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March 2005

Gene Steuerle on Social Security

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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

And then I hit the next sentence:

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

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

"Swamped"? Feh.


Jim Henley Reports on Shots in the Dark

He writes:

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

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

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


Four Things We Already Know

Tyler Cowen as Dutch Uncle:

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

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

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

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

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

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


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

From 1984:

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

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

Matthew Yglesias writes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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


Joenertia

Marshall Whitman praises Joe Lieberman:

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

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

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

Marshall Whitman's praise is greeted by laughter.

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

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

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


Mankiw 0, Liberals 3

Greg Mankiw writes:

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

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

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

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

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

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

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

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

The second "canard," Mankiw says, is:

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

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

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

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

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

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

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

Mankiw 0, Liberals 3.


How Good Is Alan Greenspan?

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

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

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

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

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

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

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

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


And This Is Too Bad...

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

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

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

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

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

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


How Stupid Does the Cato Institute Think We Are?

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

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

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

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

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

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

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

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

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

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

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

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

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


George W. Bush: Liar or Fool?

Associated Press reports:

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

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

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


Martin Wolf on Argentina's Successful Refinancing

He writes:

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

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

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

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

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

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


Mufarse

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

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

Let me hunt for the full piece...

Ah. Here it is. As a contemporaneous piece of analysis done in late summer 2001, it's really superb. He is very good:

Barry Eichengreen: Argentina After the IMF: August 27, 2001: I was in Argentina last week when the latest IMF package was announced. Never before have I heard an entire nation breathe a collective sight of relief. The local stock market, the Merval, jumped by eight per cent on the announcement, as jubilant traders shed their pessimism. The streets were bustling that evening and the tango palaces were packed with dancers.

But by the next morning the familiar mood of melancholy resignation had returned. The realization had dawned that the IMF package offered no magic formula for getting growth going again. And without growth, it is hard to see how political support for paying the foreign debt can be sustained.

Some simple arithmetic makes this point. Argentina’s external debt is a bit more than 30 per cent of GDP, well below the Maastricht Treaty’s definition of what is sustainable. But the Maastricht definition assumes that the economy will grow, typically by 2 or 3 per cent a year, and that the real interest rate -- the market interest rate minus inflation -- will not much exceed the rate of economic growth. Neither assumption is valid in Argentina. The economy has not grown for three years. And interest rates are still in the 15 to 20 per cent range despite the fact that inflation is nonexistent. When interest rates are so much higher than growth rates, even a relatively modest debt burden can rise explosively. The consequent specter of future debt servicing difficulties keeps interest rates high, which in turn creates the danger of a self-fulfilling prophecy.

President de la Rua and his economy minister Domingo Cavallo have sought to break out of this bind by cutting public spending. In a remarkable feat of political gymnastics, they have gotten a fractured Congress to agree to a zero-deficit law. This requires the budget to be balanced every month. It prohibits current spending, inclusive of debt-service payments, from exceeding current revenues. The government promises that other forms of spending -- on civil servants’ salaries and public pensions, for example -- will adjust to ensure the availability of the revenues needed to service the debt. Hence, there should be no question about the country’s ability to keep current on its financial obligations. Uncertainty about the government’s intentions having been removed, interest rates should come down. And as interest rates fall, consumption and investment will recover. If all goes well, growth will ultimately resume.

The new IMF package is a bet that this gamble can work. By replenishing the government’s coffers and thus giving it the resources needed to provide additional liquidity to the country’s cash-strapped banks, it gives the current strategy a few more months to work. The main condition attached to the new IMF money is that the zero-deficit rule be extended to the provinces. The provinces receive pro rata shares of federal revenues. Traditionally, the authorities agree on a revenue forecast and on transfers proportional to those notional revenues. Argentina’ new program with the IMF requires it to base these revenue-sharing transfers on actual revenues, not on forecast revenues. It thus closes the one remaining loophole in the zero deficit rule.

But the problem with the government’s strategy, which the IMF program does nothing to solve, is that the current government cannot commit future governments, nor can it commit the electorate. Unemployment is already 17 per cent. Pensions and civil-service salaries have already been cut by 13 per cent. Every day sees demonstrations by another aggrieved group. When I was in Buenos Aires, it was the university teachers and the employees of the national television network who were marching in the streets. On other days it is other groups, all of whom express their opposition to current policies and demand a shift to some unspecified alternative. It is not hard to imagine a generalized political backlash which either brings down the government or forces it to abandon its policies of austerity. Either way, the budget deficit will return, and along with it fears about the sustainability of the debt. The next round of Congressional elections is in October, to be followed shortly by a national plebiscite on government’s economic policies. Against this background, it is easy to see why interest rates have not come down and, consequently, why there is no sign of growth on the horizon.

Moreover, the zero-deficit rule only makes the problem worse. Cutting public spending puts more deflationary pressure on the economy. Tax revenues fall as the economy contracts, requiring yet more cuts in public spending. But those further spending cuts cause the economy to contract yet further, in a vicious spiral. And each successive cut in public-sector salaries and pensions fans political opposition to the government’s policies of austerity. By extending the zero deficit rule to the provinces, the new IMF program tightens this noose.

Is there an alternative for which the Argentine government, the IMF, and the United States Treasury might have opted? The alternative advocated by some economists in both Buenos Aires and Washington, D.C. is the so-called “Quadruple D”: devaluation, dollarization, deposit write-down, and debt restructuring. A one-time devaluation of, say, 20 per cent would enhance the competitiveness of Argentine goods at a stroke. The problem with devaluation is that it would also rekindle fears of inflation and therefore push interest rates up rather than bringing them down. Thus, following devaluation with dollarization -- unilaterally replacing the devalued peso with the U.S. dollar -- would eliminate all prospect of future monetary excesses and contain the shock to confidence.

To prevent the Argentine banking system from being destabilized, it would be necessary to write down dollar deposits in the banks to 80 cents on the dollar, since devaluation will reduce the earnings on the banks’ peso-denominated assets by 20 per cent. And since writing down the assets of Argentine residents by 20 per cent while continuing to pay foreigners 100 cents on the dollar is not a political equilibrium, it would be necessary to restructure the external debt as well.

If this restructuring was done constructively -- by carrying out good-faith negotiations with the creditors -- the markets would probably settle for 65 cents on the dollar. The country having resolved the debt situation and having put this source of uncertainty behind it, interest rates would then come down. Domestic demand would recover, and growth would resume.

This radical approach should have appealed to the Argentine government on several grounds. It promised to enhance competitiveness overnight, something that no other policy could achieve. It promised to eliminate uncertainty on both the currency and debt fronts. Moreover, it should have appealed to the IMF. External debt restructuring would have required foreign investors to “take a hit,” rather than again getting off scot free. This would have addressed the moral hazard problem, instead of encouraging more reckless lending by adding yet one more IMF bailout to the already over-long list.

Why then was the “Quadruple D” rejected? The Argentine government, the IMF and the U.S. government all backed away from it because of implementation difficulties and last-minute doubts. The Argentines insisted that devaluation would break the government’s “convertibility contract” with the public -- that is, its promise to never again tinker with the currency which has been the hallmark of its economic policy strategy since 1991. Moreover, given the country’s history of inflation, both the Argentine government and the IMF questioned whether devaluation would in fact enhance competitiveness; instead, it might simply feed through into higher prices.

Even those within the IMF who favored devaluation realized that they possessed no lever with which to force the policy on a reluctant Argentine government, other than withholding financial support, which they were not yet ready to do.

This problem could have been solved by dollarization, but patriotic Argentines continue to oppose abandoning the peso for the dollar. And the Bush Administration could not make up its mind about whether or not to encourage Argentina to adopt the dollar. It did not offer the country the $1 billion it needs to defray the cost of obtaining the necessary greenbacks.

Moreover, restructuring the public debt would have damaged the banks and pension funds, which hold some of the government bonds in question. These are two of the only strong institutions in the country. And the government has no fiscal surplus to use to repair them. In addition, Argentine companies with assets abroad could become the object of bondholders’ lawsuits. Whether this would in fact have happened is unclear. But if it did, attempts to attach these assets would have disrupted their international business, and Argentina’s exports could have fallen by half.

For all these reasons, the “Quadruple D” approach implied too many risks for agreement on it to be reached in the short period of time available.

So what comes next? Perhaps Argentine growth will miraculously resume. This is what the authorities in both Buenos Aires and Washington are betting on. But there is no sign yet of light at the end of the tunnel, and the authorities will run out of room by October, at the latest. The IMF has promised an additional $3 billion for use as collateral in a market-based debt exchange, in the hope that IMF-backed bonds can be issued at lower interest rates, which will in turn reduce the interest charges paid by the Argentine government and allow it to relax its other spending cuts. But $3 billion is a drop in the financial ocean; the government’s debt is well over $100 billion. Unless the IMF and the U.S. Treasury have a strategy for turning this $3 billion into $30 billion, the debt-exchange idea is mere window dressing. And the Bush Administration, having been forced to back down once, is unlikely to allow the IMF to offer more money, much less to offer some itself.

The alternative to growth is more deflation. More spending cuts will lead to more unemployment. Unemployment will fan political discontent. And political discontent will presage the abandonment of the zero-deficit rule. As investors see the writing on the wall, they will abandon the country, whose financial difficulties will return with a vengeance.

