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April 2005

Edmund Andrews Covers the Bush Administration Clown Show

I remember, during a debate with Michael Boskin at Stanford in October 2000, that either most of the proposed Bush tax cuts really weren't there--because they would be clawed back by the Alternative Minimum Tax--or the Bush tax cuts were a much greater threat to the fiscal stability of the American government than the Bush campaign was claiming.

Edmund Andrews reports:

The New York Times > Business > Your Money > Economic View: A Tax Increase That Bush Didn't Mention: Baffling in its complexity and often bizarre in its impact, the alternative minimum tax is a giant undeclared tax increase that will ensnare tens of millions of moderate-income families in the next several years. It was created in 1969 to prevent the very rich from using tax deductions to avoid paying a fair share of taxes. But when the deadline for filing income tax returns arrives on Friday, the alternative minimum tax will require 2.9 million families to pay an average of about $6,000 more than what they would owe under traditional calculations

That is just the start. If current law remains unchanged, the alternative minimum tax is expected to wring an extra $33.9 billion from 18 million households in 2006. In 2010, it will rake in an additional $100 billion, and by 2015 an extra $200 billion. Make no mistake: no one says they want that to happen. But it is one thing to rein in or eliminate the tax itself, and an entirely different matter to give up the money that it would generate. President Bush has promised to fix the alternative minimum tax as part a fundamental overhaul of the tax code, and he has ordered a bipartisan advisory panel to come up with recommendations by the end of July.

But in giving the panel its marching orders, White House officials made it clear that they are counting on the extra money regardless of what happens to the alternative tax. Under the president's instructions, the panel's recommendations on addressing the alternative minimum tax are supposed to be 'revenue neutral,' neither raising nor lowering taxes, and to assume that his income-tax cuts will be made permanent rather than expire in 2010, as required under current law. Making those ordinary income-tax cuts permanent would reduce the amount of available revenue by about $1.8 trillion over 10 years. But White House officials told the panel that any change to reduce or eliminate the alternative minimum tax would have to be offset by higher taxes someplace else.

'My understanding is that any reform in the A.M.T. that loses money would have to be made up with offsetting revenue,' said Elizabeth Garrett, a panel member and a professor of law at the University of Southern California. Jeffrey F. Kupfer, executive director of the tax panel and a former Treasury official, confirmed that interpretation. 'Our mandate is to be revenue-neutral, and we are interpreting that with respect to the president's policy baseline, which does not include a permanent fix to the A.M.T.,' he said in an interview last week.

Tax experts have long complained that the alternative minimum tax is a 'stealth tax increase,' one that Congress never intended and that is likely to catch millions of taxpayers by surprise. But a tax increase through tax reform could be even stealthier. If the alternative tax is reduced, the offsetting revenue increases are likely to be buried in so many other changes that most people would never know what hit them. Seen or unseen, the looming tax increases are almost as large as the president's tax cuts. Leonard E. Burman, a senior fellow at the Urban Institute, estimated that the government would have to raise ordinary income tax rates substantially in every bracket to offset the money lost in each bracket by the elimination of the alternative minimum tax. People in today's 28 percent bracket, for example, would have to pay a top rate of 35 percent. Those who now pay a top rate of 33 percent would pay 41.4 percent.

'The A.M.T. is a huge tax increase built into current law,' Mr. Burman said. 'What the current law assumes is that over time we move to a tax that is much less progressive, that has atrocious marriage penalties and penalizes people with children who live in high-tax states.'

Taylor Griffin, a spokesman for the Treasury Department, said the administration's goal was to prevent a hidden tax increase by replacing the alternative tax with something that was easier to understand and more predictable. 'What we are trying to do is prevent a stealth tax that sneaks up on you,' he said. 'If we don't do something, millions of Americans will be facing unanticipated tax increases.'

I really don't know what to do with a Treasury Spokesman who is "shocked, shocked" that the tax code contains an AMT--other than to laugh.

Treasury Secretary John Snow Goes Off Message

Via Kevin Drum:

The Washington Monthly: Although the Bush administration is pressuring industry trade groups to support its Social Security plan, it's having a harder time with corporate America itself:

When Treasury Secretary John W. Snow visited a prominent New York investmenthouse recently to talk up Social Security, a top executive asked why the White House was putting Social Security, which does not face a crisis for years, ahead of more immediate worries such as the weak dollar and the swollen federal deficit.

Snow's only response, according to one person who was in the room, was to acknowledge the import of those issues but reiterate that Social Security was the president's priority.

Social Security's long-run deficit ranks third in urgency and third in size of America's fiscal problems--the current medium-term deficit and the rapidly-growing health programs are numbers one and two.

Everybody knows this, it seems. Everybody but George W. Bush.

Shouldn't somebody tell him?

Economics in One Lesson

Tyler Cowen tells us that Henry Hazlitt's Economics in One Lesson is now online.

It's an excellent book to read if one already knows a significant amount of economics. It's an excellent book because it brilliantly and coherently restates the Classical view. It is a limited book because at least half its pages hint that the works of John Maynard Keynes are an abomination without ever grappling with the Keynesian argument.

We all know that the market system is an amazing decentralized social planning and allocation mechanism if externalities are small, if returns to scale are in general diminishing, if we are happy with the distribution of wealth and the concommitant distribution of economic power it gives rise to, and if Say's Law holds--if supply does indeed create its own demand, and we don't have to worry about large-scale unemployment and deep depressions.

Hazlitt doesn't recognize any of these ifs. And that is what makes his book very dangerous indeed to a beginner in economics, because the ifs are, all of them, important qualifications and caveats. I gather that Tyler read it relatively early, and I am amazed that he has escaped with so little permanent neurological and ideological damage.

I find it astonishing that Haslitt doesn't recognize any of these ifs. I find it especially astonishing that he doesn't recognize the last of them. The 1930s were the era of the Great Depression--the time when Say's Law was most irrelevant. Hazlitt lived through them. Yet the Great Depression years seem to have had no impact on Hazlitt whatsoever.

There is one other big problem with Hazlitt--a problem that he shares with many of his successors on the Wall Street Journal op-ed page, on the Weekly Standard, and on the National Review. His quotes cannot be counted on to be in context. His summaries cannot be counted on to be honest.

For example, Hazlitt on Keynes in Economics in One Lesson:

p. 4: There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

What Keynes actually wrote in his Tract on Monetary Reform:

Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Misrepresentations like this do Hazlitt no credit at all.

Adam Smith on Chair-Men, Coal-Heavers, Porters, Prostitutes, and Potatoes

Adam Smith is definitely pro-potato: He thinks potato-eaters are Buff and Gorgeous--"the strongest men and the most beautiful women perhaps in the British dominions.

Jack of writes in comments:

Actually, [Adam] Smith was quite nice about potatoes:

In some parts of Lancashire, it is pretended, I have been told, that bread of oatmeal is a heartier food for labouring people than wheaten bread, and I have frequently heard the same doctrine held in Scotland. I am, however, somewhat doubtful of the truth of it. The common people in Scotland, who are fed with oatmeal, are in general neither so strong nor so handsome as the same rank of people in England, who are fed with wheaten bread. They neither work so well, nor look so well; and as there is not the same difference between the people of fashion in the two countries, experience would seem to shew, that the food of the common people in Scotland is not so suitable to the human constitution as that of their neighbours of the same rank in England. But it seems to be otherwise with potatoes. The chairmen, porters, and coal-heavers in London, and those unfortunate women who live by prostitution, the strongest men and the most beautiful women perhaps in the British dominions, are said to be, the greater part of them, from the lowest rank of people in Ireland, who are generally fed with this root. No food can afford a more decisive proof of its nourishing quality, or of its being peculiarly suitable to the health of the human constitution...

Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations (London: William Strahan) Book I, Chapter 11.

The Bush Administration Social Security Clown Show Continues

Judd Legum is bemused by the White House's Charles Blahous:

Think Progress: Astoundingly, the White House is still trying to claim that carving personal accounts out of Social Security will not cost money. Yesterday, Chuck Blahous, Special Assistant to the President for Economic Policy, took questions on the White House website. Here is what Ira from Kirkland asked:

Mr. Blahous, why do we need an expensive new federal program when there are existing options for investing in securities?

Here was Blahous’s response, on behalf of the White House:

Ira, the President has not proposed a new federal program, nor to increase the costs of existing Social Security.... The personal accounts that the President has proposed would be fiscally responsible because they would be used to fund retirement benefit obligations that would exist under the current system.

What Blahous is saying is, in the words of the plumber from "Moonstruck": "Even though it costs money, it costs money because it saves money"; or maybe he's saying that it saves money even though it costs money, because you have to spend money to save money; or something like that. Blahous's claim is that even though you're diverting $2 trillion of Social Security revenues from paying benefits to funding private accounts over the next two decades (and so borrowing at addition $2 trillion on financial markets), in the long run of three, four, five, six, and more decades from now the clawback of the compounded value of funds diverted to private accounts reduces the traditional Social Security benefits of those choosing private accounts by enough that you come out even.

This is, however, wrong. As Glen Johnson of AP reported earlier this week:

WASHINGTON (AP) -- Future high-wage earners could see their traditional Social Security checks replaced by the proceeds of the personal investment accounts proposed by President Bush, according to a report by the nonpartisan research agency used by Congress.... Both trends would have the effect of eliminating the Social Security check for a hypothetical group: someone born next year who goes on to a career as what Social Security considers a "scaled high earner," which this year is a person with annual average earnings of $56,091....

"For these individuals, their entire Social Security income would be comprised solely of their individual account proceeds," said the report....

If the clawback of the private-account contribution reduces the traditional Social Security benefit to zero for somebody making $56,000 a year, that means that for everybody making more than $56,000 per year there isn't enough traditional Social Security benefit to offset the cost of the extra government borrowing made necessary by the shift of contributions to private accounts. For everyone making less than $56,000 a year, Blahous is correct in the sense that the long-run reduction in benefits offsets the short-run and medium-run diversion of revenues. But for everyone making more than $56,000 per year, the cost to the government of the extra borrowing in the short and medium run exceeds the value to the government of the reduction in the traditional Social Security benefit in the long run--even if the government claws back the entire traditional Social Security benefit.

I think that Charles Blahous really is not up to the job--that he genuinely thinks that the "personal accounts that the President has proposed would be fiscally responsible," because he doesn't understand what private accounts mean for those making more than $56,000 a year, and nobody has been able to enlighten him. The gain from misrepresenting the situation in a small-scale online chat is very small indeed...

Why Oh Why Can't We Have a Better Press Corps? (The Washington Post Needs to Fire Mary Jordan Immediately Department)

Eric Umansky is genuinely, genuinely fed up:

Eric Umansky: Something about Mary...annoys me: I just spent a bit of time recently in Mexico, reporting a few stories (one of which was, tragically, killed). Anyway, I've been following politics there for the past few months. So I feel comfortable when I say the Wash Post should find a better fucking Mexico writer. Here's a few choice lines from Mary Jordan's effort to detail the emerging constitutional crisis over Congress's likely move to effectively bar Mexico City's popular (and populist) mayor from running for president:

Many officials in Washington are concerned about the uncertainty and division the case is causing, with vast numbers of Mexicans being either fervently for or decidedly against the mayor.

Actually, Mary, 80 percent of Mexicans polled oppose their Congress's move against Obrador. It shouldn't be too hard to find that stat; your paper cited it Tuesday.  Moving on...

Lopez Obrador, 51, from the Democratic Revolutionary Party, is the latest in a string of rising political stars in Latin America who disagree, to varying degrees, with the U.S. formula of democracy, open markets and free trade as a way to help the poor.

Obrador's economic policies are one thing. But, Mary, in what exactly do you think he disagrees with 'the U.S. formula of democracy'--whatever that is?

Truly pathetic.

Oil Prices and the Global Economy

Brad Setser muses about these issues:

Brad Setser's Web Log: $55 a barrel oil: I have focused heavily on Asian central bank financing, and the role reserve financing plays in sustaining the US current account deficit. But it is worth remembering the other big theme in the world economy: rising oil prices. Greenspan is right: high oil prices will eventually trigger a market reaction, whether slower demand growth, investment in new oil fields, or the development of alternative fuels. Oil may stabilize at a higher price than in the 1990s, but it probably won't stay at current prices.

