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Program of the Week: OmniGraffle

Highly recommended:

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

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

Jason Furman Defends Mike Allen

In email from New York University, Jason Furman writes:

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

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

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

BYLINE: Mike Allen, Washington Post Staff Writer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When Spellcheckers Attack!

In comments, jjb writes:

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

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

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

Craig Thomas, Senator from Wyoming, Should Resign Today

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

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


Very funny:

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

David Wessel Writes About the Estate Tax

He strongly, strongly recommends Michael Graetz and Ian Shapiro's Death by a Thousand Cuts: - Capital: "When we last left the estate tax -- or, if you prefer, the death tax -- Congress had slaughtered it. Well, not exactly. President Bush signed a bill that reduces the estate tax gradually until it vanishes altogether in 2010. But the tax will be resurrected in its pre-Bush glory in 2011 unless Congress acts before then....

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

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

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

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

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

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

Meanwhile, from Oliver Willis:


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

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

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

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

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

Fafblog! the whole worlds only source for Fafblog.

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

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

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

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

The Onion on Tom Delay

The Onion is a priceless national treasure:

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

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

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

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

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

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

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

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


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

Do I thank or curse Mark Thoma for flagging it?

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

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

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

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

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

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

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

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

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

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

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

Enter John Tamny. Even more pathetic than the others.

Unnatural Hybrids

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

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

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

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

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

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

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

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

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

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

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

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

And Here's Dan Gillmor...

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

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

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

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

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

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

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

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

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

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

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

A Note: Returns, Growth, and Financing Social Insurance

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

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

Here's a sketch of the argument:

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

Why Oh Why Aren't I a Better Proofreader?

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

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

Longhorn: the "Good Parts" Version--Mac OS X 10.4

Here's some flamebait...

Tim Bajarin writes

I spent some time over at Apple yesterday taking a closer look of their new OS, known as Tiger or Mac OS 10.4. I had seen it at MacWorld in January and was pretty impressed with the demo then, but seeing it up close and personal yesterday made it clear to me that Apple is light-years ahead of Microsoft... a much more powerful Safari Browser, a much better email client, and something called the Automator, which is a simplified scripting system that quickly and easily can automate repetitive tasks.

But its real value is in three key components that really set it apart from any OS on the market today.

  1. The first new feature is their new desktop search engine called Spotlight. This search engine is integrated into the new OS... finding any file, image or even video file... groups them accordingly.... The initial indexing of the desktop is fast as well... a complex 90 gig HD on a G 5 system... took under 15 minutes to index the entire drive....
  2. The second new feature... Dashboard.... Widgets are little programs that are mostly utilitarian in purpose... can be created in HTML, anyone who knows how to create a Web page could create additional Widgets....
  3. The third feature... iChat... supports... up to four people in video conference mode... allows you to view the others in a 3D-like environment... framed as if they were sitting right in front of you at three different angles... even see their shadows on the virtual conference table in front of them....

Max Sawicky Finds Himself Out of Ammunition...

He writes

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

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

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

The [IMF] forecasts that the US current account deficit will grow slightly to 5.8 per cent of gross domestic product this year, with little improvement thereafter. Germany and Japan are both forecast to have surpluses close to 3½ per cent of GDP. “The US external deficit has so far been financed relatively easily, aided by continued financial globalisation,” the report said. “However, the demand for US assets is not unlimited... a continuing sharp rise in US net external liabilities will carry increasing risks.” As well as the possibility of a disorderly decline in the dollar, the fund identifed the possibility that inflation pressures lead to a spike in US interest rates, and the high and volatile oil price as key risks to the global outlook. The Bush administration's pledge to halve the US fiscal deficit is not credible, owing to a number of items left out of the budget arithmetic, and “insufficiently ambitious” in any case, the report said....