What will the authorities do then? Clearly, the “Quadruple D” will be back on the table. It may be more feasible the next time around. The banks and pension funds will have had more time to prepare their balance sheets for the looming devaluation. Patriotic opposition to dollarization will have weakened, hopefully, in the face of reality. The Bush Administration may overcome its reluctance to see Argentina adopt the greenback. In this context, a comprehensive debt restructuring, done right, would eliminate the last remaining source of uncertainty, allowing Argentina to put its economic problems behind it and begin growing again.

Hard decisions are taken only when there is no alternative. The Bush Administration was dragged reluctantly into supporting the latest round of IMF assistance for Argentina, but it is clear that this time is the last. Unless growth resumes, which is unlikely, the outcome of the next crisis, in October, will be different. Devaluation, dollarization, and comprehensive debt and deposit restructuring will not be painless. They will not be an occasion for tangoing in the streets. But they will be necessary for Argentina to finally put the crisis behind it and get growth going again.

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley.


The Vengeful Gods of Monetarism

In the 1990s, the sins of the Argentine politicians against the Gods of Monetarism were, while not venial, not obviously mortal either. They did many good things. They halted inflation. They privatized industry. They tried hard to firm up the foundations of the market economy. They did about 80% of things right. They did only 20% of things wrong. During a five-year boom interrupted by a one-year recession, they allowed the country's debt-to-GDP ratio to rise from 29% to 41%. But they did everything else right.

Thereafter the punishment, while not swift, was inevitable. Recession caused rising debt. Rising debt brought forth higher risk premiums. Higher risk premiums caused debt to rise faster. Faster-rising debt pulled higher risk premiums along, which deepened recession, which brought still further increases in debt. The debt-to-GDP ratio went from 41% to 64% in three more years, and then came the crash.

But there is an alternative in which it all turned out well. Turkey and (so far) Brazil are in that alternative.

Paul Blustein blames:

  1. The politicians of Argentina, for pretending not to know that their much-loved currency peg required budget surpluses.

  2. The IMF, for not rubbing Argentina's nose into the fact that their much-loved currency peg required budget surpluses.

  3. The IMF, for not requiring that Argentina have a currency-peg exit strategy when it became clear that the currency peg required larger primary surpluses than Argentina could attain in a recession.

  4. The private market, for being so eager to lend money to Argentina in the mid 1990s that its politicians could ignore the fact that their much-loved currency peg required budget surpluses.

  5. The private market again, for being professionally overoptimistic about Argentina.

  6. The Bush-O'Neill-Taylor led U.S. government, for futzing around.

I'm inclined to give the IMF much more of a pass on (2) at least. The IMF is doing other things while it is dealing with Argentina. In its handling of the East Asian crisis, it became clear that the IMF had placed too much stress on budget surpluses, and to some degree its wariness with Argentina is a reaction to the fact that it had been wrong and knew it had been wrong about the importance of budget surpluses in East Asia. The IMF is also, at this time, coming under regular and sharp criticism for being too aggressive and too dictatorial toward countries seeking assistance. And, remember, the IMF has two successes--Brazil and Turkey--to count alongside one disastrous failure--Argentina--so far in this millennium.

But the most important lesson from Blustein's book, I think, is that the Gods of Monetarism are jealous and vengeful Gods, and you sin against them at your peril: monetarist arithmetic is indeed unpleasant.

And let me highly, highly recommend the book.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).


The Second Coming of Norman Angell

Matthew Yglesias also preaches the Second Coming of Norman Angell:

Matthew Yglesias: Norman Angell's Second Coming: Brad Delong quotes Thomas Barnett as saying: 'Yes, as far as the Core is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons.' Praktike glosses that thusly:

Norman Angell, famously, predicted the end of war due to global economic connectivity ... and was promptly proven wrong in 1914. I guess what Barnett is saying here, based on my reading of his books, is that the prospect of nuclear annihilation is so terrifying that great power war is now a thing of the past, and interlocking flows will lead to a better world.

I think people tend to spend too much time thinking about the predictive content of Angell's work, when the important part is the prescriptive element. John Quiggin got into this in a good review of someone else's book a while back:

The classic refutation of international realism [MY: I don't think that's really what this is a refutation of, but nevermind] was put forward in Norman Angell’s The Great Illusion. Angell argued that in a modern economy no economic benefit could be generated even by successful wars of conquest. Writing for a British audience, Angell’s basic point was that, even if Germany succeeded in establishing political mastery in Europe, workers in the newly subjected countries would still have to be paid, goods would have to be purchased at market prices and so on. Hence, individual Germans would gain nothing from being part of a larger country.

Angell’s argument works even better for social democracies, where territorial expansion or even extension of hegemony produces an unpalatable choice. If the benefits and obligations that go with citizenship welfare state are extended to those under the control of the expanded state, existing citizens will almost certainly be worse off. On the other hand, any attempt to maintain a distinction between citizens and noncitizens is bound to be highly problematic.

Angell’s argument showed, beyond reasonable doubt, that war and territorial expansion are not, in general sensible policies. His views have often been derided on the basis that they were falsified by the outbreak of the Great War in 1914, which was pursued to the bitter end even though it destroyed the global market economy that had formed the backdrop to his analysis. But in reality the outcome proved him right. Of course, Germany, the power most influenced by the arguments of Clausewitz and his successors, reaped nothing but grief from the war. But the attempts of the victorious allies to exact reparations, extend their colonial influence and so on were also entirely futile, exactly as Angell had predicted.

That's the interesting thesis, that great power conflict is futile. The further thesis that an absence of great power conflict is inevitable just turns on the rather uninteresting question of whether or not leaders understand this. I by no means agree with Barnett about everything, but like him I would happily claim that 'as far as the Core [roughly, globalization's 'winners' -- the rich countries, India, China, Brazil, etc.] is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons.' The point is that even though we are pre-eminent now, we have nothing to fear from the growth in Chinese, or Brazilian, or Indian power. Nor do we have anything to fear from the prospect that a unifying Europe will become a more coherent -- and therefore more powerful -- actor on the world stage. We call ourselves the second comings of Normall Angell not because connectivity makes conflict impossible, but because it makes it pointless. As Brad Delong put it on an excellent post on Angell a while back:

Norman Angell's argument is simple: It is that in modern industrial warfare between great powers, everybody loses. Losers lose. And the winners lose. Many of their fathers, sons, and husbands are dead. Much of their wealth has been blown up. And it is next to impossible to claim that these sacrifices are counterbalanced by any positive economic advantages. Straightforward plunder of the conquered country yields little. Confiscation of property and the imposition of reparations burdens damages the rule of law on which modern industrial prosperity rests. And even if you do manage to get the conquered country to ship you significant quantities of valued foodstuffs, automobiles, and radios, you then have to cope with mass unemployment among your own farmers and manufacturing workers.

To take a contemporary example, in recent memory Hong Kong was a kind of protectorate of the United Kingdom. Since then, it has fallen under the authority of the People's Republic of China. But since if citizens of the U.K. (or the British government) wished to purchase goods or services produced by the residents of Hong Kong they had to pay money for them in a reasonably free market, and since the citizens of the U.K. can still buy goods and services from the residents of Hong Kong today, the change in sovereignty has no impact on British well-being. Now, of course, when a territory passes from the control of a democray to that of a dictatorship, the residents of the territory may suffer from the change in various ways. Hong Kong, it's worth noting, was not governed democratically even during the British days (until some last-ditch efforts right before the handover) but contemporary Taiwan is a different sort of case and both pose certain moral issues.

As far as actual conflicts of interest are concerned, however, clashes can only bring disaster. Nuclear weapons are relevant because they make clashes less likely (a good thing!) but they also ensure that clashes might become much more disastrous (a bad thing!) The challenge is to try and ensure that the rulers -- and the citizens -- of the relevant powers understand we have much more to gain from working together than from fighting.


Blustein's "And the Money Kept Rolling in (and Out)": Other Notes

Blustein: Other Notes

Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).

When are two copies of And the Money Kept Rolling in (and Out) not perfect substitutes? When one has my marginal notes in it and the other does not.

Paul Blustein believes (and I agree) that the IMF in the 1990s should have demanded that Argentina run budget surpluses:

p. 43: The big question facing the IMF [in 1997] was what it should demand of Argentina in return for the Good Housekeeping Seal. Among the Fund staff, plenty of nervousness lingered about how long the convertibility system could last.... But the Fund was not going to insist that Argentina unshackle its economy from convertibility.... [U]nder the IMF's articles of agreement, member countries are allowed to choose [their]... foreign exchange regime...

pp. 46-7: Argentina had a special reason to exercise extraordinary prudence in its budgetary policy... the cherished convertibility system.... Argentina needed to be ultradisciplined.... There were two reasons for this. First, Argentina was borrowing mainly in dollars.... If the government's debt started to look excessive, markets would worry that the government lacked the dollars required not only to pay its creditors but also to exchange pesos with all comers at $1 each.... Argentina needed to keep its debt ratios in check.... The second... reason... was that Argentina... had forsworn use of the monetary printing press... [and] had to be sure it could respond to slumps... by cutting taxes or boosting spending. The only way it could prepare itself... ws by adopting a highly responsible budget policy, preferably sizeable surpluses, during boom times...