Indeed, higher oil prices do seem to be having an impact on Europe and Japan right now -- since January, oil is up (in dollar terms) and the euro is down (in dollar terms) to oil is way up in euro terms. That is a change from the falling dollar/ rising oil price pattern of the last couple of years.

But right now, demand growth in the US -- and in China -- does not seem to be slowing. And to the extent new supply is coming on line, it is coming on line in places like Saudi Arabia, which hardly changes the basic structure of the world oil market. It also is unlikely to reduce the 'geopolitical risk' premium now built into the oil market.

The result of the so-far-limited adjustment in demand, and rather limited market pressure for lower prices: an absolutely enormous transfer of revenue toward the world's oil exporting states. If oil stays around $55 a barrel, my very, very rough calculations (which, among other flaws, make no effort to adjust for the fact that not all crude is alike) suggest that OPEC countries would get over $500 billion in oil revenues this year, about $300 billion more than in 2002 (when oil was at $26 a barrel and the Saudis were not producing at anything like full capacity). If oil stays close to its current price, Saudi oil revenues would have increased by something like $100 billion since 2002, a China-sized sum. Russia produces a large amount of oil as well; recent data suggests its 2005 oil/ gas revenues will be $70 billion more than its 2002 revenues.

Some of that oil windfall is being spent, some of it saved. Russia's export revenues in q1 2005, for example are, $16 billion more than they were in q1 2004. Russia's imports are also higher, by $5 billion. But since the increase in exports exceeded the increase in imports, Russia's overseas assets are also increasing faster than they were a year ago. We ought to have a better idea of the overall breakdown between 'spending' and 'saving' in oil exporting states when the IMF puts out its updated World Economic Outlook next week.

So for all the focus on Asia, it is worth remembering that the world's oil exporters also have tons of cash, and, even though their formal 'reserves' are not growing like Asia's, the clearly are investing large sums abroad -- whether transparently though institutions like Norway's oil fund or less transparently through the various accounts of the world's petrosheiks. Their willingness to finance the US matters too ...

A Very Welcome Return

Angelica Oung--Battlepanda (the Battlepanda?)--is back:

Maybe, just maybe, despite all the junk we have in our collective consciousness, a synapse will fire. TAKE?!

The cookie analogy continues:

Alan Greenspan in '83: Let me put this cookie away for you so you can have it for dessert later instead of ruining your dinner.

Al Gore in 2000: I wouldn't keep the cookie jar right out in plain sight if I were you.

George Bush in 2005: Oh uh! Somebody ate your cookies! Or perhaps your cookies never existed in the first place.

American people: Why preznit hand in cookie jar?

GB: To make sure this terrible terrible thing never happens again, next time we're going to keep the cookies in a jar with your name on it!

American people: (...)

The Bush Administration Clown Show Continues...

The White House's Charles Blahous confuses Brendan Nyhan, who quotes from Daniel Froomkin:

Brendan Nyhan: Do private accounts really protect you from benefit cuts?: Dan Froomkin quotes Chuck Blahous, the White House Social Security guru, pushing a common administration talking point:

Chuck Blahous, the White House's Social Security expert, took questions on the White House Web site yesterday. He didn't explicitly address whether the trust fund was worthless. But he did suggest a new link between the government's spending of the trust fund surplus and personal accounts:

'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.'

Think of it as millions of little lock-boxes.

But the government is going to take away most of the gains from private accounts with a clawback that will reduce your traditional benefit by the number of dollars contributed plus 3% interest above inflation annually. What's to stop them from changing that number and taking back more? It's just as easy or hard as cutting the traditional benefit. This argument makes no sense to me.

What's happening is that Blahous is making the ghost of an argument that he doesn't understand--it bears the same relationship to the real argument that... that... that... a cargo-cult "control tower" built of thatch does to a real airport's radar and control tower.

If you go to the real Republican economists, you will find the argument going something like this, where I have turned the frankness-and-blunt-speaking-o-meter up from its usual level of 3 to the Spinal Tap level of 11:

  1. Currently, the U.S. government is running a Social Security surplus--taking in more in Social Security taxes than it spends in benefits.
  2. When the baby-boom generation retires, the U.S. government is going to be spending more on Social Security than it will take in in taxes--so the government is going to have to borrow a lot of money in order to cover the deficit.
  3. The government will only be able to borrow if creditors think (i) the debt is not already too high and (ii) the government will have the will to levy taxes to pay us off when our bonds come due.
  4. Thus it's important that now--when Social Security is in surplus--that the government be not running up but running down the debt.
  5. If the government takes the current Social Security surplus and spends it--doesn't run a big current surplus and buy back debt now--then it will be unable to borrow when the baby-boom retirement payments come do because the debt level from which we will then start will be too high.
  6. The U.S. government--especially Frist, Hastert, Delay, and Bush--have a demonstrated incapability to not spend the Social Security surplus: there is no a snowball's chance in hell that a government run by them will buy back debt.
  7. So we are in big trouble.
  8. If only we could keep Frist, Hastert, Delay, and Bush from knowing that they have a Social Security surplus to spend, they would be forced to raise taxes or cut spending, and then the government would be able to borrow in the future to meet its Social Security obligations to the baby boomers.
  9. So let's set up private accounts. That will cut government revenues now--and so eliminate the Social Security surplus. Frist, Hastert, Delay, and Bush will be forced into fiscal sanity, and so we'll have a lower debt when we really do have to borrow in the future. And we won't have to borrow any more in the future as a result of our private accounts plan because we will cut normal benefits by an amount that is in present value equal to the amount that we're diverting to private accounts.

If Blahous understood the argument he's making--and seriously wanted to communicate it--he would say something like this: "Think of it this way: Bush and Delay and Hastert and Frist are out of their minds, and are on a giant financial bender. They think they can drink up every bottle in the liquor cabinet, but if they do we'll have nothing left for the party we're giving tomorrow. Private accounts is a way of moving some of the good liquor to another cabinet and putting a lock on it so Bush and Delay and Hastert and Frist can't spill and waste it tonight. That's what we are really doing."

And, Blahous says, Bush really wants the bottles moved to the other cabinet--one with a lock on it--so he can't get at them. After all, Blahous says, "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. These personal accounts would save Social Security money, protecting it in the accounts of individual workers, where the government could not take it away." You see, Bush really wants the government to run a budget surplus equal to the Social Security surplus, and we have to enact private accounts to force him to do what he really wants.

Yes. It's a clown show.

Exorcist to Senator Mel Martinez's Office Immediately!!

Wonkette is on the case:

Wonkette - Schiavo Memo Case Takes Sinister Twist: [M]eet Brian Darling, former chief legal counsel for Senator Mel Martinez (R - FL), currently seeking exciting new employment opportunities. But while Darling has admitted authorship of the controversial memo, questions... persist.... Darling isn't sure how the memo escaped his computer. ('He didn't think he ever printed the memo.')... Martinez... [who] gave the memo to Senator Tom Harkin (D - Iowa)... doesn't know how his hands got ahold of it.... ('Unbeknownst to me, instead of my one page on the bill, I had given him a copy of the now infamous memo that at some point along the way came into my possession.') Darling doesn't know how Martinez' hands got the memo either. ('He doesn't really know how I got it.')... [It would nice to pin the blame on truly evil forces like the Democrats or the MSM, but c'mon! Dumbass memos that magically morph from word-processing files to hard copies? Zombie brain-slaves spreading the document in a trance-like fog? Obviously, this is the work of Satan!

Wonkette - Diabolical Ghost-writer Haunts Mel Martinez: [This] is not the first document to emerge from the coven of Mel Martinez via apparent supernatural forces. In August 2004, after his campaign funded a flier that called his GOP opponent 'the new darling of the homosexual extremists,' Martinez offered a scary glimpse at his life as Satan's plaything: 'Words were used that were not mine, and were not of my choosing. Those words were spoken by others.' A couple months later, when a campaign statement of his likened federal agents to 'armed thugs,' Martinez said he wasn't responsible for that statement either —it was the diabolical handiwork of 'someone writing for the campaign.' Would someone please rescue this man before his head starts spinning like a top?

More on Potatoes

Hal Varian writes in in comments:

Paul Samuelson used potatoes as an example of a Giffen good in his Principles of Economics book and drew the well-known implication that they must therefore be an inferior good (i.e., the demand for potatoes falls as income increases.)

One year he got a letter from the Maine Potato Grower Association along with an econometric study that they had commissioned that showed that, in fact, potatoes were a normal good. They suggested that he find some other example to use in his textbook.

So what is it about you economists always bad mouthing potatoes?

Shouldn't that be "we" economists, kemosabe?

George W. Bush's $1.7 Trillion Grand Larceny Spree

Yup. That's what he said he was doing. Taking Social Security's payroll tax revenues to fund his upward redistribution of wealth, and giving the Social Security Administration "worthless IOUs" in exchange:

Max Sawicky writes:

$639 BILLION. That's how much in "worthless IOUs" our President has given to the Social Security Trust Fund (FY2002-2005), in exchange for your payroll taxes. Over the next five years, our President proposes to add another $1,061 billion to this crime spree. (President's Budget, Summary Table S-10). According to the Congressional Budget Office, the projected ten year total Trust Fund swindle (FY2006-2015) is $2,554 billion. (CBO March, p. 2, Table 1-1)

Ezra Klein's Transformation Continues

With any luck, in a year he'll be learnedly discoursing on alternative PAYGO proposals. But now he is merely entranced by the Bruce-Bartlett recommended Value Added Tax:

Ezra Klein: Now, why am I spending so much time on this? Readers who remember my health policy wonk-out from a few weeks back might also recall that the CAP health plan I was obsessing over wanted to pay for itself with a 3-4% VAT. And here we have Bruce Bartlett proposing a VAT to pay for health care spending. Stodgy Republican warhorse Bill Thomas (the one who judged Bush's privatization plan a "dead horse") also wants one. This, I think, is about as good as it gets for liberals. An emerging consensus on a new, dedicated revenue source to guarantee the financial solvency of health care. And if, while we're moving this through, we can't create a hybrid universal plan along the lines of CAP's proposal, we're completely useless as a political party...

I would rather have a larger (and more progressive) income tax. But the important thing is to balance the federal government's spending commitments with its revenues. For if we don't, then when the long-run arrives inflation or capital flight will. And one thing I have learned over the past decade or so is that the long run can arrive with terrifying suddenness and swiftness.

The conclusion of Barlett's op-ed is very well-written:

I am no deficit hawk. For decades I have argued that the negative effects of deficits are generally exaggerated. But unless spending is checked or revenue raised, we are facing deficits of historic proportions. It is simply unrealistic to think we can finance a 50 percent increase in spending as a share of gross domestic product - which is what is in the pipeline - just by running ever-larger deficits. Sooner or later, that bubble is going to burst and there will be overwhelming political support for deficit reduction, as there was in the 1980's and early 1990's.

When that day comes, huge tax increases are inevitable because no one has the guts to seriously cut health spending. Therefore, the only question is how will the revenue be raised: in a smart way that preserves incentives and reduces growth as little as possible, or stupidly by raising marginal tax rates and making everything bad in our tax code worse?

If the first route is chosen, the value-added tax is by far the best option available to deal with an unpalatable situation. Absent any evidence that the White House and Congress are prepared to restrain out-of-control health spending, I see no alternative.

I actually think our chances of arriving at his--preferred--conservative low-government (or not-quite-as-big-government) world are better than he thinks *if* we get congress to renew real PAYGO procedures that force it to acknowledge the link between spending and revenues in the long run. Spending increases are a lot harder to vote for if they carry tax increases with them.

April Fools Day Continues!

April Fools Day not only came early this year, it continues late. A correspondent writes:

Donald Luskin:

NRO Financial April 4, 2005: The actuaries, as noted earlier, assume about 1.9 percent annual real GDP growth over the coming 75 years.... At the same time, the actuaries assume 6.5 percent annual real total returns to stocks.... What’s the complaint, then? Where’s the inconsistency?..

Donald Luskin:

NRO Financial February 2, 2005: Krugman does make one good point... stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates...

There is one thing that puzzles me: Is Luskin genuinely too dumb to remember what he wrote two months ago? Or does he just think that National Review's readers and editors are too dumb to remember what he wrote two months ago?

