Previous month:
April 2005
Next month:
June 2005

May 2005

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

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

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

It is true that Gonzales does not think the whole Geneva convention is "quaint": he thinks that it is obsolete, and that the restrictions it places keep Americans from doing what must be done by opening the possibility of their being put on trial for war crimes.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

Here is Gonzales in context:

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

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

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

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

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

Why Are Auto Dividends So Low?

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

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

Here's Dan Bill Gross's column:

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

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

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

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

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

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

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

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

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

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

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

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

And with last week's Exhibit B:

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

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

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

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

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

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

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

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

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

The Global Savings Glut Argument

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

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

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

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

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

I = Sp - DG + DT

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

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

What makes Sp fall? Well:

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

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

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

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

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

I - DT = Sp - DG

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

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

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

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

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

Danny Okrent writes:

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

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

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

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

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

Dear Mr. Greenspan:

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

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

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

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

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

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

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

A Guy with a Truly Thankless Job...

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

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

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

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

And he gets whomped by Republicans:

President Discusses Strengthening Social Security in North Carolina:

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

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

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

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

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

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

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

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

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

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

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

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

But after the jump Carey writes:

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

Robert comments:

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

Are There Any Senators in the Republican Party?

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

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

Snarkiest Thing I've Read Today

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And, according to Tierney, that was bad.

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

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

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

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

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

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

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

Very Good News on the Biological Science Front

Car Zimmer summarizes:

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

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

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

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

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

Paris Hilton and Company Are Secretly Unhappy...

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

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

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

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

The poor even get more pleasure from food and drink.

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

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

The Bush administration's Social Security policy development process is definitely more mendacious or far less competent than Ira Magaziner's health care policy development effort in 1993-1994. For one thing, the Bushies either don't have or dare not release numbers. Jason Furman reports:

The Impact of The President's Proposal On Social Security Solvency And The Budget, 5/10/05: [T]he White House has not released the traditional analysis by the Social Security actuaries of the effect of its plan on Social Security solvency. It is standard practice for policymakers and outside analysts who present Social Security plans to provide the actuaries’ analysis when, or shortly after, they release their plans....

I and the people I talk to are undecided with respect to whether this failure to release numbers is because (a) the numbers are so scary and unfavorable that they dare not do so, or (b) there is still no agreement among the White House barons as to what the Bush Social Security proposal will be, hence nothing to analyze.

In either case, it's not encouraging: successful policy requires successful implementation of program details, and this crowd cannot even produce summary tables.

What would the effects of the Bush plan be? Jason Furman has come up with some estimates, which in the absence of others are our best guides:

In the absence of an analysis by the Social Security actuaries, this analysis provides some of the standard actuarial and fiscal estimates of the President’s proposal... based on the actuaries’ analysis of the Pozen proposal, which has been released, analyses by the actuaries of other private-account plans that contain features similar to those of the President’s plan, analysis by the actuaries of the President’s private accounts through 2015, and the data in the 2005 Social Security trustees report....

[W]hen both components of the President’s plan are examined... the plan... move[s] forward the year [of trust fund exhaustion]... from 2041 to 2030.... The plan also would accelerate the year in which the program begins to run cash-flow deficits from 2017 to 2011....

[T]he President’s plan as a whole... [would] close only 30 percent of the [projected] 75-year [Social Security funding] gap.... Additional benefit reductions, new revenues, or large transfers from the rest of the budget would be necessary to fill the substantial remaining gap.

It is a clown show, an episode of stupidity of a jaw-dropping magnitude:

1. The administration's Social Security gurus shove Bush out there with talking points saying that we need to act now to pass the Bush plan, because starting in 2017 Social Security will start taking resources away from the rest of the government and that's a very bad thing--and then they roll out a plan in which Social Security starts taking resources away from the rest of the government in 2011.

2. The administration's Social Security gurus shove Bush out there with talking points saying that passing the Bush plan is essential because if we don't the Social Security trust fund balance will hit zero in 2041, and big benefit cuts will then be necessary--and then they roll out a plan in which the Social Security trust fund balance hits zero in 2030.

3. The administration's Social Security gurus shove Bush out there with talking points about the importance of restoring actuarial balance to Social Security--and then they roll out a plan which closes less than a third of the 75-year funding gap (and refuse to specify the plan in sufficient detail to allow anyone to do a longer-run analysis).

Brad Setser Is Unhappy with the U.S. Treasury

There is a lot to be unhappy about it:

Brad Setser's Web Log: Rhetoric that runs ahead of reality: I noticed that the US Treasury statement that accompanied the foreign currency report adopted the rhetoric of shared sacrifice:

We are not bashing China in lieu of tackling our own problems; we in the US are committed to reducing our deficit and raising national savings.

The problem: the policies to back the rhetoric aren't there, and most of the world knows it. The much-touted partial privatization of Social Security won't raise national savings so long as it is financed by debt.... At best, it is neutral; at worse, it might lead national savings to fall.... The 'on-budget' fiscal deficit... seems to be falling for the same reason why the overall current account deficit is rising... [t]he real estate boom.... Tax revenues seem to have outperformed in part because of capital gains.... In an asset-based economy... tax revenues are quite pro-cyclical.... [T]he longer-term outlook is not pretty if the tax cuts are made permanent.

Nice words from the Treasury, but little credibility.

On the Deficit

Robert Rubin:

Attention: Deficit Disorder - New York Times: Most pressing is the 10-year federal deficit, which most independent analysts project at $4.5 trillion to $5 trillion.... Over the longer term, Social Security has a 75-year estimated deficit of $4 trillion, while the different components of Medicare, including its new prescription drug benefit, represent a fiscal problem of roughly $20 trillion.... [O]ver time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth.... [F]ar more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar. These market effects, plus the adverse impact of continuing fiscal imbalances on business and consumer confidence, could seriously undermine our economy.

We have managed to avoid these market effects so far because private demand for capital has been relatively limited, and because the central banks of Japan, China and other countries have provided large inflows of foreign capital. A change in either of those circumstances, or simply a change of market psychology for whatever reason, could, however, turn these interest rate and currency risks into a reality....

We must have serious spending discipline and entitlement reform - though any entitlement reforms likely to be proposed would have little immediate effect.... [The revenue] shortfall is especially pressing given the rapid increases in entitlement costs and the need to finance national security, investments in education and infrastructure and other critical programs.... [R]evenue-increasing measures must reverse the recent trend of disproportionately favoring upper-income taxpayers.... [I]f the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall....

Dana Milbank:

On the eve of a titanic partisan clash in the Senate, eggheads of the left and right got together yesterday to warn both parties that they are ignoring the country's most pressing problem: that the United States is turning into Argentina.... Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget "nightmare."

There were no cameras, not a single microphone, and no evidence of a lawmaker or Bush administration official... they agreed that without some combination of big tax increases and major cuts in Medicare, Social Security and most other spending, the country will fall victim to the huge debt and soaring interest rates that collapsed Argentina's economy and caused riots in its streets a few years ago. "The only thing the United States is able to do a little after 2040 is pay interest on massive and growing federal debt," Walker said. "The model blows up in the mid-2040s. What does that mean? Argentina."

"All true," Sawhill, a budget official in the Clinton administration, concurred.

"To do nothing," Butler added, "would lead to deficits of the scale we've never seen in this country or any major in industrialized country. We've seen them in Argentina. That's a chilling thought, but it would mean that."

Each of the three had a separate slide show, but the numbers and forecasts were interchangeable.... The unity of the bespectacled presenters was impressive -- and it made their conclusion all the more depressing....

The congressional staffers, accustomed to sitting on opposite sides of the room in such events, seemed flummoxed by yesterday's unusual session in the Rayburn House Office Building. One questioner suggested Republicans are to blame for multiple tax cuts; another implied the problem is a Democratic appetite for spending. The bipartisan panel would not be goaded. "I'm willing to talk about taxes if you're willing to talk about entitlements," Butler offered...

