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June 2005

DeLong Smackdown Watch

Julian Sanchez gives an effective critique of (i) DeLong's version of preference utilitarianism and of (ii) attempts to figure out how to implement it by asking people what makes them happy.

Notes from the Lounge: No problem, say the utilitarian theorists (and economists), we'll switch to preference utilitarianism, wherein "utility" or "happiness" are defined in terms of the satisfaction of preferences. This has the virtue of realigning the object of maximization with what people subjectively value, which makes for a sturdier fact/value bridge. It has the disadvantage of making it much less clear whether that appealingly simple maximizing structure is still a good fit for the task. Even rendering the very different forms of satisfaction and dissatisfaction people are capable of feeling comparable seemed a bit of a stretch. (How many of the bon vivant's wild nights on the town does it take to equal the same amount of "utility" in the monk's serene satisfaction in a day of contemplation?) Preferences over states of the world that need not be experience by the subject who prefers them make things a much bigger tangle. And should we think it's better for people to have more (and more intense) preferences, so that more of them can be satisfied? But I digress.

DeLong's problem seems to be that he's using this second, preference-based sense of "happiness." But this isn't the colloquial sense of the word.... DeLong is like a Ptolemaic astronomer who... [claims] the proposition that the earth revolves around the sun... [is the same as] the absurd proposition that the earth doesn't exist, since "the earth" is defined as the thing at the center of the universe. Now, if we're defining happiness in terms of preferences, then DeLong's semantic objection isn't as wacky as it initially seemed: The claim that freedom might be more important than happiness amounts to the claim that one prefers freedom to the satisfaction of one's preferences.

But DeLong then goes on to argue in terms of "regret" and "being happy" when contemplating one's future life, which certainly sounds as though he's conflating the preference-based and experiential senses of happiness.... [T]he discussion further blurs the line between a technical, preference-based sense of happiness in which DeLong's claim sounds right, with happiness as a sort of feeling about how things will go for you. But if we want to stick with the preference-based version of "happiness", then (and this certainly runs against the grain of ordinary English) it no longer makes much sense to talk about "being happy", since "happiness" might be maximized by the choice that leads to my being killed instantly....

[Layard's] book is described as making use of a series of psychological studies about how satisfied people are. And it's only the experiential sense of "happiness" that's going to turn up in studies like that: First, because if you ask people how "happy" they are, then everybody but Brad DeLong is going to interpret that question in the colloquial way....

Powerful and well-argued, but (to me) ultimately unconvincing. For other philosophical traditions have equal or greater weaknesses when used as foundations on which to build discussions of the good life or the good society. And the question, after all, is whether Richard Layard's book should be ignored because of incoherence in its philosophical underpinnings...

The South Asian Tiger

India's economic growth, from the FT: / World / Asia-Pacific - Indian GDP boosted by strong manufacturing: By Jo Johnson in New Delhi: India’s economy surged by 7 per cent in the fourth quarter of 2004-05, lifting the full-year growth to the 6.9 per cent predicted by the government, as strong manufacturing and services output compensated for a weak performance by the agricultural sector.... Manufacturing grew at 8.6 percent in the January-March quarter.... Farm sector output was up 1.8 percent in January-March... well below the 4 per cent targetted in India’s latest five-year economic plan....

Montek Singh Ahluwaliah, deputy-chairman of India’s Planning Commission, on Thursday lamented that agriculture growth had “run out of steam” since the 1990s and called for greater investment in irrigation and moisture retention infrastructure. In many of India’s states, water charges cover only a fraction of operational and maintenance cost, leading to substantial underinvestment in the irrigation network and shortages caused by wasteful consumption by inefficient farmers. “Nobody is actually talking about user charges covering capital cost,” Mr Ahluwaliah said. “But there is a strong case for user charges covering operations and maintenance cost."...

NCAER says 13 per cent of India’s population will have an annual income of £2,439-£12,500 by 2009-10, compared with 3 per cent in 1995-96. The improved competitiveness of Indian industry, particularly the manufacturing sector, is another reason for the decoupling of industrial production from agricultural output. Exports grew 21.4 per cent in 2003-04 and 24.4 per cent last year.

