent Democratic Policy Committee Social Security hearing, Senate aides said Wednesday.'

Max and Biggs believe that what they did was okay, because they're personal friends, and because the edits Biggs made were minor, and mostly grammatical. Here, for example, is what appears to be Biggs' advice on how to deal with split infinitives: 'Include some info from the doc we put out yesterday; it shows that widows and divorced women do better than scheduled and the plan pulls a lot of them out of poverty.' -- GREG BEATO

And he gets whomped by Republicans:

President Discusses Strengthening Social Security in North Carolina:

THE PRESIDENT: Andrew Biggs. We are here with one Andrew Biggs, a fine lad, as you can see. (Laughter.) What do you do? Work for me, of course. (Laughter.) Tell them what you do, Andrew, please -- Andrew and I have done this before, see, so I'm used to needling him. (Laughter.)

DR. BIGGS: My name is Andrew Biggs, and I'm Associate Commissioner for Retirement Policy at the Social Security Administration, which in short language means I think about Social Security reform quite a bit. The good news on Social Security, even it seems very complex --

THE PRESIDENT: Andrew has a PhD, by the way. (Laughter.) Which -- it's an interesting lesson for those of you who are worried about your college career. Andrew has a PhD, and I got a C. (Laughter and applause.) And look who's working for who. Anyway -- (laughter.)

DR. BIGGS: All those years of effort gone to waste, I guess.

THE PRESIDENT: It's a cheap shot, Andrew, I know. Do we have a problem with Social Security? You look at it, you analyze it.

DR. BIGGS: Sure, we do. The good news is you don't need a PhD to understand how this works. (Laughter and applause.) The biggest misunderstanding people have --

THE PRESIDENT: I'll let it pass, Andrew. (Laughter.)

74 words during which you can say nothing of substance, and then from the transcript it looks like you get cut off for good.

I can't figure out why any substance people at all still work for this White House. Surely you'd have more influence--and better working conditions--on Thomas's or Grassley's staff, or back at Cato?

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

Robert Waldmann Is Utopian (Why Oh Why Can't We Have a Better Press Corps?)

He expects New York Times reporter Benedict Carey to actually know that 17/111 is greater than 10/110:

Robert's Stochastic thoughts: [Before the jump] Benedict Carey writes... "the stimulator was no more effective than surgery in which it was implanted but not turned on."

But after the jump Carey writes:

"17 of the 111 patients who had implants turned on and completed the trial showed significant improvement. But 11 of 110 who had no stimulation and completed the trial also felt significantly better."...

Robert comments:

It appears that Mr Carey is unaware of the subtle mathematical point that 17/111 is greater than 11/110.... [T]he difference does not reject the null that the two rates are the same, that is, that the treatment is ineffective.... It is, indeed, very strange that the FDA is considering approval of a treatment supported by such weak evidence. Like various experts quoted in the article, I would have expected that FDA advisory panel to tell Cyberonics Inc., the Houston company that makes the stimulator that the device would only be approved after they performed a larger study.... Still my basic point stands 17/111 > 10/110, weak evidence in favor of the alternative is not proof that the alternative is false...

Posted by DeLong at 12:13 PM | Comments (0) | TrackBack

Are There Any Senators in the Republican Party?

And does anyone who really is a senator--rather than a participant in a clown show--really want to put Patricia Owen on the federal bench:

Pandagon: Useful information: "The Houston Bar Association just released 2005 judicial evaluations, so everyone can check out what the bar association of one of the most conservative cities in the country thinks of Priscilla Owen's service on the Texas Supreme Court. It's a pdf file, so I'll summarize--they think she stinks. 39.5% rated her as outstanding, 15.2% rated her as acceptable and 45.3% rated her as poor. Of course, in Bushland, having nearly half of your constituency think that you can't tell your ass from your head is considered a mandate.

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

Snarkiest Thing I've Read Today

English literary critic Terry Eagleton on U. Va. philosopher Richard Rorty. From Terry Eagleton (1996), The Illusions of Postmodernism (London: Blackwell: 0631203230):

...postmodernism combines the worst of [liberalism and communitarianism].... It has, to begin with, an embarrassing amount in common with communitarianism.... The self for both doctrines is embedded in a purely parochial history, and moral judgements thus cannot be universal. Moral judgements, for [Richard] Rorty and his ilk, really say "We don't do that kind of thing around here"; whereas... to say "sexual discrimination is wrong" usually means that we do do that kind of thing around here, but we shouldn't.... [pp. 85-86]

One kind of postmodern skeptic of universality believes in culturalist style that moral values are just embedded in contingent local traditions, and have no more force than that. An egregious example of this case is the American philosopher Richard Rorty, who in an essay entitled "Solidarity" argues that those who helped Jews in the last world war probably did so less because they saw them as fellow human beings but becasue they belonged to the same city, profession, or other social grouping as themselves. He then goes on to ask himself why modern American liberals should help oppressed American blacks. "Do we say that these people must be helped because they are our fellow human beings? We may, but it is much more persuasive, morally as well as politically, to describe them as our fellow Americans--to insist that it is outrageous that an American should live without hope." Morality, in short, is really just a species of patriotism.

Rorty's case, however, strikes me as still too universalist. There are, after all, rather a lot of Americans, of various shapes and sizes, and there is surely something a little abstract in basing one's compassion on such grandiosely general grounds. It is almost as though "American" operates here as some sort of metalanguage or metaphysical essence, collapsing into unity a vast variety of creeds, lifestyles, ethnic groupings, and so on. Would it not be preferable for an authentic critic of universality to base his fellow-feeling on some genuine localism, say the city block? On second thoughts, however, this is still a little on the homogenizing side, since your average city block does of course contain a fair sprinkling of different sorts of people; but it would surely be a more manageable basis for social justice than some universal abstraction like America. One might demonstrate compassion to those in the next apartment, for example, while withholding it from those down the street. Personally, I only ever display sympathy to fellow graduates of the University of Cambridge. It is true that such credentials aren't always easy to establish: I have occasionally tossed a coin towards some tramp whom I thought I recognized as a member of the class of 1964, only to retrieve it furtively again when I realized my mistake. But the alternatives to such a strategy are fairly dire. Once one begins extending compassion to graduates of Oxford too, there seems no reason not to go on to Sheffield, Warwick, and the Lower Bumpstead College of Agricultural Science, and before one knows where one is one is on the slippery slope to universalism, foundationalism, Juergen Habermas, and the rest.

I have not, incidently, yet resigned from the Campaign for Nuclear Disarmament, merely adjusted my reasons for belonging. I now object to nuclear warfare not because it would blow up some metaphysical abstraction known as the human race, but because it would introduce a degree of unpleasantness into the lives of my Oxford neighbors. The benefit of this adjustment is that my membership of the campaign is no longer the bloodless, cerebral affair it once was, but pragmatic, experiential, lived sensuously on the pulses. If my bit of Oxford survives a nuclear catastrophe, I really couldn't care less about the University of Virginia.

Rorty, commendably enough, really does seem to believe that getting rid of pointless abstractions like "universal humanity" would actually allow us to be more morally and politically effective. He is not so much opposed to them because they are false, a kind of judgement he does not much relish making in the first place, as because they are distractions from the true tasks in hand. He would need, however, to find grounds for distancing himself from the kind of anti-universalist who believed that murder was wrong for everyone except for aristocrats who were above the law, benighted heathen who knew no better, and those whose time-hallowed tradition happened to sanction it. It is this kind of privilege which the Enlightenment was trying to counter, and it is surely a case with strong intuitive force. In theory if not always in practice, it provided you with a powerful counterblast to those paternally-minded colonialists who thought that the natives weren't up to moral virtue or simply had ideas of it which failed to mesh with their own. The idea of human emancipation is part of the progeny of Enlightenment, and those radical postmodernists who mobilize it are inevitably in debt to their antagonists. In a similar way, the Enlightenment itself inherited concepts of universal justice and equality from a Judaeo-Christian tradition which it frequently derided. Universality just means that, when it comes to freedom, justice, and happiness, everyone has to be in on the act... [pp. 114-116]

Posted by DeLong at 12:11 PM | Comments (0) | TrackBack

Why Oh Why Can't We Have a Better Press Corps? (Who's Going to Pay to Read John Tierney? Department)

Matthew Yglesias reads John Tierney so that we don't have to. Today he comes across John Tierney's claim that the ethics of Darth Vader are those of Adam Smith:

Darth Vader's Family Values - New York Times: [Darth Vader] says he could never betray the Jedi because they're his family, but then the chancellor puts the family question in perspective: 'Learn to know the dark side of the Force, Anakin, and you will be able to save your wife from certain death.' Anakin promptly recognizes the limits of altruism, just as Adam Smith did in the 18th century. Smith knew that some people professed love for all humanity, but he realized that a man's love for 'the members of his own family' is 'more precise and determinate, than it can be with the greater part of other people.' Hence his famous warning not to rely on the kindness of strangers outside your family: if you want bread, it's better to count on the baker's self-interest rather than his generosity...

Matthew, quite rightly, goggles at this--first, because praise of the ethics of Darth Vader is simply bizarre, and, second, because it is a clear misreading of Adam Smith:

Matthew Yglesias: Tierney on Smith and the Sith: Today's column is certainly more interesting than your usual rightwing effort. Still, I can't help but think it strange that not only The Wealth of Nations (which, NB, I haven't read and thus hesitate to comment on) but also Adam Smith's Theory of the Moral Sentiments are listed at the end as 'further reading' on the theme. Tierney seems to be pushing an Ayn Rand-style 'greed is good' line here that is very much not what Smith's other book, at least, says...

The self-interest on which Adam Smith suggests we rely--our mutual willigness to enter into win-win deals as we truck, barter, and exchange--is a self-interest that has already been channeled and tamed by an extraordinary degree of development of our moral sentiments. Consider highland Scotland, where people are divided into three groups: clan members to be aided, clan enemies to be killed, and strangers to be robbed. No getting your bread from the baker's self-interest there, especially if he is a MacDougal.

And then it gets really weird, for Tierney goes on to denounce the United States as an enterprise, claiming that America is not a community with a "national sense of shared purpose" because:

America is not a clan with shared values. It is a huge group of strangers with leaders who are hardly altruists - they have their own families and needs.

And that those who say that we are all, in some sense, Americans are conning us:

We are born with an instinct for altruism because we evolved in clans of hunter-gatherers.... [W]e no longer live in clans small enough for altruism to be practical, but we still respond to politicians who promise to make us all part of one big selfless community.... [L]iberals stressed charity and social programs for all, while conservatives promoted patriotism and spending on national security - but they both expanded the government....

And, according to Tierney, that was bad.

Now there are places in the world in which altruism is not practical--places into which John Tierney dare not venture because he would be beaten bloody and senseless by the first person he came across who wanted his watch. But that is not a good description of America and Americans. The overwhelming majority of people in America are altruistic toward each other, and altruism toward your fellow citizens has a name: patriotism.

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

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

Daniel Froomkin watches the clown show that is the Bush administration on Social Security:

Exploiting a Misconception: President Bush's meticulously stage-managed presentations on Social Security have slowly shifted into a new phase, in which White House aides find misinformed young people to share the stage with the president and assert that Social Security won't be there at all when they retire. And rather than correcting them on their misconception -- government estimates, after all, say that after 2041 Social Security will still be able to pay at least three-quarters of currently promised benefits without any changes -- Bush congratulates them on their perspicacity....

Take a look at the transcript of Bush's event yesterday in Milwaukee and in particular his exchanges with the panelists winnowed by the White House from a pool of contestants selected by the local chamber of commerce. Bobby Kraft, 27, who is president of a local printing and mailing company, told Bush: 'Before I got into printing I did have a short stint as an investment advisor. And the first thing I learned getting into the industry and studying all the financial books is that don't count on Social Security to be there. We... teach our employees that they need to take advantage of the 401(k) we put in place for them because of the fact, the way the Social Security system is set up, we cannot count on that to be here.

Bush: 'Yes, let me stop you. Young guy sitting here in Milwaukee, Wisconsin, in front of the President -- don't count on Social Security to be there. A lot of people feeling that way here in America. What I'm telling you is, if we can get the United States Congress to listen to you, we can put a plan in place to make sure Social Security is there. (Applause.)... 'Bush: 'Interesting, isn't it? They took a survey amongst youngsters. Somebody explained to me, I didn't actually watch -- see the survey, but I heard what the person said. He said, more people are -- that are Christy's age think they're more likely to see a UFO than get a Social Security check. (Laughter.) Pretty funny when you think about the fact that a lot of young people are going to be putting a lot of money into a system that may not be around....'

Is it just a coincidence that so many of the young people sharing the stage with the president are laboring under this particular misconception? No. As Warren Vieth writes in a break-out Los Angeles Times story today, the White House is specifically looking for such people.... Writes Vieth: 'Although it is common for advocacy groups and political organizations to spotlight supportive views at public events, the WIPP memo suggests that the White House has provided outside organizations with explicit instructions on the kind of participants it has in mind.'

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

Very Good News on the Biological Science Front

Carl Zimmer summarizes:

Of Stem Cells and Neanderthals: Closing the Circle: Corante > The Loom > : Today in Science scientists reported a potentially big advance.... [T]ake skin cells from patients, inject them into donated eggs emptied of [the eggs'] own DNA, and nurture them along.... The cells were able to develop into a wide range of cell types, their chromosomes were normal, and they were so similar to the cells of the indvidual patients that they would not be rejected as foreign tissue. The research stopped there, but the dream behind this work is to heal your failing liver or heart or dopamine-producing neurons by clipping off a little skin and farm new cells that could regenerate those organs....

Reading about this advance, I felt a grim sense of irony. As I wrote in my original post, President Bush stopped federal funding for research on stem cells using new lines... despite the fact that most of the already existing lines were contaminated by this lost sugar. American scientists have been making some progress with stem cells with private money and state initiatives, but guess where scientists finally figured out how to solve this evolutionary problem with cell sugars? South Korea.

Reading about this research, I was also reminded of an article I read last week during the Kansas 'trial' over evolution and creationism.

Leonard Krishtalka, the director of the Kansas University Natural History Museum, was quoted pointing out how Kansas is raising $500 million to foster a bioscience and biotech industry in the state. It was ironic, he said, that the state's board of education was simulataneously 'trying to remove and water down the basic fundamental concept of evolution that underlies all of biology.'

Case in point: try to imagine a stem cell therapy company deciding where to set up shop. I doubt they'd be excited about a state that doesn't make sure their high school students understood mutations, natural selection, the origin of species, the fossil record, and all the other elements of evolutionary biology--that thinks it's fine just to claim that the broken sugar gene in our genome was just stuck there for reasons unknown by some mysterious designer...

Posted by DeLong at 12:08 PM | Comments (0) | TrackBack

Paris Hilton and Company Are Secretly Unhappy...

Don Herzog dredges up the argument that we should feel sorry for Paris Hilton and company--that they have been harmed by lower marginal tax rates for the rich and would be harmed by permanent estate-tax repeal:

Left2Right: blast from the past (two): Don Herzog: May 20, 2005: It's one of my favorite pamphlets, but alas, it isn't reprinted any more. After the author published it, he handed it off to the Association for Preserving Liberty and Property against Republicans and Levellers — yup, they don't name political groups like they used to — and they circulated it widely.... This delicious pamphlet hasn't even been publicly available online. But I have boldly taken matters in hand and now it is. The pamphlet is William Paley's Reasons for Contentment, Addressed to the Labouring Part of the British Public, first published in 1792.... Anyway, you should read Paley's deathless pamphlet. All nine pages of it....

His pamphlet insists so vehemently on the superiority of poverty that it becomes entirely mysterious why the rich don't try to find some poor suckers to take their wealth off their hands. Or for that matter why they don't just burn it outright.... Providence has ensured that most people can be happy without wealth. Workers are busy, so they have no time for the "irksome and tormenting" thoughts that afflict the wealthy in their leisure. "Frugality itself is a pleasure." The poor provide more easily for their children:

All the provision which a poor man's child requires is contained in two words, "industry and innocence." With these qualities, tho' without a shilling to set him forwards, he goes into the world prepared to become an useful, virtuous, and happy man.

The poor even get more pleasure from food and drink.