The Medium Lobster Strikes Back

Once again, the Medium Lobster of Fafblog is the only creature that can deal with the Bush administration on the appropriate level--in this case, the report of the Silberman commission on intelligence failures:

Fafblog! the whole worlds only source for Fafblog.: The precis of the final report of the Medium Lobster Commission, reporting on the failure to accurately determine Saddam Hussein's weapons capabilities in the months preceding the Iraq War:

America's intelligence agencies made thorough and grievous errors in their assessments of Iraq's weapons capabilites. For example, in the 2002 National Intelligence Estimate, the line 'Saddam Hussein is made entirely of poison and can launch fifty fusion warheads from his perpetually-flared nostrils' should properly have read 'No nukes here, nothing to see, all done now.' The commission has concluded these were wholly the result of clerical error, most likely a typo or a severe paper jam.

A Short Dialogue on the Labor Theory of Value

Glaukon: My adviser used to say that the LTV was like LSD in the '60s--it ruined a lot of good minds. I understand the temptation to get caught up in the scholastic arcana of the Labor Theory of Value: you feel like you just have to try a little bit harder and it'll all finally become clear.

Admetos: That's a great line--LTV is like LSD! May I quote it? Who is it from?

Glaukon: Actually, it's from me. My advisor used to say it about the micro-macro problem in socialogy. But LTV is a similar phenomenon.

Admetos: Ah. And it works better with LTV. Three-letter acronyms. Alliteration.

Thrasymakhos: So you took a witty and insightful saying of your own, and attributed it to your advisor because you wanted it to carry greater weight and did not care about your reputation for lapidary brilliance?

Glaukon: That's about right.

Thrasymakhos: Boy! You have a lot to learn.

Admetos: I think that at bottom the problem with LTV is the result of a flaw in our educational system. Our past lived experience gives us no idea what to do when confronted with a morass like the Labor Theory of Value. `The problem is that ever since we started grade school we had been set problems that have solutions: a little more brainpower and a little more skull sweat applied to a puzzle would always produce answers. We have done this for seventeen years and it has always worked. Then--in graduate school--we hit the LTV, and the transformation problem, and problems where more skull sweat doesn't help because they have no solution. And what do we do?

Glaukon: Well, as people who have for seventeen years lived the success of thinking harder, and as people who are convinced that this is not a fact about how the human-made educational system is organized but a fact about how the world works, we try to think harder and immerse ourselves deeper and deeper into the scholastic arcana...

Thrasymakhos: We don't do that. They do that. We wise up and finish our dissertations on topics not related to the Transformation Problem.

Glaukon: And what happens to them?

Admetos: We still see them here in Berkeley: the Hollow Men, pouring over the Grundrisse at coffeehouses. Unable to grasp the fact that nobody has found a satisfactory solution to the Transformation Problem in 150 years means that they are not going to find one either...

Thrasymakhos: You see them in coffeehouses: you're an economist. We see them in our classes...

The Commander Is on Deck

Gene Sperling issues marching orders on Social Security reform:

On Clear Lines on Progressive Savings Accounts

by Gene Sperling, Senior Fellow, Center for American Progress
April 4, 2005

With the public overwhelmingly rejecting the White House's efforts to partially privatize Social Security through the diversion of payroll taxes into private accounts, there is already a growing conservative effort to use new rhetoric and designs to blur the distinctions between harmful privatization options and the types of progressive savings options outside of Social Security that are deserving of progressive support.

One way the lines are blurred is by the emphasis on partial privatization proposals that, while sharing virtually all of the same flaws as "carve-out" privatization proposals in terms of injecting unnecessary risk and undermining Social Security's progressive guaranteed benefit, are nonetheless defined as "add-on" accounts. Indeed, even President Bush on at least one occasion has sought to describe partial privatization accounts as an "add-on." Since the phrase add-on has also been used to describe proposals like President Clinton's USA Account and the Universal 401K,* which are completely outside of Social Security and targeted to middle-income and moderate-income families, it is clear that simply using this term does little to define the nature or acceptability of such a proposal.

Another likely avenue for such line-blurring is for conservatives fleeing partial privatization plans to call for "add-ons" that rely on borrowing and running up the national debt to fund regressive savings accounts – such as President Bush's Retirement Savings Accounts and Lifetime Savings Accounts – that would further skew our upside-down savings system even more toward the most well-off. While some new proposals attached to conservative Social Security reform plans include a small incentive targeted toward low-income savers, every such plan that has been floated so far has been regressive, with the largest costs directed at the most well-off.

As one who believes progressives must support responsible and fair efforts to enhance Social Security's solvency and as a strong supporter of progressive savings options outside of Social Security such as a Universal 401K, I believe it is crucial that progressives be crystal clear about what would constitute an acceptable effort to increase pension and personal savings outside of Social Security, and what constitutes harmful regressive or partial privatization proposals.

Continue reading "The Commander Is on Deck" »

The DeLong Smackdown!

The champion is the extremely valuable smackdown by the extremely knowledgeable Ben Weiss of my claim, at "a humanist" humanist_is_.html that someone in Niccolo Machiavelli's social position would not have had a personal library half a century earlier:

Ben Weiss: A wonderful post, and a wonderful Machiavelli quotation, but I'd like to take a bit of issue with the comment about libraries in the fifteenth and sixteenth centuries --- and, yes, I know that's really not the point of the post.

The general point that libraries were fewer and smaller before the advent of printing than after is basically true. So is the fact that manuscripts were harder to come by and more expensive than printed books, but Brad's comment that "the idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier," is far too stark. In the early Middle Ages libraries really were the province of "kings, sovereign princes, and abbots", but there was a steady increase in both literacy and the number of books in circulation during the later Middle Ages. This was especially true in cities: notably in Northern Italy, but also in France and what would become Germany. By the late fourteenth century, a bureaucrat with literary tastes like Machiavelli would almost certainly have had personal copies of a large number of his favorite books, and, if he were wealthy enough, possibly even a little study (a "studiolo") in which to read them.

Over the course of the thirteenth and fourteenth centuries the book trade underwent a dramatic shift as the primary center of manuscript copying moved from monastic houses to commercial scriptoria, often in university towns. (Richard and Mary Rouse have written a very important, if slightly exhausting, two-volume history of the commercial book trade in Paris: Manuscripts and their makers: commercial book producers in medieval Paris, 1200-1500 (Turnhout, 2000).) This was both fostered by and, in turn, fostered an increase in demand for personal copies of university texts. In Paris, as in places like Vienna, Padova, and Krakow, there was an active market in both new and used manuscripts, and, in addition, many scholars (especially in Italy) copied texts out themselves.

But perhaps the most important piece of evidence of the increasing demand for books before Gutenberg is the invention of printing itself. Gutenberg was not just experimenting for the sake of experiment. He was responding to, if not an explicit demand, to a perceived opportunity. It's important to remember that the printing press was not devote to making a new type of object --- early printed books are exactly the same in form and layout to manuscripts --- but to make more of a commodity that already existed.

With thanks, and all best wishes,

Ben Weiss

The smackdown started with my declaration at "Safeway Goes Upscale" that "potatoes are as close to tasteless starch as can be attained in this world or the next..." The counterattack of the Potato Mafia was swift and brutal:

Brad, Brad, Brad. "Somebody was carrying on about something called Chateau Lafite, but as far as I'm concerned wine is just a way to disinfect water at the cost of a slightly sour flavour." Have a potato tasting evening, blind; mashed with a hint of butter - desiree, red lasoda, bintje, kipfler, purple congo, sebago, spunta -- aah! Spunta! - Tasmanian pink-eye, Toonagi delight... Would you confine yourself to one kind of bread - and white sliced at that - all your life?.... I hope you go to hell for this... (in which case your claim might come true).... I get my spuds in 10# bags from the 99¢ store, you elitist capitalist swine.... And Brad, when the itinerant potato vendor drops by my restaurant with dozens and dozens of varieties for sale, I'll think of you. I may even run a Brad DeLong Potato Sampler Dinner just for the hell of it.... Ask a Peruvian if they know any potato recipes (heh, heh) and they'll tell you aaaaaall about it - thousands of varieties, favorite dishes, etc.... Please God tell me this is some sort of April Fool's Joke.... To paraphrase Brad's post: "Having never tasted a fingerling potato, it is my considered opinion that they are tasteless." Hmmm.... Brad now wishes that he had said something less controversial. Like about who really deserves to live in Palestine.... Brad is indeed infirm. He has lived in California too long. As much a paradise as it is for most vegetables and fruits, it is a surprising black hole of flavor for certain products, including staples like beef and potatoes.... The Maine potato eschews the corporate mold for simple Down East flavor. Nothing beats mashed potatos made from Maine spuds. And no one who has tasted them can claim that "potatoes are as close to tasteless starch as can be attained in this world or the next."... Maybe it's just because I am a native Idahoan of Irish extraction, but your words cut me to the heart. "Tasteless starch?" Sure, if you're talking about rice, or pasta.... Perhaps it will be easier to turn Matthew Yglesias into an economist than Brad into a competent food critic.... I like the Yukon Golds. They do taste very good, look and taste like they have butter already on them when they don't. They are good to grow in the garden and also are more common in supermarkets now...

Interrupted only by the brief appearance of the Rice Mafia:

Non-sticky rice lacks a range of flavors? Ah, you've never had mountain rice in a Lahu, Karen or some other tribal village in northern Thailand. Now that is some rice!

It continued with my claim at "Lire le Capital" that Marx's "labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation."... It's simply not a useful tool for either moral philosophy or political action. The Marx Mafia struck back:

Marx didn't think surplus value was evil, he thought alienation was bad. But it's no good talking about exploitation without the labor theory of value, for Marx.... I find Brad's reading so superficial I hardly know where to start. ... DeLong has long ago proved himself to be a complete hack... some worm hoping to be some bigshot in Washington DC.... DeLong is inventing some nonsense story.... DeLong once again sounds more like Pat Robertson than someone studying political economy. There are plenty of socialists who wrote moralizing tracts about oppression and wrongs, but Marx was not one of them in terms of his more serious works.... DeLong is not making an economic argument against the LTV, he's making a moral argument against it. And he's making it as if the LTV is a moral argument, when the whole point of LTV is it's not a moral argument.... I guess DeLong never got to the chapter on the difference between absolute and relative surplus value. Which has nothing to do with the "economic" moralistic bullshit he's talking about.... Like so many other political economists, DeLong knows next to nothing about Marx - I've only read halfway through Capital v.1 and some brief summaries of Marxian political economy, yet I already know much more about this than DeLong. I could say that about Paul Krugman as well. One may ask oneself why they do not know more about this.... The purpose of this article was not to explicate/refute the labor theory of value, but to make a performance, as a noted economics blogger.... Dr. D has obviously never worked as a US manual farm laborer, or studied Middle Ages serfdom or Colonial Slavery, understood "Pella the Conqueror," or visited the sweat shop ghettoes of ASEAN where everyone "freely barters and trades for the value of their labor". It's such oversimplistic, Sesame Street finger-counting, nursery rhyme examples which lulled the American middle class into signing away their own "surplus value per worker" for crumbs of minimum wage against wrenching fees and taxes, usurous banking swindles, outrageous pyramids of corporate capital, for what? An abbreviated life with no medical care and no retirement pension.... [T]he LTV is not, was not intended as, an empirical-analytic theory of prices.... It seems that Brad's appreciation of Marx is on a par with his appreciation of potatoes.... [T]o dissect Marx from history and his philosophy and turn it into a mathematical exercise, with the benefit of retrospect and a century of neo-classical liberal conditioning, seems to do a disservice to history...

Potato Mafia... Rice Mafia... Marx Mafia... Rare-Book Curator Mafia... It's been a busy week.

Robert Waldmann Talks About First-Order Approximations

My ex-roommate Robert Waldmann comments on Greg Mankiw's discussion of Baker-DeLong-Krugman:

g(x) is a valid first order approximation of another function f(x) around x0 if the limit as a goes to zero of (g(x0+a)-f(x0+a))/a is zero. This does not mean that g(x) is a good approximation... "0" is a valid first order approximation for "x squared" around [x0=0]. This does not mean that 0 is a good approximation for one million squared. However, economists, who like to play with math but don't always take it seriously, use "is true to first order" to mean "is a useful approximation to the truth"....