Soaring sales of motorcycles in rural areas also illustrate growing availability of consumer finance in villages has smoothed consumption in weaker years and lessened the relationship between farm incomes and rural expenditure on manufactured goods.

The Fed Moves Up to 3.25%

Ed Andrews reports:

Fed Continues to Raise Rates at a 'Measured' Pace - New York Times: As investors had already assumed, the central bank raised the federal funds rate on overnight loans between banks by a quarter point, to 3.25 percent. The central bank also repeated previous declarations that monetary policy is "accommodative," which means that interest rates are still lower than officials want, and it said interest rates could still rise at a "measured" pace.... Today's decision marked the one-year anniversary of the Fed's effort to reverse the easy-money policies after 2001, when the central bank was fighting off an economic slowdown and a collapse of the stock market bubble...

Does Financial Globalization Remove the Possibility of a Dollar Crisis? Obstfeld and Rogoff Say, "No!"

Maury Obstfeld and Ken Rogoff say that Greg Mankiw, Alan Greenspan, and others who point to increased financial globalization as a reason not to worry (much) about the U.S. current account deficit are simply wrong. Increased financial globalization has implications for the value of gross international asset positions, but has very little to do with the macroeconomics of how unsustainable trends in net international asset positions come to an end. The unwinding of unsustainable trends in net positions requires that countries' inhabitants change how much and what kinds of goods they consume. This has little to do with financial globalization, and a lot to do with exchange rates, relative goods prices, and demand elasticities:

Maurice Obstfeld and Kenneth Rogoff (2005), "Global Current Account Imbalances and Exchange Rate Adjustments" (Berkeley: University of California):

[T]he global equilibrium ramifications of an unwinding of the US current account deficit, currently running at nearly 6% of GDP [make] the potential collapse of the dollar... considerably larger (more than 50% larger) than our previous estimates [of five years ago].... [G]lobal capital market deepening... [has] accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti).... Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment.... [A]djustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar’s decline may be benign as in the 1980s... the current conjuncture more closely parallels... when the Bretton Woods system collapsed....


Given our analysis, why then do some, such as Greenspan (2004), argue that a decline in the United States current account deficit is likely to be benign? Greenspan points to the fact that capital markets are becoming increasingly integrated, and cites reductions in home bias in equities, the secular waning of the Feldstein-Horioka puzzle, and other factors.... But our calibration here is totally consistent with the current degree of integration of capital markets.... What matters... is not the depth of international capital markets, but the costs of adjusting to lower tradables consumption in the goods markets.... [N]ontraded goods account for 75% of GDP... home bias in tradable goods consumption... US current account adjustment necessarily requires a significant exchange rate adjustment.... [E]ven a closing up of the US current account from 6% to 3% would require very substantial exchange rate adjustments, especially if one takes the likely effects of exchange rate overshooting into account....

The real question is not whether there needs to be a big exchange rate adjustment.... The real question is how drastic the economy-wide effects are likely to be. This is an open question.... [W]hereas US markets may have achieved an impressive degree of flexibility, Europe (and to a lesser extent Japan) certainly has not. The rest of the world is not going to have an easy time adjusting to a massive dollar depreciation.... With the increasing diversity of banks’ counterparty risk... a massive dollar movement could lead to significant financial problems that are going to be difficult to foresee before they unfold....

[T]he optimists can point to the dollar’s relatively benign fall in the late 1980s (though arguably it was a critical trigger in the events leading up to Japan’s collapse in the 1990s). But perhaps the greatest concern is that today’s environment has more parallels to the dollar collapse of the early 1970s than to the late 1980s....

Kudos to Ryan Nunn of the Brookings Institution

Kudos to Ryan Nunn of the Brookings Institution. He has saved us from an embarrassing (and substantive) mindo in "Asset Returns and Economic Growth."