The rich who addict themselves to indulgence lose their relish. Their desires are dead. Their sensibilities are worn and tired. Hence they lead a languid, satiated existence. Hardly any thing can amuse, or rouse, or gratify them. Whereas the poor man, if something extraordinary fall in his way, comes to the repast with appetite; is pleased and refreshed; derives from his usual course of moderation and temperance a quickness of perception and delight, which the unrestrained voluptuary knows nothing of.

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

Sing, O Muse, of the Ire of Teresa Nielsen Hayden and Company...

They are annoyed. This is far better than "your father was a hamster and your mother smelled of elderberries":

Making Light: On reading Thomas Friedman again: I was right. Thomas Friedman is indeed one of those rare enlivening bad artists who inspires better writers to bouts of splenetic eloquence. What better proof could you ask than the following poems, written upon the occasion of my previous post?

The first, by John M. Ford, from the comments thread:

Much have I travell’d on the feet of gold,
And many tumbled walls and maidens seen,
Round many horny Africs have I been
Which bards like bosoms in their welkins hold,
Oft of a spare expanse had I been told
That fence-swung Homer looked on as demesne;
Yet never did I breathe its mountains clean
Till I heard Friedman speak out uncontrolled,
Then felt I like some Cousteau of the skies
When a new bubble undermines his ken,
Or sack-like Falstaff, when with precast eyes
He stared at echoes—and his fellow men
Harked back in multitudes like single spies
Silent, past their peak in Darien.

The second came in the mail from James D. Macdonald:

On first looking into Friedman’s Flathead

Much have I travell’d in a chartered jet
And munched betimes upon a Cinnabon;
Upon my iPod listened to Don Juan
Which I downloaded from the wireless ‘Net.
I did not understand the ‘Nineties lore
Of Windows systems and of Pizza Hut,
How one was opened and the other shut,
Till I heard Friedman speak in metaphor.
Then felt I like a steroid in a vein:
Jose Canseco on a level field,
Whose random thoughts of glory and of pain
Were like an ice-cream sundae all congealed.
The moral is, when put by words in train,
That which does not exist can’t be revealed.

This becomes interesting. If it continues, Friedman may conceivably hope to someday outdo Gene Steinberg as one of the Muses of Eloquent Indignation.

Only time will tell.

Addendum: Jonathan Vos Post has weighed in:

Friedmandias

I met a traveller from the New York Times
Who said: ‘Two vast and Lexus legs of stone
Stand in Bangalore. Near their paradigms
Half sunk, a shattered visage lies, whose frown,
And open Windows, and sneer of the Berlin Wall,
Tell that its sculptor often ate at Pizza Hut
Which yet survive, stamped on this Lilliput,
T.I. that mocked them as ephemeral.
And on the plinth by this Michelangelo—
“My name is Friedmandias, king of the IPO:
Look on my prose, ye Mighty, and despair!”
Nothing coherent stays. Round the decay
Of that steroidal wreck, boundless and bare
The level playing fields stretch far away.’

Those who prefer their inspired indignation in the form of prose may appreciate Ademithopur’s Venting at Cinematic Rain:

a commenter cited this little excerpt from a review of Mr Friedman in the LATimes book review, which set me off, hence the need to vent. my apologies
“… Friedman recounts that he first realized the extent of these changes recently at the KGA Golf Club in southern India when his playing partner pointed at two shiny glass-and-steel buildings and declared, ‘Aim at either Microsoft or IBM….’”

IIRC, nearlymore than half the indian population is under the age of 25, a good number of whom live in abject poverty.

i seriously doubt that there are enough jobs at any level in IBM or MSFT or all the software startups in the world combined to satisfy such a vast labor market (250 freaking million jobs over the next 15 years, to keep up with population aging). the reason that people are pissed is because the MNC’s have this Massive advantage in the labor market and are abusing it thoroughly, making employees work crap hours for marginally higher pay. these are the ‘haves’ btw. the have-nots are pissed because they have no avenues to get a piece of this action.

i am from south india. my cousin works for HP in B’lore. i visited him this past december. i also visited chennai and hyderabad. there are a lot more poor, hungry people in india than there are employees at HP. these people have not received any of the ‘trickle-down’ effects of globalization. the situation is pretty standard for a developing nation. rich get richer, poor get bent over and penetrated with a wooden spoon. the right-wing politics that held sway the past 4 years hasn’t helped at all, only causing more social rifts while failing to heal or treat the economic ones.

It makes such a difference in the language when the writer knows something.

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

The Logical Structure of the Geneva Conventions

Paul Lukasiak writes:

The key to understanding the Geneva Conventions is that they were designed to protect everyone placed under the authority of an "enemy" during wartime. Absent the findings of a competent tribunal that someone had committed war (or other) crimes, everyone had to be treated as either a POW or a "non-combatant".

The granting of POW status is not a "benefit" under the conventions -- it is designed to enumerate (and thereby restrict) the rights of captured combatants (as opposed to captured non-combatants). In other words, there are rights granted to captured non-combatants that are far greater than those granted to combatants. The definitions for "POW status" deliniate whom a capturer can provide the limited rights afforded to combatant --- and the rights afforded "POWs" are the minimum rights granted under the Conventions.

Posted by DeLong at 12:02 PM

As the Sun Sets on Daniel Okrent Day...

This is perhaps the most bizarre thing of all. As Mr. Spock would say, fascinating...

Did Daniel Okrent really say that David Cay Johnston is the leader of a lynch mob?

Did Daniel Okrent really say that he hoped that by the end of his stint as "Public Editor" everyone would know that the New York Times does not deserve to be called the newspaper of record?

Did Daniel Okrent really read 40,000 words--200 pica courier pages--written by Luskin?

Did Daniel Okrent really say that Don Luskin is better looking than Paul Krugman?

A correspondent directs us here:

Donald Luskin on Daniel Okrent and Paul Krugman on NRO Financial: New York Times "pubic editor" [sic] Daniel Okrent.... I've met with him and corresponded with him... 40,000 words.... Yes, I'm the one Okrent was talking about when he referred to "Krugman's enemies."... [W]hy didn't Okrent go further with his critique? And why, as the self-described "readers' representative," did he feel it was necessary at the same time to take a gratuitous swipe at me--one of his readers?...

[A] fear of reprisal.... Okrent wasn't always afraid.... When I first met him in early 2004 he was full of the burning zeal of the reformer, and eager for intellectual allies. His first words to me were, "You're much better looking than Paul Krugman." He told me that the Times didn't deserve to be called the "newspaper of record" and vowed, "When I'm done with this assignment, I want everyone to know that."... I knew it wouldn't last.... I wondered how long Okrent could maintain his independence... the glittery social world of Times management.... Times staff fought Okrent.... David Cay Johnston... organize[d] other reporters into what Okrent called a "lynch mob"....

the Times's campaign coverage... Okrent... asking, "Is The Times systematically biased toward either candidate? No."... What, you are no doubt wondering, could Okrent possibly have been thinking?... the Times's coverage of the presidential campaign... self-evidently biased toward John Kerry to the point of self-parody.... hundreds of e-mails from the Angry Left....

Okrent had not only succumbed to the pressure from the Left, he had cracked under it. Here we had the "readers' representative" using the mighty power of the New York Times to lash out at one of its own readers... calling him a "coward"... quoting him... in defiance of his pleading not to be quoted....

So, Okrent ends his 18-month[s]... a broken man, having turned against the readers he was supposed to represent...

Posted by DeLong at 11:58 AM

Matthew Yglesias on Infopolitics

He has moved into the Josh Micah Marshall Empire:

TPMCafe || Politics, Ideas & Lots Of Caffeine: Infopolitics as Metaphor and Reality: Back in my TPM guest-blogging days, I concluded by asking my now-colleague here at the cafe what it was, exactly, that New Democrats and New Labour had in common, given that the policy status quo in the U.K. is so far to the left of the status quo here in the U.S.A. He replied that 'the main dividing line between New Labour and New Democrats and the more recalcitrant portions of their respective parties is a realization that the industrial age has come and gone' and that certain things follow from that.

And, indeed, I see on page 258 of Kenny's book that this is Al From's official account, too. Indeed, you see this idea popping up all over the place. It's in a bunch of really bad Joe Klein columns about Social Security, and also in his rather better book about the Clinton administration. Andrei Cherney's book, The Next Deal, which I've just been reading is positively dripping with it. It even says 'The Future of Public Life in the Information Age' right there on the cover.I think it's notable that in all these contexts, 'the information age' almost always serves as a kind of metaphor for the notion that the public sector ought to become more flexible, more consumer-oriented, and so forth. Which is to say that when Andrei writes about charter schools, he doesn't literally mean that we should move to a program of universal public school choice because people nowadays have cell phones. What he means is that in an environment increasingly driven by choice in the consumer world, a hierarchical system of segmented school monopolies sticks out like a sore thumb and rubs against peoples' sensibilities.

All that's fine as far as it goes (except when, as in the case of Klein's enthusiasm for privatization it's not fine), but it leaves what I think is a pretty noteworthy blank spot -- the literal politics and policy of the information age. There's a broad set of issues related to intellectual property law, telecommunications policy, the dispensation of the radio spectrum, and so forth that are actually about the information age where the policies we have nowadays are unsatisfactory and where mainstream liberal figures have tended not to show much leadership. I've got an article forthcoming in the Prospect about one corner of this -- broadband competition -- and hope to do more work on the subject in the future. In addition, we've got Reed Hundt, a bona fide expert on a lot of this stuff, as part of the Coffee House team.

For now I'll just note that even though it doesn't seem to me that Washington's New Dem institutions do a notably better job on this front than the Old Dem ones do, the problem here does fit very well with a lot of the New Dem critique of the party and progressive politics more generally. Which is to say that Democrats have gotten very bad at addressing issues in a systematic and consistent way unless there's some organized liberal constituency group making the issue a top priority. But better digital policy isn't a labor issue, it isn't a black issue, it isn't a feminist issue, it isn't an environmental issue, etc. But it's still an important issue, and while a political party that claims not to believe in the necessity for a public sector role in the economy can afford to simply ignore it, the party that claims to believe in the vitality of such a role really can't.

Posted by DeLong at 11:52 AM

Hitting a Nerve...

John McGowan writes at Michael Berube Online:

John McGowan: A hit, a palpable hit. The President, Vice-President, Secretary of State, the Secretary of Defense, and the Head of the Joint Chiefs of Staff all responded this week to Amnesty International’s latest Human Rights Report. Bush called Amnesty’s concerns “absurd” and Rumsfeld, while acknowledging that “some abuses” had occurred, objected most strongly to the terms “gulag” and “concentration camps”.... The gents protest too much.... Our government officials keep trying, with their talk of a few bad apples in the lower ranks or of outrage... to obscure from view that the US is forcibly detaining people against their will outside of any legal process. To “admit” and “punish” abuses in this schema actually serves the larger policy because once you agree to use the word “abuses” about some of the behavior, you are granting the legitimacy of the day-to-day operations.

Recall that the Supreme Court has ruled that the detainees at Guantanamo must have hearings. How many have gotten their Court-mandated hearings so far? I’m having a Brad DeLong—“why can’t we have a better media?”—moment on that question. An hour reading the news stories on Guantanamo failed to yield an answer. The Court ruling came on January 31, but I can’t find any updates on what has been done in way of compliance. And nobody raises the question—no less answers it—in the current spate of stories about the Amnesty Report. Except, of course, it is right there in the Amnesty Report. Will the answer shock you? None. Nada.

Rule that the Geneva Conventions are quaint. Ignore a ruling from the US Supreme Court. But jump all over the “excessive” language of “gulag” and “concentration camp.” How many times can these guys—and Condi—pull off this trick?

Hannah Arendt was very clear that evils done to humans in the modern world—which is organized politically around the form of the nation-state—begin by rendering people “stateless,” by moving them outside of any legal structure in which they are recognized as citizens with certain rights or have access to a legal system in which to contest their treatment. The US has headed down that path, not on the scale of 20th century evils, but making use of the same forms. (Of course, I didn’t have to look long to find a conservative blog that is full of scorn for legal protections for obviously wicked people.) In that respect, Amnesty’s terms are apt—and, if sensationalist, reflect a desperate attempt to get somebody’s, anybody’s, attention.

Keep the pressure on. We’ve got this brief swinging of the media’s attention to our detention centers once again. We have an administration placed once again on the defensive—and reacting by swinging out wildly at its accusers. Maybe even someone in the mainstream media will read the Amnesty report and remember the Supreme Court decision.

Impeach George W. Bush. Impeach Richard Cheney. Do it now.

Posted by DeLong at 11:50 AM

Ted Barlow's Speaker's Corner

Ted Barlow is reading around:

Ted Barlow: Speaker's Corner: I am very, very sorry that it took me so long to pull this together. Many thanks to Anthony at Things You Don’t Talk About in Polite Company for the name, and many thanks to those who emailed. Newish bloggers, I’m going to do this again in two or three weeks, and I’d love to hear from you about your best posts. Opinions expressed are not necessarily mine.

Mark Thoma at Economist’s View has a terrific basic-principles primer about The Need for Social Insurance.

Charles Norman Todd at Freiheit und Wissen compares the Bush administration’s treatment of two different Latin American governments in Guatemala and Venezuela: Two Models for U.S. Diplomacy. He also edits the Carnival of the Un-Capitalists:

Our Carnival is not meant to be anti-capitalist. Rather, we are just trying to gather the best economic posts from the left on issues ranging from globalization and neoliberalism, to income disparity, free-trade, corporate malfeasance, etc, and so on.

Patrick Smith at Tiberius and Gaius Speaking… is likely to get some angry comments about Is the Republican Party truly fascist?

Wufnik at Bazzfazz is an American ex-pat in the London. He’s got an interesting post on Team Horowitz’s take on European anti-Americanism:
American xenophobia
.

Delicious Pundit has a nice metaphor going on in The martini of public policy.

Nick at News From Beyond The North Wind writes about Cumbrian company towns in These Preterite Shoes.

Chase McInerney at Cutting to the Chase is a freelance journalist in Oklahoma; he writes In Defense of Newsweek.

Posted by DeLong at 11:50 AM

Gene Sperling on Social Security

He writes, at Bloomberg:

Bloomberg.com: Gene Sperling: June 1 (Bloomberg) -- Yesterday, President George W. Bush promised that his strategy for selling his now sinking Social Security private accounts proposal will eventually cut through opposition ``like water through a rock.'' Perhaps a more fitting water-related metaphor for Bush's proposal could be found at the end of the movie ``Annie Hall''.... I think what we've got on our hands is a dead shark.''....

When that moment of realization comes, the White House will certainly blame Democrats for being unwilling to negotiate on private accounts for purely partisan reasons.... Conservatives claim they simply want Democrats to come forward with their own positive ideas on Social Security. I drew a couple of pats on the back from them for proposing a three-part framework calling for no debt increases, a 3 percent surtax on any income exceeding $200,000, and a Universal 401(k) with matching credits to low- and middle-income savers.... What non-political reason, I am often asked, could there be for someone like myself who supports Universal 401(k)s outside of Social Security to so stubbornly refuse to even consider private accounts within Social Security?

The answer is twofold. First, Social Security is simply the wrong vehicle.... In our three-legged retirement system -- which includes market-sensitive private savings, home equity and pensions -- Social Security is the only leg free of market and economic risk.... The second substantive rationale for a hard ``no'' on privatization is that virtually every private-account plan is designed to make Americans undervalue the social-insurance benefits of Social Security and overvalue their private accounts.... By requiring borrowed funds for private accounts to be paid back not from the accounts themselves but by reducing Social Security benefits, [Bush's] plan is designed to make private accounts seem deceptively large and Social Security benefits appear deceptively small. This absurd design serves only one purpose: to encourage the healthy and the well-off to misconstrue Social Security as a bad deal...

Posted by DeLong at 11:46 AM

Don't Forget the Noseplugs!

I don't know about you, but I'm taking noseplugs to my next car-shopping expedition:

The Washington Monthly: TRUST....Swiss researchers have discovered a hormone that increases your trust in fellow human beings:

Ernst Fehr of the University of Zurich and colleagues tested 194 healthy male students in a series of sophisticated games of risk and trust....Some players were given a whiff of oxytocin, some inhaled a vial of air. None of the players knew what they were sniffing and none knew whether the trustees were trustworthy or not: they had to make a decision. Those who sniffed oxytocin showed a greater propensity to trust someone than those who simply inhaled air.