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

"China's dollar dilemma," by Andrew Balls and Richard McGregor, Financial Times,_i_rssPage=6e6e833c-cbff-11d7-81c6-0820abe49a01.html

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

Macro Lunch: "Asset Returns and Economic Growth"

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

Dean Baker, J. Bradford DeLong, and Paul Krugman (forthcoming 2005), "Asset Returns and Economic Growth," Brookings Papers on Economic Activity 2005:1.


We in America are probably facing a demographic transition—a slowdown in the rate of natural population increase—and possibly facing a slowdown in productivity growth as well. If these two factors do in fact push down the rate of economic growth in the future, is it still prudent to assume that the past performance of assets is an indication of future results? We argue “no.” Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return. Moreover, if you assume that current asset valuations represent rational expectations, simple arithmetic tells us that it is next to impossible for past rates of return to continue through a forthcoming growth slowdown. Only a large shift in the distribution of income toward capital or current account surpluses larger than those of nineteenth century Britain sustained for generations give promise for reconciling a slowdown in future economic growth with a continuation of historical asset returns.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Aren't Real Wages Rising?

Matthew Yglesias asks a good question

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

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

Well, there are three hypotheses:

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

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

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

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

Inflation Pressures without Wage Growth

William Polley talks bout the FOMC minutes:

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

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

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

Polley has a bunch more to talk about as well.

The Unreasonable Effectiveness of Mathematics in the Natural Sciences

Chad Orzel provides the pointer to Helge Kraghe, who writes in Physics Web about how quantum theory existed in the equations of physics half a decade before the human brain of any physicist understood it:

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

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

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

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

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

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

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

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

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

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

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

Something New!

From the Minutes of the Federal Open Market Committee

Ms. Cumming, Messrs. Guynn and Lacker, Mses. Pianalto and Yellen, Alternate Members of the Federal Open Market Committee...

I've long known that "Messrs." (abbreviation for Messieurs) was the plural of "Mr." I've long known that "Mmes." (abbreviaton of Mesdames) is the plural of "Mrs." I've never seen a plural for "Ms." before. The Secretary of the Federal Open Market Committee has grasped the stylistic bull by the horns and declared for "Mses."

The Labor Theory of Value Is a Menace!

Kieran Healy explains why:

What are you currently reading? This goddamn thread about the labor theory of value on Brad DeLong’s blog made me go back and look at Robert Paul Wolff’s Understanding Capital, Duncan Foley’s Understanding Capital (notice the pattern here) and Maurice Dobb’s Theories of Value and Distribution Since Adam Smith. These are three excellent books. The issue they treat is fascinating in the same way that, e.g., a big red button labeled “Do Not Push This Button” is fascinating, and absorbing in the way that, e.g., a giant squid-like alien’s stomach is absorbing.

20050408: Economics 113 Final Paper Assignment

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

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

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

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

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

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

pdf version

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

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

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

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

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

But the Washington Post editorial board is upset at Dean Baker and David Rosnick. They defend Bush's focus on Social Security because... because... because... [Y]es, this President Bush can be criticized for hyping the "crisis" in Social Security.... Dean Baker and David Rosnick of the Center for Economic and Policy Research make [the] argument [that the government should focus on the more urgent and substantial fiscal policy problems].... "Politicians and commentators who claim to be concerned about the living standards of future generations of workers seem to be misdirecting their energy by focusing on the comparatively minor problem of Social Security.... Clearly the inefficiency of the U.S. health care system poses a far larger and more immediate danger to the living standards of our children and grandchildren."

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

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

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

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

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

Bruce Bartlett Is Badly Disturbed

He's worried about the state of the Treasury Department: Treasury has always been the premier economic agency of the government. Generally speaking, the Treasury secretary is the administration's principal economic spokesman, and the department attracts the best and brightest of those with an economic bent who wish to serve in government. This was especially the case during the Clinton administration, which had an extremely high level of talent at Treasury.