Because I forgot in the Diamond model to adjust the capital stock per capita for population growth, I wrote down the wrong equation (21):

where I should have written:

And this error propagated to give the wrong expression for the real interest rate along the economy's steady-state growth path:

which should have been:

and this led us to the erroneous conclusion that in the Diamond model slowdowns in population growth have smaller effects on asset returns than do slowdowns in labor productivity growth, while in fact the effects are equal.

We are very grateful to Ryan for his sharp eyes...

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

Was the New York Times's Eric Schmitt snookered? Schmitt writes:

Army Recruiting Improves in June - New York Times: WASHINGTON, June 29 - For the first time since January, the Army met its monthly recruiting goal in June, but still faces what some senior Army officials say is a nearly insurmountable shortfall to meet the service's annual quota. The chairman of the Joint Chiefs of Staff, Gen. Richard B. Myers, told a town-hall meeting at the Pentagon today that the Army had exceeded its June quota, but gave no details. Senior Army officials said in interviews earlier in the day that the Army had exceeded the goal of 5,650 recruits by about 500 people. The Army Reserve also made its first monthly quota since last December, the official said...

But earlier this month CBS News told us:

CBS News: Army Recruiting Continues To Lag: [T]he Army... fell about 25 percent short of its target of signing up 6,700 recruits in May, officials said Wednesday. The gap would have been even wider but for the fact that the target was lowered by 1,350. The Army said it lowered the May target to "adjust for changing market conditions," knowing that the difference will have to be made up in the months ahead....

Lt. Col. Bryan Hilferty, spokesman for the Army's chief of personnel, said... the Army remains cautiously optimistic that it will make up the lost ground this summer — traditionally the most fruitful period of the year for recruiters — and reach the full-year goal of 80,000 enlistees. "One number matters: 80,000," Hilferty said....

With only four months left in the budget year, the Army is at barely 50 percent of its goal. Recruiters would have to land more than 9,760 young men and women a month, on average, to reach the 80,000 target by the end of September.

UPDATE: A correspondent writes:

The June goal (5,600 or so, I believe) was previously published, so at least in this particular case, there's no book-cooking involved.... Army Times [is], of course, intimately interested in recruiting numbers, and publish[es] a monthly recruiting tracker that follows the Army's recruiting woes, and includes goals for upcoming months through the end of the fiscal year; the 5,600 goal for June has not, I don't believe, changed since they began running that graphic several months ago.

The June goal is lower largely because of how recruiting 18-year-olds works, and in part because of how the Army accesses and trains incoming soldiers. Graduated high school seniors are more likely to pop into the system in July, and especially August and September. We'll know a lot more when the Army bumps up against its massive August and September goals, which are both above 8,000.

All of which is not to say that the Army has anything but a huge, huge problem on its hands.

People graduate from high school in June, not May. Yet the June goal of 5,650 is 2,400 smaller than the original May goal of 8,050? When we were told before that the summer is "traditionally the most fruitful period of the year for recruiters"? An 80,000 a year target is 6,667 a month on average--and more in the "fruitful" summer months.

Wotisitgood4 gives his opinion:

wotisitgood4: ten bucks says someone is lying: [W]e know from last month that the May target was 8050, and now we are expected to believe that the june target was always 5650? is there a journo on the planet with access to the internet and an abacus?... [W]hen they reduced the May target, they maintained the full year target [of 80,000] and were just "re-allocating" the 1350 across the remaining months -- June, July, August and September -- some of which were presumably stuffed into the June recruiting budget...

Looks like Eric Schmitt of the New York Times needs to do some digging. It would have been easy for him to ask the question: "Why is your June target of 5,650 so much lower than your original May target of 8,050?" He didn't.