But when the trustee was replaced with a computer, both sets of investors showed much the same judgment. So the oxytocin did not make the investors generally more gullible or profligate: the effect was only visible when they had to deal with another human being.

How sad that Lee Atwater isn't around to take advantage of this development. Just think what he could have accomplished.

Posted by DeLong at 11:44 AM

Advice for Berkeley

Our after-school babysitter has gotten into Cal--Berkeley--and will be going there next year.

Current students polled have two pieces of advice:

  1. Don't try to park.
  2. If you're running late, think that there has to be someplace legal to park at Berkeley, and fail, DO NOT park in a Nobel-prizewinner spot.

Posted by DeLong at 11:44 AM

A Worrisome Trend...

That makes three graduate students in the past three days who have asked me if they might borrow a book from me, because "all the good books are checked out of the library and recall doesn't work."

So far this week I am down:

  1. Robert Bates (1984), Markets and States in Tropical Africa (Berkeley: University of California Press: 0520052293).
  2. Francois Furet (1999), The Passing of an Illusion (Chicago: University of Chicago: 0226273407).
  3. Paul Blustein (2005), And the Money Kept Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: PublicAffairs: 1586482459).
  4. Iain M. Banks (2004), The Algebraist (London: Orbit: 1841491551).

Posted by DeLong at 11:42 AM

Mirror of Wildernesses...

Susan Madrak directs us to:

Behind the Looking Glass in Iraq: On May 10, Raja Nawaf Farhan al-Mahalawi, the newly appointed governor of Iraq's Anbar province, was kidnapped by insurgents. Five days later, according to news reports, he was freed. But today, more than two weeks after he was freed, he was "found dead along with his militant captors after a clash with U.S. forces."

Notice anything unusual in this chain of events? You do? No one in the media did. Not one report that I've seen of al-Mahalawi's death mentions that, according to the Iraqi government, he had been freed by his captors 16 days previously. I wonder why. Why was't one editor brave enough to print the following, "Raja Nawaf al-Mahalawi, the governor of Iraq's Anbar province, was killed along with his kidnappers 16 days after they had released him." After all, if you're going to print statements of U.S. and Iraqi officials as legitimate news--that is, if you're going to print absurdities--why try to hide them?

An examination of what else was happening in Iraq on May 15 explains the mystery. That was the day of Condoleezza Rice's surprise one-day visit. Evidently, it was too embarrassing for Iraq's putative leaders to have to meet with their boss while the governor of Iraq's largest province was being held by the insurgents. So they "freed" him. Simple as that. Reality? It's no longer a limitation.

Posted by DeLong at 11:39 AM

The Europeans Figure Out How to Stop the Appreciation of the Euro

Edward Hugh refers us to:

Bloomberg.com: Germany: The German Finance Ministry declined to comment on a magazine report that discussions took place last week between Finance Minister Hans Eichel, Bundesbank President Axel Weber and economists on a possible failure of European Monetary Union.

Stern magazine said in a pre-released article today that the group discussed a scenario for the single currency's collapse as differences in inflation and growth rates within the union grow. An internal ministry document formed the basis of discussions, Stern said.

The Finance Ministry ``doesn't comment on internal papers or meetings,'' said spokeswoman Sandra Hildebrandt in a telephone interview today. ``The euro is a success story.''

Inflation and growth differentials ``can lead to a meltdown in a couple of years, the collapse of the euro,'' the German magazine quoted Joachim Fels, chief fixed-income economist at Morgan Stanley, who took part in the meeting, as saying.

"The gap risks widening, so that the danger of an adjustment crisis is growing bigger,'' Stern quoted the Finance Ministry document as saying. Germany's lower house of parliament has commissioned a legal opinion on a possible reversal of EMU and the right of one of its members to leave the currency, Stern said.

The introduction of the euro has cost Germany its former advantage of lower financing costs, which partially explains why it's lagging behind the other euro members, the ministry said in the report, according to Stern.

Posted by DeLong at 11:33 AM

When Wingnuts Read!

A Washington lawyer friend of mine who reads Wonkette on an hourly basis directs us to a great piece of right-wing wingnuttery:

HUMAN EVENTS ONLINE :: Ten Most Harmful Books of the 19th and 20th Centuries:

  • The Communist Manifesto
  • Mein Kampf
  • Quotations from Chairman Mao
  • The Kinsey Report
  • Democracy and Education
  • Das Kapital
  • The Feminine Mystique
  • The Course of Positive Philosophy
  • Beyond Good and Evil
  • General Theory of Employment, Interest and Money

Posted by DeLong at 11:32 AM

Social Causation and Discouraged Workers

Early in March 1980, about 100 of us Harvard sophomores began carrying around--everywhere we went--a large book with a bright red cover, and the word "SUICIDE" emblazoned on the front in large black letters.

It had been--as it always is in Cambridge, Massachusetts--a miserable winter: not cold enough for the snow to be a constant delight, but just a wet garbage-filled slushness. The absence of sun had given us all seasonal affective disorders. And we were desperate for spring and sunlight to come as we opened our copies of our books and smeared turkey tetrazini from the Leverett House dining hall across the table of contents.

To make things worse, our roommates and passers-by used the books we carried as an opportunity for jokes: "Don't do it, Brad! You still have plenty to live for!" was about as good as it got.

What we were reading, of course, was Emile Durkheim's Suicide. As we were taught the book, Durkheim was attempting two very important things:

  1. A critique of classical liberal modernity, as tending to cause a great deal of distress as people found themselves severed from their communities and turned into isolated Benthamite machines or, more optimistically, Millian agents.
  2. A stunning demonstration of the power of sociology: nobody about to commit suicide will say "I'm doing this because I'm Protestant and not Catholic" or "I'm doing this because I live in a big city rather than a small town," and yet suicide rates exhibit powerful variation in response to standard sociological variables. What the sociological background is can provide the extra push that makes the normal (or abnormal) stresses of life unbearable, or can provide the extra support that makes the unbearable bearable.

It is for this reason--call it social causation--that I find unconvincing Andrew Samwick's argument that because people don't say that the primary reason they're dropping out of the labor force is because jobs are hard to find that we can therefore conclude that people aren't dropping out of the labor force because jobs are hard to find:

Vox Baby: Re-critiquing Krugman, with Friends: What generated the several posts of mine last fall was my attempt to figure out the extent to which the decline in the unemployment rate is due to the fact that 'some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics'.... I considered the three usual augmented measures of the unemployment rate that the BLS tabulates in Table A-12 each month that specifically track those who are not in the labor force because they are not actively looking for work....

  • Unemployment Rate: Fell from 6.3 to 5.4 percent
  • UR, Incl. discouraged workers: Fell from 6.6 to 5.7 percent
  • UR, Incl. discouraged and other marginally attached workers: Fell from 7.2 to 6.4 percent
  • UR, Incl. marginally attached workers and those employed part-time for economic reasons: Fell from 10.3 to 9.4 percent

Subsequent exchanges with readers and with some helpful folks at the BLS revealed that the BLS also collects information monthly on those who are not in the labor force but want a job, even if they have not searched recently enough and/or are not currently available to work. So we could add another bullet point (from my last post in the series in October) to include these people:

  • UR, Incl. any who wants a job: Fell from 9.2 to 8.4 percent

Even measures of the unemployment rate that are specifically designed to pick up people who are out of the labor force because they stopped actively looking for work declined over the period in question. All of them fell by 0.8 - 0.9 percentage point, compared to the decline of 0.9 percentage point in the official unemployment rate. I don't even get 'primarily' from this...

I am not convinced by Andrew. Falling unemployment rates with roughly constant employment-to-population ratios and disappointing real wages seems to me more consistent with the hypothesis that discouragement is pushing more people across the psychological line that leads them to drop out of the labor force, people who when asked what is their primary reason for leaving say that it is to get more schooling or have a kid or just take some time off.

On the other hand, he is not convinced by me. And he's right to some degree at least: I should be worried by the fact that the Labor Department's attempts to pick up this phenomenon that I believe is going on do not succeed in doing so.

Posted by DeLong at 11:30 AM

Interesting Dreams He Has

Tyler Cowen writes:

Marginal Revolution: Usually I find books like this only in my dreams: Fischer Black and the Revolutionary Idea of Finance, by Perry Mehrling.

That's not what happens in my dreams at all! Nevertheless, the book is highly recommended.

Posted by DeLong at 11:27 AM

Why Oh Why Can't We Have a Better Press Corps? (Jonathan Chait No Like Danny Okrent Department)

Chait writes:

The New Republic Online: etc.: OKRENT'S LAST WORD: I didn't think Daniel Okrent, the departing New York Times public editor, could get any more cowardly. But he just did.

If you didn't notice, Okrent included in his final Times column a parting shot at columnist Paul Krugman and two other Times columnists. Okrent wrote, 'Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.' Okrent declined to offer a single example of such slicing and dicing, or even to expound upon his accusation in any way. By way of explanation, he wrote: 'I didn't give Krugman, Dowd or Safire the chance to respond before writing the last two paragraphs. I decided to impersonate an opinion columnist.'

This is, of course, a shockingly dumb explanation. No, op-ed columnists don't give their targets a chance to respond. But they do make some effort to substantiate their claims. Krugman wouldn't write that President Bush told a lie in a recent speech and leave it at that. He would pass on to the readers what Bush said and explain why he felt it was a lie. Is Okrent really so dim that he couldn't grasp this point?

Maybe, but more likely he doesn't have the guts to do it. In an online debate, Krugman pressed Okrent to substantiate his accusation. You can read the debate here. It's truly pathetic. Krugman explains why Okrent's accusations were wrong, and Okrent repeatedly dodges the substance.

For instance, Okrent writes, 'His 5/9/05 column on progressive indexing. The column itself (without the ex post facto explanation) suggestively conflates 'retirement income' and 'social security benefits' without sufficient explanation, but with plenty of apparent point-making.'

Krugman replies:

I explained that the term 'retirement income' normally refers to income from all sources, not just Social Security benefits (the Social Security Administration says on its Web site that 'you should not count only on Social Security for your retirement income.') I supplied him with a study (pdf) that used Social Security Administration data to show that because high-income workers depend much less than middle-income workers on Social Security, they would have smaller percentage cuts in overall retirement income than middle-income workers. This was similar to a point I made, using different data, a week earlier (5/1/05), so I was surprised that Mr. Okrent even raised the issue.

So Okrent simply launches even more personal attacks. For instance, he writes: 'For a man who makes his living offering strong opinions, Paul Krugman seems peculiarly reluctant to grant the same privilege to others. And for a man who leads with his chin twice a week, he acts awfully surprised when someone takes a pop at it.'

But of course Krugman didn't challenge Okrent's right to disagree with him, only his right to launch unsubstantiated attacks on his integrity.

The sneakiest thing in Okrent's latest entry is this:

Believe me--I could go on, as could a number of readers more sophisticated about economic matters than I am. (Among these are several who, like me, generally align themselves politically with Prof. Krugman, but feel he does himself and his cause no good when he heeds the roaring approval of his acolytes and dismisses his critics as ideologically motivated.)

Note what's going on here. First, Okrent implies that there are lots of examples of Krugman abusing data but declines to provide them. Next, he conflates that accusation with a completely different one--that Krugman plays to his liberal base and dismisses those who disagree too easily. I think there's some truth to the latter criticism. But that's a completely different accusation. Being too ideological or partisan is a common flaw among pundits, and it's in the eye of the beholder. Manipulating data is far more serious. Readers can judge for themselves if Krugman is playing to the liberal crowd. They can't judge whether he's using numbers dishonestly. To say he does so is to tell readers they can't trust him.

Okrent continues on with other snide remarks, including this parting shot: 'If he replies to this statement, as I imagine he will, I'll let him have what he always insists on keeping for himself: the last word. I hate to do this to a decent man like my successor, Barney Calame, but I'm hereby turning the Krugman beat over to him.' Look, many journalists have been in the position of wanting to dodge a reader who harbors a burning desire to debate some obscure point and lots of time on his hands. But Krugman isn't some crank, and he's not debating some obscure point. Okrent smeared him in his own newspaper, and he has a right to clear his name.

I'm not saying there are no quarrels that anybody could ever make with any of Krugman's data. He deals with very complicated questions in a very small space. He simply can't devote endless technical paragraphs to establishing his every premise. (That's why I happen to think his recent series of columns on health care, which allowed him to develop his thoughts at greater length without rushing through his premises, have been his best ones.) So Krugman can't chase every rabbit down every hole, but given the constraints of his column, he does a very good job. Okrent ought to be ashamed of himself.

Posted by DeLong at 11:26 AM

Why Oh Why Can't We Have a Better Press Corps? (Paul Krugman Has Another Word Department)

He writes:

The New York Times: Public Editor's Web Journal (Forum/Message Board): Just one last word. Mr. Okrent has so far offered only one example that, if true, would have justified his all-out attack on my ethics. Everything else is picking nits: I could explain why 77 percent, not 64 percent, is the right number, but does it really matter? The only significant example was his claim that I blended household and establishment survey data on jobs, in an attempt to score political points. But as I showed in the previous note, I didn't and in the column itself I pointed readers to the correct data. Now Mr. Okrent claims that he was only referring to my assertion that the economy needs to add 140,000 payroll jobs per month, which for some reason he thinks comes from the household survey. (It doesn't.) Sorry, that's an unconvincing evasive maneuver. Mr. Okrent clearly accused me of playing mix and match with the job numbers themselves. In fact, in our correspondence, when I said that it was all payroll data, he declared that 'your insistence that you relied only on one set of numbers is very puzzling. I don't see how the math works any other way; maybe you could further enlighten me.' In other words, the only accusation that could have justified Mr. Okrent's attack was completely unfounded. And now he's not enough of a mensch to admit his error.

Posted by DeLong at 11:25 AM

Why Oh Why Can't We Have a Better Press Corps? (Danny Okrent Jumps the Shark Once Again Edition)

Paul Krugman writes:

My thingie and Okrent's reply are up:

http://forums.nytimes.com/top/opinion/readersopinions/forums/thepubliceditor/publiceditorswebjournal/index.html

Something you can quote me on:

"Okrent is lying to cover his mistake when he accused me of blending data from the household and establishment surveys. He now claims that he was only referring to my estimate of how many payroll jobs the economy needs to add per month [to keep labor market conditions from deteriorating], which for some reason he thinks is based on the household survey.

"But that's not what he said to me: he claimed that the basic numbers I gave on job growth were mix-and-match. In fact, in our correspondence, when I said that it was all payroll data, he declared that "your insistence that you relied only on one set of numbers is very puzzling. I don't see how the math works any other way; maybe you could further enlighten me."

"In other words, he screwed up completely..."

And here, in the extended entry, are Krugman and Okrent, with a few of my annotations:

The New York Times: Public Editor's Web Journal (Forum/Message Board): Daniel Okrent, in his May 22 farewell column as the first public editor of The New York Times, criticized Paul Krugman, an Op-Ed columnist for the newspaper. Prof. Krugman, who disputed the validity of Mr. Okrent's comments in the public editor's regular reader-letters column in The Times on Sunday, elaborated in a longer e-mail message for this Web Journal -- with the understanding that Mr. Okrent's response would be posted simultaneously.

* * *


Krugman Lays Out Why He Believes Okrent Was Wrong

When I asked Daniel Okrent for the specifics behind his final attack, he offered two examples of what he claimed was improper use of numbers. This was the first time I heard from him, or anyone else, about either alleged problem.

Let me start with the example that, I think, sheds most light on what is going on: Mr. Okrent's claim that I engaged in "blending, without explanation, numbers from the household survey and the establishment survey -- apples and oranges -- apparently in order to make a more vivid political point about Bush (5/25/04)."

He's referring to two different surveys conducted by the Bureau of Labor Statistics, which provide alternative estimates of employment. Some people play games by mixing and matching numbers from the two surveys, and Mr. Okrent has apparently spent the past year firmly believing (without having checked with me) that I did the same thing, to score political points. But I didn't. All the numbers in my 5/25/04 column came from the establishment survey.