Blustein believes that Wall Street financiers danced to the edge of misrepresentation. I have somewhat more sympathy for them: the needed "fiscal adjustment" was small; the consequences of failing to make the fiscal adjustment were so dire; only a country whose political class was truly irresponsible could fail. Indeed, I still find Argentina's failure to make the needed "fiscal adjustment" to be almost totally unbelievable:

p. 66: J.P. Morgan's September 2000 report, "Argentina's Debt Dynamics: Much Ado About Not So Much," was an example. The basic thrust... was that fixing the fiscal problem was essential but that a modest adjustment would enable the country to avert default. In March 2001 anohter Morgan report... said "The government's capacity to service its debt this year is not in question.... We believe that the fears of abandoning convertibility are overdone and point out that devaluation is not a polic option due to the limited benefits..."

Paul Blustein likes Nouriel Roubini. So do I:

p. 104: Born in Turkey to Iranian Jewish parents, raised in Italy, and educated at Bocconi University and Milan and at Harvard, Nouriel Roubini was something of a celebrity in the community of international financial-crisis experts.... [He] had created a website... where he posted important documents, news articles, and academic papers--and for people interested in the subject, the site became a cyberspace version of the place to see and be seen.

Ted Truman talks about decision-making in the Clinton administration:

p. 105: "People knew it was high risk," said Ted Truman... Assistant Secretary of the Treasury for International Affairs. "We managed to convince ourselves that the debt dynamics were sustainable. That was probably a mistake, but it was a serious effort. We looked at a number of analyses and did some of our own." A more serious error, truman added, was that "there should have been a clearer message that the next step would be Plan B..." If the IMF program ailed to improve Argentina's economic situation fairly quickly, the country would have no choice but to restructure its debt and, if necessary, change its currency policy.... A concrete plan for pulliing the plug should have been devised and agreed with...


The Economist on Paul Blustein

The Economist on Blustein

I don't think that this is a fair reading of Paul Blustein's book. More to come...

Economist.com | Argentina: IN THE 1990s, Argentina was held up as an exemplar of the ‘Washington consensus’ of free-market reforms. In December 2001, after three years of slump and amid political and financial chaos, it declared the biggest sovereign-debt default in history. Following a traumatic devaluation, its economy is now recovering, but income per head is still below its 1998 level. As Paul Blustein, a financial reporter with the Washington Post, notes in his new book, Argentina has become ‘Exhibit A’ for critics of globalisation and free markets.

Wrongly so. The author stresses that those chiefly to blame were Argentina's own politicians and officials, who pursued an insufficiently rigorous fiscal policy to sustain a fixed exchange rate. He also explores the extent to which they were abetted by outsiders. In addition to Argentine officials, Mr Blustein also interviewed officers at the International Monetary Fund and its political master, the United States' Treasury.

The result is an engrossing inside account of how, despite the best of intentions, the Fund's two loans to Argentina in 2001 ended up merely prolonging the country's agony and increasing its debt burden. Wall Street investment banks raked in fees for issuing yet more Argentine bonds even as some of their analysts were privately gloomy about the country. Although he goes as far as calling one of his chapters ‘Enronization’, the author does not believe that the investment banks' efforts amounted to fraud.

Mr Blustein rightly notes that the decisions facing policymakers were extremely difficult. The IMF was worried that it would be blamed for the recession that would follow if it withheld assistance. Argentines, who have a tendency to self-pity, duly blamed it both for doing this—and for not doing it earlier. The Fund has since admitted that it erred in its second 2001 loan (though the US Treasury continues to defend this) and, above all, in failing to be tougher on Argentina's fiscal laxity in the late 1990s...


Paul Blustein on Paul O'Neill, John Taylor, and Company

Blustein on O'Neill and Taylor

Paul Blustein does not like Treasury Secretary Paul O'Neill or Treasury Undersecretary John Taylor:

p. 145: Intense as the IMF's internal debate... the one under way within the Bush administration was even more bruising... disjointed and disorganized... high-level conference calls... top members of the administration were on their August vacations. Bush... in Crawford... Paul O'Neill... in Bethany Beach, Delaware....

Hubbard and his colleages on the CEA were the most hawkish.... Representatives of the NSC and the State Department were much more favorably inclined toward giving Argentina more IMF money.... In between... was the Treasury Department. That may seem surprising, given the criticism O'Neill had leveled at the Clinton administration.... Treasury officials concluded that the IMF ought to give the country a new sort of loan.... The upshot... was to make a hash of a rescue that was already a very long-shot proposition. Argentina... would be done a disservice by being used as a guinea pig for a novel approach... that can only be described as muddle-headed. For this, blame belongs to O'Neill and... undersecretary John Taylor....

Taylor... guarded his access to O'Neill and made it clear that he was the one primarily responsible for delivering advice.... Taylor tended to resist... prodding with the explanation that Washington could not, and should not, order countries around.... Treasury economist found him unwilling even to entertain the idea that Argentina should be challenged on the need to forcibly restructure its debt....

From that conversation [between Cavallo and O'Neill] sprang the idea... that at least some of the IMF money would be used to help Argentina restructure its debt. How this was supposed to work was never spelled out in detail, and even some of the economists who worked on it later pronounced themselves mystified....

Treasury staffers protested that the numbers did not add up... a few billion dollars in IMF money could not be "leveraged" into a much greater amount of debt restructuring as O'Neill seemed to think. In response, O'Neill went into... CEO [mode].... "You're smart people," O'Neill told them. "Why can't you figure this out?"...

As much as Hubbard preferred to refuse any IMF loan... he said that if a loan must be granted, he would favor making it much bigger than the $8 billion being contemplated, so that it could actually do some good.... Hubbard... declared during one interagency conference call that the Treasury position "failed introductory finance."...

Rogoff fired off a scathing memo.... The memo ridiculed the notion that the money could be leveraged into a restructuring of much greater value. "After one strips out all the window dressing, there is no way to make $6 billion in liquidity worth more than $6 billion in liquidity," the memo stated. "But there are many creative ways to make it less."...

O'Neill's heals were well dug in, however, and Taylor showed no sign of breaking ranks with his volatile boss, telling those who questioned the approach that some way had to be found of making it work.... [T]he British, Canadians, Japanese, and others voiced strong objections.... [M]uch head-scratching ensued over the portion of th epress release concerning the debt-restructuring proposal.... "It was quite embarrassing for us," recalled Alberto Ramos.... "People were calling and asking, 'What is this for?' And I had to say, 'I don't know'."...

Glenn Hubbard is, of course, right. If you are the U.S. government and if you have confidence that the government of Argentina is committed and if you believe that it is worth supporting, then you count up Argentina's foreign debt--$95 billion. You authorize the Treasury or the Federal Reserve or both to buy up to $95 billion of Argentina's foreign debt as long as Argentina's government runs a month-to-month budget surplus, and not otherwise. If the problem is that you don't trust the Argentinean government to follow through, you change its institutions so you do trust it before you commit the money. Stand up and announce that Argentina's fiscal policy is sound, that its currency peg is secure, that its debt is undervalued, that the U.S. government has been buying bonds and will keep buying bonds until (a) prices rise to proper fundamental values or (b) the U.S. owns them all.

If you want to change market expectations, then change market expectations.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).


Paul Blustein on Stan Fischer and Company

Paul Blustein on Stan Fischer and company:

p. 136: Throughout July... borrowing rates for the government of about 19 to 22 percent.... At the time of Taylor's August 3 visit, reserves totaled $20.4 billion, down from $28.8 billion at the beginning of July.... [T]he de la Rua government was seeking [an augmentation of] aid from the IMF.... Once again, the hope was that a large infusion of money from the Fund would restore calm... and give the government time to address credibly its long-term debt problem.

The Argentine government was offering a monumental quid pro quo--the zero-deficit law.... Convertibility was a legal restriction on the government's ability to print money. Now the government... was putting a legal restriction on its ability to spend....

[W]ith unemployment above 16 percent, questions abounded over whether the government could implement such a policy for long.... [T]he intensified austerity seemed likely to generate a popular revolt--if not in the streets, then in congressional and provincial elections that were looming....

The IMF's stance was that it would back the zero-deficit policy, provided this was truly where the Argentine body politic wished to go.... [T]he managing director admonished Cavallo that he must demonstrate broad political support for it.... By the end of July... both houses of Congress had indeed approved the policy, "so I as in a position to tell Kohler, 'Look, we have demonstrated what you requested'," Cavallo recalled....

[T]he Argentine government could not borrow at affordable rates, so it had no other choice, as Cavallo and his top aides repeatedly emphasized. No other choice, that is, except for default and/or devaluation.... "The Fund said, 'What you're doing [the zero deficit] is not politically sustainable'," recalled Federico Sturzenegger, who was secretary for economic policy at the Economy Minitry. "We told them, 'What is not politically sustainable is the alternative'."...

For three weeks in the second week of August [2001], a pitched battle ensued about the proposal for the additional $8 billion loan.... As Jack Boorman... put it later: "Argentina had a terrible history of credit culture, and it had done a terrific job of signaling to the public [in the 1990s] that it was not going to dishonor contracts. One was loath to give that up." On the other hand... the debt was so burdensome, the interest cost so high, the economy so weak, and the government's ability to achieve the necessary spending restraint more so questionable, that the odds were clearly against....

The most positive assessments... came... from Claudio Loser, as well as Tomas Reichmann. Remarkably, though, the highest probability they attached to success was 30 percent.... Reichmann recalled... "As an institution, we cannot be seen as the ones who pulled the plug on a country the legislators and executive branch are making such efforts, so long as there is a chance the situation will work out--especially given the horrendous costs of the alternative."...