Limits to Arbitrage: The Sociology Side

Brayden King writes:

Pub Sociology: Dissertation relief and the busy summer ahead: I did it! I turned in a dissertation draft to my committee this afternoon and now I'm just waiting for feedback. My defense is on June 13. Until then I plan on finishing an R&R, getting a re-write of an older paper mostly finished, find somewhere to live in Provo, and have a baby. Well, I'm not having a baby, but Karrie is - very soon. Here's the dissertation abstract:

The origin of market value has not been sufficiently explored in the social sciences. While there is a tendency among economists and sociologists to see value as imported to the market from external sources (e.g. culture, internal preferences), I argue that shifts in market value are often endogenous to the market setting. Perceptions of value, or collective beliefs that specific sets of assets will yield benefits for the owner, are most malleable when markets are unstable. Instability is caused by intense competition and rapid technological change, both of which upset firms’ abilities to make consistent profits and retain their market position. Instability amplifies general uncertainty about the best ways to create value.

Perceptions of value emerge in unstable markets as firms monitor and mimic their peers, who act as information proxies about the future value of assets. I look at acquisitions within the communications industries from 1997 to 2002 to assess this claim. I expect that firms acquire target assets in the same segments as their closest competitors and market leaders. Unstable market conditions amplify the extent to which firms use their peers to guide their acquisition choices. The collective flow of acquisitions caused by this mimicry creates perceptions of value that become reflected in concrete, standard measures of market value. Investors and other third-party observers use peer behavior as an interpretive frame for estimating value creation. They assume the collective acquisitions are social proof that value is being created and this is reflected in their investment behavior, which in turn drives up the stock prices of acquiring firms.

Regression findings support these propositions; although there is weak evidence that market value gains from peer mimicry are long-term. Instead, I find that using peers to frame acquisition value tends to lead to initial overvaluation, which is subsequently corrected through a long-term value discount. I suggest that unstable market conditions tend to lead to speculative behavior and inefficient market pricing....

Equal Suffrage in the Senate

We have a long-term problem here:

MyDD: In the 100 elections that determined the current make-up of the Senate, 200,723,923 votes were cast. The Democratic candidates in these elections received a combined 96,307,088 votes.... The Republican candidates received 94,994,293...

To the extent that heavily-populated states that pay federal taxes swing more Democratic, and lightly-populated states that receive lots of giveaways (military bases, agricultural subsidies, cut-price access to national resources) swing more Republican, senate votes will become less and less legitimate.

Time, I think, to reapportion the senate: combine the Great Plains states and divide up California, New York, and Texas for purposes of senate representation.

Ken Rogoff Is Unhappy with the Bush Administration

Yet another unhappy camper: Ken Rogoff: / Comment - A healthy global economy begins at home : In its biannual foreign exchange report to Congress, [the Treasury] declared that while China is not yet guilty of exchange rate manipulation, it will soon become guilty unless it changes its policy.... Too many lawyers must have worked on this phrasing....

To be fair, the Treasury report is... aimed at mollifying trade protectionists in Congress.... The report... focus[es] on the way that China's current dollar peg blocks an important price mechanism from helping to unwind today's massive global trade and current account imbalances. Of course, what the Treasury report does not say is that 'global imbalances' is a euphemism for 'US borrowing binge'. After all, America is now absorbing 75 per cent of the current account surpluses of the world's surplus countries, not just China. Nor does the report mention [that]... US... policies... played a far bigger role than China's peg in exacerbating the problem....

The report spews the official line... reducing its own fiscal deficit. But the official target... 50 per cent deficit reduction by 2009 is [not] ambitious enough, even if it were... credible.... [I]t is hard to see any scenario for unwinding the global imbalances in which Asian currencies do not appreciate sharply against the dollar.... Eliminating the global imbalances would entail a proportionately larger appreciation (35 per cent) of Asian currencies, and a 10-20 per cent appreciation of major non-Asia currencies including the pound and the euro....

We have talked about China's contribution to smooth global adjustment in the face of massive US borrowing, but what policy is best for China? It is a very tough question... China is really two economies rolled.... Wealthy coastal China has 450m people living in a vibrant emerging market... the rest... 750m... living in a poor developing country... rural unemployment at over 150m people. Poor developing countries typically do well with relatively fixed exchange rates, whereas emerging markets typically need more flexible ones....

[T]he US Treasury ought to focus its next report on getting the country's own fiscal house in order.

Robert Pozen Opposes Bush Social Security Plan

Denounces carve-out accounts:

Think Progress: Robert Pozen, whose "Cprogressive indexing" plan was firmly endorsed by the president at a high-profile press conference last month, has said that Bush should drop his plans for private accounts. Just out from CQ...

[Pozen] said Wednesday that Bush should back away from the other half [of his Social Security plans] -- the insistence that individual investment accounts be created in the program.... "I would advise the president to say that carve-out accounts are no longer required," Pozen said in an interview after a debate at the American Enterprise Institute with Brookings Institution scholar Peter R. Orszag, a leading critic of Bush's proposal. Bush, Pozen said, should indicate that he is "willing to have a package that, if otherwise satisfactory, does not have carve-out accounts."...

Pozen challenged the wider theme that Bush has used to justify private accounts:

For many conservatives, the philosophical importance of creating accounts from the payroll tax cannot be understated. They believe it would turn many lower-income workers into investors, ushering in a new "ownership societ." Pozen disagrees. "Talk of an 'ownership society,' Pozen said Wednesday, is'a weak basis' for arguing for an overhaul."

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

Calculated Risk writes:

Calculated Risk: Fed News: Gramlich Resigns, Greenspan Might Stay Longer: Meanwhile, the WaPo is reporting that 'Administration Considers Delaying Fed Chief's Exit'.

Bush administration officials are mulling whether to encourage Greenspan, 79, to continue as Fed chairman for at least a few months beyond the Jan. 31 expiration of his term, according to sources told of the possibility. That would give the White House more time to broaden the search for possible successors, looking beyond the academic and policy worlds to the corporate world, as they have been urged to do by some financial analysts...

'More time to broaden the search'? The White House wasn't aware that Greenspan was retiring in January?

Even weirder is the implication later on in the article by the Post's Nell Henderson that Paul Volcker was a corporate-world appointee "beyond the academic and policy worlds." Henderson describes Volcker as someone who had "worked for Chase Manhattan Bank and did not have a PhD in economics." She makes no reference to the Paul Volcker's years as Undersecretary of the Treasury for Monetary Affairs, or to his being President of the Federal Reserve Bank of New York when appointed Chairman of the Fed.

I'll try to find out tomorrow morning whether she (a) simply did not know that Paul Volcker was not a "corporate world" Chair but a "policy world" one, or (b) knew but was trying to score some White House favor points by misrepresenting Volcker's career in a way the White House momentarily finds convenient.

Nuclear Option

Josh Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: May 15, 2005 - May 21, 2005 Archives: As we wait on the sidelines for the seemingly inevitable chain reaction to take place on the senate floor, it is worth observing and considering the fact that every Republican senator certainly knows that the proposition they're about to attest to is quite simply a lie.... What do I mean?... [W]hat "it" actually is is this: the Republican caucus, along with the President of the Senate, Dick Cheney, will find that filibustering judicial nominations is in fact in violation of the constitution.... Their reasoning will be that the federal constitution requires that the president makes such nominations "by and with the Advice and Consent of the Senate" and that means an up or down vote by the full senate.

Nobody believes that.

Not Dick Cheney, not any member of the Republican Senate caucus.

For that to be true stands not only the simple logic of the constitution, but two hundred years of our constitutional history, on its head. You don't even need to go into the fact that other judicial nominations have been filibustered, or that many others have been prevented from coming to a vote by invocation of various other senate rules, both formal and informal, or that almost countless numbers of presidential nominees of all kinds have simply never made it out of committee. Indeed, the whole senate committee system probably cannot withstand this novel and outlandish interpretation of the constitution, since one of its main functions is to review presidential appointees before passing them on to the full senate.

Quite simply, the senate is empowered by the constitution to enact its own rules.

You can think the filibuster is a terrible idea. And you may think that it should be abolished, as indeed it can be through the rules of the senate. And there are decent arguments to made on that count. But to assert that it is unconstitutional because each judge does not get an up or down vote by the entire senate you have to hold that the United States senate has been in more or less constant violation of the constitution for more than two centuries.

For all the chaos and storm caused by this debate, and all that is likely to follow it, don't forget that the all of this will be done by fifty Republican senators quite knowingly invoking a demonstrably false claim of constitutionality to achieve something they couldn't manage by following the rules.

This is about power; and, to them, the rules quite simply mean nothing.

Why Did They Choose Bill Frist, Anyway?

The pool of Republican talent is amazingly thin, isn't it?