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

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

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

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

Warren Buffett, Hank Greenberg, and Eliot Spitzer

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

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

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

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

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

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

We Have a *Huge* Problem Here

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

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

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

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

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

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

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

Even with the Bush Justice Department's taking a dive in the case, the payouts that Microsoft is making to settle the claims produced by its antitrust law violations aren't chicken feed:,_i_rssPage=80fdaff6-cbe5-11d7-81c6-0820abe49a01.html Financial Times: Microsoft to pay Gateway $150m: Payments by Microsoft to escape its antitrust morass are expected to top $4.5bn. This follows news on Monday that the software group will pay $150m to Gateway, the PC maker, and set aside another $550m against other legal claims... a $43m charge for a settlement last month with in a pre-tax charge to earnings in the latest quarter of more than $700m, Microsoft indicated. The Gateway settlement takes to six the number of companies in the industry with which Microsoft has reached private agreements, at a combined cost of more than $2.2bn. It has also incurred costs of more than $1.2bn to settle state-level anti-trust suits in the US and paid a fine of about $600m to the European Commission. In addition, Microsoft has paid more than $2bn to settle patent disputes in the past year....

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

Double Gurk!!

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

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

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

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

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

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

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

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


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

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

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

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

The Economics of Microfinance

Professor: Oh woe!

Grad Student 1: Woe?

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

Grad Student 1: So why is this a problem?

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

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

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

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

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

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

Professor: Yes. Do you have need of it?

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

Praktike recommends "The New American Militarism"

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

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

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

Bacevich writes:

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

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

Brendan Nyhan Bangs His Head Against the Wall

He finds Glenn Hubbard saying something sensible on Marketplace--but wishes it did not come accompanied by a certain form of amnesia: What is R. Glenn Hubbard talking about?

During a "Marketplace" commentary yesterday, R. Glenn Hubbard, the head of President Bush's Council of Economic Advisers from 2001-2003, said the following:

"[The late Princeton economist David Bradford's tax reform] proposal would repeal the dreaded alternative minimum tax. The AMT was meant to tax the wealthy but is affecting more and more middle-income families than Congress ever intended."

From Hubbard's description, you would think he and the Bush administration had nothing to do with the AMT problem, but the reality is that the 2001 and 2003 tax cuts, which Hubbard supported, dramatically exacerbated it by lowering rates without corresponding permanent fixes to the AMT. After leaving the administration in 2003, Hubbard specifically argued for the dividend tax cut in place of AMT relief, saying that the AMT should be addressed in the context of a larger discussion about tax reform.

The decision to not permanently fix the AMT was at least partially strategic. The administration and Republicans in Congress were able to push through much larger tax cuts than would otherwise have been possible because of the AMT, using revenue that would be generated by its explosion in future years to mask the true long-term cost of the proposals. The White House has also continually omitted funds for fixing the AMT from its budgets. Both tactics make future deficits look far smaller than they actually will be. The administration claims that the AMT will be fixed in the context of the President's tax reform agenda, but this seems unlikely given the lack of funds available to pay for it.

(See this 2004 Center on Budget and Policy Priorities article and a February 2005 CNN/Money article for background on these issues.)

Of course, Hubbard is aware of all this, but in his commentary he plays dumb and blames the problem on Congress. Thanks Glenn! Good luck cleaning up your reputation among economists!

To be fair, during the late Clinton administration the tax guys would come forward with proposals to fix the AMT, and the High Politicians would always say that the Republicans wanted it fixed much more than the Democrats, and so we should wait until the Republicans brought it up before dealing with the issue. So there is some strategery on both sides here.

Another Interpretation of Charles Blahous

In comments, P. O'Neill notes that Dan Froomkin had provided another correct interpretation of Charles Blahous's:

'The President believes that surplus Social Security money should not be spent, which is one reason why he has proposed creating a system of personal accounts,' Blahous wrote. 'These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away.'

O'Neill's gloss:

Remember during the campaign when we made fun of Al Gore for saying that the Social Security surplus needed to be put in a lockbox? We did a bad, bad thing. It does need to be put in a lockbox. We want to fix the damage we did, we really do!