I recall a professor presenting a quadratic loss function saying it was arbitrary. I raised my hand and said something.... The professor said "sure but there is no way of knowing how close is close enough, The loss function could look like this (drawing)" I was chastened at the time, but pleased when he said my comment was good.

Recently reading [Mankiw], I noticed a third meaning... "according to the [simplest] neoclassical model of the phenomenon."... Note that this third usage is much further from the formal mathematical usage than the second is. No one could possibly believe that the first neoclassical model of something must be a good approximation.... The professor who wouldn't let me elide the difference was named N. Gregory Mankiw.

Ah. But, Robert, attachment to methodological principles of rational thought invariably lasts only until they begin to cause serious pain to positions taken for ideological reasons...

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

It is a fact that the non-economics writers of National Review are plumbing the depths of the Luskin scale. Consider Jonah Goldberg, who writes:

Jonah Goldberg: Krugman also notes that engineers and other faculty in the hard sciences are also disproportionately liberal. It’s not just in the humanities. Good point.

What he — Mr. Prize-Winning Economist — neglects to mention or consider is that engineers in the private sector make good money. Ditto many scientists. Indeed, I don’t have the data to back this up handy, but it would hardly surprise me to find out that the most liberal members of the science faculty are probably the least likely to be able to find work elsewhere. I’m sure there’s a market for private-sector biodiversity experts, but something tells me it’s smaller than the market for electrical engineers...

Does Goldberg - Mr. National Review Pontificator - not remember when he writes paragraph 2 that in paragraph 1 he admitted that it's not just the ecologists but the engineers who are "disproportionately liberal"? Surely it's a minimum requirement for sentience that you have enough brain cells to maintain at least a simulacrum of consistency from one paragraph to the next.

Perhaps Goldberg could go ask some scientists and engineers why they aren't Republicans. Do a little legwork. I know that when I ask scientists and engineers why they aren't Republicans, I get back five answers:

  1. From libertarians, because the Republicans are really hostile to individual freedom: they want to control people's lives and boss people around.
  2. From biologists, because Republican politicians say they don't believe in evolution.
  3. From chemists and physicists, because Republican politicians pretend to believe that CO2 molecules created by human action have a different radiation-absorption spectrum than other CO2 molecules.
  4. From all corners, because Republican politicians are the tools of lobbyists and do not respect the evidence about anything.
  5. From all corners, because Republican politicians don't understand how important investment in education is for the future of America--they have no idea where our current wealth and health really comes from.

I think these are five very good reasons.

Why Oh Why Can't We Have Smarter Big-Box Stores? (Wal-Mart "Always Low Prices" Department)

Think Progress reports that Wal-Mart is on the attack:

Think Progress: Wal-Mart CEO Lee Scott says he is sick and tired of being a “punching bag” for reactionaries who don’t understand the free market:

The thing is, innovation and competition tend to change the status quo. We were a small store once, too. We were able to innovate and use the economies of scale and volume buying to deliver the value our customers needed and wanted. If it weren’t Wal-Mart, it would have been someone else. I can assure you that people who live paycheck to paycheck are thrilled when we come to town.

And the first thing it does on the attack is to try to shut down one of its defenders--economics graduate student Kevin Brancato's "Always Low Prices" weblog:

Kevin Brancato: After a year of my blogging about Wal-Mart on ALP, Wal-Mart has had enough. WM has sent its attorneys after me -- to stop me from using their slogan "Always Low Prices", and to scoot me off the domain.

Let me be clear at the outset; there is no scandal here. I am not outraged. This is about business and control of property -- not persecution. Unlike GM, WM did NOT send a goon squad. And though I find many of Wal-Mart's claims spurious, I am not a lawyer, and I will have to consult with my own lawyers before proceeding formally. And though they will tell me to not discuss the matter any further, I think transparency is more important than most lawyers do.

I promise to fight to keep the domain and Always Low Prices name. And I want the blogosphere's help and advice on how to proceed....

What is the claim?

The claim is that I am in voliation of the Lanham Act -- §1125(a), §1125(d), and §1114. Basically that I pretend to be allied to Wal-Mart, and that I use Google Ads to profit off of Wal-Mart's trademark.

I am sympathetic to Wal-Mart's desire to control its private property, but my use of this domain has in no way taken business away from them. Indeed, as one of Wal-Mart's most ardent defenders, taking this domain away from me is likely to hurt Wal-Mart in the short and long run. Who else regularly faces off against Wal-Mart's opponents, union sympathizers, and the like on the internet?...

DeLong's Ignorance Corrected!

Ben Weiss, Curator of Rare Books at the Burndy Library of MIT's Dibner Institute for the History of Science and Technology, writes in:

First off, I love your blog, and read it avidly; many thanks for the wide learning and elegant argument. I don't know if you go through your comments section, so I thought I would also email this to you, as there is a bit of economic history buried in the response.

Response to A Humanist

A wonderful post, and a wonderful Machiavelli quotation, but I'd like to take a bit of issue with the comment about libraries in the fifteenth and sixteenth centuries --- and, yes, I know that's really the point of the post.

The general point that libraries were fewer and smaller before the advent of printing than after is basically true. So is the fact that manuscripts were harder to come by and more expensive than printed books, but Brad's comment that "the idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier," is far too stark. In the early Middle Ages libraries really were the province of "kings, sovereign princes, and abbots", but there was a steady increase in both literacy and the number of books in circulation during the later Middle Ages. This was especially true in cities: notably in Northern Italy, but also in France and what would become Germany. By the late fourteenth century, a bureaucrat with literary tastes like Machiavelli would almost certainly have had personal copies of a large number of his favorite books, and, if he were wealthy enough, possibly even a little study (a "studiolo") in which to read them.

Over the course of the thirteenth and fourteenth centuries the book trade underwent a dramatic shift as the primary center of manuscript copying moved from monastic houses to commercial scriptoria, often in university towns. (Richard and Mary Rouse have written a very important, if slightly exhausting, two-volume history of the commercial book trade in Paris: Manuscripts and their makers: commercial book producers in medieval Paris, 1200-1500 (Turnhout, 2000).) This was both fostered by and, in turn, fostered an increase in demand for personal copies of university texts. In Paris, as in places like Vienna, Padova, and Krakow, there was an active market in both new and used manuscripts, and, in addition, many scholars (especially in Italy) copied texts out themselves.

But perhaps the most important piece of evidence of the increasing demand for books before Gutenberg is the invention of printing itself. Gutenberg was not just experimenting for the sake of experiment. He was responding to, if not an explicit demand, to a perceived opportunity. It's important to remember that the printing press was not devote to making a new type of object --- early printed books are exactly the same in form and layout to manuscripts --- but to make more of a commodity that already existed.

With thanks, and all best wishes,

Ben Weiss

The wonderful and awesome thing is not just that there is someone somewhere on the earth who can answer pretty much any question I might ask, but that so many of them read my weblog. I am truly fortunate.

Roofs or Ceilings?

Kevin Brancato of Truck and Barter has scanned in Friedman and Stigler's classic attack on rent control:

Truck and Barter: Roofs or Ceilings?: Sorting through some papers I acquired a while back, I found an original copy of Roofs or Ceilings? The Current Housing Problem by Milton Friedman and George Stigler, as originally published in 1946 by the Foundation for Economic Education. This classic essay argues against the use of rent control:

Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building. Formal rationing by public authority would probably make matters still worse.

Although the essay is in the public domain, I couldn't find it on the net. So I've scanned it in, and put it on my university server.


Kash of Angry Bear Is Upset

Employment is almost exactly the same as it was four years ago, even though there are an extra twelve million Americans sixteen and over:

Angry Bear: The most disappointing part about the US economy's poor job creation right now is that we may well be pretty much at the peak of economic growth for this business cycle; most economists forecast growth in the US to slow gradually from 2004's pace over the next two years... and those economists who think hard about the US's necessary current account adjustment (are you surprised that I was able work that subject into this post?) suspect that the economy may slow more than just gradually sometime over the next year or two. If this is the best job creation that the US economy can do when growth is relatively strong, what will the labor market look like as the US economy slows?

Keynesian Economics: Mail Call...

Reading Keynes:

Dear Professor,

I'm a student at Florida State University, and I've recently taken up a second major in economics after reading a few books by Keynes. You're an often-quoted person in the "blog-o-sphere," and I note your review of Keynes's Tract on Monetary Reform on the Berkeley website.

I've been having trouble getting straight answers from people on campus - generally, an Austrian-aligned bunch - about whether or not Keynes was correct about deficit spending during depressions. By that, I mean whether deficits will provide at least a temporary boost in output and employment. I've heard that the effects can vary based upon whether the spending is long-term or short-term. (I may be thinking of the wrong economist, but I believe Edward Prescott demonstrated this difference.) I was wondering: What is your opinion on this?

Thank you very much,


Well, it depends. For example, in Argentina in 2001, Stanley Fischer argued that increasing Argentina's budget deficit would increase expectations of inflation and capital flight, would cause a collapse in private investment, and so you would lose more than you gained--that a more "stimulative" fiscal policy would actually cause not an addition to but a collapse in demand and employment.

At the same time, Joe Stiglitz argued that reducing Argentina's budget deficit would do little to increase investment in the short run, would throw people out of work thus reducing their incomes, that reduced incomes would cause reduced spending and higher unemployment, that higher unemployment would deepen the political crisis, and that a deeper political crisis would accelerate capital flight, reduce investment, and lead to a collapse in demand and employment.

The terrible thing is that, as best I can tell, I think that they were both right: that increased deficit spending in the 2001 Argentine depression would have made things worse, and that reduced deficit spending in the 2001 Argentine depression would have made things worse.

When can deficit spending in a recession help?

  1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
  2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.

You thus see that my view is closely related to (but not identical to) the short-run long-run distinction you draw. The longer-run are deficits, the more likely they are to cause a crisis of private-sector investor confidence. The shorter-run are deficits, the more likely they are to be part of a stable, sustainable structure of economic policy.

Lire le Capital: Mail Call

From: "XXXX"
To: delong@econ.Berkeley.EDU
Subject: Communism
Date: Mon, 4 Apr 2005 14:22:30 -0700
Thread-Index: AcU5XGg0e/rUmG6pRfqAi7kFYayhrA==

I was wondering if I could borrow some of your insights on Economics.... I have taken Transitional Economics and have a healthy background (for an undergrad) of the “Economics of Shortage” and decision making under socialist constraints.

However, reading Das Kapital and other things, I am seeing a different interpretation of how an item is valued, and the value of labor verses what I have been taught in traditional classes and I need more understanding. What is the “value” of a product, or of labor? Marx argues that exploitation in capitalism is structural, because the basis of making a “good deal” is paying someone four dollars for something worth five. To be a capitalist means you have to exploit the true value of their labor for what you’re willing to pay them for it.

I was hoping to get your insights into how products and labor are valued, and what you think of exploitation in capitalism. Any help you can provide would be greatly appreciated, even if it is a referral to other books or anything. Thank you in advance.


Let's run through Marx's labor-theory-of-value argument in a simple finger-exercise model:

Start with 100 identical farm families on 100 identical farms, each of which produces 3000 pounds of wheat (and other crops, but let's assimilate them all into wheat) each year.

Now suppose that ten of these families starve themselves for a decade--living on little more than half-rations--to raise the cash to buy farm machinery, irrigation systems, fruit trees, et cetera from the cities. As a result of their sacrifice, saving, and investment, thereafter their farms require four times as much labor each year to operate, but also produce crops worth eight times as much because of the capital investment. They then hire thirty additional families' worth of workers, leaving the remaining ninety original farmsteads to be worked by sixty families.

If diminishing returns do not set in and if the sixty families that remain in the family-farm sector expand their crops to take over the now-idle land, each of them can now produce 4500 wheat-pound equivalents of product each year: their standard of living has gone up by 50%. The owners of the capital-intensive farms have to pay each of the 30 families they hire 4500 wheat-pound equivalents to get them to work in the capital-intensive farm sector. Each of the proprietor families is then left with 24000 - 13500 = 10500 wheat-pound equivalents in income--4500 wheat-pound equivalents of which is the "wages" of the proprietor family, and 6000 wheat-pound equivalents is profit.