Spearheading the opposition... were... Ken Rogoff... and... Carmen Reinhart. The chances of success, Rogoff said, were essentially zero. Rebutting those who were worried that the Fund would be blamed for Argentina's collapse... Rogoff and Reinhart emphasized that augmenting the program would impose a substantial encumbrance on Argentina's taxpayers. As Reinhart observed later: "These aren't grants; these are loans," which, coming from the IMF, are far more costly to default on than private credits. "And increasing them adds to Argentina's repayment burden."...

One immensely influential participant... Stan Fischer stayed silent.... Fischer favored giving Argentina an augmented loan. Staffers recall him as saying that hen a country was willing to go to such extraordinary lengths to secure IMF support, the Fund had to go the one last mile....

I find the pro-augmentation faction within the IMF hard to understand. They needed to change expectations, but the IMF was simply not able to operate on a large enough scale to do so. As Mussa said, the $8 billion would have done Argentina much more good after an abandonment of the peg than it did when committed before the abandonment of the peg.


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).


Paul Blustein on David Mulford and Company

Blustein on Mulford

Paul Blustein does not believe that David Mulford played a constructive role in the Argentine financial crisis:

pp. 125-31: Now the silver-haired Mulford had an idea... a debt "swap."... The purpose was to eliminate... the large amounts of interest and principal payments Argentina was required to make during the 2001-2005 period.... the payments would be stretched out so taht much more would fall due in the years after 2005.... Argentina would gain time to recover and avoid default.... The... megaswap... ranks among the most infamous deals that Wall Street has ever peddled to a government.... For CSFB and a half dozen other Wall Street firms, the megaswap would be a bonanza... more than $90 million in fees.... For Argentina, it would be a bust, rendering the country's solvency even more questionable than it was already....

The new name of the game was "liability management"... arranging for debtors to stretch out or reduce their debt burdens.... In most cases, these deals were used by countries with firm market standing to save money. Mexico and Brazil... used swaps to retire... bonds... difficult to trade. Argentina's situation was different.... [t]he deal Mulford was proposing would increase Argentina's debt costs rather than decrease them; that was the price... to postpone its debt payments....

The appeal the deal had for Cavallo was obvious. Mulford's message... was that for reasons unrelated to his stewardship... Argentina was facing a liquidity crisis... $80 billion... due in the next four and a half years.... There was no need to default or impose a haircut; investors would be happy to reschedule.... Once that was accomplished, markets would start to settle down, giving Cavallo the leeway he needed to work his magic....

Ridicule... greeted this line of reasoning as the swap's terms became clear. Desirable as it might be to reduce near-term payments... the cost was far too high.... The IMF... had kind words for it in public.... But behind the scenes... the swap drew scron from the Research Department.... Mussa's anger boiled over in a table-pounding, finger-pointing exhibition.... Mussa's staff had calculated that the transaction would save $12 billion in debt payments from 2001 to 2005... at an effective interest cost of 16 percent.... To borrow so much at such a high cost made no sense for a country that was already having grave difficulty....

The swap's champions proclaimed the deal a triumph... $29.5 billion worth of securities.... "We have beaten those who were betting against Argentina," Cavallo declared.... Mulford... predicted "the market will now recover," with yields falling so that "future financing will be done at substantially lower rates"....

The markets' disappointing reaction to the megaswap is subject to conflicting explanations.... Mulford and other bankers... blamed the Argentines, accusing them of making two market-rattling mistakes. First, the government continued auctions of treasury bills in which local banks were reportedly pressured to bu.... Second, Cavallo sprang another weekend surprise that some analysts interpreted as undermining credibility... a subsidy would be paid to exporters... a duty charged to importers.... The measure was akin to a 7% devaluation of the peso for trade purposes....

Although these moves were unhelpful, it is a stretch to call them the cause of the letdown that followed the megaswap.... [T]he swap did not produce the miraculous effects that Mulford had predicted, and it arguably made matters worse...


Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).


The Place to See and Be Seen on the Internet

I am on page 104 of Paul Blustein's very good And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 1586482459). I learn on that page that Nouriel Roubini's is the place to be:

Born in Turkey to Iranian Jewish parents, raised in Italy, and educated at Bocconi University and Milan and at Harvard, Nouriel Roubini was something of a celebrity in the community of international financial-crisis experts.... [He] had created a website... where he posted important documents, news articles, and academic papers--and for people interested in the subject, the site became a cyberspace version of the place to see and be seen.

I guess I should put on a tie and mosey on over...

:-)

I'm told that Blustein's book has three heroes: Nouriel Roubini, Brad Setser, and Charlie Calomiris, all of whom played the role of Cassandra in the Argentine crisis. But I don't know when I'll have time to finish the book...


Do You Think My Methods Are Unsound?

I see no method at all, sir:

World Tribune.com -- Army report: U.S. lost control in Iraq three months after invasion: WASHINGTON – The U.S. military lost its dominance in Iraq shortly after its invasion in 2003, a study concluded.... "In the two to three months of ambiguous transition, U.S. forces slowly lost the momentum and the initiative gained over an off-balanced enemy," the report said. "The United States, its Army and its coalition of the willing have been playing catch-up ever since."

The report was authored by Maj. Isaiah Wilson, the official historian of the U.S. Army for the Iraq war. Wilson also served as a war planner for the army's 101st Airborne Division until March 2004, Middle East Newsline reported. His report, not yet endorsed as official army history, has been presented to several academic conferences.

In November 2003, the military drafted a formal plan for stability and post-combat operations, Wilson said. Termed Phase-4, the plan was meant to follow such stages as preparation for combat, initial operations and combat. "There was no Phase IV plan," the report said. "While there may have been plans at the national level, and even within various agencies within the war zone, none of these plans operationalized the problem beyond regime collapse. There was no adequate operational plan for stability operations and support operations."...

The report disclosed the lack of planning by the U.S. military for the occupation of Iraq. Over the last year, Defense Secretary Donald Rumsfeld and his aides have been blamed for lack of post-war planning based on their assessment that the military campaign in Iraq would be brief and quickly lead to a democratic and stable post-Saddam Hussein government.... Wilson said army planners failed to understand or accept the prospect that Iraqis would resist the U.S. forces after the fall of the Saddam regime. He deemed the military performance in Iraq mediocre and said the army could lose the war.

"U.S. war planners, practitioners and the civilian leadership conceived of the war far too narrowly," the report said. "This overly simplistic conception of the war led to a cascading undercutting of the war effort: too few troops, too little coordination with civilian and governmental/non-governmental agencies and too little allotted time to achieve success."

I did see Thomas Barnett yesterday at his luncheon talk. After listening to him, I came away with the following message: It is now clear that we have failed at post-lightning war stabilization and society-building--political society, civil society, and commercial society--efforts in Iraq, but that this is going to be the last such failure. The U.S. Army knows that it has failed, and doesn't like to fail in the same way twice.

He also has three great lines:

  • "Martin van Creveld is very good, but he generalizes immediately from the West Bank to the world as a whole. The world as a whole is not like the West Bank."
  • "Robert Kaplan is very good, but he generalizes immediately from West Africa to the world as a whole. The world as a whole is not like West Africa."
  • "Yes, as far as the Core is concerned, you can think of me as the second coming of Norman Angell. But I am Norman Angell with nuclear weapons."

(Of course, you need to have read Martin van Creveld, Robert Kaplan, and Norman Angell to understand these).


Free Trade in Textiles

From Simon World:

Simon World :: Free trade working too well: "Ask someone if they prefer cheaper clothes prices for the same quality product and the answer is obvious. Likewise the manufacturer who can produce the clothes at a cheaper price but still turn a profit. Especially happy should be the Governments of the manufacturing nation (all those extras jobs) and the consuming nations (all those happy voters/consumers). Alas, not always.

On January 1st this year the world abolished quotas on textiles. China was expected to rapidly claim market share from other producers who had previously benefited from favourable quotas.... From January 2004 to January 2005 China's exports of cotton trousers to the USA increased by 1,332% and of cotton knit shirts by 1,836%. Over the same period to the EU exports of jerseys expanded by 735% and blouses by 301%. At the same time the average unit cost of those jerseys and blouses fell by 36%. People are buying more for less.... China is rightly petrified of protectionist action by the EU and America, with both domestic and international competitors wailing. The option exists for these countries to impose 'safe-guard actions' to protect their domestic industries, which will re-impose quotas....

China has responded by introducing a new licensing system... considering imposing minimum prices on textile exports and a crackdown on textile exporters' violations of labour law. This last action should happen regardless, but that's for another post.

It's a race to see who can impose the restrictions first: China or the EU/USA. So if you are wondering why your clothes were cheaper for a couple of months before they became more expensive again, this is the answer: because countries are competing over trade barriers, not on products and price.


Alan Greenspan as Seen by GQ

ABC's "The Note" writes:

[ABC News: The Note: 'Both Hopeful and Precarious':] GQ's Wil Hylton has written a non-loving profile of Fed Chairman Alan Greenspan in which he accuses the Chairman, with some evidence, of being, a, well, a political hack — but not necessarily a partisan one.

Tracing Greenspan's political career from obscure Randian disciple to Nixon economist to Ford political adviser (sort of) to mysterious, Andrea-Mitchell-loving, tennis-playing, naked-bathtub-loving Fed Chair, Hylton suggests that Greenspan's political instincts do not always lend themselves to the advancement of Republican causes.