Moreover, I not only played fair with my readers, I urged them to check the data for themselves. Here's what I wrote in the column:

"Go to the Bureau of Labor Statistics Web site at stats.bls.gov. Click on 'U.S. economy at a glance,' then on the green dinosaur next to 'Change in payroll employment' for a 10-year chart of monthly job gains and losses."

If Mr. Okrent had done that, he would have seen for himself that what I said about job growth was true.

For his other example, Mr. Okrent criticized me for "asserting that the 40 percent unemployed out of work for more than 15 weeks was a 20-year record" (2/10/04, 3/12/04) without acknowledging that the comparison only applies back to the redesign of the CPS questionnaire. See Polivka and Miller, "The CPS After Redesign," on the BLS Web site.

This sounds like another accusation that I blended two sources of data, without telling readers. In fact, all I did was use the Bureau of Labor Statistics data series on long-term unemployment, which is available on the BLS Web site, where there is no indication given to the public of any problem with comparisons between different time periods. Lou Uchitelle did the same thing in an article published in the New York Times business section, "The New Profile of the Long-Term Unemployed", two days after Mr. Okrent's blast. That article made the same point that I did in the columns Mr. Okrent criticized: long-term unemployment is unusually high.

After Mr. Okrent directed me to Polivka and Miller, I checked it out; it's a 1995 research paper which suggested that the 1994 redesign of the Current Population Survey questionnaire might have raised estimates of long-term unemployment. It wasn't an official statement that pre-1994 comparisons are improper, and the BLS didn't consider the questions raised in that paper serious enough to warrant a warning for consumers of its data. Like most such consumers, I don't go hunting for research papers suggesting possible problems with the numbers unless the BLS says there's reason to be concerned otherwise, it would be impossible to get any work done. Let me also say that the issue is pretty trivial: adjusting the data might put long-term unemployment at a 10-year rather than 20-year high, but it's unarguably very high by historical standards.

To summarize: when I asked Mr. Okrent for evidence of my malfeasance, he provided one example in which his description of what I did was simply wrong, and another in which he accused me of pulling a fast one on readers, when all I did was use official data in a standard way.

In correspondence with Mr. Okrent, I pointed out that his specific attacks -- especially the blatantly wrong characterization of my 5/25/04 column -- were unfair. I asked him to do what he would have expected me to do, and admit that he had been in error. He refused.

Let me repeat that Mr. Okrent never raised these issues as public editor. He now says that he didn't because he "experienced your best-defense-is-a-good-offense approach, and found it futile to deal with it."

Maybe a description of some of my experiences with him will give some sample of what he found difficult to deal with.

On 6/8/04, I made a numerical mistake, reading from the wrong line in a table of tax rates during the Reagan years. Although the mistake didn't change the column's conclusions, I reluctantly issued a correction. But I forgot to use the word "correction," which I hear got Mr. Okrent upset.

Mr. Okrent questioned my assertion (10/12/04) that Congressional Budget Office estimates show tax cuts were responsible for two-thirds of the fiscal 2004 deficit. I explained that in each of its budget projections the CBO estimates how much of the change from its previous projection is due to changes in tax law, and that the Center on Budget and Policy Priorities adds these numbers up to calculate the CBO's implied estimate of the overall cost of tax cuts since 2000. I provided Mr. Okrent with the data used for that calculation.

Mr. Okrent challenged my assertion (5/9/05) that the Bush Social Security "progressive indexing" plan would impose its largest percentage reductions in retirement income on middle-income workers.

I explained that the term "retirement income" normally refers to income from all sources, not just Social Security benefits (the Social Security Administration says on its Web site that "you should not count only on Social Security for your retirement income.") I supplied him with a study (pdf) that used Social Security Administration data to show that because high-income workers depend much less than middle-income workers on Social Security, they would have smaller percentage cuts in overall retirement income than middle-income workers. This was similar to a point I made, using different data, a week earlier (5/1/05), so I was surprised that Mr. Okrent even raised the issue.

If Mr. Okrent was unsatisfied with my explanations in these and other cases, it was his right to demand a fuller explanation, and, if he was still unsatisfied, to say something specific in his column.

I hope we aren't going to get into an extended period in which Mr. Okrent, who failed to air his concerns when that was his job, then failed even in private to provide examples that bear any resemblance to what he accused me of doing, keeps throwing out new accusations.

* * *

Okrent Responds

For a man who makes his living offering strong opinions, Paul Krugman seems peculiarly reluctant to grant the same privilege to others. And for a man who leads with his chin twice a week, he acts awfully surprised when someone takes a pop at it.

Because only a fool or a supply-sider would eagerly engage in a debate on economics with Prof. Krugman, I'll try to eschew argument and stick to facts -- or, at least, the sort of statements that he himself represents as purely factual:

1. I offered him only three examples of "shaping, slicing and selectively citing" (for some reason, he's left one out of his rebuttal) Note: the example Krugman left out is an Okrent complaint that is not about numbers at all--Okrent's complaint Krugman called a study by Jagadeesh Gokhale and Kent Smetters a "Treasury Study" rather than a "study by Treasury Department economists." But the study was much more than a mere academic study by Treasury underling economists. It was a study commissioned by ex-Treasury Secretary Paul O'Neill and reviewed by then-OMB Director Mitch Daniels and ex-NEC head Larry Lindsey--but that's too long to get into a 700 word column

CNN: The Financial Times reported Thursday that the Gokhale-Smetters study was commissioned by Paul O'Neill when he was treasury secretary, and Smetters told the paper that White House advisers Lawrence Lindsey and Mitch Daniels read and were 'very engaged' with it. The Treasury Department Thursday denied having anything to do with the study, which is likely to be published by the AEI in July, and Gokhale said it was meant only to be a 'talk piece.'

because I was at home when he began bombarding me with outraged demands for retraction and apology; I'd completed my tenure as public editor the preceding week, and did not have any files with me. When I had the chance to consult some of my reader mail later in the week, some of his greatest mis-hits immediately came to the fore. I'll get to a few of those in point No. 5, below.

2. This was the first he heard from me on these specific issues partly because I learned early on in this job that Prof. Krugman would likely be more willing to contribute to the Frist for President campaign than to acknowledge the possibility of error. When he says he agreed "reluctantly" to one correction, he gives new meaning to the word "reluctantly"; I can't come up with an adverb sufficient to encompass his general attitude toward substantive criticism. But I laid off for so long because I also believe that columnists are entitled by their mandate to engage in the unfair use of statistics, the misleading representation of opposing positions, and the conscious withholding of contrary data. But because they're entitled doesn't mean I or you have to like it, or think it's good for the newspaper.

3. The mixing of household and establishment numbers in his 5/25/04 column: Missing from the BLS chart he cites is any number that even resembles the 140,000 new jobs each month needed to keep up with the growing population a statistic he cites in the column, and upon which he seems to have based some of his computations. To my knowledge, that number only appeared in the household survey.

Note: to my--certain--knowledge, that number appears in neither the household nor the establishment survey: it's an estimate of the current trend growth rate of payroll employment driven by rising population. I have no idea who could have told Okrent it came from the household survey, or why.

4. The Polivka-Miller paper: On the substance, readers can come to their own conclusions by examining the report themselves, particularly the chart and related narrative addressing Duration of Unemployment on page 23 (pdf).

Note: Polivka and Miller's numbers imply that the 1994 CPS survey redesign raised the reported average duration of unemployment by a week. Unemployment duration is reported at 19.6 weeks today. It averaged 15.4 weeks in the 1984-1993 decade before the survey redesign, and 14.2 weeks in the decade before that. It's not quantitatively important.

On Prof. Krugman's defense of his unfamiliarity with it, he's effectively saying, "If I didn't know about it, it must not be important." This is a polemicist's dodge; no self-respecting journalist would ever make such an argument.

5. Some other examples of Krugmania that popped out of my copious files:

    His 1/27/04 assertion that the cost of unemployment insurance "automatically" adds to the federal deficit. This two-fer misrepresents a pair of facts: that unemployment insurance is largely borne by the states, and that major federal contributions to the states come about only because of an act of Congress, which is hardly automatic.
    His 2/3/04 assertion that tax proposals offered by Democrats would help the 77 pecent of taxpayers in the 15 percent bracket or less. The most recent generally accepted figures available at the time indicated that the number was actually 64 percent. Note: I believe that 77% of *all* taxpayers are in the 15% bracket or less; 64% of those who pay *income* taxes to the Treasury are in the 15% bracket or less; there are a bunch of people who pay taxes but not income taxes.
    A very recent example that nonetheless escaped my memory until Prof. Krugman generously reminded me of it in his letter: His 5/9/05 column on progressive indexing. The column itself (without the ex post facto explanation) suggestively conflates "retirement income" and "social security benefits" without sufficient explanation, but with plenty of apparent point-making.
Believe me -- I could go on, as could a number of readers more sophisticated about economic matters than I am. (Among these are several who, like me, generally align themselves politically with Prof. Krugman, but feel he does himself and his cause no good when he heeds the roaring approval of his acolytes and dismisses his critics as ideologically motivated.) But I don't want to engage in an extended debate any more than Prof. Krugman says he does. If he replies to this statement, as I imagine he will, I'll let him have what he always insists on keeping for himself: the last word.

I hate to do this to a decent man like my successor, Barney Calame, but I'm hereby turning the Krugman beat over to him.

Posted by DeLong at 11:23 AM

A Defender of Daniel Okrent on Paul Krugman... Well, Half a Defender

Andrew Samwick of Dartmouth couches his lance and spurs his horse forward. But he's only going to defend Okrent halfway:

Vox Baby: I'm not going to get into the issue of whether Okrent should have provided an example.

This is wise on his part--for Okrent is indefensible. In fact, it's worse than Okrent not providing any examples. It looks like he didn't have any examples that stand up in mind--otherwise he would have provided them by now.

Samwick attempts a much more limited exercise:

The discussion that followed Okrent's piece might lead one to believe that there are no examples. I'll remind my readers of one that occupied our time back in October. It started with the post, 'Paul Krugman, Meet Irony.' The key quote (with the offending statement highlighted) from Krugman's op-ed, 'Checking the Facts in Advance' is:

Mr. Bush will boast about the decline in the unemployment rate from its June 2003 peak. But the employed fraction of the population didn't rise at all; unemployment declined only because some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics. The labor force participation rate - the fraction of the population either working or actively looking for work - has fallen sharply under Mr. Bush; if it had stayed at its January 2001 level, the official unemployment rate would be 7.4 percent.

As I noted in my original post and the considerable discussion that followed (here, here, here, here, and here), there are two channels that allow the unemployment rate and the labor force participation rate to fall while leaving the employment-population ratio unchanged. The first is that people who want to work give up looking for work. (This takes the same person out of both unemployment and the labor force, with no one entering or leaving employment.) The second is that people who have jobs decide they don't want them anymore (perhaps to take care of their kids or go back to school), and they get replaced by someone who was previously looking for work. (This takes one person out of employment and the labor force and another person out of unemployment and into employment. Same net effect.) The two channels have opposite implications for whether we think the statistics are bad news for the economy. Krugman asserts--via the word 'only'--that the second channel doesn't exist...

I will concede that Paul Krugman should have written "primarily" rather than "only."

Andrew's two channels have the same effect on the unemployment rate and the labor force participation rate, but they have very different effects on wages. It's just supply and demand. In the Samwick channel--unemployment falling because some of the employed decide they don't want jobs anymore, and the unemployed fill their place--the driving force is a reduction in the supply of workers--a leftward shift in the labor supply curve. Such a leftward shift is associated with a higher price of labor: higher real wages relative to trend. In the Krugman channel--unemployment falling because some of the unemployed update their views of the state of the labor market and conclude it's no longer worth it to look for work (rather than doing something else)--the exit of people from the labor market is a response to lousy labor market conditions. It is a move downward and to the left along the supply curve rather than a leftward shift of the supply curve. It is associated not with higher but with lower real wages relative to trend.

So we can figure out which channel predominates--which is the primary cause--by looking at what has happened to real wages relative to some measure of trend. And the natural trend to use is that of labor productivity. If we plot total compensation per manhour deflated by labor productivity for the nonfarm business sector, all from Economic Indicators, we find:

Since the end of 2000, employee compensation--wages and salaries plus benefits--has been falling way behind productivity. This isn't what we would expect to find if changes in preferences had led to a leftward shift of the labor supply curve, making labor scarce and expensive. This is what we would expect to find if weak labor demand had pushed the economy down the labor supply curve.

I cannot come up with a story according to which the Samwick channel is the dominant one that is consistent with the growing gap between wages and productivity.

Posted by DeLong at 11:20 AM

The Medium Lobster Writes About Eggs and Omelettes

It's a wise crustacean. Is there a discount if you order it before 6?

Fafblog! the whole worlds only source for Fafblog.: sPerhaps, at this time, you may require some reassurance. Perhaps, if you are one of the handful of Americans not otherwise occupied with Amber Alerts and runaway brides and the curious sleepover habits of washed-up eighties pop stars, you may have accidentally happened upon a few bodies halfway across the world (Afwhatsistan? Bagrawho?), which may or may not have pricked whatever remains of a long-dormant and desensitized National Conscience. And you may be asking yourself what the point of all this has been, what has driven Americans halfway around the globe to sieze innocent men, beat their legs to pulp, and chain them to ceilings until they die.

Regrettable, yes, but let us remember that these two eggs, like the dozens before them, and the tens of thousands before them, were broken to make the greatest and worthiest of omelettes, the most succulent of breakfasttime generational commitments, the proudest and most visionary of truck stop slop. And when it is finished and served, to whomever it is served, will it not have been worth the mound of eggshells, the broken crockery, the shattered glass, the mountain of murdered cooks, the acres of burning kitchen, the unbroken stench of dead flesh? And if that omelette is never made, won't the idea of the omelette - finer and purer and more pristine than the thing itself - have been worth them all, in the end?

We must remember that for each complete failure the media reports - the innocents tortured to death without reason - there are hundreds of mere semi-failures we can never know about for reasons of vital national security, when the torture and murder of innocents stops a treacherous ticking bomb. Indeed, we must believe - no, assume - that with each new horror a new blow is struck for freedom, that with every new atrocity a fresh-painted Iraqi school blooms like a rose bud in spring.

The day will come when the justice of this is made manifest, when these heaps of corpses will be vindicated as unquestionably righteous. That day is ahead of us, a bright light at the end of this dark tunnel. Can you see it growing closer, brighter, louder? Victory is bearing down on us with the sound of thunder.

Posted by DeLong at 11:13 AM

Revenge of the Sith

Wow! What an experience! The misdirection as to the identity of the Evil Sith Lord in episodes 1 and 2 was completely successful! I was flabbergasted to learn who the evil mastermind really was!

It echoes through my mind still, and always will:

"Meesa no name Jar-Jar Binks! Meesa name: DARTH SIDIOUS!!!!"

Posted by DeLong at 11:09 AM

General Relativity Made Concise

John Baez writes:

Einstein's Equation: We promised to state Einstein's [general relativity] equation in plain English, but have not done so yet. Here it is:

Given a small ball of freely falling test particles initially at rest with respect to each other, the rate at which it begins to shrink is proportional to its volume times: the energy density at the center of the ball, plus the pressure in the x direction at that point, plus the pressure in the y direction, plus the pressure in the z direction.

In the final section of this article, we will prove that this sentence is equivalent to Einstein's equation. The reader who already knows general relativity may be somewhat skeptical of this claim. After all, Einstein's equation in its usual tensorial form is really a bunch of equations.... It is hard to believe that the single equation (2) captures all that information. It does, though, as long as we include one bit of fine print: in order to get the full content of the Einstein equation from equation (2), we must consider small balls with all possible initial velocities -- i.e., balls that begin at rest in all possible local inertial reference frames...

That is remarkably concise. Of course, the amount of auxiliary stuff you need to surround that equation with in order to calculate things with it is enormous...

And I wish somebody, sometime would tell me why Einstein's theory differs from Newton's in its prediction of the precession of the perihelion of Mercury...