Now in Marx's schema, the first situation--where average labor productivity is 3000 pounds of wheat per family, and each family receives 3000 pounds of wheat in income--is one of no exploitation: labor is paid its average product:

Average Labor Product: 3000
Real Wage: 3000
_____ _____
Surplus Value per Worker: 0
Total Exploitation: 0

And in Marx's schema, the second situation--where average labor productivity is 5100 wheat-pound equivalents, and each non-proprietor family earns or is paid 4500 wheat-pound equivalents--is a situation of exploitation in which the proprietor class extracts surplus value from the workers by using their market position to pay those that they hire less than the true value of their labor.

Average Labor Product: 5100
Real Wage: 4500
_____ _____
Surplus Value per Worker: 600
Total Exploitation: 60000

Now it should be clear that this labor-theory-of-value-based analysis makes no sense at all. The proprietor families starve themselves for a decade, and yet Marx views them as exploiters? The heavy investments of the proprietor class and their resulting demand for labor raises the real wage by 50%, and yet the working class is oppressed? Something is very wrong here.

Now at this point the standard response is that the example is rigged: that in the real world those who own property and hire labor and live richly gained their wealth not through sacrifice but through a combination of luck and theft and having chosen the right parents. Thus it is unfair to set forth an example in which the proprietors' moral claim to their higher income is so clear and strong.

And the rebuttal is that, yes, this example is rigged: that's the point. The aim is to construct useful analytical categories that will help one identify and assess injustice. The aim is not to construct analytical categories--like the labor theory of value--that claim to find injustice whether there is in fact injustice or not. The fact that the labor theory of value finds injustice whether it is there or not is a sign that it is not the brightest light on the tree of good ideas.

Marx's labor-theory-of-value-schema makes no distinctions between profits on capital that have their origins in luck, theft, and choosing the right parents on the one hand; and profits on capital that have their origins in sacrifice, industriousness, or flashes of genius on the other. They are all, to Marx, "exploitation," "unjust enrichment," "extraction of surplus value." They are all, to Marx, signs of evil. But in this particular example the proprietors are, in reality, not evil. The proprietors are, in reality, public benefactors. The effect of their savings and investment is to raise not just their own incomes (after an extended period of sacrifice) but everyone else's incomes as well.

Thus the labor theory of value category of "exploitation" does not map onto what either ordinary language or our moral intuitions call "exploitation." There are social and economic changes that are good that are, in Marx's schema, increases in the rate of exploitation. There are social and economic changes that are bad that are, in Marx's schema, increases in the rate of exploitation. It's simply not a useful tool for either moral philosophy or political action.

Moreover, the labor theory of value is of little help in predicting what average market prices will be. It's not a useful tool for economic analysis either. In my view, the labor theory of value is pretty much useless.

If you want to make a compelling criticism of economic and social relationships, you cannot do so by saying that there is Marxian "exploitation"--which exists wherever workers are paid less than the average product of labor. You have to, instead, inquire into the origins of the wealth and property rights on which the proprietor class's income is based. The labor theory of value is simply a red herring.

UPDATE: Matthew Yglesias and many others enter the lists and couch their lances in defense of German Charlie from Trier. Matthew writes:

Matthew Yglesias: Some Marxian Musings: Brad Delong offers a critique of the labor theory of value that is, I think, helpful as an exercise in understanding economics but not a very useful contribution to Marxiania. Brad suggests that Marx would have us prefer the situation in which there's zero exploitation and real wages of 3,000 wage-units to the one where there's 60,000 units of aggregate exploitation but real wages of 4,500. This, however, is wrong. What Brad describes here is essentially the transformation from a pastoralist economy to a capitalist one. Marx emphatically does not condemn the tranformation to a capitalist economy and certainly does not suggest that we ought to move backward to a world of subsistence farming. Rather, he looks at the exploitative capitalist economy where average labor product is 5,100 and real wages are only 4,500 and suggests that, though the collective ownership of the means of production, we could move forward to a world where the real wage is pushed up to the average labor product (i.e., 5,100) and the element of profit/exploitation is reduced to zero...

I would not disagree. Marx approved of the transition from petty-bourgeois agricultural commodity production to capital-intensive agricultural commodity production even though the rate of exploitation rose. His key labor-theory-of-value-model measure--the "rate of surplus value"--increased across this change. Yet Marx saw this change as good. I think that this is my point: The labor-theory-of-value model is simply not a good or useful model. Marx's measures of "exploitation" and "rates of surplus value" don't tell you very much about what is really going on. It's a swamp you really don't want to enter.

Estranged from One's Species Being

A humanist writes:

The Weblog: Single Post View: Meanwhile, the problem of, for instance, 'How much do you forgive?' becomes, at best, a scholarly issue of how to bring together what is said by Derrida, Arendt, etc., in a sufficiently unique way that publishing the results will be at least minimally justifiable.

When I started reading these texts, the passion initially came... from a feeling that these people were going to teach me how to live. Kierkegaard, for instance -- I thought he knew something I didn't, or could in some way lead me to see life differently.... Now, I'm trying to figure out some way to squeeze out a paper on Zizek's use of Kierkegaard, so that I can send it off and people will publish it, so that I can write down on a piece of paper that it has been published.

I have the game of academia down, in its basic points; at this point, it's a matter of building up a sufficient resume that people will believe I am good at it. I have no doubt whatsoever that I could make a career out of it.... But -- for example -- how much do you forgive? I don't know. I really don't even know what it would look like to forgive....

And dissecting yet another text in order to produce a text of my own that will conform with the canons of professionality within certain circles of 'philosophical' and 'theological' discourse doesn't seem like any kind of answer -- it doesn't seem like it would help anything, anything at all, even a little bit. Not when I'm trying to figure out some way to walk down the street, to be with people, to do right by them, to experience some kind of peace.

I met a student after that lecture, obviously a very bright guy, who had hit the jackpot and been accepted to DePaul. We got to talking about various things, and I think that in essence, he treated me like shit. He had to have his little pissing match with the kid from Nowhere Theological Seminary, who came to the lecture with his overeager undergrad friends. I wonder how much different I would really be, even if I had gotten into a program that would make it so that I won't have to worry for a few years -- maybe part of the reason it's so grating is that this gnawing sense of insufficiency keeps getting grilled into me, such that even when I'd 'arrived,' I would still feel like I constantly need to prove myself, just like him. Because I wouldn't feel like I deserve it, because there is no deserving -- there is no available way to determine deserving. And so, prove yourself -- for nothing, to no one, to no end...

Sounds like our humanist is undergoing one of those dark cloudy midafternoons of the soul that happens when you keep your nose to the grindstone. So let me be an annoying Dutch uncle, and tell him what he already knows: step back. You see, when you think of what you are doing as "dissecting yet another text in order to produce a text of my own that will conform with the canons of professionality within certain circles of 'philosophical' and 'theological' discourse," you have fallen victim to the letter that killeth, while the spirit giveth life.

Let me pull the first four "texts" off my nearest bookshelf: Garry Wills, Nixon Agonistes (an incredibly dense, incredibly thoughtful book that I badly need to reread, for whenever I have read it I have thought that wonderful insights are eluding me); Laurence Meyer, A Term at the Fed (his memoirs of his days as a Federal Reserve Governor; we chose him for the job as someone who could be a bridge between the High Policymakers and the forecasters and model-builders; I think--and the book says--that he did this job very well); Liza Featherstone's excellent Selling Women Short: The Landmark Battle for Workers' Rights at Wal-Mart; and Adam Jaffe and Josh Lerner's Innovation and Its Discontents (I can't believe I still haven't read this! I really need to!).

As long as I think of these as "texts," they are dry and boring. But there is a key to making them exciting: to remember that they are not texts: they are people--people urgently trying to talk to me, to tell me something very important that they think I desperately need to know. Liza Featherstone thinks that I very much need to know about Wal-Mart's battling to keep its workers down--and their resistance--if I am going to be a good economist, a good citizen. She grabs me and lectures me at length, with excited and animated gestures. Never mind that I have never met her (I do know her husband, Doug Henwood, slightly). She is there, in front of me on the page, and it would be rude to cut her off--not to turn to the next one.

Niccolo Machiavelli, I think, put it best. Let me quote from his letter to his friend and hoped-for patron Francesco Vettori, written in the days when he was rusticating in rural exile outside Florence.

I am living on my farm.... I get up in the morning with the sun and go into a grove I am having cut down, where I remain two hours to look over the work of the past day and kill some time with the cutters.... Leaving the grove, I go to a spring, and thence to my aviary. I have a book in my pocket, either Dante or Petrarch, or one of the lesser poets, such as Tibullus, Ovid, and the like. I read of their tender passions and their loves, remember mine, enjoy myself a while in that sort of dreaming. Then I move along the road to the inn; I speak with those who pass, ask news of their villages, learn various things, and note the various tastes and different fancies of men. In the course of these things comes the hour for dinner, where with my family I eat such food as this poor farm of mine and my tiny property allow. Having eaten, I go back to the inn.... I sink into vulgarity for the whole day, playing at cricca and at trich-trach.... So, involved in these trifles, I keep my brain from growing mouldy, and satisfy the malice of this fate of mine, being glad to have her drive me along this road, to see if she will be ashamed of it.

On the coming of evening, I return to my house and enter my study; and at the door I take off the day's clothing, covered with mud and dust, and put on garments regal and courtly; and reclothed appropriately, I enter the ancient courts of ancient men, where, received by them with affection, I feed on that food which only is mine and which I was born for, where I am not ashamed to speak with them and to ask them the reason for their actions; and they in their kindness answer me; and for four hours of time I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death; entirely I give myself over to them.

When evening comes Niccolo Machiavelli enters his personal library. There he talks to his friends--his books, or rather those who wrote the books in his library, or rather those components of their minds that are instantiated in the hardware-and-software combinations of linen, ink, and symbols of Gutenberg Information Technology. They are 'ancient men' who receive him 'with affection,' and for four hours he 'ask[s] them the reason for their actions; and they in their kindness answer me; and... I do not feel boredom, I forget every trouble, I do not dread poverty, I am not frightened by death...'

Remember: Machiavelli lives only two generations after Gutenberg. He is thus one of the very first people in the world to have had a personal library. Before printing, libraries were the exclusive possession of kings, sovereign princes, abbots, masters of the Roman Empire (like Caesar and Cicero). The idea that a mere mortal--a disgraced ex-Assistant for Confidential Affairs to the Republic of Florence--might have a personal library would have been absurd even half a century earlier. To him, therefore, his personal library is not something he takes for granted, but something new, something he has that his predecessors did not. And so he can see clearly--more clearly than we can--what his personal library does for him, what his books are.

In disgraced semi-exile--when many he would talk to are afraid to be seen in his company, and where he is afraid to be seen in the company of almost all the rest--the ability to read and reread his personal copies of Publius Ovidius Naso, Petrarch, Dante Alighieri, Titus Livius, Plutarch, and the rest makes them his friends: people who will receive him with affection, and honestly answer his questions about politics and history. It is important to have such friends, and to pay them proper respect. Hence Machiavelli will not go to them in his clothes-of-the-day--those in which he had managed his farm, haggled over the price of firewood, gambled, and on which he had spilled beer. He will, instead, enter his library only in 'garments regal and courtly.'

Moreover, people's rough edges are filed off in their books. Adam Smith found Jean-Jacques Rousseau impossible in person, but that chunk of Rousseau's mind that is instantiated in the hardware-and-software combination of Gutenberg Information Technology is very pleasant company. Nobody outside his family (save Friedrich Engels) could ever stand Karl Marx for any length of time. But that part of Marx's mind that is instantiated in his books doesn't fly into irrational rages, doesn't accuse one of being a police spy, doesn't beg for money, doesn't demand that one accept that he is very much the smartest one in the room. Marx-in-the-book speaks passionately of his hopes and fears for the future--hope coming from the progressive destiny of humanity and the extraordinary progress of technology, and fear coming from our constant tendency to f*** up our social engineering problems--and (save when he starts raving Hegelian gibberish, or when you see that huge, huge chunks of his argument fall away because he has confused the physical capital-output ratio with the value capital-output ratio) can be good company.