: "This morning on the floor of the Senate, Sen. Chuck Schumer asked Majority Leader Bill Frist a simple question:

SEN. SCHUMER: Isn't it correct that on March 8, 2000, my colleague [Sen. Frist] voted to uphold the filibuster of Judge Richard Paez?

Here was Frist's response:

The president, the um, in response, uh, the Paez nomination - we'll come back and discuss this further.... Actually I'd like to, and it really brings to what I believe - a point - and it really brings to, oddly, a point, what is the issue. The issue is we have leadership-led partisan filibusters that have, um, obstructed, not one nominee, but two, three, four, five, six, seven, eight, nine, ten, in a routine way.

So, Frist is arguing that one filibuster is OK. His problem is that several Bush nominees have been filibustered. This position completely undercuts Frist's argument that judicial filibusters are unconstitutional. (Which is, in turn, the justification for the nuclear option.) If judicial filibusters are unconstitutional there is no freebee. But Frist digs his hole even deeper:

The issue is not cloture votes per se, it's the partisan, leadership-led use of cloture votes to kill - to defeat - to assassinate these nominees. That's the difference. Cloture has been used in the past on this floor to postpone, to get more info, to ask further questions. When Frist voted to filibuster Paez's nomination it had been pending for four years. It's hard to believe he couldn't get all the info he needed or ask all the questions he had during that time. Make no mistake about it: Bill Frist was trying to kill the Paez nomination. A press release issued the following day by former Sen. Bob Smith, who organized the filibuster effort, read "Smith Leads Effort to Block Activist Judges."...

Not a Good Paragraph

CEA Chair Harvey Rosen writes: - Data Bait: Tax policy represents an opportunity to strengthen our economy. The president is committed to keeping taxes low by making his tax relief permanent. And he has called on Congress to join him in reforming the tax code to make it simpler, fairer, and more pro-growth. Fiscal policy is another opportunity. By controlling spending and keeping taxes low, we can improve growth and fiscal health. Congress has adopted two consecutive budgets that increase discretionary spending at or below inflation. And for the first time since 1997, the budget includes savings for entitlement spending as well. Policy makers now need to follow through on these initial steps and take the much bigger step of permanently fixing Social Security's funding imbalance...

If a CEA Chair dares not write the phrase "budget deficit," he is useless.

Why Oh Why Are We Ruled by These Idiots? (Republican Senate Edition)

Pandagon quotes Mike Allen and Jeffrey H. Birnbaum:

Pandagon: Hey, Dick, Can We Turn The Democratic Side Of The Aisle Into A W.G. Grinder's?: The Washington Post has a script for the nuclear option...

Here's what Republican aides and officials say is most likely to happen:

At 9:30 a.m. today, the Senate will begin debating Bush's nomination of Priscilla Richman Owen, an abortion opponent on the Texas Supreme Court who was nominated to the U.S. Court of Appeals for the 5th Circuit, based in New Orleans.

Tomorrow or Friday, Frist and other Republican senators are likely to file a motion seeking cloture, or an end to debate. One session day must pass before a vote to end debate, so a vote would be held and Republicans would expect to get fewer than 60 votes to confirm Owen.

Frist aides say he has not decided exactly what would occur next. But the scenario most widely expected among senators in both parties is that he would seek a ruling from the chair -- Vice President Cheney, if it looked as if the vote was going to be close -- that filibustering judicial nominations is out of order. Assuming the chair agreed, Reid would then object and ask that the ruling of the chair be tabled. Most Republicans would then vote against the Democratic motion, upholding the ruling. Then the Senate would move to a vote on Owen, and a precedent will have been set that it takes 51 votes, not 60, to cut off debate on a judicial nomination...

Ummm.... Yes and no. A precedent will be set that it takes 51 votes to change the rules of the Senate in a direction that the Senate majority leader wishes.

As Pandagon says:

There's a standing rule in the Senate that it takes 67 of 100 votes to change Senate rules on procedure. What they're asking Cheney to do is to make a ruling that the rules don't allow the disputed course of action, despite the fact that there's approximately zero evidence behind their position. The nice thing for Republicans is that courts stay out internicine procedural warfare in Congress - they'd prefer if you can't have sex with someone of your same gender in the privacy of your own home, but we can pay for Congress to rub its collective ass over the Constitution. Granted, it is double-ply, but still...

It would be one thing for Frist to get 67 votes to change the Senate rules so that 51 votes closes debate on a judicial nomination. This is something very different: a declaration that no matter what the rules have been, the Senate will pretend that the rules are whatever the majority leader can get 51 votes for.

Hearts and Minds, Hearts and Minds

From the Rising Hegemon:

Rising Hegemon: ...the implementation of 'Operation Matador'.

In interviews, influential tribal leaders and many residents of the remote border towns said the 1,000 U.S. troops who swept into their territories in the weeklong campaign that ended over the weekend didn't distinguish between the Iraqis who supported the United States and the fighters battling it. 'The Americans were bombing whole villages and saying they were only after the foreigners,' said Fasal al Goud, a former governor of Anbar province who said he asked U.S. forces for help on behalf of the tribes. 'An AK-47 can't distinguish between a terrorist and a tribesman, so how could a missile or tank?'

Once again, the troops are only following the dictates of their commanders -- none of them know f***-all about Iraq, or what the hell is going on. The Bush Administration had no idea what it was doing in Iraq, nor has it really learned shit about how to deal with it since.

More Bad News from Iraq

And Eric Umansky is shrill about it:

Eric Umansky: Good to know we have enough troops to control the place: From the AP:

QAIM, IRAQ -- Iraqi fighters toting machine guns and grenade launchers swaggered Friday through the rubble-strewn streets of this town on the Syrian border, setting up checkpoints and preparing to do battle despite a major U.S. offensive aimed at rooting out followers of Iraq's most-wanted terrorist. The six-day U.S. offensive in the area -- one of the largest since insurgents were driven from Fallujah six months ago -- was launched in Qaim and is aimed at supporters of Abu Musab al-Zarqawi.

Capt. Jeffrey Pool, a military spokesman, said Marines have not conducted operations inside Qaim since the opening days of the campaign, called Operation Matador, which began overnight Saturday and led to the killing of six suspected insurgents and capture of 54 in the town.

In other words, Qaim was one of the focuses of the campaign and yet while the offensive is still under way, guerillas are tooling around and actually feel secure enough to set up checkpoints! You might recall what one 'military official' told the LAT a few days ago: 'We require more manpower to cover this area the way we need to.' So why aren't there enough Marines in the area to do more than spot-check the insurgency? Well, for one thing the military is just about plain tapped out. That's a problem that's been exacerbated by and embodied in one SecDef Rumsfeld. I bring you Republican (but non-winger) Senator Sue Collins: 'When it became evident that we were going to face a determined and prolonged insurgency, he was very resistant to increasing troop levels, stepping up production of up-armored Humvees, and modifying the game plan,' said Senator Susan Collins, a Maine Republican on the Armed Services Committee....

Not Good Macro News

The Financial Times reports: / US - US wholesale prices rise 0.6 per cent: Producer prices rose by more than expected last month, with the headline rate rising 0.6 per cent and the core rate excluding food and energy - up 0.3 per cent, the Labor Department reported. Over the past 12 months, the overall PPI rose by 4.8 per cent, just below the March level, while the core rate increased by 2.6 per cent....

Separately, a report released by the Federal Reserve on Tuesday pointed to a surprising drop in industrial activity last month. Industrial production fell by 0.2 per cent in April, compared with the consensus forecast of a 0.2 per cent increase. Capacity utilisation fell slightly to 79.2 per cent....

The Federal Reserve has signalled concern about inflation pressures, and has said it expects to continue raising its target interest. Earlier this month, the Fed tightened by another quarter point, bringing the federal funds rate to 3 per cent. Don Kohn, a Federal Reserve governor, said following a speech yesterday that higher core inflation represented in part the effort by businesses to pass on higher energy costs to their customers. "My best guess is that inflation will remain contained provided we continue to tighten at a measured pace," Mr Kohn said.

Thank God I'm Not a Republican!

If I were, I would have to vote for people who would choose somebody like this for their leader:

Carpetbagger Report: Why would anyone contribute $5,000 to a campaign that ended two years ago, to a candidate who finished a distant fourth? It makes more sense when the donor is Bill Frist and the candidate is Family Research Council President Tony Perkins.... I can appreciate that Frist is desperate to rally religious right support for his Senate agenda (and his 2008 presidential campaign), but donating $5,000 to a campaign that doesn't exist just to curry favor with a far-right group is bound to look pretty bad.