Posted by DeLong at 11:08 AM

Variance of Price/Rental Ratios

General Glut makes excellent points:

General Glut's Globblog: There are many bits of evidence one can muster to identify housing bubbles. The Sunday New York Times trotted out a lot of data on purchase-to-rental price ratios to further bolster the argument that in California, Florida and parts of the Northeast, it's bubblemania.The logic of the indicator is, of course, that if purchase and rental prices both increase at roughly the same pace, there are some actual economic fundamentals driving the inflation: population growth, job growth, income growth, whatever. Of course, the ratio can increase somewhat if the quality of the purchased housing stock rises more than the quality of the rental housing stock, but there shouldn't be a complete disconnect between the two.

Read the entire article to get a flavor for the data, but check out this chart for something to chew on. What stands out most remarkably to me is that in 2000:I, before the US asset-based economy switched from stocks to housing, the purchase price to rental price ratio across all major US housing markets (data for 54 of them are reported) was virtually the same. The national average stood at 11.6, with San Jose at the high end (14.1) and Pittsburgh at the low end (10.5). Note that this gap was not wide: San Jose was 122% of the national average and Pittsburgh was 91%.

It's quite a different story five years later. In 2005:I, the ratio for the national average is up to 17.1, with the top and bottom at an amazing distance from one another. The peak is now San Francisco at a stunning 34.1 (San Jose is a close second at 34.0); the trough is Albuquerque at 11.8 -- still above the national average from five years ago, I might add. Thus the high is now 199% of average; the low, just 69%.

Not only is the gap tremendously larger with the peaks in the stratosphere. The opposite motions of purchased versus rental home properties in a few markets has to be a harbinger of danger. Over the past five years, rental prices have actually decreased in frothy San Jose, San Francisco and Oakland, and have barely budged in New York, all while purchase prices have vaulted skyward...

Posted by DeLong at 11:06 AM

Andrew Samwick at the Crossroads

Andrew Samwick thinks about what the Republican Party is--or, rather, what it might become:

Vox Baby: The Conservative Movement at the Crossroads: PGL from AngryBear notes that Max (of the newly and impressively redesigned MaxSpeak) linked to the Washington Post story in which I am quoted as follows:

"I'm inclined to support the Republican Party, but the question becomes, how much other stuff do I have to put up with to maintain that identification?" asked Andrew A. Samwick, a Dartmouth College economics professor who until recently was chief economist of Bush's Council of Economic Advisers.
I served on the staff at CEA from July 2003 through June 2004. The story quotes me later with:

Samwick said the disenchantment of small-government conservatives has been building since the passage of the USA Patriot Act, which some saw as infringing on individual liberties, and the Medicare drug benefit, which created future government liabilities that exceed the entire projected Social Security shortfall.

"Some of these outcomes are really starting to alienate people who might be Republican because they are for limited government," Samwick said.
The story quotes me accurately. The trigger for me has been the fiscal policy, and the unfunded expansion of Medicare in particular. I don't have big problems with the Patriot Act or the faith-based programs. However, the quotes should not be construed to suggest that I wouldn't support the President's Social Security plan relative to the status quo or that I was particularly impressed with the challengers that the Democrats managed to put on the ticket the last time around.

I was interviewed about this topic on the Arnie Arnesen radio show this afternoon. Like a lot of people, neither of the two political parties line up particularly well with all of my views. That's been true for a while with the Democrats for me. It's a newer phenomenon with the Republicans--as they have stood less and less for limited government, which best summarizes my general view.

I think this issue is well captured in Newt Gingrich's recent white paper, with the same title as this post. (The Speaker visited campus as a guest of the Rockefeller Center last month and presented these ideas in a Government course.) He's been out of elected office for long enough now that he can "campaign" as an outsider. Here's what he had to say in the paper's introduction:
For almost a half century, from the early effort of William Buckley and National Review and the publication of Conscience of a Conservativeby Barry Goldwater, the conservative movement has been a dynamic, defining force in American politics and government.

Now at the very moment that members of the movement are in control of the White House, the House and Senate, and many governorships and state legislatures, conservatives find themselves at a crossroads.

Elected officials find themselves caught between explaining and defending the institutions over which they preside and the impulse to continue to criticize and change those institutions. The longer people are in office the more likely they tend to defend the very bureaucracies and the very policies which they may once have campaigned against. The impulse to force a transformation of those institutions is gradually overwhelmed by an impulse to preside. Presiding over an existing bureaucracy is not the same as forcing the creation of a new form and style of government.

Should the conservative movement be:

1. A movement at the grassroots dedicated to insisting on transformation of government into an institution capable of meeting the challenges of a rapidly changing 21st century world within the values of smaller government, lower taxes, stronger national security, greater individual freedom and strengthening American civilization as a unique “Creator endowed” system of human liberty; or,

2. A national and state capital- focused system of defending whatever today’s compromises with the old order of liberal big government requires because after all the people presiding over the system are people we support.

To state it more directly, should we be comfortable with presiding over the bureaucracies, special interests, and spending of the liberal government we have inherited or must we insist on transforming that obsolete system into a new, more dynamic, and significantly different system of governing?
You can read more about Newt's ideas in his new book, Winning the Future.A lot of the book makes a lot of sense. He would prefer that the Republican Party focus on governmental transformation and reduced spending, but he makes an appeal to the religious constituency as well. However, we can also see dissension from those in the Republican Party who wouldn't necessarily agree with Newt's proposals any more than they would with the Administration's policies. Consider Christine Todd Whitman, and her new book, It's My Party, Too.She wants more fiscal balance and almost everything else on the party's current agenda except for the "social fundamentalist" issues.

So the question becomes, "What does the Republican Party look like when it emerges from this internal contest? Which of these politicians represents the core constituency's ideas in 2008--Bush, Gingrich, or Whitman?"

Posted by DeLong at 11:04 AM

While I Wasn't Looking...

...I climbed back onto Technorati's "Top 100" list, and acquired links from more than 2000 other weblogs:

Technorati: Top 100: 80. Brad DeLong's Semi-Daily Journal 2,715 links from 2,069 sources.

Thanks, guys. We must now redouble our efforts, to produce higher-quality and more useful weblogging...

Posted by DeLong at 11:02 AM

Tyler Cowen Says that Jesse Shapiro Is an Underappreciated Economist

Tyler writes:

Marginal Revolution: Underappreciated economists, a continuing series: Jesse Shapiro. Yes, he is a mere Youngling, having just finished his Ph.D. at Harvard (he was a Shleifer student, and now visiting at Chicago). But he is likely to be one of the leading economists of the next generation. He studies why and how large numbers of people can make, or appear to make, systematic errors. This is perhaps the frontier question in contemporary economics. Here is the abstract from Jesse's paper on advertising:

I present a model of advertising in the presence of bounded memory and limited recall. In the model, consumers' memories record the quality of their experiences with a product. Exposure to advertising leads to memories of good experiences. Crucially, I assume that consumers cannot recall whether a memory orginates from a genuine consumption experience or from exposure to advertising. The model yields several novel implications. First, advertisers will concentrate their efforts on past customers, because experienced consumers will be more likely to trust that their positive feelings toward the brand are genuine. The model may therefore help to explain why established, familiar brands continue to advertise extensively. Second, the firm's desire to "saturate" the consumer with positive memories can lead to the commonly observed phenomenon of "pulsing," in which a firm oscillates between no advertising and some positive amount. Third, exaggeration is limited, in the sense that advertisers may not cause consumers to remember haivng extraordinary experiences with the brand. Indeed, under some conditions an equilibrium in which advertising conveys the best possible impression of the brand can exist only when the total amount of advertising is small.

Posted by DeLong at 11:00 AM

After the Downing Street Memo

Big Brass Blog writes:

Big Brass Blog : The Big Brass Alliance was formed in May 2005 as a collective of progressive bloggers who support After Downing Street, a coalition of veterans' groups, peace groups, and political activist groups formed to urge that the U.S. Congress launch a formal investigation into whether President Bush has committed impeachable offenses in connection with the Iraq war. The campaign focuses on evidence that recently emerged in a British memo containing minutes of a secret July 2002 meeting with British Prime Minister Tony Blair and his top national security officials...

It's not clear to me why the Downing Street Memo makes a difference. Enough evidence--a mountain of evidence--already exists.

Posted by DeLong at 10:55 AM

The Flower Carrier

Diego Rivera's "The Flower Carrier" at SFMOMA:

The guide said, "You have to be able to think like a communist--or at least an economist--to understand this painting."

It's true. You have to note:

  1. That in reality it's not the big basket of flowers that is bone-crushingly heavy--but the burden of being an unskilled worker under modern capitalism is very heavy.
  2. That flowers are and are a symbol of pleasant luxury--but the flower carrier never sees them: for him they are not pleasant use values, but only exchange values.

It is, I think, my favorite painting at SFMOMA.

But I also found William Kentridge's "Tide Table" to be very, very good as well:

artblog: Upstairs... we wound our way... into the permanent collection where we found the Kentridge piece, 'Tide Table' (2003).... The piece, like other Kentridge works, intertwines the character Soho Eckstein, a white industrialist who is the stand-in for the artist, with the lives of black South Africans. Here, Soho vacations at the beach and quickly the beach scene dissolves into one of hospital-dormitories with people dying of AIDS. The tide comes in, the tide goes out like the lives ebbing and flowing...

Posted by DeLong at 10:53 AM

Paul Krugman Gets in Touch with His Inner Friedrich Hayek

Not Hayek the post-WWII libertarian political philosopher, but Hayek the interwar business cycle theorist.

Hayek's theory of depressions was that they started when, for some reason, interest rates got too low--below fundamentals. If interest rates are low, asset prices are high--above their fundamentals. Because financial markets are sending false signals that capital--whether in the form of machines, business organizations, commercial buildings, or housing--is very valuable, the market shift resources into capital-producing sectors and adds to its capital stock.

Someday, however, interest rates return to their fundamentals. When they do, asset prices fall sharply: it becomes clear that there are a lot of business organizations, machines, commercial structures, and houses that do not produce value to cover their costs. The last thing needed is more investment. Workers, entrepreneurial energy, and capital have to be shifted out of capital-goods production and into the production of consumer goods and services. And, said Hayek, it is that painful, lengthy, but necessary process of shifting resources out of capital-goods production that we call a "depression."

In Hayek's monetary overinvestment theory of the business cycle, the magnitude of the depression depended on the magnitude of the required structural shift, which depended on (a) how much interest rates had been pushed below fundamentals, (b) how long they had been pushed there, and (c) how much damage--in terms of capital investments that should not have been made given fundamental values--the false prices fed to the real economy by the financial sector had done.

It was a corollary to Hayek's main theory that lowering interest rates when a boom was ending was a counterproductive thing to do. It would push off the depression, yes. But only at the price of magnifying the overinvestment imbalance and thus magnifying the magnitude of the depression when it finally arrived.

It was bad luck for Hayek that he proposed his theory just as the Great Depression arrived. It was not a plausible theory of the Great Depression, not a plausible theory at all.

But today we see Arch-Keynesian Magister Paul Krugman flirting with a Hayekian line wobble:

Running Out of Bubbles - New York Times: Remember the stock market bubble?... [A] few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses. I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. 'There is room,' he wrote, 'for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism.... [I]nterest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble.

Nobody thought the economy could rely forever on home buying and refinancing. But the...[I]f the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene.... That's why it's so ominous to see signs that America's housing market... is approaching the final, feverish stages of a speculative bubble.... In parts of the country there's a speculative fever among people who shouldn't be speculators that seems all too familiar from past bubbles - the shoeshine boys with stock tips in the 1920's, the beer-and-pizza joints showing CNBC, not ESPN, on their TV sets in the 1990's....

[I]t's true that the craziest scenes are concentrated in a few regions, like coastal Florida and California. But these aren't tiny regions; they're big and wealthy, so that the national housing market as a whole looks pretty bubbly. Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in. More than 30 percent of new mortgages are interest only, a sign that people are stretching to their financial limits.

The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble. So what happens if the housing bubble bursts?...

Mr. Roach believes that the Fed's apparent success after 2001 was an illusion, that it simply piled up trouble for the future. I hope he's wrong. But the Fed does seem to be running out of bubbles.

I would admonish him for this wobble away from Keynesian orthodoxy toward Stephen Roach-Friedrich Hayek deviationism. But I feel the same way. With each month that passes Roach and Hayek look a little bit better.

Posted by DeLong at 10:51 AM

*Sigh*

For a long, long time--it was 43 years ago when Bob Solow made this point while working for the Kennedy Council of Economic Advisors--it has been next to impossible for an economist serious about boosting national savings to avoid saying "balance the budget". Balancing the budget--indeed, moving it into surplus--is almost certainly very close to a magic bullet for increasing national savings, and it's a very good bet that it's the most effective thing the government can do to boost national savings. It's the first an highest priority for those who do care about boosting national savings.

It is very difficult for a real economist to talk about boosting national savings without saying "balance the budget." Greg Mankiw manages:

Magazine - Economist Greg Mankiw Sounds Off on Karl Rove, Paul Krugman, and More - FORTUNE - Page 5: [W]hile the trade deficit isn't a problem in itself, it may be a symptom of a problem. The problem is that Americans aren't saving enough. I don't think there's a single magic bullet to increase national saving, but I do think a switch from an income tax to a consumption tax would help.

Q: But we don't seem to have had much success with efforts to bolster the savings rate, which remains near record lows.

A: I'm intrigued by some compelling evidence from [Harvard economics professor] David Laibson and others that if you design 401(k)s differently, you could improve saving a lot. For example, suppose we made the default for a 401(k) plan that people have to decide to opt out if they don't want to save, rather than having to opt in if they do want to save, as is currently the norm. The evidence suggests that the participation rate would increase substantially.

And let's not forget that while a trade deficit may not be a problem "in itself," a large trade deficit funded by foreign central bank purchases of dollar-denominated assets at a rate that they cannot sustain is a problem "in itself."

Posted by DeLong at 10:36 AM

Making Light: Getting serious about "getting serious"

Patrick Nielsen Hayden's Electrolite has been absorbed by his wife's Making Light in what is on Wall Street referred to as a "merger of equals". This leaves him time to get seriously shrill about "getting serious about national security":

Making Light: Getting serious about "getting serious": Atrios discusses self-identified "liberal hawks":

The primary conceit of the "liberal hawks" has been and is that only they are "serious" about the security of the nation. Support for the Iraq war demonstrated that seriousness, no matter how misguided it was. The truth is concern for our national security was a very real reason to oppose the Iraq war, and the primary reason for lots of its opponents.

He's right. The reason so many in the Democratic "base" are infuriated over being lectured by the likes of Peter Beinart and Joe Biden about the need to "get serious about national security" is that the people delivering the lectures are precisely those who were wrong about one of the most important national security questions of our time. As a result we've spent $172 billion and 1600 American lives, damaged our military immeasurably, trashed America's global reputation for justice and fair play, and given the bin Ladens of the world a gift that will keep on giving for generations to come. The entire enterprise has made us profoundly less secure. Meanwhile, I live three blocks from New York Harbor, and port security is still, by all reports, a complete joke.

The fact of the matter is that the supposed distance between self-identified "national security Democrats" and the allegedly dovish party "base" is based on a self-serving slur promulgated by people with something to hide. The NSDs want to impute that run-of-the-mill Democrats and liberals have a deficit of temperament, a persistent inability to understand that sometimes America has got to go out and kill people. In the wake of being spectacularly wrong about Iraq, the NSDs are even more eager to promote this.

It is, of course, a bum rap. Liberal Democrats like Atrios, or me, aren't remotely opposed to "national security." We're strongly in favor of it. Getting killed because I'm an American, at home or overseas: bad. Spending money and resources to protect me from getting killed: good. Maintaining a strong military, at least until planetary utopia breaks out and there are free Jill Johnston posters for everyone: really good. Making all of that far harder, and increasing my likelihood of getting killed, because some politicians and pundits needed to "look tough": really, really bad. Likelihood that I'm going to take my cues on "national security" from those politicians and pundits: low.

At times it all seems like some sort of Bizarro World faith-versus-works argument. Liberals wind up being the ones pointing out, endlessly, that national security is provided by actual practices, not just by holding your face right. Meanwhile popinjays like Joe Biden desperately file their chins to razor-sharpness in the probably vain hope that the electorate, having sometimes demonstrated a preference for strutting phonies, will mistake them for one. And of course the fact remains, as the Poor Man never ceases to remind us: Michael Moore is fat.