And then there are those whom one really wishes one could know in person. For who would not like to be good friends with (if one were quick and witty enough to avoid becoming one of his targets) John Maynard Keynes, or David Hume, or John Stuart Mill, or Adam Smith? I know Larry Meyer--but it is an extra gift to have a piece of him on my bookshelf that I can talk to anytime, in the form of A Term at the Fed. (It would be better to be able to call him up to appear to talk at will, but A Term at the Fed is a pretty close substitute). I wish I knew Garry Wills in person, but you can't have everything, and pieces of his literary persona haunt at least four rooms in our house plus my office. I'm going to try to meet and talk to Liza Featherstone the next time I'm in New York with time to spare, but meanwhile I have her book. And Adam Jaffe is (justifiably) angry with me for an episode of writer's block which meant that I failed to revise a paper he was editing--but his book isn't angry at me.

So I think that as long as a humanist views himself as turning the crank on a machine ("squeeze out a paper on Zizek's use of Kierkegaard, so that I can send it off and people will publish it, so that I can write down on a piece of paper that it has been published") he is doomed. But when he shifts his mental frames, and remember what is really going on--that Kierkegaard is desperately trying to communicate something difficult and important that he only half-grasps, and that Zizek is mulling this over and answering back--he may yet be saved. It's when the moment comes when Adam gets so excited by watching Zizek argue with Kierkegaard that he thinks, "I have something to add to this; I have something important to say too"--then is the moment to write down what you have to say, not in order to build your c.v. but because you have something to say. In fact, the only effective way to build your c.v. is to let it happen as a byproduct of your having something to say.

I remember... it must have been 1984, some evening, when I was sitting in one of the cushy chairs in the middle of the NBER's third-floor offices. Larry Summers was coming in while Paul Krugman was going out. And they stopped each other.

"Paul," said Larry.

"Yes?" said Paul.

"In our basic model, the U.S. is running a trade deficit because demand is greater than production, and especially because demand for non-tradeables is high, and so workers are pulled out of jobs making tradeables into jobs making non-tradeables, and so domestic production of tradeables is insufficient to satisfy demand, and so we import," said Larry.

"So?" said Paul.

"Why, then, are workers in tradeable-goods industries in the Midwest experiencing this not as being pulled into higher-wage jobs in the non-tradeables sector, but as being pushed by foreign competition into lower-wage jobs in the non-tradeables sector?" said Larry.

And they were off. For a good half hour or so they argued the issues back and forth. More graduate students gathered to watch what was a fascinating pickup debate and discussion about just why there were so many losers from the trade deficits of the 1980s, when the first-cut full-employment model suggested that it should have been win-win.

You have to be in the right place at the right time to get the peak intellectual experience of watching two minds of such extraordinary caliber together wrestle with each other and with important problems. Actually, you don't. You just have to pick up the right book.


It's been a while since I envied Alan Greenspan and his successors. But it's looking like the life of a central banker is going to be even more exciting than I had imagined: / Markets / Commodities - Crude oil prices surge past $58: By Peter Garnham:

The price of oil has moved more than $3 a barrel higher since last Thursday when investment bank Goldman Sachs released a report saying oil prices might have entered a ‘super-spike’ period that could drive them towards $105 a barrel as demand outstrips capacity. Adding to concerns were reports that the International Energy Agency is preparing a warning this month that oil-importing countries should implement emergency oil-saving policies if supplies fall by as little as 1m-2m barrels a day. This was much lower than the 6m b/d agreed in the treaty that founded the energy watchdog back in the 1970s.

Nymex WTI for May delivery, the benchmark US crude, hit $58.28 a barrel on Monday.... Nymex WTI for September, trading at a premium to the front month, hit $60.03, the first time a futures contract has passed $60 a barrel....

Opec on Monday sought to calm fears over oil supplies. Sheikh al-Fahd al-Sabah, Kuwaiti oil minister and Opec president, said that Opec oil ministers had begun phone consultations on increasing production quotas by a further 500,000 b/d in an attempt to stem prices.... But analysts said the market was taking Opec’s willingness to increase production as confirmation of the strength of physical crude oil demand and remained unconvinced that the market will not shrug off any new production increase, much as it did the last one. ‘The lack of impact that additional Opec crude is having is indicative of a market in super-bullish mode and an environment where almost all news is being interpreted positively,’ said Kevin Norrish of Barclays Capital.

Meanwhile, Russian figures reinforced the view that there was little room for non-Opec oil producers to increase oil supply, as they were already near capacity. Data revealed the world’s second biggest producer pumped 9.3m b/d in March, unchanged from February.

Ben Bernanke to Chair CEA

It's not often that I write that a White House personnel decision has increased my trust and confidence in the Bush administration. But that is the case today: / World / US - White House chooses Bernanke for CEA: The White House has nominated Ben Bernanke to serve as chairman of the Council of Economic Advisers.... ‘I am honoured by the president's intent to nominate me and subject to Senate confirmation I look forward to this new opportunity,’ Mr Bernanke said....

During his two years at the Fed, Mr Bernanke has proved himself to be an effective communicator. He has been an advocate of transparency in policymaking at the Fed. A keen supporter of inflation targeting, Mr Bernanke's influence lay behind the decision this year for the Fed to start providing two-year inflation forecasts, to help guide market expectations on the central bank's objectives.

Mr Bernanke is seen as a leading contender for the job of Fed chairman, along with Glenn Hubbard, a former CEA chair in Mr Bush's first term, and Martin Feldstein, a Republican economist who held the position during the Reagan administration....

Mr Bush has now put in place the team that will have to make the economic case for the president's chief domestic priority: Social Security reform. The White House is expecting to wage a long campaign to win the introduction of private savings accounts and, while the president has so far failed to win public support, his aides warn against writing off the reform effort so early in the second term.

IMHO, the first thing that Ben should do is to make a stand on a technical-but-vital issue where the CEA should have made its stand: get the Bush administration to reduce the clawback real interest rate on its proposed private accounts from 3% plus inflation to a floating rate equal to the U.S. Treasury's borrowing rate (or the borrowing rate minus a small margin). That would keep Bush's private accounts from being a bad deal for the non-rich who opt for them...

Berkeley Has a Chancellor: Robert Birgeneau Calls for the Repeal of Proposition 209

This is very nice to see. Mark Thoma has the text:

Economist's View: Berkeley's Chancellor on Prop 209: Minority Inclusion is a Public Good, Not a Private Benefit: Nine years ago the people of California passed Proposition 209 in what I believe was a sincere effort to foster nondiscrimination in the state. However, 209's supporters do not see what I see every day as the new chancellor at UC Berkeley.

Instead of ensuring nondiscrimination, Proposition 209 has created an environment that many students of color view as discriminatory. That's because minority representation has dropped appallingly, and where there should be camaraderie across cultural lines, I have seen too much alienation, mistrust and division.

Proposition 209 has had its biggest impact on the enrollment of Latinos, Native Americans and African Americans. The situation for African American students is truly at a crisis point. Freshmen enrollment at UC Berkeley, for instance, has gone from 260 black students in 1997 to just 108 students this year. That's too small a number to form a supportive student community, and many of Berkeley's black freshmen view themselves as struggling against a hostile environment.

They tell me how difficult it is to be the only African American in a class when an issue involving multiculturalism comes up and all eyes turn to you; how much pressure it puts on an 18-year-old to be regarded as the sole representative of her race; and why it is a tragedy for California when there are only dozens of African American men in a freshman class of 3600.

Proposition 209 assumed that considering race or ethnicity in the admissions process would allow undeserving students into Berkeley. But it is significant that the graduation rates of African Americans before and after the proposition's passage have stayed virtually the same. Far from weeding out students who could not succeed, the elimination of race as a consideration in admissions has actually prevented many of California's most able students from the opportunity of a Berkeley education.

In my view, it is unrealistic to think that one can judge a person's likelihood of success at Berkeley without taking into account his race and gender. I spent many years on the faculty at MIT. For decades, women were significantly underrepresented in the undergraduate student body there. So MIT aggressively recruited young women and in the admissions process explicitly took into account negative environmental effects on their SAT scores. We found that it took at most two semesters for these women to catch up to their male peers. Most important, by the time of graduation the failure or withdrawal rate of these women was significantly less than that of their male classmates.

Although the situation is not directly parallel, I believe that at Berkeley we are similarly missing out on exceptional African American, Latino and Native American students who can not only succeed here, but whose participation can improve the education the university offers all its students.

Minority inclusion is a public good, not a private benefit. Indeed, the president of the University of Mexico once said to me that the single most important skill that a 21st century student must master is 'intercultural competence' the ability, best learned via experience with and appreciation of other cultures, to navigate successfully in today's globalized society.

California's business community understands this. That is why several leaders from private industry have anonymously funded private academic preparation programs to identify and deepen the pool of eligible minority candidates for UC and UC Berkeley. We applaud this effort. Many Berkeley students are engaged in private efforts to recruit more students of color. This month we are opening a multicultural center on campus to bring students together to help overcome mistrust among races and ethnic groups at Berkeley.

We need, however, to do much more. As the premier public teaching and research university, we know we must lead the discussion on the unintended consequences of Proposition 209. I am initiating a broad-based diversity research agenda at Berkeley to study this and a myriad of related issues. Our goal is to find innovative ways to make this campus the inclusive and welcoming environment to which it aspires.

This call to action extends the efforts of previous chancellors and others at Berkeley. As the current chancellor, I feel a moral obligation to address the issue of inclusion head-on. Ultimately it is a fight for the soul of this institution. Inclusion is about leadership and excellence, principles that California and its leading public university have long represented and might again.

Implementing Monetary Policy

Ben Bernanke talks about how monetary policy is actually conducted:

FRB: Speech, Bernanke--Implementing Monetary Policy--March 30, 2005: at the Redefining Investment Strategy Education Symposium, Dayton, Ohio March 30, 2005

Among the most important of my duties at the Federal Reserve is serving on the Federal Open Market Committee (FOMC), the body that makes U.S. monetary policy. Nineteen men and women--the seven members of the Board of Governors and the Presidents of the twelve Reserve Banks--gather in Washington eight times each year to participate in FOMC deliberations on the course of monetary policy. If necessary, the FOMC can also convene by conference call between regularly scheduled meetings. The FOMC's decisions are guided by the dual mandate given to the Federal Reserve by the Congress, which enjoins the Committee to use its powers to pursue both price stability and maximum sustainable employment.

To achieve its mandated objectives, the FOMC must influence the course of the U.S. economy, helping it to grow rapidly enough to make full use of available resources but not so rapidly as to stoke inflation. How, specifically, does the Committee exert this influence? The person in the street might tell you that the Fed 'controls interest rates.' That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly. Since many of you plan to work in the financial markets, I thought that you might find it interesting to hear some of the details of how U.S. monetary policy is actually implemented and how policy decisions affect asset prices and yields. I will begin by discussing how the Federal Reserve influences the federal funds rate, the one market interest rate over which it has fairly direct control. I will then discuss the effects of changes in the federal funds rate on the asset prices and yields that matter the most for economic activity and inflation.

Continue reading "Implementing Monetary Policy" »

Prefunding and Private Accounts

Andrew Samwick quotes Alex Tabarrok:

Vox Baby: Well, At Least He's Engaging: "So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being 'at or near retirement.' The more we wait, the larger the burden on future generations, and the higher that 3.5 percentage point surtax would have to climb."

And Andrew then comments himself:

The $10.4 trillion is about 90 percent of current GDP. In a later post, I made a rough calculation that if we waited until 2042 (the projected date of trust fund exhaustion), the implicit debt would grow (at the 3 percent real interest rate), to about $32 trillion, which would be about 141 percent of that year's (much larger GDP). So even if taxable payroll didn't fall as a share of GDP, the surtax applied in perpetuity would have to increase by a factor of 141/90, or from 3.5 to 5.5 percentage points.

The issue that Alex is pointing out is tax smoothing: for efficiency reasons, it is better to have a surtax rate that is steady at 3.5 percent rather than one that is 0 for 38 years and then jumps to 5.5 percent. The issue is, for me, less about tax smoothing and more about the intergenerational fairness of consigning future generations to pay higher payroll tax rates. We shouldn't be doing that--in Social Security, the General Fund, or Medicare.

The argument is that if you have a large lumpy liability waiting for you in the future, it's best to start saving for it now--to smooth out your tax rate.

This argument is correct, or rather would be correct were it not for one thing: the Bush administration. Remember: to the Bush administration the Social Security Trust Fund doesn't exist--"it's just a bunch of IOUs." Raise Social Security taxes now (or twenty years ago), and find a generation hence (or now) politicians like George W. Bush or Bill Frist or Dennis Hastert cutting income taxes and stating that there is no option but to default on the debt the general government owes to the Social Security Administration..