Or, as Dan Froomkin put it, "Think of it as millions of little lock-boxes."

P. O'Neill adds:

It's time to start putting together a list of pundits who ridiculed Al Gore for his emphasis on the lockbox in 2000. Howard Kurtz was still at it in November 2003: "But at least the candidates would be arguing about something important, as opposed to all that '00 prattle about a lockbox that now seems totally irrelevant in an era of huge budget deficits.

Tim Geithner Is Nervous...

He gives a short talk at Princeton:

Remarks by Timothy F. Geithner before Princeton University's Center for Economic Policy Studies - Federal Reserve Bank of New York: Timothy F. Geithner, President and Chief Executive Officer: I am glad to be here at Princeton's Center for Economic Policy Studies to have this conversation with Alan Blinder and to address some of the key questions regarding monetary policy today. I am particularly pleased to be in front of such a distinguished audience, including colleagues from the Federal Reserve who will be talking about some of the same questions at tomorrow's meeting.

I would like to start with a few propositions about the state of U.S. monetary policy and the Fed today.

The achievements in inflation outcomes of the past decade or so—low inflation, less volatility in inflation, more moderate long term inflation expectations, and less volatility in those expectations, achievements that are impressive relative to past U.S. experience as well as to the gains of other mature central banks—suggest we are close to the frontier of monetary policy credibility. These gains came alongside a significant reduction in the volatility of U.S. output. And they are impressive in light of the speed and force with which the Fed acted in several instances of systemic financial distress.

The major economic policy challenges facing the nation today—pick your favorites among the usual suspects of low public and household savings, concerns about educational quality and achievement, high and rising income inequality, the large imbalances between our social insurance commitments and resources—are not about monetary policy. Poor monetary policy choices would make these problems harder to address, but monetary policy itself can't do much to fix them.

The issues about monetary policy regimes we spend most of the time debating these days—such as those involving communications and disclosure and variants on inflation targeting—are high class problems to have. Even if they were resolved in the direction of what seems to be the broad academic consensus, they would still leave us with all the hard questions in monetary policy. The color of truth in monetary policy (apologies to McGeorge Bundy) is often grey, not black or white, and moving further along the spectrum toward greater transparency or more explicit rules, will not make easier the hard choices of what to do in the face of the normal fog that surrounds the forecast.

In thinking about the durability of these gains in monetary policy delivered under Volcker and Greenspan, there are a few aspects of our history and about the world today that deserve note.

The actions of individual chairmen have been very important in the history of the Fed. The considerable strengths of the institutional framework of the Fed—full de jure independence, the depth of technical talent, a committee designed to bring a diversity of independent perspectives to the monetary policy decision making process—have not been strong enough to deliver consistently good monetary policy decisions over time.

The constituency for price stability in the United States today seems broad and strong and reasonably bipartisan, but it's been a generation since we've had high inflation and had to face the costs of bringing it down. It seems like a long time since monetary policy has been the subject of major political or popular attention. And the extent of deference the Fed now enjoys—the extent of de facto autonomy—is a relatively recent, surprisingly recent phenomenon, and substantially due to the competence demonstrated by the past two chairmen.

Monetary policy has been the beneficiary of a long period of good fortune in the form of smaller and less adverse external shocks, a sustained and very large acceleration in productivity, the disinflationary forces produced by global economic integration, greater flexibility in the U.S. economy and improved financial sector resilience, and the effects of these factors and technological change in reducing macroeconomic volatility. We don't know much about the probabilities surrounding the future path of most of these variables.