Posted by DeLong at 10:33 AM

Why Oh Why Are We Ruled by These Idiots? (Special California Edition)

Cory Doctorow finds this one:

Schwarzenegger creates, then fills Potemkin pothole: California governor Arnold Schwarzenegger dispatched a road crew to a residential street in San Jose to create a pothole, which he later turned up and filled, grinning for news-cameras and declaring his willingness to increase funding for transportation projects. The Potemkin pothole was later sealed by a roadcrew with a gigantic roller truck,

Porrovecchio and his business partner, Joe Greco, said that at about 7 a.m. they became fascinated watching '10 city workers standing around for a few hours putting on new vests,' all in preparation for the big moment with Schwarzenegger. But their street, he noted, didn't even have a hole to pave over until Thursday morning. 'They just dug it out,' Porrovecchio said, shrugging. 'There was a crack. But they dug out the whole road this morning.' 'It's a lot of money spent on a staged event,' said Matt Vujevich, 74, a retiree whose home faced the crew-made trench that straddled nearly the whole street. 'We still have the same problems. Everything's a press conference.'

Posted by DeLong at 10:30 AM

Spyware

The San Jose Mercury News says, "Get a Mac!"

Good Morning Silicon Valley: Sure, I could get a Mac, but the time I spend with my daughter removing spyware is very precious: Listening to Intel CEO Paul Otellini at the All Things Digital conference the other day, you'd think he was heading up Apple's marketing department. From today's Wall Street Journal:

Pressed about security by (a reporter), Mr. Otellini had a startling confession: He spends an hour a weekend removing spyware from his daughter's computer. And when further pressed about whether a mainstream computer user in search of immediate safety from security woes ought to buy Apple Computer Inc.'s Macintosh instead of a Wintel PC, he said, 'If you want to fix it tomorrow, maybe you should buy something else.'

Posted by DeLong at 10:29 AM

Jim Henley Has Some Good Advice

He tells us:

Things That Surely Go Without Saying But Don't: Beating captives to death does not exhaust the list of "abuses" one can commit against captives. We know of two people, so far, who had their legs crippled and were hung from the ceiling until they died. We have not been discussing the people who had their legs crippled but weren't hung from the ceiling, the people who were hung from the ceiling and didn't die, or those who were tortured in other ways at Bagram Air Base, but what we know makes it pretty clear such people existed. (For instance people whose legs were beaten, but not to the point of permanent ruin.) The torture apologists will intone "two people two years ago" because that's their established method: exaggerate a detail until it obscures the full story. Don't fall for it.

Fire Donald Rumsfeld. Impeach Richard Cheney. Impeach George W. Bush. Do it now.

>

Posted by DeLong at 10:27 AM

Bob Rubin on Social Security

From The Hill:

Rubin urges Democrats not to reveal their hand: Former Treasury Secretary Robert Rubin, the steward of President Clinton's economic policy, told the House Democratic Caucus yesterday that it needs to continue to "hold firm"... and advised the Democrats not to introduce their own plan, according to aides and lawmakers in the meeting. Rubin, who has gained huge stature in the party for presiding over the national finances during the Clinton boom years, counseled congressional Democrats against engaging Republicans on specifics. He urged them instead to cast the debate in terms of principles.... In a sweeping review of the fiscal health of the country, the strength of the dollar and international trade, Rubin said that Social Security ranks third behind deficit reduction and Medicare reform as the most important economic policy issue facing the country. He also warned his fellow Democrats that they would need to work in a bipartisan manner with Republicans to address Medicare's deep problems.... "From a political standpoint, [Rubin] said, hold firm because you have a difference in principles; their principle is a privatization plan, ours is not to add to the deficit, and there's not a whole lot of room for compromise. 'They control the playing field. We can't get into this debate without compromising our principles.'"

Posted by DeLong at 10:24 AM

New Principles of Economics...

Marty Olney reports that the teaser chapters from R. Glenn Hubbard and Anthony P. O'Brien (forthcoming), Principles of Economics (New York: Prentice-Hall: 0130675520), look excellent.

I'm also still waiting for Paul Krugman and Robin Wells (forthcoming), Principles of Economics (Worth).

Posted by DeLong at 10:23 AM

Musings on Finance

Powerpoint slides for a talk, Musings on Finance, that I gave at a Global Association of Risk Professionals San Francisco chapter meeting; Room 303, 425 Market St. (San Francisco State University Downtown Center), San Francisco, CA; May 26, 2005; 3:00 PM.

Posted by DeLong at 10:21 AM

Electricity in Iraq

Jim Henley notes:

Unqualified Offerings: Tim Lambert's tabular history of the "good news" on the [Iraq] electricity front is a useful contribution to the field. His summary:

Due to lack of maintenance, electricity production fell from 9000 MW in 1991 to 4400 MW before the war. Since then, there have been many announcements of improved generating capacity and production has fallen further to 3560 MW.

Sadly, Dana Gioia's poem, "News from 1984," is not online.

Posted by DeLong at 10:20 AM

Gillian Tett on Credit Derivatives and IB Losses

From the Financial Times:

FT.com / Companies / Financial services - Credit derivative swings hit hedge funds: Recent swings in the price of credit derivatives have inflicted losses of about $1bn (£550m) on hedge funds and large banks, according to estimates by Goldman Sachs. The figure - which some traders consider far too conservative - represents the first public estimate of the damage created by the recent turmoil in instruments such as collateralised debt obligations. "A back-of-the-envelope calculation suggests that the change in net present value among market-to-market players [in the CDO market in the past three weeks] is about $1bn," Claus Toft, a senior strategist at Goldman Sachs, told a conference in London....

Mr Toft stressed that the losses sustained by hedge funds and banks could be easily absorbed by the overall financial system. However, the estimates come amid intense curiosity about the problems faced by some institutions in the CDO market. So far no bank or hedge fund has admitted to serious losses from CDOs. And some bankers hope that these losses will shrink in the coming weeks, if credit market prices recover. Indeed, some bankers now believe that a rebound is under way, because new investors are coming into the market....

The main reason hedge funds and banks suffered was that they held the so-called "equity" tranches of CDOs, the riskiest slice of debt. These tranches fell in price in mid-May, partly due to the problems at General Motors and Ford, the US carmakers...

Posted by DeLong at 10:18 AM

Yes, Andrew Sullivan Is Still a Dork

He writes:

www.AndrewSullivan.com - Daily Dish: MANKIW ON KRUGMAN: Almost as damning as Dan Okrent.

And gets eviscerated by an anonymous correspondent:

You are dead wrong (as well as sloppy and lazy) in your portrayal of Okrent and Mankiw's statements about Paul Krugman. (For the record, I know both Paul and Greg. although not well.)

The Okrent case is the more egregious: he says that Krugman "slices and dices" data to support his point of view, without offering an example. I'm an economist myself, and know the macro data very well. I can't think of single example to support Okrent's statement. (Paul has published corrections regarding a couple of minor, and non-substantive, points.) Most conservative attacks on his arguments involve innumeracy or sheer ignorance of basic facts or basic principles of economics; many involve willful misrepresentation.

Now consider Greg's statement (and I'm paraphrasing) that "Paul seems to think that everyone who disagrees with him is either fool or a liar." To begin with, I'll stick to economics. The plain fact is that the Bush Administration has been consistently and deliberately mendacious in its public portrayal of its economic policies. (This characterization, by the way, is the overwhelming consensus in the professional economics world, which includes many conservatives.) Capable policy apointees (like Greg or Glen Hubbard) have had no meaningful input in this Administration; nor has the professional staff at places like Treasury or CEA. All economic policy involves politics. But the politicization of the policy making process in this Administration is without precedent in my professional life.

Paul would have been called a moderate or even conservative Democrat prior to this Administration. (Read his classical essay, "In Praise of Cheap Labor," if you're under the illusion that he's some sort of leftist.) So would I. Paul appears strident only because he's had the bad manners to say that people are lying when they're obviously lying. (A prominent case in point: many of the President's public statements about the finances of the social security system have been plain, simple untruths.) And what's maddening to Paul, and to me, is that there's no core of conservative principle in this Administration. A conservative devotion to free markets has been displaced by reckless spending, reckless tax cuts, crony capitalism and special interest give-aways. What "balanced" take on these issues should Paul offer?

More generally, you should know better. Remember, I've confined myself so far to economic policy. Do you want to defend the honesty and integrity of this Administration on, say, abuse of detainees?

And then gets re-eviscerated by Matthew Yglesias:

Matthew Yglesias: The Lies, The Lies: As we know, and as this letter writer to his site reminds us, Andrew Sullivan has been a pretty consistent proponent of the view that Paul Krugman is some sort of liar. At issue, are Krugman's repeated insistences that George W. Bush's economic policy is founded on a tissue of lies. Krugman is, of course, entirely correct about this. The unnoted irony here is that in his May 14, 2001 column 'Downsize,' Sullivan conceded Krugman's point:

Ah, but the details. The Krugmans and the Chaits will shortly have a cow, if not a whole herd of them. The Times will weigh in again with yet another barrage of articles, editorials, and op-eds opposing any tax relief that would actually benefit those who pay most of the taxes. And, to be fair to these liberal critics, they're right about one thing. One of the tax cut's effects will surely be that the United States won't be able to afford a vastly expanded Medicare drug benefit. And the archaic sinkhole known as Social Security won't be shored up either. And Medicare, may the gods preserve us, may even have to grow at a slightly slower rate. In fact, many of the spending programs that some still believe solve most human problems will encounter the only political resistance that matters in budgetary matters: insolvency.

To which my response is: Hoorah. We don't need these expansions of the welfare state. We need to privatize Social Security if we want to provide for our retirement in ways slightly more up-to-date than those based on economics and life-expectancy figures devised in the 1930s. We don't need to add yet another entitlement for the most pampered generation--our current seniors.

And if there is one thing we have learned in the past 20 years, it's that controlling government spending is simply impossible without deficits. Look back at the last decade. A huge part of Bill Clinton's economic success was his remarkable grip on public finances. He deserves credit for this, although the Republican Congresses from 1994 to 1998 were mainly responsible, and Ross Perot made deficit-cutting hot. But from 1998 on, all hell broke loose. Last year, discretionary spending increased by a whopping 8 percent--under the Republicans. The minute deficits became surpluses, in other words, the politicians started bribing the voters with their own money. The only relevant question is: Why do Dennis Hastert, Trent Lott, Dick Gephardt, and Tom Daschle know better than taxpayers how to allocate their own resources? . . . Some commentators--at this magazine and elsewhere--get steamed because Bush has obscured this figure or claimed his tax cut will cost less than it actually will, or because he is using Medicare surplus money today that will be needed tomorrow and beyond. Many of these arguments have merit--but they miss the deeper point. The fact that Bush has to obfuscate his real goals of reducing spending with the smoke screen of 'compassionate conservatism' shows how uphill the struggle is.

Yes, some of the time he is full of it on his economic policies. But a certain amount of B.S. is necessary for any vaguely successful retrenchment of government power in an insatiable entitlement state. Conservatives learned that lesson twice. They learned it when Ronald Reagan's deficits proved to be an effective drag on federal spending (Stockman was right!)--in fact the only effective drag human beings have ever found. And they learned it when they tried to be honest about taking on the federal leviathan in 1994 and got creamed by Democrats striking the fear of God into every senior, child, and parent in America. Bush and Karl Rove are no dummies. They have rightly judged that, in a culture of ineluctable government expansion, where every new plateau of public spending is simply the baseline for the next expansion, a rhetorical smoke screen is sometimes necessary. I just hope the smoke doesn't clear before the spenders get their hands on our wallets again.

Now needless to say, Sullivan differs from Krugman in thinking that this is a good thing, while Krugman thinks it's a bad thing. But that's really all there is to it. Bush was lying. As Sullivan correctly points out, the lies were integral to securing public tolerance for Bush's agenda. Krugman has tried to expose the lies in hopes of denying Bush's agenda public support. It's very hard to see how Krugman can be held culpable in this scenario.

Posted by DeLong at 10:16 AM

Why Oh Why Are We Ruled by These Liars? (George W. Bush Smirks Edition)

Kevin Drum's shrillness level exceeds aleph-null:

The Washington Monthly: "George Bush's rhetorical stance is that democracy is on the march and 138,000 troops are more than enough to get the job done in Iraq. He knows perfectly well this isn't true, but in public he just smirks and says that he'd be happy to send more troops over if any of his generals asked for them.... George Bush... [is] one of the shrewdest politicians to inhabit the Oval Office in a long time, but he doesn't sound like he's being shrewd. He sounds like he really believes that our current troop strength is perfectly adequate.

So what's the answer? As Juan Cole says, 'Sometimes You are Just Screwed.' Bush knows near term success is impossible with current troops levels, just as he knows that his economic policies are unsustainable as well. In both cases, he seems to be hoping only that he can avoid disaster during the next three years and then hand off both problems to his successor in 2009 while he retires to the ranch. Politics doesn't get much more cynical than that.

Posted by DeLong at 10:15 AM

Bob Rubin on Social Security

From The Hill:

Rubin urges Democrats not to reveal their hand: Former Treasury Secretary Robert Rubin, the steward of President Clinton's economic policy, told the House Democratic Caucus yesterday that it needs to continue to "hold firm"... and advised the Democrats not to introduce their own plan, according to aides and lawmakers in the meeting. Rubin, who has gained huge stature in the party for presiding over the national finances during the Clinton boom years, counseled congressional Democrats against engaging Republicans on specifics. He urged them instead to cast the debate in terms of principles.... In a sweeping review of the fiscal health of the country, the strength of the dollar and international trade, Rubin said that Social Security ranks third behind deficit reduction and Medicare reform as the most important economic policy issue facing the country. He also warned his fellow Democrats that they would need to work in a bipartisan manner with Republicans to address Medicare's deep problems.... "From a political standpoint, [Rubin] said, hold firm because you have a difference in principles; their principle is a privatization plan, ours is not to add to the deficit, and there's not a whole lot of room for compromise. 'They control the playing field. We can't get into this debate without compromising our principles.'"

Posted by DeLong at 10:13 AM

June 01, 2005

David Francis on Mobility and Inequality

Mark Thoma reads the Christian Science Monitor, and finds a good article:

Economist's View: Is The American Dream Fading?: This article discusses the decline in income mobility in recent decades and asks if the US "...is becoming less of a meritocracy, where skill and intelligence determine success, and... more of a class-bound society...":

The American Dream gains a harder edge, By David R. Francis, CSMonitor.com: The American dream, at least on the economic side, is fading.... Today... nearly 1 in 5 American households has zero net worth or actually owes more than it owns. And the odds of a son or daughter rising above their parents in such a financial predicament have shrunk. 'Income mobility has declined in the last 20 years,' says Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago. What that means is that the US is becoming less of a meritocracy, where skill and intelligence determine success, and becoming more of a class-bound society, where economic background, including the better education money can provide, matters more.... Most Americans don't believe that to be true, surveys show. But academic studies suggest that income mobility in the US is no better than that in France or Britain. It's actually lower than in Canada and is approaching the rigidity of Brazil. That marks a change from the past.... From 1950 to 1980, Americans were more and more likely to see their offspring move up - or down - the income ladder.... Today, it could take five or six generations to close the gap between poverty and middle-class status, calculates Mr. Mazumder...

Posted by DeLong at 04:55 PM | Comments (0)

Today's Snark Prize Goes to

Miriam Burstein. Very high quality snark:

The Little Professor: Cited by: Donald Kagan's Jefferson Lecture. Despite Kagan's warnings against the dangers of over-generalization, his critique of contemporary historiography was so non-specific--apparently, we're still stuck in 80s crusades against DWM--that I had a hard time finding the "there" there.... Being an English professor, albeit of the old-fashioned literary-historical variety, I naturally pricked up my ears (eyes?) when I stumbled across some references to Stanley Fish and Paul de Man. I was a tad puzzled to discover that Kagan didn't cite Stanley Fish and Paul de Man directly, but only from excerpts: Fish from Roger Kimball's Tenured Radicals and de Man from David Lehman's Signs of the Times: Deconstruction and the Fall of Paul de Man.