We simply cannot smooth out the taxes to pay for this forthcoming large lumpy liability--at least, not as long as we keep electing Republican politicians.

This is, I think, the principal reason that so many Republican economists are attached to private accounts. They imagine--think--hope--that private accounts will induce fiscal responsibility on the part of Republican High Politicians. When private accounts are implemented $200 billion a year of Social Security revenue will disappear from the government's books, and the enlarged magnitude of the budget deficit will then bring Bush, Frist, and Hastert to their senses. They will propose serious cutbacks in other entitlement spending programs. They will abandon their efforts to get expiring tax cuts extended. They will undergo a sea change, and all will be well.

I'm skeptical. But it is one of the two good arguments for private accounts that I have heard.

Polluting the Information Stream

A big problem with open-source software: programmers gotta eat.

Suw Charman reports:

The Wordpress linkfarm furore - symptomatic of a wider problem: Corante > Strange Attractor > : There's been a lot of discussion about the way that Matt Mullenweg has been trading's Google PageRank for cash, hosting unrelated articles on his server in order that they rank more highly in Google.... [I]t was probably a mistake for Matt to enter into an agreement with a company in which he assists them in gaming Google for money.... We can moralise about whether Matt should or shouldn't have taken money for helping a company game Google, and we can say 'Oh, he should have asked for donations - I would have given him money', but at the end of the day, that doesn't address the root cause of the problem....

There is something very, very wrong with:

  1. Declaring that you are an "open source" project giving to the community.
  2. Making money by crapping in Google's information stream by including high-value ad-words like "mesothelioma" (a very nasty asbestos-caused cancer) in your web page, thus polluting the information flow, and so degrading the quality of the services that can be offered.

When the Morning Stars Sang Together

Voice 1: Whence comest thou?

Voice 2: From going to and fro in the earth, and from walking up and down in it.

Voice 1: Hast thou considered my servant Karol, that there is none like him in the earth, an honest and an upright man, one that feareth Me, and escheweth evil?

Voice 2: Doth Karol fear thou for nought?

Voice 1: But he has been tested...

Voice 2: Tested! Broken, rather. What business had You to cause him to be Pope of this church at this time?

Voice 1: So that all could see a man who was a friend to the poor in body and a friend to the poor in spirit; one who forgave his injuries and his injurers. So that all could see what a True Friend of Mine is.

Voice 2: But You cursed him. Being who he was, born where he was, with the life that he had, he could not but reaffirm the prohibitions against contraception. And even while the conclave to elect him Pope was meeting, the AIDS virus had already crossed the species barrier and was building up its numbers in its first few human patients.

Voice 1: So?

Voice 2: Simply this: his reaffirmation of Humanae Vitae made him the very, very good friend of the AIDS virus--and the deadly enemy of all those with infected sexual partners who believed that barrier contraceptives made You angry. You cursed him.

Voice 1: Have I not done this before?

Voice 2: Yes, You have. But when You pose someone a test you know they cannot pass--knowingly test someone beyond destruction--break them--You have a moral duty to tell them why.

Voice 1: I do?

Voice 2: You do.

Voice 1: Who is this that darkeneth counsel without wisdom? Gird up now thy loins like a man; for I will demand of thee, and answer thou Me. Where wast thou when I laid the foundations of the earth? Whereupon are the foundations thereof fastened? Or who laid the corner stone thereof, when the morning stars sang together, and all My sons shouted for joy?

Failures of "Intelligence"

Ashton Carter writes about the Bush administration's "intelligence failures"--which are not failures of the intelligence agencies to do their jobs:

A Failure of Policy, Not Spying ( [T]he fallacy in the administration's appointment of a commission to study intelligence failures is that there is almost never such a thing as a pure intelligence failure. Intelligence failure is usually linked to policy failure. It's easy to see why Bush, or any president, would not want to call attention to that link. But the commission should have....

Let's take the case of North Korea. While the commission's chapters on North Korea's nuclear program are rightly classified, the unclassified summary suggests that spies and satellites have yielded very little information about that country's nuclear weapons efforts. But what does it matter? North Korea has admitted, indeed boasted, of its growing nuclear arsenal, and the United States has done nothing to stop it. How could a few more details provided by the CIA make a difference? If you don't have a policy, intelligence is irrelevant. North Korea's runaway nuclear program is a policy failure, not an intelligence failure.

What's worse, policy failure has actually caused intelligence failure in North Korea. From 1994 to 2003 North Korea's plutonium was at a known location, Yongbyon, where it was measured, handled and surveilled by international (including American) inspectors. We could inspect it -- or bomb it -- at any time. But when North Korea threw the inspectors out and threatened to truck the plutonium away to a hidden location, the United States did nothing. In due course the North Koreans made good on their threat and took the plutonium away. Are we now supposed to believe that it is an 'intelligence failure' that we don't know where it is?

A second member of the axis of evil, Iran, demonstrates the same point. Iran, unlike North Korea, denies it has a nuclear weapons program. The Bush administration firmly contends that it does and is almost surely right, even though the intelligence is apparently not a 'slam dunk.' But since the administration does not plan either to attack Iran's nuclear sites or to try to negotiate them away (the Europeans are supposed to be trying the negotiation route), it hardly matters whether we know all the details....

Without a comprehensive policy to combat WMD, better intelligence will not improve U.S. security. Bush was right to say that keeping the worst weapons out of the hands of the worst people is a U.S. president's highest national security priority. Since Sept. 11, under his leadership, we have scored many successes against the worst people. But U.S. policy toward the worst weapons is still in a pre-Sept. 11 state. Indeed, since Sept. 11 the United States has suffered greater setbacks in counterproliferation than at any time since the 1980s, when Pakistan went nuclear. Until this changes, preventing intelligence failures will still not matter.

The Missing Apple

Atrios directs us to a review of a non-existent record album:

The New York Times > Arts > Music > Music | Bootleg Review: The Lost Apple: In 2002 and 2003, Fiona Apple recorded what would have been her third album, 'Extraordinary Machine.' Its producer, Jon Brion, has said that Ms. Apple's label, Sony Music's Epic Records, shelved the album because it didn't hear potential hit singles. An Epic spokeswoman said, 'Fiona has not yet delivered her next album.' Lately, what purports to be the full album, 11 songs, has been leaked onto the Internet, where - despite the efforts of Sony's legal department - a simple search will find multiple sources of downloads. The album is an oddball gem.

Its producer, Mr. Brion, is fond of instruments that huff and plink and wheeze, as he showed in his soundtrack for 'I {sheart} Huckabees.' Epic may have been discomfited that Ms. Apple's collaboration with him doesn't sound anything like what's on the radio now. As a songwriter, she's the same Fiona Apple who sold millions of copies of her first two albums; she's still sultry and sullen, obsessing in detail over why her romances went wrong and teetering between regret and revenge. Her vocals smolder like torch songs, then boil over with rage and accusations. But this time, the music doesn't always mope with her.

The album sets the 21st century aside. The beats are often waltzes and oom-pahs, not hip-hop or punk; the arrangements are full of cellos, horns, bells and vintage keyboards. Ms. Apple's piano and voice are still at the center of the music, but now orchestras and show bands sprout around her, adding layers of whimsy and artifice. Ms. Apple has always placed herself somewhere between confession and entertainment, but in songs like 'Window' or 'Better Version of Me,' the carnival bounces and mock-Hollywood glitz put a cartoonish frame around her traumas, giving them a brand-new perspective.

Had it been released, 'Extraordinary Machine' would have been a fine counterbalance to a pop moment full of monolithic, self-righteous sincerity. As it stands, mysteriously leaked and proliferating, the album is an object lesson in how an Internet that's not controlled by copyright holders can set artistic expression free.

Safeway Goes Upscale

Found today:

Frieda's Fingerling Potato Assortment: Fingerling potatoes are small, thin-skinned potatoes originating out of the Andes Mountains in Peru. Now grown in limited supply high up in the Rockies, Frieda's Fingerling Potatoes represent the best of all the fingerling varieties. Frieda's Fingerling Potato Assortment includes the Yellow Russian Banana, with its rich and buttery flavor; the red-streaked and smooth-skinned French Fingerling that has a delicate nutty flavor; the sweet thumb-shaped and pink-fleshed Red Thumb; and the Ruby Crescent with its deep, earthy taste.

Try them baked, roasted, grilled, steamed, fried, sauteed, boiled, or mashed. Slice them into salads, soups, or use them as a pizza topping. Frieda's Fingerling Potatoes offer such a delicious natural flavor there is no need to add anything to them... they are that good.

In my experience, potatoes are as close to tasteless starch as can be attained in this world or the next...

John Gruber, "Public Finance and Public Policy"

Alex Tabarrok loves this book:

Marginal Revolution: Public Finance and Public Policy, the new textbook by Jonathan Gruber, is not only the best public finance textbooks I've ever read it is one of the best textbooks I've read in any field.  Gruber and Worth Publishers have clearly put a huge amount of money and effort into this book - the content is superb and so is the presentation (graphs, organization, supplementary material - e.g. check out these cool powerpoint presentations.).

Gruber is especially good at discussing empirical research.  What is the effect, for example, of social security on private savings, on the living standards of the elderly, on the incentive to retire?  What do we learn from the international evidence?

(Quick answers: Social security crowds out about 35 cents of private savings for every social security dollar.  As a result, social security has reduced the eldery poverty rate although not quite as much as naive trends would suggest.  Social security does reduce the labor force participation rates of the elderly but less so in the United States than in most European countries where there are huge disincentives for working beyond the normal retirement age.  (Get the book or this powerpoint presentation for more details - note you need to view the PP in SlideShow mode to get the full effect.)

Gruber covers all the major programs - education, social security, unemployment insurance, Medicaid and Medicare, the tax system etc. - and in each case he carefully explains the institutional details and then he evaulates the empirical evidence focusing on the most telling pieces of evidence (rather than trying to cover everything that has ever been written as in a review paper).

Gruber is so good on the empirical research that this book would be a useful supplement to an applied econometrics class.  Just flipping through it and reading the boxed Empirical Evidence sections gives a good feel for what the cutting edge questions and techniques are in empirical research. 

Congratulations to Gruber on a tour de force! | The French Language

The Economist reports on the French government's struggle with Google: | The French language: IN THE dimly lit cyber-café at Sciences-Po, hot-house of the French elite, no Gauloise smoke fills the air, no dog-eared copies of Sartre lie on the tables. French students are doing what all students do: surfing the web via Google. Now President Jacques Chirac wants to stop this American cultural invasion by setting up a rival French search-engine. The idea was prompted by Google's plan to put online millions of texts from American and British university libraries. If English books are threatening to swamp cyberspace, Mr Chirac will not stand idly by. He asked his culture minister, Renaud Donnedieu de Vabres, and Jean-Noël Jeanneney, head of France's Bibliothèque Nationale, to do the same for French texts—-and create a home-grown search-engine to browse them. Why not let Google do the job? Its French version is used for 74% of internet searches in France. The answer is the vulgar criteria it uses to rank results. ‘I do not believe’, wrote Mr Donnedieu de Vabres in Le Monde, ‘that the only key to access our culture should be the automatic ranking by popularity, which has been behind Google's success.’...

Googlephobia is spreading. Mr Jeanneney has talked of the ‘risk of crushing domination by America in defining the view that future generations have of the world.’ ‘I have nothing in particular against Google,’ he told L'Express, a magazine. ‘I simply note that this commercial company is the expression of the American system, in which the law of the market is king.’ Advertising muscle and consumer demand should not triumph over good taste and cultural sophistication.... Mr Jeanneney wants a ‘committee of experts’...

*Sigh* More Bad Macroeconomic News

From Ralph Atkins of the FT: / World - Confidence dives in Europe's economy: "Gloom about Europe's economic outlook intensified markedly on Thursday after a plunge in economic confidence across the continent and further rises in French and German unemployment.

Economic sentiment in the 12-country eurozone and the UK fell to the lowest levels since December 2003, according to the European Commission. Economists fear that eurozone economic growth will slow in months ahead, despite a bounce back at the beginning of 2005after a weak second half of 2004.