We face a number of transitions ahead that will have important implications for U.S. monetary policy. Among these are:

  • The transition from a long period of exceptionally low short-term nominal and real interest rates in the major economies and in many emerging market economies as well. Real short-term interest rates in much of the world, as in the United States, are still some distance below the band of estimates of equilibrium.
  • The approaching demographic pressures on fiscal resources, which will hit most major economies at a time when underlying fiscal positions are still likely to be in substantial deficit.
  • The inevitable evolution in the exchange rate regimes of China, and the substantial number of countries that have been actively targeting their nominal exchange rate against the dollar, to a system where there is more variability in their bilateral and real effective exchange rates.
  • The disposition of the global imbalances reflected most conspicuously in the U.S. current account deficit.

These are all types of disequilibria. They can be sustained for a time, but not indefinitely. They could be diffused gradually and smoothly. But the transitions to a more sustainable equilibrium could also bring a risk of greater volatility in asset prices, less stability in macroeconomic outcomes, and more uncertainty. This could mean a less benign future environment for U.S. monetary policy.

The potential uncertainties posed by these challenges may be more troubling because of confidence engendered by the stability and resilience of the U.S. economy over the past decade. We are in the midst of an unusual dynamic in financial markets, in which low realized volatility in macroeconomic outcomes, low realized credit losses, greater confidence in the near term path of monetary policy, low uncertainty about future inflation and interest rates, rapid changes in the nature of financial intermediation (role of hedge funds and the change in how credit risk is bought and managed), and a large increase in the share of global savings that is willing to move across borders, have worked together to bring risk premia down across many asset prices.

There is no reliable analytical framework one can use to determine whether we are experiencing an unwelcome or unjustified decline in expected volatility, or whether investors are giving too much weight to the relative stability of the recent past and too little to the uncertainty posed by the challenges ahead. And analysts can point to good fundamental reasons and some plausible theories to support this collective judgment of market participants about low future risk and volatility. But there is much we do not understand about how these transitions ahead will unfold—in fiscal positions, the U.S. external imbalance, and in the exchange rate system and portfolio preferences. The recognition that things that are not sustainable will eventually come to an end does not give us much of a guide to whether the transition will be calm or exciting.

These dimensions of the broader context in which we will be making monetary policy in the years ahead put a very important premium on keeping U.S. monetary policy as close to the frontier of credibility as possible. And this suggests we need to continue to examine the case for a measured further evolution in the U.S. monetary policy framework—evolution in the direction of finding ways to provide more clarity about our long term inflation objective, about the underlying forces shaping the Federal Open Market Committee's forecast, the dimensions of uncertainty that surround that forecast, and the likely implications for monetary policy, to the extent we are aware of them. We have moved a long way in this direction, even in the past 18 months.

The FOMC's record over the past 25 years suggests that the state of monetary policy and the state of the Fed is strong. The challenge in thinking about what's next in any further evolution in our regime is about how to ensure that U.S. long-term inflation expectations remain stable at a level close to reasonable definitions of price stability, while retaining the flexibility to act wisely, but with speed and force and creativity in response to changing circumstances.

Thank you.

I'm nervous. And I'm not in the Hot Seat. He is.

Return to Herbert Hoover--Not!

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

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

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

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

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

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

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

The Taliban Wing of the Republican Party

The Carpetbagger Report says:

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

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

I protest! This is grossly unfair to the Taliban! The Taliban studied their Holy Writ assiduously, and strove for theological consistency! Phyllis Schlafly and Edwin Vieira, by contrast, do not know The Gospel According to John:

Jesus went unto the mount of Olives. And early in the morning he came again into the temple, and all the people came unto him; and he sat down, and taught them. And the scribes and Pharisees brought unto him a woman taken in adultery; and when they had set her in the midst, they say unto him, "Master, this woman was taken in adultery, in the very act. Now Moses in the law commanded us, that such should be stoned: but what sayest thou?" This they said, tempting him, that they might have to accuse him.

But Jesus stooped down, and with his finger wrote on the ground, as though he heard them not. So when they continued asking him, he lifted up himself, and said unto them, "He that is without sin among you, let him first cast a stone at her." And again he stooped down, and wrote on the ground. And they which heard it, being convicted by their own conscience, went out one by one, beginning at the eldest, even unto the last: and Jesus was left alone, and the woman standing in the midst.