For that matter, maybe Frist could elaborate a bit on why, exactly, he would offer such generous financial support to Perkins's long-finished campaign. After all, this is the same Perkins who paid former Ku Klux Klan Grand Wizard David Duke $82,000 for his mailing list and later tried to hide the payment from the Federal Election Commission. It's also the same Perkins who blamed MTV for the Abu Ghraib scandal, compared Thomas Jefferson's wall of separation between church and state to the communists' Berlin Wall, and argued that federal judges who disagree with him pose "a greater threat to representative government" than"terrorist groups." Sounds exactly like the kind of guy who should get $5,000 checks from the Senate Majority Leader, right?

The Lebanonization of Iraq Progresses...

In this morning's news, John Burns and Terence Neilan report:

Iranian Envoy in Iraq for Talks: Iran's foreign minister arrived in Baghdad for talks that he has said will tackle a number of issues.... The Iranian foreign minister, Kamal Kharrazi, is the second senior visitor to Baghdad since the formation of the new Iraqi government, following the meetings held here on Sunday by Secretary of State Condoleezza Rice. Mr. Kharrazi is to hold talks with Prime Minister Ibrahim al-Jaafari, a Shiite, and Foreign Minister Hoshyar Zebari, a Kurd.

It is clear that his arrival sends a signal as to where the friendships are going to lie between Iran and the two Shiite religious parties that control the new government: Sciri, headed by Abdul Aziz al-Hakim, and Dawa, led by Dr. Jaafari. Indeed, his visit throws into question the degree of Iranian influence in Iraq. Ahead of the visit, Mr. Kharrazi described the Iran-Iraq relationship as an important one, and that his meetings would deal with a number of topics.... Now that Iraq's majority Shiite community has risen to power, Baghdad has been working to build on ties with Iran, a Shiite-dominated republic...

How many Iranian troops and secret police are currently in southern Iraq? And what are they doing?

It seems more and more likely to me that the endgame is that Iran plays a role in Iraq like that Syria has played in Lebanon for the past two decades, and that the U.S. tolerates it just as Israel has tolerated Syria's domination of Lebanon.

A principal goal of U.S. foreign policy since 1979 has been to minimize and contain the influence of the Iranian government. It seems that that goal has failed.

Distressing Innumeracy

How can the people who run the scoreboard at Oakland's baseball stadium think that someone with three major-league at-bats can have a batting average of 0.200? That someone with ten at-bats can have a batting average of 0.275? This is very distressing indeed.

And the Network Associates Colosseum is no more. In its place we have the McAfeee Colosseum. I wonder if the first 10,000 paying customers get a free computer virus...

God! I'm Glad I'm Not a Republican!

If I were a Republican, I'd have to write things like this: :: Daniel W. Drezner :: So how do Mexicans view African-Americans?: While Latinos critics in the United States have their hands full combating discrimination in the Star Wars movies (link via Glenn Reynolds), Latinos south of the border have a slightly bigger problem... dealing with their own racial prejudices.... An intriguing angle about this story is the ability of [Jesse] Jackson and [Al] Sharpton to go global with.... that thing they do (though in this case they have a pretty valid point). Readers are heartily encouraged to predict the next world leader who will be required to mau-mau Jackson and Sharpton for something they say. I think it's a toss-up between Silvio Berlusconi and Vladimir Putin.

Alamedia of "Unfogged" Is Puzzled by Investment Banker Compensation Levels

She writes:

Unfogged: The Mysteries of Chet: I have here a special, economics-type query which I direct to Brad DeLong, among others. Here's the thing: I have known many investment bankers in my day. Hell, I'm related to plenty of investment bankers, even if only by marriage. Many of these men are stand-up guys, fun to be with, always up for smoking a few bowls and playing golf. Others are asshole blowhards....

All of them, however, have the same basic character type, which I will call 'Chet'. Chet is a hail-fellow-well-met sort, cracking jokes all the time (some of most of which may be 'politically incorrect', because he doesn't care about things like that). Chet is tall, probably tan, and has big white teeth like a mouthful of chiclets.... Chet is a member of country clubs, and has a thin wife, and two adorable kids, etc. etc. If you close your eyes and imagine a picture in a silver frame on an end table in an apartment on 84th and Park, then you know what Chet's kids look like (super cute!).

Finally, Chet has an incredibly high opinion of himself. He is confident to the point of arrogance, but friendly, outgoing. There is one thing Chet is not, ever, in my experience, and that is particularly bright. Really. Not an intellectual powerhouse, is where I'm going with this. Not, in all likelihood, able to perform complex mathematical operations. Given that this is so, I have a few questions:

  1. Is the role of these guys just to schmooze clients for their banks?... [A]re there wonky types behind the scenes, making the actual money decisions? Strangely enough, I take it that there are not, otherwise there would be all these rich, but wonky, investment bankers. As far as I know, there aren't any.
  2. So let us say that my sucessful Chet friends at Lazard Freres and whatnot are actually deciding stuff about money. The question is, why them given that they aren't the brightest bulbs on the chandelier? (But can be perfectly nice!)
  3. Is this a market failure caused by suceeding generations of Chets selecting other Chets?... [C]ould someone clean up by having a bank with a front office of Chets and a back office of Brad DeLongs? But maybe the colossal failure of LTCM, one of the only times I ever heard of anyone trying to have smart people who knew about economics in charge of a hedge fund, has scared people off Brad DeLongs and back into the welcoming, hearty hug/back-slap combo of Chet?
  4. If it's not a market failure, and Chets do just as well as brainiac PhD's in Economics at making decisions about hellishly complex derivatives, then is the whole thing just random?...
  5. Why do they all have to be irritating Republicans who are convinced there is some very real sense in which they have earned a multi-million-dollar bonus, when it's so clear to anyone that they cannot possibly, ever, have done enough work to 'deserve' all that money (which is not to say that you can't structure a semi-sucessful company on this basis). It's so very tedious of them. Oh well, they're probably less-overpaid than Fortune 500 CEO's, I'll give them that.

There are a lot of investment bankers who are not "Chets" and who are very smart as I define smart: my brother's bosses Frank Brosens and Ken Brody; Robert Rubin and Roger Altman; the late Fischer Black. Read Emmanuel Derman's My Life as a Quant to get the idea of what life is like for the very antithesis of Chet-hood.

But there are a lot of investment bankers who are "Chets." Indeed, a very smart quant like Emmanuel Derman is (from one point of view) a Chet-enabler: he constructs models and writes programs so that the Chets can, with three keystrokes, know what they have to charge their clients in order to make money for the firm. So Alameida's question is a good one: why are the Chets paid so much?

Part of the answer is that they are sitting at a nexus: a huge amount of money blows past Wall Street, and if you can sit in the right place with a large net, unbelievable quantities of money will be trapped by it.

A bigger part of this answer is that there are four relevant human capabilities here: the ability to master details, the ability to quickly grasp what the salient issues are and follow them through to their conclusion, the ability to work like a dog, and the ability to size up people--figure out quickly who will actually produce something useful and who will not, who will hang tough and who will easily bid more, who will soften if wooed and who will stay hard-nosed. Next to nobody has all four or even three of these capabilities in world-class measure. Fewer people than you think have even two. And for someone who has one of the other three--mastery of detail or skill at analysis or the ability to work like a dog for ungodly periods of time--mastery of Chet-hood is a very valuable and lucrative skill.

Consider Felix Rohatyn, running the auction of RJR-Nabsico in the 1980s. Rohatyn tells the bidding syndicates that there will be only one round--that they will have no opportunity to rethink their bids and raise them, so that they had better choose their bids carefully. The competing syndicates bid. Rohatyn says, "Thank you." And then:

the board, Atkins said, was willing to give Kohlberg Kravis one final opportunity to bid. "If you haven't already done so, this is the time to put in your best bid."


Kravis and Roberts were too startled to speak. Beattie and Cogut exchanged a glance of amazement. *One final bid? Hadn't they been through this five hours ago?*

Felix Rohatyn's voice filled the void: "This is a serious offer. You should do your best to respond to it." Then, looking Kravis square in the eye, Rohatyn said: "We want your highest and last offer."