Brad Setser Has Lots to Say--All of It Interesting

Brad Setser is happy with Martin Wolf:

Brad Setser's Web Log: Martin Wolf makes sense (the Economist does not) : Martin Wolf's FT column makes a number of crucial points:

  1. Asia has let undervalued exchange rates (and reserve accumulation) substitute for policies to promote domestic demand. The (growing) backlash in the US toward these policies hardly should be a surprise: "So long as exports remain competitive and trade balances strong, the need to promote domestic demand, thereby reducing the surplus of savings over investment, is diminished. Net exports support demand instead. This is modern mercantilism. The adverse reaction now seen in the US congress is predictable and understandable."
  2. Continuing this system is risky: "They [the US deficit and emerging market surpluses] generate growing protectionist pressure in the US; they force the US into monetary and fiscal policies whose consequence is growing indebtedness, both domestic and externally, they are likely to end in a brutal correction, and that correction is likely to be more brutal the longer it is delayed."
  3. China's scale constrains its ability to continue to rely on exports to substitute for a lack of domestic demand: "A country with a population of 1.3 billion cannot grow at 10% a year and remain as dependent on trade as one with 50m without provoking a backlash from its trading partners."
  4. Adjustment ultimately hinges on China's willingness to adopt policies -- exchange rate adjustment, stimulus to domestic demand -- that will reduce its current account surplus significantly: "A world in which emerging market economies not only run vast current account surpluses but also recycle the capital investors want to place in their economies is unprecedented, undesirable and unsustainable." "China, for example, has foreign currency reserves almost as big as annual imports. With current policies, those reserves are likely to continue to grow rapidly for indefinite future. This is not a reasonable pattern of development in the medium term.

The IMF estimates China's 2005 current account surplus [at] $80 billion. That... is low... $120 billion this year (even with oil at $60). That current account surplus combines with net FDI inflows of $70 billion... to generate a basic [financial] balance of close to $200b, or above 10% of China's GDP. To quote Wolf, that "is enormous by any standards."

Brad Setser is unhappy with the Economist:

[It] manage[s] to argue that a country with a large and growing current account surplus even in the face of a massive investment surge is not really undervalued. The Economist article argues that... it makes sense to look at a country's behavioral equilibrium exchange rate... Using work from Stephen "Current account deficits do not matter" Jen, the Economist concludes that yuan is only modestly undervalued. Let's repeat that. The Economist looks at a country with a current account surplus of 6-8% of GDP in the midst of an investment boom, and says its currency is NOT undervalued.

I am not sure what the "behavioral" exchange rate measures in the context of a country whose government is spending more than 10% of its GDP to manage its exchange rate.... We all know that they have fixed their exchange rate to the dollar, and have spent huge sums -- over $150 b in 2003, over $200 b in 2004, and probably over $250 b in 2005 -- to keep that peg....

The other argument made by the Economist is that "internal balance" in China -- keeping China's workers employed -- requires an undervalued exchange rate.... It is hard to dispute the fact that China's undervalued exchange rate is stimulating employment in China's export sector.... Wolf... argues that it is neither politically or economically sustainable for a country as large as China to offset the absence of internal demand with a huge-- at least 5% of GDP and perhaps closer to 8% of GDP this year -- current account surplus. I agree....

[U]nprecedented deficits in one key part of the global economy, and unprecedented reserve accumulation and current account surpluses in another. But you would never know that there was a real problem in the world just from reading the Economist...

Brad Setser is puzzled by the Federal Reserve:

Brad Setser's Web Log: How does the Fed imagine the US current account deficit will adjust?: Greenspan does not think a revaluation of the RMB would have a major impact on the US trade balance. The Fed does not think that reducing the fiscal deficit would generate a major reduction in the current account deficit. Bernanke thinks a smaller fiscal deficit would just produce a bigger housing boom. Empirically, work from the Fed staff -- work summarized by Roger Ferguson in his current account deficit speech -- suggests that changes in private savings and investment offset a rising (or falling) budget deficit, so a $1 fall in the fiscal deficit only reduces the current account deficit by 20 cents.