The eurozone ‘is experiencing a faltering recovery . . . after almost a half-decade of achievement,’ the Euro-frame group of leading research institutes said yesterday. In forecasts in line with those to be published by the Commission next week, Euroframe expected eurozone growth of just 1.5 per cent this year, after 1.8 per cent in 2004. However, 2006 would see 2 per cent growth.

The latest data, which reflect the impact of higher oil prices and a stronger euro, may force the European Central Bank to revise its view that last year's soft patch was ‘transitory’. However, Lucas Papademos, ECB vice-president, told an Italian newspaper that he expected ‘the economic recovery in the eurozone will pick up momentum over the course of 2005’.

The French and German governments, meanwhile, face increasing political pressures caused by high unemployment. Patrick Devedjian, French industry minister, described as ‘very bad’ figures showing the country's jobless rate at a five-year high of 10.1 per cent in February.

‘France is struggling with the cost of reforms that went in the wrong direction the 35-hour week, for instance,’ said Klaus Eklund, economist at SEB Bank in Stockholm and adviser to José Manuel Barroso, the European Commission president. ‘Germany seems to have gone through that stage, the crisis-consciousness is higher.’

German unemployment, nevertheless, rose in March by a seasonally adjusted 92,000 to almost 5m, or 12 per cent of the workforce although the Federal Labour Agency said 20,000 jobless were due to statistical changes while unusually cold weather was responsible for another 50,000.

‘The accuracy of these estimates is not necessarily high,’ said Dirk Schumacher, economist at Goldman Sachs. ‘What is true, though, is that information from business surveys is consistent with a stagnation or mild deterioration of the labour market.’

Earlier this week, Gerhard Schröder, chancellor, highlighted Berlin's nervousness by demanding a stop to the ‘endless talk’ about German companies shifting jobs overseas.

The Commission's survey showed confidence declining in industrial, services and retailing sectors. EU consumers were more worried about unemployment than at any time since last June.

The overall ‘economic sentiment’ indices for the eurozone, and the entire EU peaked last October, with the latest results showing particularly steep declines in the UK and Poland, as well as in Germany, France, and to a lesser extent Italy.

Asset Returns and Economic Growth

UPDATE: Greg Mankiw has sent along his comments...

There's lots I would dispute. Let me just note one point. Mankiw's last paragraph seems just wrong:

I don’t think the key issue in the debate over Social Security is whether, over the next century, the risk-free return will be 1 or 3 percent, or whether the equity premium will be 3 or 5 percent. So even if I agreed with the arguments raised in this paper and lowered my estimates of rates of return, it would not change my mind about the need to reform Social Security or the kinds of reforms that are desirable. I would guess that, in their hearts, the authors of this paper agree with me about this. To see if I am right, I would like them to answer the following question: Suppose that next week, the stock market falls by 50 percent, so dividend and earnings yields double. Would Baker, DeLong, and Krugman suddenly be in favor of President Bush’s proposal for Social Security reform? I suspect they would not. If I am right, this suggests that while the paper raises some interesting questions about the future of asset returns, as far as the debate over Social Security goes, it is largely a non sequitur.

As I see it, there are four important reasons to be against Bush's Social Security plan:

  1. The terms on which it offers private accounts to the non-rich make them not a very good deal.
  2. The plan does nothing to raise national savings in the short and medium run.
  3. Applying price indexation to the bend points produces a Social Security program that is an ever-decreasing share of GDP.
  4. The Bush administration is incompetent--corporate tax bill? farm bill? budget balance? Iraqi reconstruction? handling of our alliances?--and so there's every reason to think bad things would happen in implementation.

If reasons (2), (3), and (4) were not each of them dealbreakers, and if the stock market today were half what it is today, then yes, I would be in favor of a well-designed and well-implemented private-accounts plan (even with the 3% real clawback). With such a high prospective rate of return on equities, the benefits of grasping for some of the equity premium, of prefunding, and of getting a share of Social Security taxes out of the "federal revenues" column would, I think, significantly outweigh the costs of the risk that private-accounts plans impose on non-rich beneficiaries. But with current prospective equity and asset returns, private accounts make no sense with a 3% real clawback.

Max Sawicky reports from the Brookings Institution:

MaxSpeak, You Listen!: GUNFIGHT AT THE BROOKINGS CORRAL: "Dean Baker and Paul Krugman presented their paper, co-authored with Brad DeLong, on 'Asset Returns and Economic Growth,' at the Brookings Institution today. They lay out the problem of what makes a logically consistent scenario of economic growth, in terms of assumptions on interconnected variables, including labor force growth, productivity, immigration, stock prices, returns on equity, etc. N. Gregory Mankiw, late of the President's Council of Economic Advisers, acted as discussant.

The authors zero in on 4.5 percent as the most plausible estimate of future returns to stock ownership. This tracks closely with the 4.6 of Robert Shiller, discussed here previously. When you include this in a diversified portfolio that has bonds and government securities, the average rate of return is much lower than the numbers routinely thrown around by privatization snake oil salesmen.

The paper discusses how plausible economic growth elsewhere does not change the basic scenario, a previously neglected subject.

Mankiw gave me a Groucho Marx moment -- as in, 'who are you going to believe, me or your own two eyes? -- by suggesting that the connection between stock returns and Social Security privatization was spurious. So why, you may ask, are the President and Vice Pres . . . Oh never mind.

Mankiw also accused the authors of Galbraithian lack of faith in 'corporate capitalism,' due to what he construed as their assumptions about corporate dividend policy. This was good timing, since there happens to be an event at Brookings next week about Galbraith and his life's work.

Nobody in the room (about 50 heavy-weight economists) sided with Mankiw's comments. Robert Gordon and Benjamin Friedman made fun of him. Gordon for Mankiw's New Republic article, where Mankiw cited the investment opportunities of the Harvard faculty as a model for working people. Friedman noted that he was implicitly attacking George W. Bush for mixing up the issue of Social Security privatization with that of solvency.

Gordon is much more optimistic about economic growth than the Social Security trustees. This suggests better stock market performance, but it also means the Trust Fund balances persist for much longer than 2041. He said 'the big deal here is immigration.' He went on to point out that a modest assumption about immigration meant a huge difference for labor force size in the long run.

There was a fair degree of consensus, as there is in the literature, that privatization and solvency are two separate matters that don't have much to do with each other. Privatization -- not necessarily in the form proposed by the Bush Administration -- allows the individual to revel in his own risk-taking, enjoying the thrill of success and the agony of failure. It entails the replacement of social insurance with individual saving. You could be for this irrespective of whether the market rate of return is much higher than that under Social Security, or under riskless U.S. government bonds.

Solvency or 'pre-funding' is the grim task of matching the present value of future spending to future receipts, mostly by reducing benefits. An irony of this is that 'solvency' proposals typically take a burden that is otherwise spread over all future generations and concentrate it on . . . why, on you, dear reader. As long as you're under 55. The people who have been told they benefit the most from 'privatization' are precisely the ones who get screwed the worst.

I met Mankiw afterwards. He wasn't too familiar with this site, which was predictable and is probably just as well. I told him I quoted him periodically. He was pleased.

Most of the conference was on some crazy little thing called the current account deficit, which maybe could cause interesting problems in the future.

So Greg didn't say that a 3% real clawback on private accounts is too high? That the clawback rate should be matched to the actual Treasury borrowing rate? Sigh...

Bob Gordon is--as is almost invariably true--smart. Raising immigration by 0.3% of the workforce every year wipes out nearly half of the 75-year Social Security deficit--and that's the decline in immigration that the SSA expects to happen between 2000 and 2030.


The employment news is not good: / World / US - US March job gains weakest in eight months: U.S. employers created only 110,000 new jobs in March, the smallest gain in eight months, as manufacturers and retailers shed workers, the Labor Department said on Friday. The surprisingly weak March jobs number was barely half the 220,000 that Wall Street economists had forecast and came a shock to financial markets. The dollar’s value dropped immediately and bond prices shot higher on the prospect that it meant less likelihood of large interest-rate rises ahead. The March weakness was emphasized by the fact that the Labor Department also revised down the two preceding months’ job totals...

Unholy Transformations

Tyler Cowen agrees with my plan to turn Matthew Yglesias from a philosophy major and a feuilletonist into an economist:

Marginal Revolution:: [Yglesias] truly ought to be an economist, albeit with more Milton Friedman driven into his blood (although here is his George Stigler impersonation).

The plan is going well: witness this:

Matthew Yglesias: There's a very oddly written story in The Hill which seems to suggest that Senate Democrats are going to offer an alternative Social Security plan after all. But when you peer into the details, that doesn't seem to be what's actually happening. Instead, it 'tackles low-income incentives for saving by setting up accounts at birth in which the government would deposit $500 for each newborn and $1,000 for families with below-average incomes.' That sounds like a version of the ASPIRE Act, which has always had some support from liberals (and deserves more, I think) but has very little to do with Social Security as such.

The article details some other ideas... hav[ing] to do with savings and investment policy but not with Social Security as such. I think that's... correct.... [I]t would be good to create a society in which all Americans get to be owners and investors. There's just no reason to accomplish this by phasing out Social Security. My favorite idea for strengthening savings policy is, sadly, this mind-numbingly dull one endorsed by the dull-but-worthy folks at Brookings. 'In a nutshell, the automatic 401(k) consists of changing the default option at each phase of the 401(k) savings cycle to make sound saving and investment decisions the norm, even when the worker never gets around to making a choice in the first place'...

This is very encouraging.

Only... You can't talk about your favored proposals for increasing national savings as "mind-numbingly dull." You have to write, "My favorite idea for strengthening savings is this fascinating and innovative idea out of the Brookings Institution." Only when he can write this--and mean it--will the transformation be complete! Remember: fascinating and innovative.

The Erie Canal

Daniel Gross has a very nice review of the excellent:

Peter Bernstein (2005), Wedding of the Waters: The Erie Canal and the Making of a Great Nation (New York: Norton: 0393052338).

Gross writes:

The Erie Canal was an engineering triumph, to be sure. But Bernstein notes that it was also an economic triumph. This was one of the first great American examples of network effects—later seen with the telegraph, telephone, and ultimately the Internet. Connecting more and more people through a system makes the individuals more productive and capable and makes the network itself a powerful economic force.

The canal made possible the settlement of the upper Midwest and transformed the nation's "primary axis from north-south to east-west." Clinton's ditch turned canal towns into seaports, the Hudson Valley into an industrial zone, and the Midwest into a breadbasket. Happiest of all was New York City, which became the central span in the "bridge between the inexhaustible supplies of grain from the Midwestern United States and the inexhaustible demand for food from Europe." In the quarter century after the wedding of the waters, the nation's growth rate rose to a whopping 4.6 percent a year, compared with 2.8 percent annually for the period from 1800 to 1825.

Of course, it took the railroads, the telegraph, and a strong national currency to create a truly integrated national market in the late 19th century. But Bernstein's case is pretty convincing. Oddly, he shies away from the greatest—and seemingly most obvious—historical lesson of the Erie Canal: the necessity for direct government involvement in building the expensive commercial arteries that have been so vital for economic growth. Left entirely to its own devices, the private sector likely never would have produced the Erie Canal, the railroads, the interstate highway system, or even the Internet.

A Proper April Fools Day!

Yep. It's time for Donald Luskin:

Donald Luskin: Click here to read a draft (typos and all) of the 'paper' that 'economists' Dean Baker, Brad DeLong and Paul Krugman will 'present' today at the Brookings Institution (this is a leaked copy obtained at great personal hazard -- as of this posting, Brookings has taken down its link to the final paper on its web site).

But it's not "leaked": it's freely accessible. The Brookings link is active: And the link from my website is active:

Don't be fooled by the academic veneer. This is just more propaganda aimed at blocking Social Security modernization. It's basically just a tarted up version of Paul Krugman's February 1 New York Times column (which I debunked thoroughly here)...

But Luskin didn't debunk it. He agreed with it. Our main point is that stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates. And what did Luskin write? He wrote:

Krugman does make one good point... stock returns in the neighborhood of 6.5 percent will not be possible over the coming 75 years if economic growth is as low as the 1.9 percent rate used by the actuaries of the Social Security Administration in their solvency estimates...

Why say that you debunked it when you agree with it--as anyone who can click on a link can see? Why say it was hard to obtain when it was easy--as anyone who can click on a link can see? What's the upside for Luskin here?