"This is the craziest thing I've ever seen," Kravis said. "We gave it to you five hours ago!"

A half hour later, Beattie and Cogut emerged from the aquarium room.... Kohlberg Kravis has two conditions before it will place its final bid on the table....

Kravis went around the room one last time. What should we bid?... Fifty cents a share too much or too little could be the difference. Already the bidding had reached heights all but the foolhardy were uncomfortable with.... The verdict seemed unanimous. They would throw in one last raise, just fifty cents a share in cash, roughly $115 million. "Is everybody comfortable with that?" Roberts asked....

"No, I'm not." The voice was Jamie Greene's.... "I don't know if we should do it at all" Greene said. "But if we do, let's do it with a dollar in cash. We've come this far. We want to win this deal."

"I think he's right," Roberts said. "That's exactly what we should do. We've gone this far. We've made up our minds we want to own this company. Let's not get shortsighted now."...


By being Chets--knowing when to push and when not to, and how far KKR could be pushed--Felix Rohatyn and company gained their clients an extra $230 million dollars with fifteen minutes' worth of work. You need people who know what the big things that affect fundamental values are. You need people who know how the details of contract provisions interact. And you need Chets--lots and lots of Chets--if you're going to squeeze anything like the best prices out of your counterparties. As Rohatyn did with KKR. KKR made a fortune, but it and its backers took on a huge amount of risk in doing so. Rohatyn made his clients a fortune, and did so by shedding risk rather than bearing it.

As to why the ones whom Alameida knows are all Republicans who believe that they generally deserve all their wealth. It is very annoying, but it's inevitable given what humans are: all our successes are due to our skills and industry, and all our failures are do to bad luck, right? (And there are a bunch I know--not a majority of those I know, but a bunch--who are Democrats, in a plurality of cases because being told once a year that you were slaves to Pharoah in Mizraim influences how you think about a whole bunch of issues.)

Time to Learn from Tojo Hideki...

Ted Galen Carpenter and Justin Logan write:

American Prospect Online - ViewWeb: Clearly, the X factor for China is potential U.S. intervention. But China's strategists think they may have the key to overcoming the United States: sinking a U.S. aircraft carrier. Chinese Major General Huang Bin explained the reasoning: "Once we decide to use force against Taiwan, we definitely will consider an intervention by the United States. The United States likes vain glory; if one of its aircraft carriers should be attacked and destroyed, people in the United States would begin to complain and quarrel loudly, and the U.S. president would find the going harder and harder." China has equipped its advanced Sovremenny-class destroyers with Sunburn supersonic anti-ship missiles -- missiles designed to sink large vessels such as aircraft carriers...

I would advise General Huang Bin and China's other military strategists to very carefully study the mistakes of Tojo Hideki and the history of the 1940s. Very carefully.

COINS Is Inching... No, Nanometering... Forward

From Berkeley's Science Matters:

Nanoscience's Master Mechanic: This fall, UC Berkeley is launching a new $11.9 million center for researchers to design and test novel motors, sensors, batteries, and other mechanical components. What will set this center apart from most engineering endeavors is that none of the devices built there will be visible without an electron microscope. The Center of Integrated Nanomechanical Systems (COINS) aims to develop a storehouse of mechanical components hundreds of times smaller than the diameter of a human hair. Physics professor Alex Zettl is leading the charge, having recently demonstrated a conveyor belt for ferrying atoms, the world's smallest nanomotor, and an oscillator based on drops of liquid metal that weight just one-quadrillionth of a gram.

I am no Associate Director for Societal and Ethical Implications of this thing, COINS. It is becoming more and more clear that there will indeed be a thing called "nanotechnology". But what will be its social, economic, and ethical implications? It's going to be a hard puzzle...

I Need Minions...

One thing I could do if I had serious minions is set them to work reading the comment threads at Teresa Nielsen Hayden's Making Light to alert me of absolute gems like this:

Making Light: Which sf writer?: David Goldfarb ::: (view all by) ::: May 15, 2005, 09:16 PM: [Re] "there are lots of locations where, if you search on (e.g.) 'Ming's Purple Death Dust,' you'll get offers to provide all your Ming's Purple Death Dust needs on eBay. At exceptional discounts. Order tickets to Frigia on Travelocity now."

My favorite example was when I was poking around on the San Francisco Chronicle's web site and found an article about the activity of the Hayward Fault. At the bottom of the page:

Fault Line New and used Fault Line available at low prices on eBay.

Um, I'll pass, thanks.

Dana Milbank on the Bolton Nomination

He writes:

A Defection on the GOP Side: Lugar, as shepherd of Bolton's nomination, was scarcely more helpful.... It was, perhaps, not the ideal slogan for confirmation: Bolton -- not a criminal. Only four days earlier, Lugar predicted that Bolton would be endorsed by the committee on a party-line vote. Yesterday, he was reduced to urging colleagues not to 'reject Secretary Bolton without even granting him a vote on the Senate floor.'The difference, of course, was Voinovich, who challenged Bush and GOP leaders in a way few of his colleagues have dared. 'What message are we sending to the world community?' he asked about Bolton. Though he said that 'all things being equal' he would support a presidential nominee, 'all things are not equal.' Responding to a main White House argument, he added: 'To those who say a vote against John Bolton is against reform of the U.N., I say, 'Nonsense.' ' Lugar held a thin smile while Voinovich talked. Sen. Lincoln Chafee (R-R.I.), who took a political risk by backing Bolton, stared at his water glass and looked as if he were about to cry...

Senate Hearing on Social Security Proposals

Mark Thoma finds the CSPAN video link to last Friday morning's Democratic Policy Committee Social Security hearing:

Economist's View: CSPAN Video: Senate Hearing on Social Security Proposals: Testimony of Shiller, DeLong, Max, Orszag, and Kobliner on Social Security Reform Before the Senate Democratic Policy Committee: Link to CSPAN page listing video file. Link to Real Player

Approximate starting times of segments:

Shiller: 11:00 min.
DeLong: 23:00 min.
Max 32:00 min.
Orszag 41:00 min.
Kobliner 49:00 min.
Q&A (Dayton and Lincoln) 57:00 min.

I thought that Beth Kobliner and Bob Shiller were highly effective, and that Peter Orszag was awesome. Derrick Max has the hard problem of being a convinced small-government Republican who must show considerable loyalty to the current Republican Party line or else he will simply be unable to function. He must confine his dissent to secondary points and footnotes as he tries to push the Republican Party in a constructive direction.

It is always a pleasure to testify before the Senate: they know their issues very well.

As for me?... Well, see for yourself: I cannot judge. To the extent that I was effective, the credit should go to Jack De Vore and Michael Levy, who ran a talking-to-senators minicourse on the third floor of the Treasury's west wing in 1993.

My written statement:

My spoken statement is in the extension...

Continue reading "Senate Hearing on Social Security Proposals" »

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

Kevin Drum reads David Brooks so we don't have to, and says that yes, he is a dork:

The Washington Monthly: INCOME MOBILITY....David Brooks writes about income mobility today:

The big difference between poor Republicans and poor Democrats is that the former believe that individuals can make it on their own with hard work and good character. According to the Pew study, 76 percent of poor Republicans believe most people can get ahead with hard work. Only 14 percent of poor Democrats believe that.

Elsewhere in the New York Times we learn who's right: "New research on mobility... shows there is far less of it than... most people believe.... The incomes of brothers born around 1960 have followed a more similar path than the incomes of brothers born in the late 1940's, researchers at the Chicago Federal Reserve and the University of California, Berkeley, have found. Whatever children inherit from their parents -- habits, skills, genes, contacts, money -- seems to matter more today."

Ever since World War II, the United States has done a phenomenal job of sorting people by talent.... The result is that life roles have become more hardened... [while] incomes -- and jobs -- ... are far more unstable than they were a few decades ago. And as recent research indicates, most of them are increasingly stuck....

In the face of this, Brooksian paeans to the hardworking Republican poor are little less than appalling. Clap your hands and you can be rich! What this faux optimism masks is the astonshing real-life pessimism of modern conservatism. Among advanced economies, the United States is by far the richest, youngest, and fastest growing country in the world. By far. And yet, we're supposed to believe that an increase in Social Security costs from 4% of GDP to 6% over the next 50 years is cause for panic. We're supposed to believe national healthcare would bankrupt us -- never mind that our current dysfunctional system is the most expensive and most unfair on the planet. We're supposed to believe that broader unionization would ruin American industry, home of the highest profits and most highly paid executives in the world. We're supposed to believe that the nation's millionaires, having already had their tax rates slashed by a third over the past two decades, are still being bled to the bone by federal taxes...