When I teach my graduate students how to evaluate secondary sources, I always ask them to consider how many times the author chooses to cite primary sources that have been quoted in other works, as opposed to citing directly from the original texts. While it's legitimate to cite a primary source "quoted in" another work when you cannot access the original text... there's no excuse for citing easily available sources in such a fashion. How can you tell if the quotation has been taken out of context or misquoted? What if your secondary source hasn't understood the original text? There's something rather depressing about reading a paean to traditional historical inquiry, only to discover that the author is generalizing about something that he apparently knows only in snippets and at secondhand.... Now, Richard J. Evans does a fine job of critiquing postmodern theories of history, precisely because he's done the reading, has clearly thought about it at some length, and can separate the wheat from the chaff. No vague handwaving there...

Posted by DeLong at 04:23 PM

Who Rules the Streets of Basra?

Praktike writes:

Tales from Basra | Liberals Against Terrorism: People who have been paying attention more or less knew this already, but Steven Vincent is reporting that the streets of Basra remain controlled by shadowy religious parties:

Sitting in the plastic chair beneath the harsh fluorescent lights, watching teary-eyed men smoke cigarettes and sip their tea, I wondered about these unnamed people in Basra who 'chose to take life so cheaply'--often in the name of the Iraqi people, sanctioned by their own idea of religious virtue, purity and divine retribution. They rule the streets of Basra now. Everyone is afraid of them, including me. But more on this topic, I cannot say.

Posted by DeLong at 01:35 PM

College Dropouts

Mark Thoma tells us to go read David Leonhardt:

Economist's View: The Dropout Boom and the Growing Education Gap: This article describes the rising college drop-out rate, particularly among lower income students, and the widening education gap this is bringing about. The article also looks at potential causes of the rising dropout rate and policies attempting to reverse the trend:

The College Dropout Boom, By DAVID LEONHARDT, NY Times: One of the biggest decisions Andy Blevins has ever made, and one of the few he now regrets, never seemed like much of a decision.... He had been getting C's and D's, and college never felt like home, anyway.... So he quit college... and... joined one of the largest and fastest-growing groups of young adults in America. He became a college dropout... Only 41 percent of low-income students entering a four-year college managed to graduate within five years, but 66 percent of high-income students did. That gap had grown over recent years....

Posted by DeLong at 01:33 PM

Rumors that GM *Is* Going to Shovel Lots of Cash Out of the Enterprise

The question of why the auto companies aren't shoveling cash out of their enterprises is partially answered. Lee Hawkins reports:

Heard on the Street: Wall Street is betting that General Motors Corp. -- facing the twin issues of having its bonds rated 'junk' and Las Vegas billionaire Kirk Kerkorian's tender offer under way -- soon will undertake a more ambitious restructuring... GM's highly profitable finance arm, General Motors Acceptance Corp., which last year earned $2.9 billion, or about 80% of GM's total net income. GMAC's potential for growth was crimped when Standard & Poor's downgraded GM's credit ratings to junk status earlier this month.... Now, some analysts say selling all or part of GMAC would help GM raise more cash to pay for an overhaul of its money-losing North American auto business -- or a payout to shareholders -- while allowing GMAC to obtain an investment-grade debt rating that will allow it to grow....

Action in GM's shares suggests that investors are betting that something big will happen, but watching the debt situation warily....

Getting concessions from the UAW to close more plants and reduce GM's work force still might not be enough to make a significant difference, says Ron Tadross, an auto analyst at Banc of America. 'The UAW is no silver bullet here,' he said, since labor costs represent only about 20% of the cost equation for GM.... The core of GM's current problem isn't cash -- it is sitting on $54.9 billion -- but declining revenues per vehicle in North America, a reflection of slumping sales of large sport-utility vehicles and mediocre demand for many of GM's cars....

Some shareholders want more significant steps. 'I would hate to see them split off some of their best assets, but at the same time they need to take some strong action to save the company,' says Christopher Ailman, chief investment officer of the California State Teachers Retirement System, the third-largest public pension fund in the U.S. Some analysts caution that it wouldn't be a simple matter for GM to simply sell GMAC.... If Mr. Wagoner raised cash with a GMAC transaction, how would he spend the money? Some analysts have suggested GM could use the proceeds of a GMAC deal to fund employee-buyout plans.... [A]ny windfall from a GMAC deal also could be returned to shareholders. Mr. Kerkorian has in the past invested in companies and then pushed management to return more wealth to shareholders.... 'The benefit [of selling GMAC assets] would be really to GM shareholders as opposed to GM as an ongoing company,' says Brian Johnson, an auto analyst at Sanford C. Bernstein. 'It gets money in their pocket and forces GM to negotiate with the UAW without the GMAC piggybank in their pocket.'...

Posted by DeLong at 01:31 PM

Egrades

An interesting email telling me why I can't submit my students' "egrades":

Date: Tue, 24 May 2005 23:18:20 -0700
To: Brad DeLong
From: Bear Facts Team
Subject: Re: Technical Issues

The system is heavily overloaded at egrades time. Response times are made slow by a heavy influx of students checking their grades, and the processor never gets a chance to recover because they just keep pounding on the system, making response times worse.

A system critical to the university's smooth functioning at a critical time. High demand not a surprise.

Posted by DeLong at 01:30 PM

Edward Hugh on the European Central Bank

He writes:

A Fistful of Euros: Crisis Looming At The ECB?: A right royal row is brewing at the ECB. Basically the old guard theorists of the "one size fits all" monetary policy are being challenged by more pragmatic observers of day to day realities. For the moments it is the politicians who are making the running (but there are plenty of competent economists in Germany and Italy who are ready to back them up), and yesterday the OECD joined the fray....

[Y]ou have the theorist of the old guard over at the ECB Otmar Issing: "European Central Bank chief economist Otmar Issing said euro zone growth differentials have to be addressed by national economic policies rather than by the ECB's interest rate policy." In fact Issing is really digging in. He provocatively gave this One Size Fits All speech on 20 May. His conclusions were as follows: "Let me conclude with a citation. On the eve of the changeover, I wrote a commentary on diversity and monetary policy in the euro area. To the question whether a single one-size monetary policy could fit all parties involved -- be they national entities, social partners or economic actors -- my answer was: 'One size must fit all'. The political decision on the creation of EMU had resolved all discussions on whether monetary union should precede or follow political unity and the fulfilment of the criteria for an optimum currency area. Today, in light of the evidence gathered so far in the euro area, I am more confident in saying: 'One size does fit all!'"

p>Obviously you have to ask whether Issing in now losing his grip on reality.... As the FT notes: "The ECB has insisted that a rate cut would be harmful and was not supported by sensible economists. Jean-Claude Trichet, the ECB president, told the European Parliament on Monday: 'The last time we met, we were absolutely convinced that we would not improve the situation [with a rate cut] but that we would hamper Europe if we would go in the direction that is suggested by some.' But now that the OECD, a bastion of orthodox economic thought, has flatly contradicted the ECB's position, Mr Trichet will find it more difficult in future to reject out of hand a discussion of lower rates."...

Just to give us a measure of who is and who isn't considered a "sensible economist", one might look at today%'s statement from Hans-Werner Sinn, President of Germany's prestigious Ifo index: he is reported as telling CNBC that: "the ECB has done a good last year in keeping interest rates stable, but we have a different situation now and the ECB should cut interest rates." This situation is not without its comic aspect: Sinn means sense, ie he is the real, true to life, sensible economist.

Posted by DeLong at 01:28 PM

More Signs of Incipient Senility...

For about two years now, I have been saying "Stu Eisenstat" when I mean "Dick Zeckhauser," and saying "Dick Zeckhauser" when I mean "Stu Eisenstat." I have no excuse and no explanation.

And then there was that horrible moment in lecture this year when I all of a sudden could not distinguish FDR's trustbuster Thurman Arnold from poet Thomas Arnold from Terminator Arnold Schwarznegger from golfer Arnold Palmer from Wilson's red-baiting Attorney General Mitchell Palmer.

Not to mention my also-inexcusable frequent confusion of Sandra Bullock with Sarah Jessica Parker...

Posted by DeLong at 01:17 PM

The Fed and the Housing Bubble

Mark Thoma's weblog has another Fed Watch by Tim Duy on The Fed and the Housing Bubble.

Posted by DeLong at 12:44 PM

Housing Bubble

James Hagerty and Ruth Simon find some people who are certainly acting like they would in a housing bubble. Up until six months ago, I could account for housing prices in terms of scarcity (they aren't building many houses near the California coast any more) and low interest rates. That's getting less possible with each passing day:

WSJ.com - As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate: A year ago, Ryan Epstein and his wife had whittled down the mortgage on their four-bedroom colonial house in North Beach, Md., to $130,000. Then Mr. Epstein had a chat with a mortgage broker. The broker helped the Epsteins refinance their home, valued at about $300,000, to take advantage of lower interest rates. He also encouraged the couple to take out extra cash, a popular technique called a cash-out refinancing. The Epsteins used that cash, $25,000, as the down payment to buy a rental property. That purchase swiftly led to others. Today, Mr. Epstein says he has about $1.4 million of equity in nine dwellings -- and $2 million in mortgage debt. Those rapid profits reflect surging house prices, rising at a double-digit rate in the Epsteins' area near Washington. "It's a wonderful market out there," Mr. Epstein says.

Five years into a housing boom that has boosted U.S. home values an average of 50% and added an estimated $5.5 trillion to the total market value of residential real estate, many Americans no longer think of their home as just a place to live. Instead, it's a cash machine that can be used to rapidly build wealth. To that end, a growing number of people are tapping into their home equity to invest in more real estate. That's a lot like using a margin account -- a line of credit backed by securities in an investor's portfolio -- to buy stocks. During the 1990s, many investors used such accounts to buy shares in fast-rising tech stocks. When the dot-com bubble burst, the value of the shares bought on credit cratered and investors' borrowing worsened their losses. Economists say today's debt-fueled investment binge in real estate is fanning the flames of an already overheated housing market, and making demand from people who actually need houses to live in seem stronger than it truly is.

In some markets, this buying is adding to a glut of rental housing and causing rents to fall, which will make it more difficult for investors to break even. Already, there are signs that a few investors are starting to get burned. On Friday, Federal Reserve Chairman Alan Greenspan suggested that house-price inflation in some parts of the country is starting to look excessive. "At a minimum, there's a little froth in the market," Mr. Greenspan said in response to a question at a lunch hosted by the Economic Club of New York. "We don't perceive that there is a national bubble, but it's hard not to see that there are a lot of local bubbles," he added. He played down the idea that the market could suffer a dramatic crash like the bursting of the dot-com bubble, in part because homes don't sell as quickly as stocks do. Also, most people still have plenty of equity in their homes, he noted, so the prospect of mass bankruptcies in the event of a housing-market decline seems far-fetched.

Others express more anxiety. Dean Baker, co-director of the Center for Economic and Policy Research, a think tank in Washington, says many Americans are being "incredibly reckless" in assuming that real-estate prices will keep rising or, at worst, flatten out. "It's a classic phenomenon you expect to see in a speculative bubble," Mr. Baker says. He is so bearish on housing prices that he sold his own home last year and now rents. In another sign of growing concern, the Federal Reserve and other bank regulators last week issued guidelines calling for lenders to tighten their criteria for making loans backed by home equity by looking more closely at borrowers' ability to repay under various possible future market conditions. The regulators are starting work on similar guidelines covering mortgage loans used to purchase homes. Among regulators' top concerns: the surge in popularity of interest-only loans, which allow people to pay only interest in the initial years and face the burden of paying back the principal later....

Why are people like the Balderstons so confident of strong returns from real estate even amid growing warnings about the dangers of a housing bubble? "People form their expectations on a backward-looking basis," says Jan Hatzius, an economist at Goldman Sachs in New York. Based on the experience of recent years, they tend to see real estate as a very promising investment, he says, adding: "That's probably not correct.... You should think pretty hard about whether you want to increase your exposure to real estate at a time when it is trading at historically high valuations." Like the Epsteins, who used their home equity to buy rental housing in Maryland, many real-estate investors see the stock market as far riskier. "If you buy stocks," Mr. Epstein says, "the next day they can tumble in the toilet." Home prices can't fall nearly as quickly as stocks, he reasons, because people tend to hang on to their real estate when prices are weak and await an upturn. And unlike those who buy stocks with borrowed funds, home buyers don't face margin calls, or demands from their creditors for additional funds, when prices fall....

What makes this get-rich-quick formula more dangerous is that many investors are willing to buy properties on which the rent is too low to pay for financing and other monthly costs. Their bet is that rising property prices eventually will make these deals profitable...

Posted by DeLong at 12:40 PM | Comments (0)

Virtual Steve Levitt Seminar at Crooked Timber

There is a very good virtual Steve Levitt seminar at Crooked Timber:

Steven Levitt Seminar - Introduction: Posted by Henry: Steven Levitt's work is familiar to many Crooked Timber readers. He's a professor in the University of Chicago's Economics Department, a winner of the John Bates Clark medal, [an] editor of the Journal of Political Economy, and the author of a rather terrifying number of peer-reviewed articles.... Freakonomics is currently Number Two on the New York Times bestseller list.... We asked Steve a while back whether he would be prepared to participate in a Crooked Timber seminar on freakonomics, economics, and the social sciences; he very kindly agreed, and you see the result before you. We're also grateful to have the participation of two non-CT regulars. Tyler Cowen is a professor at George Mason University; he blogs at Marginal Revolution and still puts in an occasional appearance at the Volokhs. Tim Harford writes the Dear Economist column for the Financial Times. His first book, The Undercover Economist, is coming out in November 2005.

I was supposed to participate, but inspiration did not strike and the time to write something good while uninspired was nibbled to death by bureaucratic ducks. *Sigh.*

It's very good.

Here's Steve's gracious response:

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner - William Morrow, 2005 : Posted by Steven Levitt: I'm not sure whether it says more about my own shortcomings, or the quality of these five commentaries above on Freakonomics, that I gained a great deal of self-awareness from reading them. It was a surprising reaction for me. There have been many published reviews of Freakonomics, and not one of them has given me the slightest insight into myself. Strangely, though, I felt like I understand my own motivations and goals better than I did a few hours ago. For me, that has always been one of the greatest benefits of inter-disciplinary interactions. Self-awareness is a scarce commodity, and a valuable one, so I am quite grateful for this remarkable gift that Tyler Cowen, Henry Farrell, Tim Harford, Kieran Healy, and John Quiggin have given me.

So let me try to pay these guys back with some thoughtful responses to their comments. Because the same themes ran through most of the comments, I address them collectively rather than individually.

Let's start with the title. Freakonomics. We debated endlessly over the title. From a naming perspective, the difficulty with this book is it doesn't have a theme. We thought about a question title ("What do sumo wrestlers and school teachers have in common?"), some non-threatening titles ("The Hidden Side of Everything" or "Ain't Necessarily So"), and some loopy titles ("E-ray Vision"). In the end, though, Freakonomics became the obvious choice, for reasons anchored in the contrast between my own research on names and that of others. Let's just assume that the research is right and it is really true that names matter for getting a resume callback, but don't matter for long-term life outcomes. Then this probably implies that names matter a little for first impressions, but then quickly get swept aside in importance once we gain some familiarity. When's the last time you thought to yourself, "Oprah is a ridiculous name, I certainly won't watch her show." Or, "The Beatles...what a ridiculous name for a band. No one would ever buy their records." In naming a book, you need something attention-grabbing to cut through the clutter of the thousands of competing books, but as shocking as "Freakonomics" sounds the first time you hear it, by the twentieth time it becomes familiar, like Oprah. My guess is that the commenters were already softening their hatred for the title by the time they finished writing. And a year from now, they may even forget that they ever hated the title. (At least, that is what happened with our publisher, who initially dismissed the title out of hand, only allowed it at the 11th hour, and now are telling us we need to sign up with them for a second book because who else can market our books as well as they do.) And if there is a second book, we have a title in mind that is so outrageous it will have to be loved.