To wit: Greenspan's famous 'deal' with Bush 41. There's an amusing exchange in the article with Nicholas Brady, who seems to admit that Greenspan agreed to lower interest rates if 'the president would tackle fiscal policy . . . He just plain didn't do what he said he was going to do.' According to Hylton, Brady does a Class A Emergency Dial Back after those remarks.

Fans of the Chairman's will find Hylton's profile to be gosh-darned mean and will probably dispute his account of history, but the article is certain to be be widely e-mailed and widely referenced in the days ahead — after it is released in NY/LA on March 22.

Hylton's account is characterological and eschews an in-depth discussion of policy issues — and certainly doesn't even attempt to answer the question of whether the Chairman has done a good job.

You know, it really wouldn't take much to get us a better press corps--even a much better press corps. Alan Greenspan is not terribly interesting because of his appearance, or because he is a good husband, or for his dress sense, or for the amount of money he has paid. He is interesting because of the policy issues: he has sat in the monetary policy seat since 1987, and has, I would argue, done a superb job on monetary issues and made major missteps since 2000 on fiscal policy issues. To do a profile of Alan Greenspan without an "in-depth discussion of policy issues" as as stupid an enterprise as doing a profile of Martha Stewart without mentioning that she does interior design or doing a profile of Gwyneth Paltrow without mentioning that she acts in movies.

As for Nicholas Brady's belief that Greenspan promised that he would lower interest rates if the Bush I administration took action to curb the deficit and Brady's belief that Greenspan broke his promise.... I can almost see what happened.... Greenspan is extremely unlikely to have ever told anyone that he would lower interest rates below what he thought was appropriate under any circumstances. But Greenspan is very likely to have told all and sundry that action to reduce the deficit--tax increases, entitlement cuts, and discretionary spending caps--would (or was highly likely to) produce an appropriate path for the interest rate that would be lower than if the deficit were left unchecked.

Greenspan would thus have said that the path of interest rates he would be able to choose would be lower if action was taken to reduce the deficit. And Brady would have garbled it and remembered it as the level of interest rates would be lower.


Not Your Father's Sixth Grade Math Class

The Eleven-Year-Old's math homework involves rotation matrices. I don't think I even saw a rotation matrix until tenth grade.

What was my sixth grade math class like? Ah, now I remember. I didn't have one. We had an open classroom. We spent our time constructing "rabbits" with artificial genomes and tracing Mendelian inheritance down the generations, and playing a lot of Conway's "Life" on the classroom's Go board. That and listening to Mr. Karman read Arthur C. Clarke's "Rescue Party"--those were the highlights.


Personal Bankruptcy and Private Accounts

Max Sawicky asks an excellent question:

MaxSpeak, You Listen!: [Would] the private accounts and annuities under Bush's... Social Security privatization plan would be vulnerable to attachment by creditors, thereby opening up a new source of equity to the credit card industry, after they have sucked out all your blood?

I think the answer is "Yes"--either immediately in the plan itself as it moves through the House of Representatives, or in five years as the next wave of credit-card industry lobbyists hit the beaches of Capitol Hill.


Advice on Paper Writing

What is the one piece of advice on paper writing that I should give to these Berkeley undergraduates?

The ones coming in for advice aren't the ones who really need it. The ones coming in to talk to me about their papers are, broadly, in the top quarter of the papers we received. And these were very short papers: three pages on the role of economic grievances in the American Revolution.

The typical easy-to-correct mistakes that the students who come to see me are making seem to be two:

  1. Nobody ever told them--or they have forgotten, or they are too stressed for time--to revise. They are handing in first drafts.

  2. Nobody ever told them that if you are going to hand in a first draft, an easy way to significantly improve it is to, when you are finished, cut the last paragraph from the paper and paste it at the beginning. Your final sum-up paragraph--written at the end, as you have by trying to write down what you think discovered what you really do think--is almost always going to make a better first paragraph than the first paragraph that you wrote.


Why Oh Why Can't We Have a Better Press Corps? (Joshua Micah Marshall Gets Shrill Department)

Today his screeds of unbalanced shrillness are directed against George W. Bush, and against Anne Kornblut and Sam Roberts of the New York Times:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: "The more he sinks the more he lies. In fact, I'm not even sure 'lying' quite does it justice. He just makes it up as he goes along now.... [T]here's been a debate... over private accounts carved out of Social Security [vs] 'add-on' accounts... in addition to Social Security. The add-on terminology has become close to universal in large part because it accurately describes what is being discussed.

Indeed, as recently as yesterday, Secretary Snow said that while the president greatly preferred [carve-out] private accounts as part of Social Security... he was willing to put add-ons on the table if Democrats would negotiate.... On the same day, the Post helpfully pointed out that though Snow was sent out to signal willingness to compromise, the president was only doing this to lure Democrats to the table ...

Snow told reporters that Bush also has not ruled out embracing a plan backed by many Democrats to create government-subsidized personal savings accounts outside the existing system. White House officials are privately telling Republicans that Bush is opposed to the idea but does not want to say so because it would appear he is not willing to compromise.

But that was yesterday. Now, realizing that the add-on terminology is less toxic than his Social Security privatization policy, the president has decided that privatization really is an add-on after all....

This is a retirement account we're talking about.... See, personal accounts is an add-on to that which the government is going to pay you. It doesn't replace the Social Security system....

Now we would be remiss if we did not note that the Times article covering the day's events adopted what can only be called a singularly generous approach to the president's word games....

Bush did not retreat from his plan to divert some payroll taxes into individual accounts... he shifted his language... describing the popular program as a 'safety net' and borrowing a term for the types of accounts some Democrats have favored, 'add-on' accounts outside the Social Security benefit system, to now describe his version of private accounts.

Where to start? In a case where A and B are fundamentally different and you take the term for A and apply it to B, that is not usually known as 'borrowing'. I'm not sure whether 'lying' or 'deceiving' or something else altogether is a better term for it. But this isn't borrowing. It's simply an effort to mislead....


National Savings and Social Security

I seem to have confused a dead parrot--which, when you think about it, really is quite an unusual accomplishment.

It writes:

The Dead Parrot Society: Savings and Social Security: "The 'conservative' position on Social Security and its effect on national savings seems reasonably clear. If the government issues bonds to allow people to buy stocks with Social Security taxes, the private sector will have to buy bonds and sell stocks. In net, these effects likely offset dollar for dollar. This is the position of Barro, Becker, and apparently Mankiw and Swagel who describe private accounts as neither a panacea nor threat.

Overall, conservatives hope that national savings will increase in the long-run, however, because (a) this will encourage everyone to become an investor and (b) this is the first step toward moving from a mostly pay-as-you-go system to a fully funded system.... To the extent that raising payroll taxes would simply lead to increased government spending, this might raise the implicit debt obligations of the future; therefore, putting Social Security surpluses into the market might also lower government spending and future borrowing. These reasons all tend to appeal to conservatives, thus they tend to view private accounts as attractive and the effect on national saving as either zero or positive.

I have never pretended to fully understand the 'liberal' position, and Brad DeLong's post today reinforces my confusion. He takes great exception to the above characterization: 'Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know ...' [T]his... I believe, makes Brad DeLong the first economist to go on record arguing that privatization will actually reduce national saving....

Let's say that private investors today put away $K in their 401K's, all in stocks for simplicity. This amount coupled with their Social Security benefits ($B) will add up to some future wealth value, say $W. You can think of all these amounts as present-values.

Now, let's chop $B down, dollar for dollar and put the money instead into a new private account, $P, so that we now have $B-$P in Social Security wealth. The conservative argument is that people will sell some of their $K worth of stocks, rebalancing their private 401K to contain $P worth of bonds and $K-$P worth of stocks. In net, therefore, we are back where we started: $K of stocks ($K-$P of it in your 401K, $P of it in your private account). You would have $B-$P worth of traditional social security benefits, but you also $P worth of bonds in your 401K, so it all adds up to $W in the end. No direct effect of private accounts on national saving or wealth.

Brad DeLong is essentially arguing that privatization will make you sell even more than $P worth of stocks from your 401K. In such a world, we would have less than $K worth of stocks in total, we'd have $B-$P in Social Security wealth, and $P in bonds. Overall, therefore, we'd have less than $W for tomorrow. This means that privatizing Social Security would actually reduce future consumption below $W....

Let me first take exception to having my position called "liberal." My position on this is the same as Alan Greenspan's, who says:

Alan Greenspan: First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back. If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector'. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

What Greenspan is saying--what I am saying--is that the Dead Parrot might be right--it might be the case that you wind up with "no direct effect of private accounts on national saving or wealth." But it might not be right. And if it is not right, then, as Greenspan says:

[I]t would be creating more difficulties than I would imagine. So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way.... I do say, as I said previously, that I would be very careful about very large increases in the [government's] debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'

My position is that we really don't know what the impact of having the Treasury sell $4.5 trillion more of government bonds and then having individuals invest that $4.5 trillion in their private Social Security accounts will be. I would bet that there's at least a 50-50 chance that it will be a wash as far as national savings is concerned. I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings.

What I object to are assertions that people know that the effect on national saving will be a wash. They don't know this. What I object to are assertions that worriers--like me and Alan Greenspan--should "stop railing about the budget impact [of the Bush Social Security plan]. The... increase in the budget deficit won't place a new burden on future generations." There's reason to hope that this is the case, and I think it is better than a 50-50 bet. But as Uncle Alan said, it's important to go slowly: if it is a big mistake, we need to find that out in time to stop it.