The Return of "My Pet Goat"

Belle Waring asks the obvious question:

John & Belle Have A Blog: They Told Cheney Right Away, So...: Can it really be the case that everyone who works for President Bush in any capacity is convinced he's just a cypher when it comes to potential security threat? That he shouldn't be told anything worrying till the My-Pet-Goat-reading/bike-ride-with-high-school-pal is over? This just seems weird to me.

Capitol Police officers began shouting to stragglers, 'Run, run, this is for real!' At the Patuxent Wildlife Research Center in suburban Maryland, a half-hour's drive from the White House, Mr. Bush's Secret Service detail - following him on bicycles and in vehicles as he got some midday exercise after returning the previous night from a five-day trip to Russia, Latvia, Georgia and the Netherlands - decided not to inform him of what was unfolding, said Scott McClellan, the White House spokesman.

Mr. McClellan said the members of the security detail had decided that Mr. Bush need not be informed because there was no danger to him and because procedures for intercepting the airplane, evacuating buildings in Washington and increasing security at the White House did not require his authorization. The Secret Service agents did not consult with Andrew H. Card Jr., the White House chief of staff, or other senior administration officials, Mr. McClellan said.

Mr. McClellan said Mr. Bush was told of the incident at 12:50 p.m., after his ride with a high school friend. Asked whether Mr. Bush wished he had been informed earlier, Mr. McClellan replied: 'The president has great trust in his security detail. He was never in any danger, and the protocols that were in place were followed.'

I mean, obviously it turned out to be no big deal, but not even to mention it?

Why Oh Why Are We Ruled by These Idiots? (Bush Department)

Josh Micah Marshall outlines a few of the reasons that negotiating with *this* administration over the future of Social Security makes no substantive policy sense at all:

Talking Points Memo: by Joshua Micah Marshall: May 15, 2005 - May 21, 2005 Archives: There seems to be a rising chorus of claims that, even if the expected shortfalls in Social Security funding are still almost forty years in the future, every year that goes by the cost and difficulty of fixing the problem increases. But this makes no sense...e\ President Bush's proposed means of 'fixing' Social Security's shortfall turn entirely and exclusively on cuts in guaranteed benefits.... If the issue was prefunding Social Security as a social insurance program, then the sooner we start doing that the better. But President Bush has specifically ruled out new funds.... [I]t's even wors... Bush has also ruled out the existing funding mechanism by which any sort of pre-funding could take place....

Let's say we immediately cut everyone's Social Security benefits by 20%.... [T]he Trust Fund last longer... there's more money in it... it would pay down more slowly.... But [Bush] doesn't believe that the Trust Fund exists.... [I]t would be foolish for current beneficiaries of the program, or people currently paying payroll taxes, to fatten up the Trust Fund in this way so long as the current president isn't even willing to stipulate that the money will be paid back....

Given... [what] Bush will allow, it won't be any harder or more costly to 'fix' Social Security five or ten or any number of years into the future than it is today...

Alan Greenspan Gives Sarbanes-Oxley Praise--Faint Praise, but Praise

Andrew Balls of the FT reports: / US - Greenspan praises corporate governance law: Alan Greenspan, the Federal Reserve chairman, said on Sunday that the Sarbanes-Oxley Act, the legislation introduced in 2002 to improve corporate governance, had been surprisingly successful.... Mr Greenspan said there was scope for fine-tuning of the legislation. But he sounded a very different note to some business lobbyists, and some Bush administration officials, who have warned of excessive compliance costs and of the potential impact of the legislation on corporate risk-taking."I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has," Mr Greenspan said. "The act importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use." Mr Greenspan, in the commencement address to students graduating from the Wharton business school at the University of Pennsylvania, gave a wide-ranging lecture on the importance of ethical behaviour among business leaders. Chief executives, he said, held most of the decision-making power in US companies, and had a duty to promote ethical behaviour in their companies. Mr Greenspan said the US could not have achieved its strong economic performance over the past 200 years if corporate governance had been deeply flawed. He also said financial market punishment was the best antidote to business and financial transgressions. But he praised the Sarbanes-Oxley requirement that chief executives vouch personally for their company's financial statement, saying that mere adherence to generally accepted accounting principles had been shown to be inadequate by the "imaginative accounting" of recent years....

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

Edmund Andrews tries to keep score:

Beware the Easy Fix for Social Security - New York Times: The problem is that Mr. Bush's [Social Security] plan would not keep Social Security from running out of money. An apples-to-apples comparison would have to take into account that the government would eventually need to cut benefits or raise taxes even if the government did adopt progressive price indexing.

White House officials contend that the changes Mr. Bush has outlined would close about 70 percent of the long-term deficit, but... the changes would eliminate less than 60 percent... of the shortfall expected over the next 75 years. The projected insolvency would be delayed by only six years, to 2047. At that point... the government would have to reduce benefits by an additional 15 percent. Kent Smetters, a former Treasury official under President Bush and now an associate professor at the Wharton School of Business, came up with similar estimates about the impact of progressive price indexing.

Mr. Smetters noted that Mr. Pozen's original plan would have gradually trimmed disability benefits and would have closed about 70 percent of the shortfall. But Mr. Bush has vowed to preserve disability benefits at current levels, and to ensure that even low-income retirees are kept above the poverty line. 'I would say it solves about 60 percent, or a little less' of the projected deficit, Mr. Smetters said in an interview.

White House officials do not dispute those estimates, but they have redefined the problem. Instead of saying they would solve 70 percent of the 75-year deficit, the measure most analysts use, administration officials say the plan would reduce about 70 percent of the deficit in the 75th year of their plan. The difference is worth about $500 billion over 75 years. 'The real question is how close you are to getting the system back to positive cash flow by the final year,' said Andrew G. Biggs, deputy director of Mr. Bush's National Economic Council. 'How much of the final-year deficit does it eliminate? By that measure the plan closes about 70 percent of the deficit.'

Now let's be clear about what's going on here:

  • The White House rolled out its declaration of "directional consistency" with Robert Pozen's progressive price indexing plan on April 28.
  • The White House picked up from Pozen the claim that the plan would close 70% of the projected 75-year Social Security deficit.
  • Someone in the White House then decided that Pozen's proposed cuts to disability benefits were unacceptable.
  • Nobody went back and said: "Wait a minute. We're changing the plan. What does this mean for the 70% number we are claiming?"
  • Andrew Biggs in the White House now has the thankless task of coming up with a number--not a number that anybody has ever used before, not a number than anybody particularly cares about, and not a number that anyone but an idiot would take as a summary statistic--that the Bush plan closes 70% of.

It would be much better for Mr. Biggs to admit that he is badly overworked and outnumbered by substance-free spinmasters, and as a result things get sloppy.

Class, Status, Prada

Matthew Yglesias is unhappy with the New York Times: I'm glad someone decided to write about class in America -- an important subject -- but the Times's first take is just filled with baffling assertions: There was a time when Americans thought they understood class. The upper crust vacationed in Europe and worshiped an Episcopal God. The middle class drove Ford Fairlanes, settled the San Fernando Valley and enlisted as company men. The working class belonged to the A.F.L.-C.I.O., voted Democratic and did not take cruises to the Caribbean. Today, the country has gone a long way toward an appearance of classlessness. Americans of all sorts are awash in luxuries that would have dazzled their grandparents. Social diversity has erased many of the old markers. It has become harder to read people's status in the clothes they wear, the cars they drive, the votes they cast, the god they worship, the color of their skin. The contours of class have blurred; some say they have disappeared....

Why does it appear that class is fading as a force in American life? For one thing, it is harder to read position in possessions. Factories in China and elsewhere churn out picture-taking cellphones and other luxuries that are now affordable to almost everyone. Federal deregulation has done the same for plane tickets and long-distance phone calls. Banks, more confident about measuring risk, now extend credit to low-income families, so that owning a home or driving a new car is no longer evidence that someone is middle class.

Obviously, those things are happening. But if you can't tell who owns the expensive stuff and who owns the less expensive stuff you're not paying very much attention. Surely we all know the difference between a really fancy car and a less-fancy one, no? A gigantic house and a small house?