When Jesus had lifted up himself, and saw none but the woman, he said unto her, "Woman, where are those thine accusers? hath no man condemned thee?"

She said, "No man, Lord."

And Jesus said unto her, "Neither do I condemn thee: go, and sin no more."

First, Make the Biggest Possible Pizza

Ken Jarboe points us to Hal Varian's column about player pianos--and other things:

The New York Times > Business > Economic Scene: File-Sharing Is the Latest Battleground in the Clash of Technology and Copyright: Grokster makes software that enables Internet users to share computer files on peer-to-peer networks. The technology has been used to distribute many kinds of content, including copyrighted digital music. MGM and other entertainment companies want to hold Grokster liable for the copyright infringement that occurs when users download copyrighted music without paying for it. Grokster argues that there are many legitimate uses for its technology and that it is not responsible for those who use it to violate copyrights. This is just the latest installment of a longstanding battle between technology companies and copyright holders. It is useful to look at the history of some of these past innovations in trying to understand what policies may be appropriate today.

In the early 1900's, the disruptive technology was player pianos. Manufacturers of player piano rolls purchased a single copy of the sheet music of a song, hired someone to record the music and then sold these mechanical reproductions to consumers. The songwriters held that this was copyright infringement, while the piano roll manufacturers pointed out that they had paid the appropriate copyright fees when they purchased the sheet music. In 1908, the Supreme Court found in favor of the piano roll manufacturers, but practically invited Congress to consider new legislation on the issue. Congress responded with the Copyright Act of 1909, which created a new form of intellectual property, mechanical reproduction rights. The new law required piano roll manufacturers to pay songwriters a fee for each song. Subsequently, mechanical reproduction fees have been extended to new technologies like phonographs, audio tapes, CD's and online streaming digital music.

In the 1908 case, songwriters did not try to ban player piano technology. They clearly recognized that the additional distribution of their songs was potentially advantageous. Their goal was simply to get a fair share of the proceeds from the piano roll sales.

Another directly relevant Supreme Court decision is Sony v. Universal City Studios.... The studios lost the Sony case, but it forced them to take the home video market seriously. Their first instinct was to set a $50 to $60 price for videocassettes. But by choosing a high price, they stimulated the development of the video rental market, giving users inexpensive access to movies. On the other hand, the availability of rentals stimulated the demand for VCR's. As VCR prices declined, more people bought them and the video rental industry flourished, creating a new, rapidly growing outlet for studio productions.

In the late 1980's Disney began to experiment with lower prices for videos, hoping to bypass the rental stores and sell directly to home users. Disney's 1987 video release of 'Lady and the Tramp' was priced at $29.95 and sold over 3.2 million copies, making it the best-selling video as of that date. Its record was soon eclipsed by 'E.T.,' which sold 14 million copies at $19.95 apiece.... The critical lesson from the history of the VCR is this: If consumers have ways to share content, either via rental markets or via the Internet, you will have to set low prices to induce them to buy. But low prices may well stimulate enough volume to make up for the lost revenue....

So what should the policy be for new technologies like Grokster? I advocate the Pizza Principle: If you want everybody to get as big a slice as possible, you first have to figure out how to bake as big a pie as possible. Once you have a nice big pie, you can let people fight over how they slice it up. With respect to technology, the Sony decision got it right: encourage technologies that create more total value. Then, let companies fight to find business models that deliver that value to consumers. They can be awfully creative when they are forced to be.

Paul Volcker Is Unhappy

As each month passes, the "hard landing" global economic scenarios become more likely: An Economy On Thin Ice: By Paul A. Volcker: Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.... What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar. Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States? More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth. And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency....

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a 'soft landing'... China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving.... But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice.... [T]here is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable... monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher...

Paul Volcker is saying that the time to fix the roof is before the monsoon comes.