There's nothing "conservative" about plans for large social and economic transformation based not on evidence but on hopes about what is the case. Nothing conservative at all.


The Three Faces of Alan Greenspan

Kash of Angry Bear is pleased to see various denunciations of Alan Greenspan:

Angry Bear: This story by Rex Nutting of MarketWatch warmed the cockles of my heart, for two reasons. First, because at least one member of the regular business press seems to be catching on to Greenspan:

Greenspan did President Bush two big favors this past week, endorsing the president's calls for fundamental reforms in Social Security and tax policy. Greenspan said the U.S. economy could 'stagnate' if Congress raised taxes or borrowed more money to pay for all the promises Washington has made to the elderly and those soon to be. Like it or not, Greenspan said, government spending must be slashed. Reid, the combative Nevada Democrat, said Greenspan was acting like a partisan 'hack.'

The Federal Reserve may consider itself above politics, but its chairman definitely isn't.

...What really got Reid's hackles up was Greenspan's denial of his own role in fostering the fiscal problems he was decrying. Greenspan endorsed the Bush tax cut of 2001 because, without them he said, the surplus could become dangerously large.

How wrong that forecast was! Instead, the projected surplus is now become an endless deficit, and Greenspan's logic has undergone a similar U-turn. Now, he says, it would be folly to roll back the tax cuts that led to the deficits, because higher taxes would cripple the economy. And yet the U.S. economy enjoyed one of its greatest growth periods ever under those higher tax rates.

The second reason I enjoyed reading this story was because it notes that Reid's reaction was vigorous, entirely appropriate, and out of character for Democrats in Washington:

Reid's rude assessment of Greenspan was a bit of a shock, mostly because Washington is used to having Greenspan walk all over Congress, especially the Democrats. A Democratic leader with a spine is something we'll have to get used to.

By calling Greenspan on his partisan testimony this week, Reid also sent a message to Bush that the Democrats won't roll over if he nominates a full-time partisan hack as Fed chairman when Greenspan's term is up next January.

It's refreshing to see the Democratic leadership in Washington treat Greenspan the way he deserves... and to see that at least some of the press agrees.

Let me agree that since 2000, Alan Greenspan's public interventions in U.S. fiscal policy have been, from my point of view, destructive as measured by headlines, lead paragraphs, and summaries of his positions. (Speeches and testimonies themselves are more nuanced in the details, but the press pay no attention to details.) But let me point out that within Republican councils Greenspan has been one of the few relatively grownup voices: pointing out dangers, and asking for Plan Bs--his support for triggers to reverse the 2001 tax cuts back when they were proposed, and his recent call for caution in changes to Social Security which may have destructive effects on national savings, to give two examples.

But let me say that I am not terribly surprised that Greenspan has not been helpful--according to my lights of helpful--on fiscal policy. For Alan Greenspan is three-faced. He is:

  1. The superb monetary policy technocrat
  2. The Randite--the long-time disciple of Ayn Rand--who believes that in a good society government spending would be less than 5% of GDP.
  3. The Republican team player.

The Greenspan we saw for the most part in the 1990s was the superb monetary technocrat--the person who maintained low inflation and yet nudged the U.S. economy closer to full employment than I would ever have believed possible, and the person who was desperate for a balanced budget because persistent unbalanced budgets generate enormous pressure on central banks to allow inflation.

But there's also the Greenspan who believes that the social insurance state is fundamentally illegimate: an offense to human dignity and a long-run policy disaster. He wants a balanced budget, but he wants spending cuts much more than tax increases. In 1993--with a Democratic president and a Democratic congress--he would settle for tax hikes as a means to balanced budgets. But that was never his preference.

And there's also the guy who is fundamentally on the Republican team.

Don't expect him to be just the non-partisan monetary policy technocrat. That's not who he is. That never was who he was.


Why Oh Why Are We Ruled by These Fools? (Budget Department)

Fiscal irresponsibility watch, from Alan Fram of AP:

Bush's Budget Would Keep Annual Deficits Over $200 Billion for Next Decade, Analyst Says: WASHINGTON (AP) - President Bush's budget would keep federal deficits over $200 billion annually over the next decade, Congress' top budget analyst said Friday in a report raising doubts about White House efforts to contain the shortfalls. The analysis by the nonpartisan Congressional Budget Office said Bush's plans for spending and taxes would yield deficits through the decade ending in 2015 totaling $2.58 trillion... $1.6 trillion worse than they would be if none of the president's fiscal plans become law... cumulative deficits over the next decade will be $125 billion worse than it estimated only last January. That is largely because it has added $70 billion to its projected 10-year costs of Medicare spending....

Last Wednesday, Federal Reserve Chairman Alan Greenspan warned Congress that federal deficits had become 'unsustainable' and warned lawmakers to act quickly to staunch the red ink....

Friday's numbers also raised new doubts about Bush's goal of halving federal deficits in five years by projecting a 2009 deficit of $246 billion... not be close to cutting last year's actual $412 billion deficit in half.... Over the next decade, deficits would get no lower than $229 billion in 2010, the congressional office estimated. It also projected that Bush's fiscal plans would yield deficits of $394 billion next year and $332 billion in 2006....

The congressional analyst noted that Bush's budget omitted the costs of overhauling Social Security, which some analysts expect to exceed $1 trillion for the first decade. Bush's budget also omits any new funds for U.S. military and reconstruction operations in Iraq and Afghanistan for 2006. The congressional analyst said keeping next year's military operations at this year's levels would probably add about $40 billion to the 2006 shortfall, pushing it to perhaps $375 billion.


Robert Waldmann's Thoughts on Social Security and National Saving

Robert Waldmann resorts to the neoclassical theory of savings, and says that the Bush Social Security reform will reduce national savings unless Bush and company are lying:

Robert Waldmann: I think that Brad may be right that private accounts are likely to be a wash as far as national savings go, but... only... because you assume that Bush, the Cato institute and the CEA are full of it. They all claim that private savings accounts are a better deal than traditional social security. They even claim that young people will be better off with the reform.... [And that is the equivalent of] claim[ing] that the reform will reduce national savings....

If the reform means that people are better off, then the reform should make people consume more and save less. Under standard assumptions that means national savings decline.... [C]onservatives like to go on and on about how offering a better return on savings will cause increased savings due to the substitution effect.... In the case of social security reform, there is no substitution effect. The proposal is to replace one form of forced savings with another.... [I]f, as claimed by Bush and the Cs, private accounts are a better deal, then there should be an income effect causing increased consumption....

National savings = GNP - C [Consumption] - G [Government Purchases].... One might hope that private accounts will, in some way, scare the state into spending less [reducing G] because the huge deficits involved will scare people... [but Bush and] the CEA say those deficits aren't deficits, and are nothing to be scared about (not to mention that they don't seem ever to have been scared about deficits, and why should we listen to their ideas about how to starve the beast: they are the beast).... So I assume that G is fixed.... [I]n standard analyses of national savings, Keynesian effects are assumed to be temporary.... End of story. Give social security participants a better deal and national savings should decline....

To argue that social security reform will increase national savings one must argue that it will make participants poorer or will make the accumulation of national debt more terrifying. The President is effectively saying -- "Trust me, don't worry, I'm obviously lying."

Robert is, broadly, right. The name of the game is increasing national savings, which means--absent fiscal responsibility on the part of Republican leadership--reducing C. In the neoclassical framework, reducing C means either (a) scaring people into thinking that they are poorer over their lifetimes or (b) tax increases. If the plan reassures people, then--in the neoclassical framework--national savings falls.

Now the argument that there will be a demonstration effect--that once the non-rich see their private Social Security account balances grow, they will want to open parallel accounts with their spare cash--is not completely stupid. It is, however, almost completely stupid. Banks and mutual funds and brokerages have spent a lot of money talking about the benefits of saving and ownership of financial assets. And our private savings rate is still very low.

The argument that it is all about habits and defaults (make the default to direct $1000 of your tax refund to top off your Social Security private account in addition to your diverted payroll contributions, and provide a partial match to the extra $1000 out of uncapping FICA, unless you send in an extra form to the IRS) is relatively smart--but there is no sign the administration is thinking along these lines. And this is too bad: I wish it were.

There is yet another argument, which Robert refers to in his discussion of the level of government spending. The argument is that diverting payroll taxes into private accounts will shock the Republican congressional leadership and Bush into fiscal responsibility--an argument Alan Greenspan has made relatively frequently--seems to me to be a forlorn hope: since 1980, after all, nothing has shocked the Republican Party into fiscal responsibility. It is a replay--this time as both tragedy and farce--of the Reagan first term fiscal policy which was conducted by, as Greg Mankiw says, charlatans and cranks. According to David Stockman (see The Triumph of Politics: Why the Reagan Revolution Failed and The Education of David Stockman) the idea was to:

  1. Allow the charlatans and cranks to make outrageous claims about how tax cuts would not create deficits.
  2. Get the tax cuts passed.
  3. Point out to Congress that the outrageous claims had been false, and that in order to balance the budget large spending cuts were needed.
  4. Pass the spending cuts.

Of course, Congress reacted badly to this bait-and-switch: Congress's response to the Reagan administration was "you caused this f--- up, you fix it."