I think Matthew has misread Janny Scott and David Leonhardt. They are, I believe, trying to make three points: (a) consumption is more "middle class" than ever before, so that (b) it appears as though class is unimportant, but (c) in reality choosing the right parents matters more than ever in America today:

The economic advantage once believed to last only two or three generations is now believed to last closer to five.... [I]n the past, Professor Solon added, "people would say, 'Don't worry about inequality. The offspring of the poor have chances as good as the chances of the offspring of the rich.' Well, that's not true. It's not respectable in scholarly circles anymore to make that argument." One study, by the Federal Reserve Bank of Boston, found that fewer families moved from one quintile, or fifth, of the income ladder to another during the 1980's than during the 1970's and that still fewer moved in the 90's than in the 80's. A study by the Bureau of Labor Statistics also found that mobility declined from the 80's to the 90's.

The incomes of brothers born around 1960 have followed a more similar path than the incomes of brothers born in the late 1940's, researchers at the Chicago Federal Reserve and the University of California, Berkeley, have found. Whatever children inherit from their parents - habits, skills, genes, contacts, money - seems to matter more today.... But there is broad consensus about what an optimal range of mobility is. It should be high enough for fluid movement between economic levels but not so high that success is barely tied to achievement and seemingly random.... [T]here should remain an incentive for parents to cultivate their children. "Most people are working very hard to transmit their advantages to their children," said David I. Levine, a Berkeley economist and mobility researcher. "And that's quite a good thing."

One surprising finding about mobility is that it is not higher in the United States than in Britain or France. It is lower here than in Canada and some Scandinavian countries but not as low as in developing countries like Brazil, where escape from poverty is so difficult that the lower class is all but frozen in place.... [T]he United States differs from Europe in ways that can gum up the mobility machine. Because income inequality is greater here, there is a wider disparity between what rich and poor parents can invest in their children. Perhaps as a result, a child's economic background is a better predictor of school performance in the United States than in Denmark, the Netherlands or France, one recent study found.

"Being born in the elite in the U.S. gives you a constellation of privileges that very few people in the world have ever experienced," Professor Levine said. "Being born poor in the U.S. gives you disadvantages unlike anything in Western Europe and Japan and Canada."

This argument--that rising standards of living as a whole are making it appear that class is unimportant while in fact class matters more than ever--is an old one. It is one of the centerpieces of George Orwell's The Road to Wigan Pier. Orwell is distressed by the consumption of "cheap " by the relatively poor. He thinks: The system is taking advantage of the relatively poor by enabling them to consume commodities that they think are luxuries, but that in fact are not or are no longer so. It is conning them.

In the middle of the Great Depression in Britain, Orwell expected that the economic catastrophe would bring dismay, discontent, protest, and revolt. Yet it did not do so. Why? Orwell thought that even though "whole sections of the working class... have been plundered of all they really need" by high unemployment, they had also been "compensated... by cheap luxuries which mitigate the surface of life": fish and chips, artificial-silk stockings, tinned salmon, cut-price chocolates, movies, radio, tea.

Note the words: "palliative," "mitigate," "surface." Orwell is in the final analysis not pleased at all by the fact that:

the youth... for two pounds ten on [installments]... can buy himself a suit which... at a... distance looks... tailored on Saville Row. The girl can look like a fashion plate at an even lower price.... [I]n your new clothes you can stand on the corner, indulging in a private daydream of yourself as Clark Gable or Greta Garbo."

For Orwell writing in the 1930s this pattern of cheap middle-class consumption masks the reality--that the working class has lost relative income, relative wealth, and relative power. It makes tolerable what should not be tolerated: that the upper class has much too large a share of the pie.

Part of what is going on is that it is a mistake to say that the shop-girl of today has the same standard of living as a duchess of a century ago because the key element of being a duchess is being exceptional. To the extent that goods are valued not for the services they provide by themselves but as indices of exclusivity, it is pointless to produce them for more people because then they become less exclusive and so less valuable. Paul Krugman, for example, has placed himself on Orwell’s side: he would rather be middle-class in the fifties than working poor in the nineties-—even though the material standard of living of America's working poor in 1990 is higher than that of America's middle class in 1950. He:

know[s] quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter because they have never received a [job] offer from Harvard and will probably not get a Nobel Prize. The live very well... but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing ‘em jump." Privilege is not merely a means to other ends, it is an end in itself.

It may be a very big mistake to think that human happiness is necessarily and significantly increased by piling up larger and larger heaps of material goods. Richard Easterlin in his Growth Triumphant points to evidence from public-opinion surveys that suggests that money does not buy happiness over time or across countries, and believes (though I think he is wrong) that people are no happier in the U.S. today than they are in India today, or were in the U.S. a century ago. Happiness is attained when you achieve your dreams and solve your problems. Material abundance helps you do so, but it also teaches you to dream bigger dreams and pose yourself more complicated problems. Easterlin thus concludes that modern economic growth is a "hollow victory": the "triumph of economic growth is not a triumph of humanity over material wants; rather, it is the triumph of material wants over humanity."

On the other hand, it may not be a very big mistake to think that human happiness consists in expanding our powers and capabilities to accomplish things (not the least of which are maintaining our comfort and satisfying our curiosity), and that wealth is a powerful tool to those ends. There is a standard American response to the claim that money doesn't buy happiness: "Your money doesn't buy you happiness? Then send it all to me. It will help buy me mine."

Economist's View: The Art and Practice of Fed Watching

Mark Thoma introduces Tim Duy:

Economist's View: The Art and Practice of Fed Watching: I am pleased to announce a regular feature at Economist's View. Tim Duy, whose qualifications are noted here, has agreed to resume his formal role as Fed Watcher for us on a regular basis. Here are Tim's thoughts on the art of Fed Watching:

Raised From The DeadI seemingly gave up my career as a Fed Watcher more than three years ago, choosing instead to reinvent myself as a local and regional economist in an effort to build a life in the Pacific Northwest (I am hoping global warming increases rain in the region. I understand there is a 50-50 chance of that outcome). Under some congenial prodding from Mark Thoma, however, I am warily putting my feet back in the water.

Some initial observations on Fed Watching, so I can establish something of a baseline:

  1. I do not claim to have any special contacts with members of the Federal Reserve. To be sure, I know economists who work or have worked at the Federal Reserve Board of Governors or District Banks, but I am not pumping them for inside information.
  2. I do not believe that there are mountains of secret information about Fed policy waiting to be discovered. Of course, on occasion a loose piece of information may slip via a private conversation from someone closely connected with the Fed. But such slip ups are relatively rare, especially as the Fed has become increasingly transparent.
  3. As a corollary to point 2 above, I am amazed that investment firms will pay thousands of dollars for the inside scoop on the Fed. My recommendation is to buy a subscription to the Wall Street Journal. Greg Ip is more likely than anyone else to get the story right (except me, of course!). I expect some angry comments back on this one.
  4. The secret to remember is that Fed Watching is not about your interpretation of the economy or what you would do if you were a Board member. That approach will lead you down a bad road. The secret is to interpret the data as the Fed sees it, and remain agnostic about whether the policy is wrong or right.
  5. The worst screw ups will happen when the Fed switches gears in their policy stance. The Fed Watcher must both anticipate a turn in the economy and the Fed's timing of any reaction. Given that economists have correctly predicted something like 8 of the past 5 recessions, a shift in the business cycle will likely leave the Fed Watcher bloodied (been there, done that).
  6. One should be aware of what is happening on Wall Street, but not be overly influenced by the day to day noise. It is easy to get carried away in the hype.
  7. Read the speeches of Fed officials, particularly Board members. Speeches from District Bank Presidents may be interesting and insightful, but policy is made in Washington (New York is the exception to this rule).
  8. Everything will change next year. Be wary -- no matter who replaces Greenspan, he (or, in a bow to political correctness, she) will be fresh blood, and thus a mystery. Uncertainty is the bane of financial markets....

Fed policymakers keep a careful eye on global developments, to be sure. But policy remains focused on domestic stabilization. And also, all economies should maintain a similar focus.... [T]he Fed will keep watch on the current account deficit, and consider how to respond to the challenges a sudden stop of capital would create, but are unlikely take policy action directed toward the current account. Likewise, there may in an asset bubble in the housing market, but don't expect the Fed to react to that, at least not before it bursts. What to look for then? Growth, jobs, and inflation. Boring, I know, but these are the tried and true friends of any Fed Watcher....