So how about the absence of a unifying theme in the book? My own hunch, borne out by the public response to this book, is that nobody really cares about or even wants a unifying theme in a book. Everyone is just afraid not to have one, since almost all books do. (In this respect, I think unifying themes in books are a lot like campaign spending. All candidates feel compelled to spend a lot of money for fear of the disastrous consequences that could result if they take a chance and don't spend, spend, spend.) But when I read Malcolm Gladwell's incredible books, I don't care about the theme, I just love his stories. His books top the charts because he has incredibly good taste and he is the best storyteller going. For me, and others I talk to, the unifying themes sometimes get in the way of his stories which are individually so amazingly interesting. Books of short stories, similarly, have no unifying theme. I certainly don't feel cheated by that either. More valuable than anything else I or Dubner ever does, perhaps, would be to make the world safe for books that have great stories but no unifying theme.

All of the commentaries spent some time discussing where I fit into economics and the social sciences more broadly. If I got to make three wishes, perhaps one of them would be that I might turn into a truly interdisciplinary social scientist who uses data to inform human behavior in ways that both shed light on and draw upon not only economics, but sociology, political science, and psychology as well. But, let's be realistic. I'm having trouble even mastering the tools of my own discipline. (If you ask my students whether I know calculus, they will say "not very well." I'm not proud of that fact, but I am a realist. If you ask the really great economic thinkers like Gary Becker or Kevin Murphy, how often I'm right when I try to apply Chicago price theory, they will simply tell you that I am showing a lot of improvement because they are kind.) The only things I'm good at, really and honestly, are asking questions that people seem to find interesting, and figuring out how to trick data into answering those questions. I will never be even a passable sociologist, political scientist, or psychologist. But that is okay. I think the thing that gets a lot of economists into trouble is the false belief that they can be good at everything. A few years back, when I was on sabbatical at the Center for Advanced Study of Behavioral Sciences at Stanford, I gave a talk to the other fellows on my research. Some in the audience were indignant, asking why I called myself an economist given what I did. They said I was really a sociologist. One only had to look at the horror on the faces and the strong counter-arguments made by the sociologists in the room to see that I wasn't a sociologist either. But, by starting from the position that I don’t know much, I am open-minded enough to co-author with an ethnographer (Sudhir Venkatesh), an econometrician (Jack Porter), a political scientist (Tim Groseclose), and now a journalist (Stephen Dubner). And maybe, in addition to making it safe for someone to publish a book without in a theme in the future, I will make it easier for academics from all social sciences to follow the sort of "adisciplinary" (as opposed to inter-disciplinary) path I'm on.

Next, there is the question of incentives. In the same way that "utility maximization" can be turned into a tautology, the commentors point out that our use of the term incentives is moving in that direction as well. By widening incentives to encompass not only financial, but social and moral incentives, we have covered just about everything. Still, I think there isn't really another choice. To focus just on financial incentives would obviously be misguided. On the flip side, for me (and I think this is the thing that makes me an economist ultimately) I just can't get away from the idea that people are active decision makers trying to get what they want in a reasonably sophisticated fashion. The most real sense in which I think incentives are the unifying theme of my research (even when they aren't obviously there like in the abortion-crime stuff), is that whenever I try to answer a question, I put myself in the shoes of the actors and I ask myself "what would I do if I were in that situation?" And I am the kind of person who is always trying to concoct some scheme to beat the system or avoid getting scammed, so I presume the people I'm studying are thinking the same way. So when I think about legalized abortion, I think it sounds like a really sick form of insurance policy against an unwanted pregnancy. When I see that one sumo wrestler has more to gain from a win than the other foregoes by losing, I figure they'll make a deal. When I think about real-estate agents, I'm constantly paranoid they are trying to screw me.

Finally, there is the question of whether I deserve to be called a rogue economist or not. There are two definitions of rogue. One kind of rogue is the Saddam Hussein-type. We have a few of those in economics, unfortunately, and we sure don't need any more. But when the book calls me a rogue, we mean it in the "mischievously playful" sense of the word that Webster's lists as the second definition. The rogue I have in mind is someone who strays from the subjects deemed appropriate for an economist, fails to treat economics with the necessary sense of seriousness (how dare I admit I can't do theory, or call the book Freakonomics), and embraces approaches that are implicitly disallowed by the profession (like ethnography and story-telling). As I said on the Daily Show, and apparently no one except me has seen Shrek 2, I like to think of myself as a rogue in the way that Antonio Banderas' character Puss 'n' Boots is a rogue.

I am the first one to admit that if all economists were like me, the field would probably be a disaster. But the fact that other economists more or less like me in spite of this, tells me that there is plenty more room for rogue economists in the profession.

Posted by DeLong at 12:29 PM

Wait a Minute Here!

Fortune's Peronet Despeignes interviews Greg Mankiw:

Magazine - Economist Greg Mankiw Sounds Off on Karl Rove, Paul Krugman, and More - FORTUNE - Page 7: Q: So you often read the paper and slap your forehead?

A: Let me give you example. This is as I was arriving [as the new chair of the White House Council of Economic Advisers]. Glenn Hubbard, my predecessor, was leaving. I read one of Paul Krugman's New York Times' columns, and he said something like, 'Hubbard said he was leaving to be with his family, but you could see the knives sticking out of his back.' The suggestion was that he's being kicked out. I knew that wasn't true. I knew I got the job in large part because Glenn recommended me. So here we have Krugman sitting in some office in New Jersey making a supposition about what's going on in Washington and then writing for the New York Times, with readers presuming that he knew something...

Wait a minute. Stop right there. I understood that when Paul Krugman was writing, Glenn Hubbard had just played the up-or-out game--promote me to a job that has more power and prestige, or I'll head back to Columbia. Remember that in the winter of 2003 Glenn Hubbard was being described as one of the "four horsemen of Bush economic policy," the "most influential chairman of the Council of Economic Advisers in two decades," a man who has "stretched his role far beyond tinkering with the tax code and overhauling the pension system." The Washington gossip vine in the fall and winter of 2003 was singing that Glenn would stay--but only for the right job, with more influence.

When Glenn went back to Columbia in early 2003, I was told by not-very-senior administration officials that it was because some feared that Glenn was just a little *too* smart and too capable, and that he was not "safe."When the Treasury and NEC jobs were opened up, Glenn did not get either of them--that's what Paul Krugman was referring to. (I think that everyone in the White House now agrees that this was a bad mistake: that Glenn would have greatly strengthened the administration's economic policy team over the last two and a half years.)

Greg is telling the truth when he says that Glenn recommended him for the job, and Greg is telling the truth when he says that Glenn could surely have stayed in the CEA chair job if had wanted to. But Greg's claim that Krugman is wrong? The best you can say is that it is... "incomplete."

Read Greg's _Fortune_ interview with this in mind, particularly when you come to statements like:

There are three kinds of people in Washington when they look at this budget situation. There are conservatives—honest conservatives—who think we need to reduce the size of government. There are honest liberals who want to raise taxes to make government bigger. And then there are people who are putting their heads in the sand who do not want to do either. It's very clear that this administration is filled with conservatives who believe in smaller government, leaner government, and the tax cuts go hand in hand with that.

No Greg. That's not clear at all. Not clear to anyone.

Posted by DeLong at 12:27 PM

More Intellectual Garbage Pickup

This is really a thankless task. But somebody needs to occasionally lay down a marker that Steve Antler writes with forked tongue.

He attempts to come to Daniel Okrent's defense:

EconoPundit: Professor Krugman says... "unemployment lasts much longer than it used to."... Daniel Okrent says: ...columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults."

A plot of the BLS statistic 'average weeks unemployed' from its 1948 start to the present illustrates Okrent's point:

The first gray arrow shows upward trending from 1948 to 1983. During those years Krugman was correct. The second gray arrow shows a slight downward trend since the mid 1980's. During these years, Krugman is wrong.

So which is it? Relative to 1948, unemployment now lasts longer than it used to. Relative to 1983 recession-peak-unemployment lasts about two weeks less than it used to.

I guess the question is one of interpretation. It just has to be left to the voters. Do they share Krugman's pessimism, or do they feel optimistic about the future?

Here is Antler's figure:

What should you think of this argument?

  1. You should look at the duration of unemployment during business cycle peaks, and see a steady rise: 7.8, 10, 10.8, 11.9, 12.6--today's level is 19.3.
  2. You should look at the average duration of unemployment during entire business cycles, and see a steady rise: 12, 10.5, 12.8, 15, 15.4, 17.1.
  3. You should cyclically-adjust the series--after all, we know that the duration of unemployment will be relatively high whenever unemployment itself is relatively high--and calculate what the duration would be if the unemployment rate were six percent, as is shown here:
  4. You should reflect on the fact that of these four possible ways of calculating the trend in unemployment duration, only one way--and a relatively weak way--produces Antler's downward trend since 1983. And Antler's way produces a much stronger upward trend in unemployment duration in the 1970s and early 1980s than any of the alternatives.
  5. You should reflect on the fact that Krugman's "unemployment lasts much longer than it used to" is part of a tradition of analysis that contrasts the first post-World War II generation--the 50s, 60s, and early 70s--with today. There's nothing in Krugman to make anyone imagine that "used to" applies to the 1980s only.

But it really isn't economics that Steve Antler is doing here, is it?

Posted by DeLong at 12:25 PM

Louis Uchitelle Looks at the Long-Term Unemployed

The reliable Louis Uchitelle looks at the distressingly-high level of long-term unemployment:

The New Profile of the Long-Term Unemployed - New York Times: After three years of unemployment, Allen Gruenhut finally landed a job as director of human resources for a company in the stone business on Long Island. His age, 53, worked against him in his long hunt for work, he contends, and so did the six-figure salary he earned at his last job, in banking. "They would not take me seriously at job interviews when I said I would be happy with a lower salary," Mr. Gruenhut said.

Jackie Ellenwood, 31, is still without a job. She worked for three travel agencies over 13 years, until her last job, in Allen Park, Mich., ended in a layoff nine months ago. The industry is shrinking in response to more Internet bookings and cutbacks in corporate travel so Ms. Ellenwood is looking for work elsewhere and studying to become a nurse, confident that health care will continue to expand in an aging America. "I'm going to stick to my nursing courses," Ms. Ellenwood said, "even if I get a job."

The experiences of Mr. Gruenhut and Ms. Ellenwood help to explain why many of the nation's unemployed are still struggling to get back to work. Not since World War II has long-term joblessness - the percentage of the unemployed out of work for six months or more - been so high for so long after a recession has ended.... Several factors seem to be contributing to the rise in long-term unemployment. The swelling cost of company-paid health insurance is "inducing business to be less aggressive in its hiring," said Mark Zand.... The baby boomer bulge working its way through the labor force also plays a role; as this large group of workers ages it becomes harder for some who lose their jobs to find new work suited to their skills....

"It looks like employers are very hesitant about the future of the economy," said Lawrence F. Katz, a labor economist at Harvard. "It may be that we will fall into another weak economic period before we get a good recovery and really robust hiring." After World War II, when traditional industries dominated the economy, the usual pattern was for long-term unemployment to surge during recessions and die away quickly as recoveries took hold. That changed during the early 1990's and is even more evident in the current recovery, which began in November 2001. Rather than subside as growth resumed, long-term unemployment as a share of total joblessness continued to rise, according to the Bureau of Labor Statistics. It peaked 17 months ago at 23.3 percent and has only gradually tapered off since then, to 21.2 percent in April....

Toyota Motors of North America, whose sales are rising more rapidly than other automakers in the United States, is holding back on hiring although its plants are operating flat-out. Its payroll, said Dennis Cuneo, a senior vice president, has grown by only 600 jobs this year - all of them at newly opened plants - to a total of just over 32,000 employees. Existing factories continue on two shifts a day. Overtime and reconfigured work schedules help to squeeze out more production, without adding third shifts and the hiring that the additional shifts would require. "We are reluctant to bring people on immediately," Mr. Cuneo said. "We are going to wait and see what we can still get from improvements in productivity. If the demand is sustained, there will come a point where you have to add a shift."...

Sixty-six percent of the working age population was in the labor force in April, down from 66.7 percent at the start of the recovery. That is 1.6 million missing people, enough to raise the unemployment rate to 6.2 percent from its present 5.2 percent - if they all showed up....

Posted by DeLong at 12:23 PM

Alan Greenspan Is a Master at What He Does

Matthew Yglesias watches with a kind of awe:

Matthew Yglesias: Department of Equivocation: "Being Chairman of the Federal Reserve is sort of like the reverse of being a blogger -- you need to be very, very, very careful about every word that passes through your lips lest an unintentional slip create a financial panic. Thus, Greenspan's thoughts on housing are a true classic of the genre:'

Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern,' Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown. Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over 'froth' in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are 'a lot of local bubbles' around the country.

No bubble, but many small, local bubbles. Hence an overall froth. And, presumably, a bubble here in Washington, DC, where prices have gone up a lot. From the standpoint of self-interest, this seems to me to be the best possible outcome since a decline in local home prices would be give for me as a non-homeowner who plans on sticking around town for a whle, but a nationwide collapse would have all sorts of bad spillover effects. Therefore, I choose to believe that Greenspan's called this correctly.

Via Alina Stefanescu who notes that the equivocation has thrown the nation's headline-writing industry into crisis.

I am told that in Washington, whenever someone wants to know whether they are supposed to deepen the darkness or illuminate the issue, they are likely to say, "Should I Greenspan it?"

Posted by DeLong at 12:21 PM

Speaking of Ire...

The Daily Howler uses its verbal trebuchet to launch a rhetorical cow in the direction of Daniel Okrent:

Daily Howler: Daniel Okrent finally leaves--taking a cheap shot at Krugman: What a truly amazing flyweight is departed Times public editor Daniel Okrent! Yesterday, Okrent concluded his unfortunate reign, discussing thirteen topics he somehow avoided during his eighteen months of service.... Below, we present the second of these thirteen ruminations, in full. But alas! As Okrent slices and dices Paul Krugman, he provides the perfect public showcase for his fly-weight intellectual standards and his unexplained but omnipresent resentment. Try to believe that he actually wrote such a cheap slasher piece! Again, it's the second thing he "meant to write about" but somehow never did:

Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults....

[S]ome of Krugman's enemies are every bit as ideological (and consequently unfair) as he is. But that doesn't mean that their boss, publisher Arthur O. Sulzberger Jr., shouldn't hold his columnists to higher standards.

I didn't give Krugman, Dowd or Safire the chance to respond before writing the last two paragraphs. I decided to impersonate an opinion columnist.

Good grief! If the ivory-billed 'pecker is the "Lord God bird," that must be the "Lord God third paragraph....

In the case of Dowd and Safire, Okrent at least provides specific complaints... at least semi-valid.... But what about Krugman? Okrent goes after his troubling poster boy hard--but he doesn't cite a single specific example of the gentleman's troubling conduct! He calls Krugman every name in the book--but after eighteen months on the job, he doesn't give a single example of Krugman's deeply disturbing conduct. How exactly is someone like Krugman supposed to respond to such work?

For the record, Krugman is quite a bum--if you listen to Okrent. According to the exercised editor, Krugman "has the disturbing habit of shaping, slicing and selectively citing numbers." Beyond that, Krugman is "ideological" and "unfair," Okrent says--and he seems to say that the slippery scribe selects his misleading numbers in a fashion designed to "please his acolytes." These are very nasty charges. But in the style of classic hit-and-run bullies, Okrent provides no examples of his target's troubling conduct, and he bravely offers these ringing complaints in his final public editor column, depriving Krugman of a chance to respond (and knowing he wo't have to defend himself against the complaints that will come).

How big and brave is the mighty Okrent--this big, bold man who slithers away with so many loud complaints? The big, brave fellow had eighteen months to offer examples of Krugman's misconduct, but even now, he offers none.... In his very next item--undiscussed Topic 3--Okrent complains that three other writers have failed to let the great New York Times serve "as a guardian of civil discussion!" Was this an attempt at comic relief? Or is it the sign of a consummate flyweigh--the sign of a man who waded far over his head when offered this unwise assignment?...

The exercised ed had eighteen months to offer examples of Krugman's misconduct. Instead, he waits until his final column, then provides exactly no examples of the crimes he lustily limns.... [I]n Sunday's closing (cheap) shot against Krugman, he showed himself again as a cheap, petty thug--and as a flyweight for the ages. How does America's most important newspaper have such a flyweight in such a high post? We'll examine that important question all week, starting tomorrow with Okrent's Topic 5--an item which is almost perfect in its pure unalloyed dumbness.

Posted by DeLong at 12:19 PM