If there is actually a plan to try to use the diversion of payroll taxes into private accounts to shock the Republican leadership into fiscal responsibility, I think it is highly likely to fail as miserably as did David Stockman and company. Congress will react in the same ay to another bait-and-switch: the Bush administration's acolytes may say now that the projected larger cash-flow government deficits don't matter and plan to say five years from now that the cash-flow deficits are horrendous and need to be closed immediately, but Congress has a memory and is very unlikely to buy it.


Matthew Yglesias Protests That He Is Not a "Realist"

Matthew Yglesias attempts to unconfuse Oxblog:

Matthew Yglesias: What Realist Where?: David Adesnik is but the latest in a long string of hawks to slam me for my belief that promoting democracy in Lebanon doesn't have much to do with American interests. Allegedly this makes me 'stuck in some sort of Kissingerian realist mode.' But no! Suppose I believed that promoting democracy in Lebanon didn't have much to do with American interests and therfore we shouldn't do it. That, I think, would be a Kissingerian line. Alternatively, suppose I believed that promoting democracy in Lebanon would be great for American interests and therefore we should do it. That would be consistent with Kissingerism (or whatever), along with all kinds of other views.

Now what I've been saying about Lebanon, however, is that since the means the Bush administration has been using to promote democracy in Lebanon are of very little cost to the United States, they're well-worth using even though it doesn't have much to do with American interests. That's closer to the reverse of a Kissinger-style view. Since the rest of the post is about 75 percent tired slurs and cheap, ill-informed psychoanalysis of myself and others, I won't try to rebut the rest... but I've seen this confusion about a billion times, I thought I would clear it up.

I have other worries, which are neither realist nor non-realist but more reality-based: What are we doing in Lebanon? Is expelling the Syrians from Lebanon best understood as promoting Lebanese democracy or as setting the stage for the accession to power of Hezbollah? I would really like somebody who knows something about Lebanon to tell me which it is.


National Savings and Social Security

I seem to have confused a dead parrot--which, when you think about it, really is quite an unusual accomplishment.

It writes:

The Dead Parrot Society: Savings and Social Security: "The 'conservative' position on Social Security and its effect on national savings seems reasonably clear. If the government issues bonds to allow people to buy stocks with Social Security taxes, the private sector will have to buy bonds and sell stocks. In net, these effects likely offset dollar for dollar. This is the position of Barro, Becker, and apparently Mankiw and Swagel who describe private accounts as neither a panacea nor threat.

Overall, conservatives hope that national savings will increase in the long-run, however, because (a) this will encourage everyone to become an investor and (b) this is the first step toward moving from a mostly pay-as-you-go system to a fully funded system.... To the extent that raising payroll taxes would simply lead to increased government spending, this might raise the implicit debt obligations of the future; therefore, putting Social Security surpluses into the market might also lower government spending and future borrowing. These reasons all tend to appeal to conservatives, thus they tend to view private accounts as attractive and the effect on national saving as either zero or positive.

I have never pretended to fully understand the 'liberal' position, and Brad DeLong's post today reinforces my confusion. He takes great exception to the above characterization: 'Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know ...' [T]his... I believe, makes Brad DeLong the first economist to go on record arguing that privatization will actually reduce national saving....

Let's say that private investors today put away $K in their 401K's, all in stocks for simplicity. This amount coupled with their Social Security benefits ($B) will add up to some future wealth value, say $W. You can think of all these amounts as present-values.

Now, let's chop $B down, dollar for dollar and put the money instead into a new private account, $P, so that we now have $B-$P in Social Security wealth. The conservative argument is that people will sell some of their $K worth of stocks, rebalancing their private 401K to contain $P worth of bonds and $K-$P worth of stocks. In net, therefore, we are back where we started: $K of stocks ($K-$P of it in your 401K, $P of it in your private account). You would have $B-$P worth of traditional social security benefits, but you also $P worth of bonds in your 401K, so it all adds up to $W in the end. No direct effect of private accounts on national saving or wealth.

Brad DeLong is essentially arguing that privatization will make you sell even more than $P worth of stocks from your 401K. In such a world, we would have less than $K worth of stocks in total, we'd have $B-$P in Social Security wealth, and $P in bonds. Overall, therefore, we'd have less than $W for tomorrow. This means that privatizing Social Security would actually reduce future consumption below $W....

Let me first take exception to having my position called "liberal." My position on this is the same as Alan Greenspan's, who says:

Alan Greenspan: First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back. If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector'. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

What Greenspan is saying--what I am saying--is that the Dead Parrot might be right--it might be the case that you wind up with "no direct effect of private accounts on national saving or wealth." But it might not be right. And if it is not right, then, as Greenspan says:

[I]t would be creating more difficulties than I would imagine. So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way.... I do say, as I said previously, that I would be very careful about very large increases in the [government's] debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'

My position is that we really don't know what the impact of having the Treasury sell $4.5 trillion more of government bonds and then having individuals invest that $4.5 trillion in their private Social Security accounts will be. I would bet that there's at least a 50-50 chance that it will be a wash as far as national savings is concerned. I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings.

What I object to are assertions that people know that the effect on national saving will be a wash. They don't know this. What I object to are assertions that worriers--like me and Alan Greenspan--should "stop railing about the budget impact [of the Bush Social Security plan]. The... increase in the budget deficit won't place a new burden on future generations." There's reason to hope that this is the case, and I think it is better than a 50-50 bet. But as Uncle Alan said, it's important to go slowly: if it is a big mistake, we need to find that out in time to stop it.

There's nothing "conservative" about plans for large social and economic transformation based not on evidence but on hopes about what is the case. Nothing conservative at all.


Why Oh Why Can't We Have a Better Press Corps? (Joshua Micah Marshall Gets Shrill Department)

Today his screeds of unbalanced shrillness are directed against George W. Bush, and against Anne Kornblut and Sam Roberts of the New York Times:

Talking Points Memo: by Joshua Micah Marshall: February 27, 2005 - March 05, 2005 Archives: "The more he sinks the more he lies. In fact, I'm not even sure 'lying' quite does it justice. He just makes it up as he goes along now.... [T]here's been a debate... over private accounts carved out of Social Security [vs] 'add-on' accounts... in addition to Social Security. The add-on terminology has become close to universal in large part because it accurately describes what is being discussed.

Indeed, as recently as yesterday, Secretary Snow said that while the president greatly preferred [carve-out] private accounts as part of Social Security... he was willing to put add-ons on the table if Democrats would negotiate.... On the same day, the Post helpfully pointed out that though Snow was sent out to signal willingness to compromise, the president was only doing this to lure Democrats to the table ...

Snow told reporters that Bush also has not ruled out embracing a plan backed by many Democrats to create government-subsidized personal savings accounts outside the existing system. White House officials are privately telling Republicans that Bush is opposed to the idea but does not want to say so because it would appear he is not willing to compromise.

But that was yesterday. Now, realizing that the add-on terminology is less toxic than his Social Security privatization policy, the president has decided that privatization really is an add-on after all....

This is a retirement account we're talking about.... See, personal accounts is an add-on to that which the government is going to pay you. It doesn't replace the Social Security system....

Now we would be remiss if we did not note that the Times article covering the day's events adopted what can only be called a singularly generous approach to the president's word games....

Bush did not retreat from his plan to divert some payroll taxes into individual accounts... he shifted his language... describing the popular program as a 'safety net' and borrowing a term for the types of accounts some Democrats have favored, 'add-on' accounts outside the Social Security benefit system, to now describe his version of private accounts.

Where to start? In a case where A and B are fundamentally different and you take the term for A and apply it to B, that is not usually known as 'borrowing'. I'm not sure whether 'lying' or 'deceiving' or something else altogether is a better term for it. But this isn't borrowing. It's simply an effort to mislead....


The *Real* Elephants in Bush's Living Room

Morgan Stanley's Richard Berner talks about some of America's real fiscal problems--the one's that the Bush administration's "focus on Social Security" allows it to avoid talking about. He's mostly right, I think. However, I think he overestimates the importance of reforming the PBGC and underestimates the importance of figuring out what to do in the long run with Medicare:

Continue reading "The *Real* Elephants in Bush's Living Room" »


Wow...

The FT reports:

FT.com / World / US - Dollar rises on strong productivity report: US productivity grew much faster than first estimated at the end of last year, easing worries that inflation may accelerate but also reducing the pressure on firms to step up hiring. The initial estimate for fourth quarter productivity growth showed a rise of only 0.8 per cent annualised the slowest increase in nearly four years. On Thursday this was revised up to 2.1 per cent. Unit labour costs, meanwhile, rose by only 1.3 per cent in the last three months of the year rather than the 2.3 per cent initially reported. As a result, unit labour costs were up only 0.4 per cent during the year. Despite an upward revision to the unit labour costs for the third quarter, this suggests that employment conditions are still too weak to start pushing up prices.... Between 1973 and 1995 annual productivity growth averaged 1.4 per cent. It accelerated to 2.5 per cent between 1995 and 2001. Since then it has averaged 4.3 per cent a year. The latest burst of speed has been widely attributed to the delayed effects of the high-tech investment of the late 1990s which took companies some time to integrate into their business processes...