Text of the Downing Street Memo

An historical document: The Downing Steet Memo:


From: Matthew Rycroft
Date: 23 July 2002
S 195 /02

cc: Defence Secretary, Foreign Secretary, Attorney-General, Sir Richard Wilson, John Scarlett, Francis Richards, CDS, C, Jonathan Powell, Sally Morgan, Alastair Campbell


Copy addressees and you met the Prime Minister on 23 July to discuss Iraq.

This record is extremely sensitive. No further copies should be made. It should be shown only to those with a genuine need to know its contents.

John Scarlett summarised the intelligence and latest JIC assessment. Saddam's regime was tough and based on extreme fear. The only way to overthrow it was likely to be by massive military action. Saddam was worried and expected an attack, probably by air and land, but he was not convinced that it would be immediate or overwhelming. His regime expected their neighbours to line up with the US. Saddam knew that regular army morale was poor. Real support for Saddam among the public was probably narrowly based.

C reported on his recent talks in Washington. There was a perceptible shift in attitude. Military action was now seen as inevitable. Bush wanted to remove Saddam, through military action, justified by the conjunction of terrorism and WMD. But the intelligence and facts were being fixed around the policy. The NSC had no patience with the UN route, and no enthusiasm for publishing material on the Iraqi regime's record. There was little discussion in Washington of the aftermath after military action.

CDS said that military planners would brief CENTCOM on 1-2 August, Rumsfeld on 3 August and Bush on 4 August.

The two broad US options were:

(a) Generated Start. A slow build-up of 250,000 US troops, a short (72 hour) air campaign, then a move up to Baghdad from the south. Lead time of 90 days (30 days preparation plus 60 days deployment to Kuwait).

(b) Running Start. Use forces already in theatre (3 x 6,000), continuous air campaign, initiated by an Iraqi casus belli. Total lead time of 60 days with the air campaign beginning even earlier. A hazardous option.

The US saw the UK (and Kuwait) as essential, with basing in Diego Garcia and Cyprus critical for either option. Turkey and other Gulf states were also important, but less vital. The three main options for UK involvement were:

(i) Basing in Diego Garcia and Cyprus, plus three SF squadrons.

(ii) As above, with maritime and air assets in addition.

(iii) As above, plus a land contribution of up to 40,000, perhaps with a discrete role in Northern Iraq entering from Turkey, tying down two Iraqi divisions.

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

The Foreign Secretary said he would discuss this with Colin Powell this week. It seemed clear that Bush had made up his mind to take military action, even if the timing was not yet decided. But the case was thin. Saddam was not threatening his neighbours, and his WMD capability was less than that of Libya, North Korea or Iran. We should work up a plan for an ultimatum to Saddam to allow back in the UN weapons inspectors. This would also help with the legal justification for the use of force.

The Attorney-General said that the desire for regime change was not a legal base for military action. There were three possible legal bases: self-defence, humanitarian intervention, or UNSC authorisation. The first and second could not be the base in this case. Relying on UNSCR 1205 of three years ago would be difficult. The situation might of course change.

The Prime Minister said that it would make a big difference politically and legally if Saddam refused to allow in the UN inspectors. Regime change and WMD were linked in the sense that it was the regime that was producing the WMD. There were different strategies for dealing with Libya and Iran. If the political context were right, people would support regime change. The two key issues were whether the military plan worked and whether we had the political strategy to give the military plan the space to work.

On the first, CDS said that we did not know yet if the US battleplan was workable. The military were continuing to ask lots of questions.

For instance, what were the consequences, if Saddam used WMD on day one, or if Baghdad did not collapse and urban warfighting began? You said that Saddam could also use his WMD on Kuwait. Or on Israel, added the Defence Secretary.

The Foreign Secretary thought the US would not go ahead with a military plan unless convinced that it was a winning strategy. On this, US and UK interests converged. But on the political strategy, there could be US/UK differences. Despite US resistance, we should explore discreetly the ultimatum. Saddam would continue to play hard-ball with the UN.

John Scarlett assessed that Saddam would allow the inspectors back in only when he thought the threat of military action was real.

The Defence Secretary said that if the Prime Minister wanted UK military involvement, he would need to decide this early. He cautioned that many in the US did not think it worth going down the ultimatum route. It would be important for the Prime Minister to set out the political context to Bush.


(a) We should work on the assumption that the UK would take part in any military action. But we needed a fuller picture of US planning before we could take any firm decisions. CDS should tell the US military that we were considering a range of options.

(b) The Prime Minister would revert on the question of whether funds could be spent in preparation for this operation.

(c) CDS would send the Prime Minister full details of the proposed military campaign and possible UK contributions by the end of the week.

(d) The Foreign Secretary would send the Prime Minister the background on the UN inspectors, and discreetly work up the ultimatum to Saddam.

He would also send the Prime Minister advice on the positions of countries in the region especially Turkey, and of the key EU member states.

(e) John Scarlett would send the Prime Minister a full intelligence update.

(f) We must not ignore the legal issues: the Attorney-General would consider legal advice with FCO/MOD legal advisers.

(I have written separately to commission this follow-up work.)


As originally reported in the Times of London, May 1, 2005

Larry Lindsey Wants to Boost National Savings

Ex-Bush NEC head Larry Lindsey thinks that the administration's Social Security plans move in the wrong direction:

Hearing Archives: Committee on Ways & Means :: U.S. House of Representatives: Statement of The Honorable Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group, Fairfax, Virginia

Testimony Before the House Committee on Ways and Means

May 12, 2005

Mr. Chairman, members of the Committee, I am honored to have been asked to testify today on the issue of Social Security reform. It is surprising that the issue of promoting national saving is not at the center of the current debate over Social Security reform, and that will be the focus of my comments today....

The first part of any credible Social Security reform plan is to permanently eliminate the actuarial deficit in the system.... There are a number of ways of closing this gap, but with different implications for national saving. For example, it would take a 28 percent increase in payroll taxes to make sure that the government collected all the money it needed to meet benefit promises over time....

The second way of bringing the system into balance is to change the formula for determining benefits now.... The system could be brought into balance by limiting future benefits to the level of benefits enjoyed by those retiring from the system now, while fully indexing those benefits to inflation. This could even be coupled with a generous minimum Social Security benefit....

In order to maintain the level of consumption in retirement that the government previously promised, but could not deliver, individuals would have to gradually increase their personal saving during their working lives. This may not be easy for some folks. So, a second part of any Social Security reform that promotes national saving should include a personal account plan that helps people save and learn the benefits of saving by watching their own accounts grow.... The best way is to allow workers to choose a plan where they would contribute more to their retirement in return for gaining ownership and a higher return on their existing payroll taxes... the government could match private contributions.... Consider... a plan that asked employees to contribute 1 ½ percent of their wages to their own personal account, with no change in their current taxes. For only a slightly higher short run budget effect than the President’s proposal, Social Security could offer a four-for-one match on employee contributions made on the first $10,000 of earnings and a one-for-one match on contributions made on earnings above that amount. A worker making $10,000 would thus contribute $150 a year to his account and be matched $600 from existing payroll tax revenue – producing a $750 account. A worker making $50,000 would contribute $750 a year and be matched $1,200, producing a $1,950 personal account. The resulting accounts would build up much more quickly, generate more earnings, and provide far more funds for retirement. The employee’s contribution would not affect their Social Security defined benefit in any way. But as in the President’s plan, the Social Security system would be made whole for any diversion of existing payroll tax revenue.

Best of all, national saving would be enhanced unambiguously. The funds being contributed by workers would largely be net contributions to national saving. They would also involve the real attributes of ownership of capital since the worker would unequivocally have some “skin in the game.” A high initial match rate would also create the right kind of incentives to change long term attitudes toward national saving....

This proposal is not a “carve out.” Nothing is carved out or removed from the Social Security system. The dollars allocated to personal accounts impose no additional strain on the Social Security system. This proposal is not an “add on.” There is no new entitlement.... The combination of gradual reductions in the promised rate of real increase in future benefits and a personal account system that promotes national saving – that is neither a carve out, nor an add-on – is the best approach.

Larry's is a fine idea. The only complaint I can have it is his characterization of it: it is too an "add-on"...