Nouriel Roubini Adds to My Book Pile

Yet another book to read:

Nouriel Roubini's Global Economics Blog: March 2005 Archives: Paul Blustein of the Washington Post [has] published a fascinating book - 'AND THE MONEY KEPT ROLLING IN (AND OUT: Wall Street, the IMF, and the Bankrupting of Argentina' - that provides an excellent post-mortem of the Argentine crisis even if it does not cover the debt restructuring deal. This is a first rate, very well researched and gripping account of the causes of the Argentine crisis and the events and background that led to the default and collapse of the currency board. Thus, a very good follow-up to Blustein's The Chastening, his earlier book and tale of the Asian crisis.

Continue reading "Nouriel Roubini Adds to My Book Pile" »


Albertine Disparue (Thanks Sonny Bono Department)

Not only Albertine but also La Prisonnière and Le Temps Retrouvé--at least in their new English translations, at least for those of us in the United States.

Boing-Boing reports on what we owe to Sonny Bono:

Boing Boing: Sonny Bono vs. Marcel Proust: Slate.com's Aaron Matz reports that the Sonny Bono copyright act is preventing a the final volumes of a new translation of Proust from appearing in the US:

Only the first four volumes of the new translation—from Swann's Way through Sodom and Gomorrah—are available here. For this we have Sonny Bono to blame. Just before he died in 1998, the congressman sponsored a bill to extend the term of copyright by 20 years: According to the Sonny Bono Copyright Act, passed later that year, rights would expire 95, rather than 75, years after an artist's death. Since Proust died in 1922, only those four volumes first published during his lifetime had passed into the American public domain by the time the Bono Act became law. It will therefore be at least 2018 before readers in the United States can find the final three installments of the new translation (The Prisoner, The Fugitive, and Time Regained) in their local bookstores.


*Sigh* Greg Mankiw

UPDATE: One correspondent asks if Mankiw's:

WSJ.com - Free Advice for Democrats: Take your heads out of the sand.... [Y]ou look like idiots. President Clinton talked about the 'crisis' in Social Security long before President Bush did. Sure, you can make a plausible argument that Social Security's unfunded liabilities are not a 'crisis' but only a 'major problem.' But even if you win that argument, you lose. You look like you're more interested in word games than good policy...

is really directed against Alan Greenspan:

Latest News and Financial Information | Reuters.com: While embracing the concept of private accounts, Greenspan did not specifically endorse Bush's approach and steered clear of calling the funding problem a crisis, as Bush has done. 'I would not use the word crisis,' he said. 'Crisis to me usually refers to something which is going to happen tomorrow or is on the edge of going into a very serious change. That is not going to happen.'

SECOND UPDATE: Another correspondent, Paul Krugman, points out that Alan Greenspan has (rightly) major, major problems with Mankiw's claim that the transition deficits are just "an acknowledgment of promises that were made long ago":

Greenspan Likes Social Security Private Accounts, But Urges Caution: 'The issue with respect to the financing is a difficult one to answer, because there are things we don't know.... First, we don't know the extent to which the financial markets at this stage, specifically those trading in long-term bonds, are discounting the $10 trillion contingent liability that we have. Actually, it's more than $10 trillion now; it's $10 trillion awhile back.

'If indeed the financial markets do not distinguish through most of that $10-plus trillion, and say it is just as much of a debt as the $4-odd trillion that is a debt to the public, then, one would say, 'Well, if you wanted to go to a private system, you could go fully to a private system without any response in interest rates because, obviously, you're not changing the liabilities involved, you're just merely switching assets to the private sector. But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I would imagine.

'So if you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way, and recognize that there is yet another problem involved, which is this: Unlike almost all of the other programs with which we deal, moving to a forced-savings account technically does not materially affect net national savings. It merely moves savings from a government account to a private account.... I do say, as I said previously, that I would be very careful about very large increases in debt. But I do believe that relatively small increases are not something that would concern me.... I would say over a trillion is large...'


This morning Greg Mankiw writes (with Phil Swagel), giving free advice to Democrats like me:

Mankiw and Swagel: Stop railing about the budget impact [of the Bush Social Security plan]. The introduction of personal accounts will involve some transition financing, but this increase in the budget deficit won't place a new burden on future generations. These deficits are just an acknowledgment of promises that were made long ago. And if you think that complaining about budget deficits will advance your career, just ask President Mondale.

Back in 1998 he wrote:

...the most basic lesson about budget deficits follows directly from their effects on the supply and demand for loanable funds: When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate. (N. Gregory Mankiw (1998), Principles of Economics (New York: The Dryden Press/Harcourt Brace), p. 557.

We worry about the budget impact and effect on national saving of the Bush Social Security plan because there is a chance that it will significantly diminish national saving and lower economic growth. If holders of defined-contribution private accounts regard them as close substitutes for their other assets in a way that promised defined-benefit standard Social Security was not, then the Bush plan will be yet another budget-busting shift of the tax burden that will slow economic growth.

Mankiw has no business making a claim that the Bush private-accounts carve-out won't reduce national saving. No business at all. He may hope, but he doesn't know that private account-holders won't regard their private accounts as closer substitutes for 401(k) wealth than Social Security wealth is: the claim that the transition financing will not reduce national saving might be true, but it might no be true. And Mankiw damned well does know the connection between national saving and economic growth.

When people are working for an administration--under message discipline--you try to cut them some slack. Their external positions are ways of gaining credibility in an internal policy debate, and whatever degradation of the quality of the external debate happens is, you hope, more than counterbalanced by the greater weight the voices of (relative) reason gain in internal policy debates.

But after people have left the administration--once they are identified as professors at Harvard (or resident fellows at AEI)--they have no business making claims that they don't know to be true or false.

As you can tell, I'm really cranky this morning.

The main reason that I'm really cranky is that I just got off the phone after spending an hour with a reporter who read Mankiw, Forbes, and Rosen (2005), "Three Questions About Social Security" (Washington: CEA), and took it seriously, particularly this paragraph:

Although short-run movements in growth can affect stock market returns, there is no necessary connection between stock returns and economic growth in the long run. Longrun economic growth is determined by productivity growth and labor force growth here in the United States, while stock market returns are determined by the overall cost of capital in the global economy and by the return investors require to bear the risk that comes with equity ownership. There is no reason to believe that slowing population growth in the United States would significantly lower the cost of capital, as set by increasingly globalized capital markets, or the premium required by stock investors...

So I had to walk him through the issue. I had to point out that the implied claim that there is no connection between economic growth and asset returns is true only for small open economies with fixed exchange rates whose products and assets are close substitutes for those of other countries--and that the U.S. economy is neither small, nor completely open, nor has a fixed exchange rate, nor makes goods and issues assets that are perfect substitutes for those of other countries.

I had to point out to the reporter that while Mankiw, Forbes, and Rosen imply that slower growth is unconnected with lower returns by stating that they are determined by different factors, total growth is made up of productivity growth and population growth, and that Mankiw, Forbes, and Rosen are--deliberately--silent on the issue of whether slower productivity growth is likely to bring with it lower asset returns (it is). All they dare say explicitly is that slower population growth does not bring with it lower asset returns. And I had to further point out that even that smaller claim is true only in a restricted class of growth models--representative agent models with perfect familial altruism, in which you treat other family members past and present as you would treat yourself.

I had to spend my time bringing the reporter's knowledge of the debate back up to the level it was at before Mankiw's misinformation had dragged it down. And I like my time. I have things to do with it. I don't like having to spend it in this particular way cleaning up after elephants--especially elephants who can no longer claim that they are doing lots of good in the "inside" debate within the White House.

I am cranky, and annoyed. And I am not asking for very much. All I want is:

  • No more claims that we know that carving-out Social Security revenues to fund private accounts will have no damaging effect on national saving. It might work. It might not.
  • No more claims that the U.S. is a small open economy. It isn't.
  • No more claims that there is no reason to think that slower economic growth will carry lower asset returns with it. There are good reasons to fear this.
  • No more claims that the household employment survey is as good a guide to short-term labor market trends as the establishment survey. It isn't.
  • No more claims that an honest forecast of what George W. Bush's policies are sees the deficit cut in half by the end of this decade. It doesn't.

I want attempts to raise the level of the debate, not attempts to lower it still further.


Underrepresentation of Republicans in Academia

Belle Waring finds Aaron Swartz making this definitive comment on the issue:

John & Belle Have A Blog: Discrimination!: This is a really funny post on discrimination in academia:

A shocking recent study has discovered that only 13% of Stanford professors are Republicans. The authors compare this to the 51% of 2004 voters who selected a Republican for President and argue this is ‘evidence of discrimination’ and that ‘academic Republicans are being eradicated by academic Democrats’.

Scary as this is, my preliminary research has discovered some even more shocking facts. I have found that only 1% of Stanford professors believe in telepathy (defined as ‘communication between minds without using the traditional five senses’), compared with 36% of the general population. And less than half a percent believe ‘people on this earth are sometimes possessed by the devil’, compared with 49% of those outside the ivory tower. And while 25% of Americans believe in astrology (‘the position of the stars and planets can affect people’s lives’), I could only find one Stanford professor who would agree. (All numbers are from mainstream polls, as reported by Sokal.)

This dreadful lack of intellectual diversity is a serious threat to our nation’s youth, who are quietly being propagandized by anti-astrology radicals instead of educated with different points of view. Were I to discover that there were no blacks on the Stanford faculty, the Politically Correct community would be all up in arms. But they have no problem squeezing out prospective faculty members whose views they disagree with.

Man, they're just afraid that if people learned the truth about homeopathy, the near-total lock leftists have over our nation's institutions would be broken.