If you take "Houthakker-Magee" seriously... the Bush Administration's preferred solution... faster growth abroad... won't do much either.... According to Menzie Chinn, one percentage point faster growth abroad increases exports by 1.7-2%.... Given that exports have to grow something like 60% faster than imports to keep the trade deficit from expanding, faster growth abroad only works if accompanied by slower growth in the US. Remember, the world as a whole grew extremely rapidly in 2004 -- and the US current account deficit still expanded significantly.... Plus, wouldn't faster growth abroad just push up oil prices and hte US oil import bill even more?...

My own view? The US deficit is now so large in relation to the US export base that... [no] individual action in isolation [will] have an enormous impact.... Get rid of China's current account surplus of $120b (projected 2005) through increased US exports to China and the US current account deficit would fall from an enormous $820b (projected 2005) to an only slightly less enormous $700b. The only thing guaranteed to bring about a big adjustment fast is just what no one wants. A hard landing.

Bringing down a 7% of GDP current account deficit (that is where we are heading, fast) and 7% of GDP trade and transfers deficit without a crash will take time, and a bit of everything. Exchange rate adjustment. Steps to stimulate domestic-demand led growth abroad. Fiscal adjustment in the US. Lower oil prices would be a nice bonus. Slower consumption growth in the US.

Exchange rate moves matter. Bringing down the trade deficit won't necessarily be a lot of fun -- living beyond your means usually is nicer than living within your means. But a fair amount of evidence suggests that a weak exchange rate can make the external adjustment process a bit more pleasant...

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

Mark Thoma's jaw drops:

Economist's View: WSJ Commentary: Monetary Policy Does Not Affect Core Inflation: The Wall Street Journal can do better than this. This article by Alan Reynolds of Cato claims that monetary policy has no effect on prices and inflation, a claim that is just plain dumb:

The Fed's Crude Policy, By Alan Reynolds, The Wall Street Journal: … It is commonly assumed that the Fed "leans against" inflation -- raising interest rates when inflation accelerates and lowering rates when inflation slows. Yet the graph nearby proves it is difficult to discover any coherent relationship between the funds rate and the "core" deflator for personal consumption expenditures (PCE), or any other measure of inflation not distorted by energy prices. … The only way to link the fed-funds rate to inflation is to assume the Fed suffered from "energy illusion" -- focusing on fluctuating energy prices rather than the impressive stability of other consumer prices. Perhaps the best way to show this is to look at the consumer price index with and without energy, so there can be no doubt that food prices (which are also excluded from core inflation) were irrelevant…

Here’s the problem with this.... Suppose that monetary policy perfectly controlled inflation.... [Then inflation] would be a flat line with no variation... and it would be uncorrelated with any other variable. The fact that there is no correlation between inflation and the ff rate would be an indication of the success of the policy, not that inflation and monetary policy are unrelated.... [T]he [right] conclusion is exactly the opposite of what [Reynolds] author claims. Finding a correlation between the ff rate and inflation including energy prices means, if policy is successful, that policy does not target energy prices, not that it does.... This does not belong in the Wall Street Journal.

I presume Mark has noticed that almost nothing on the editorial pages of the Wall Street Journal belongs anywhere.

This would make a good easy question for this summer's macroeconomics field exam, however.

Joseph Ferrie and Werner Troesken Go to 19th Century Chicago

What a hellhole! Another thing to add to the very top of the pile:

Joseph P. Ferrie and Werner Troesken (2005), "Death and the City: Chicago's Mortality Transition, 1850-1925" (Cambridge: NBER Working Paper 11427).

Abstract: Between 1850 and 1925, the crude death rate in Chicago fell by 60 percent, driven by reductions in infectious disease rates and infant and child mortality. What lessons might be drawn from the mortality transition in Chicago, and American cities more generally? What were the policies that had the greatest effect on infectious diseases and childhood mortality? Were there local policies that slowed the mortality transition? If the transition to low mortality in American cities was driven by forces largely outside the control of local governments (higher per capita incomes or increases in the amount and quality of calories available to urban dwellers from rising agricultural productivity), then expensive public health projects, such as the construction of public water and sewer systems, probably should have taken a back seat to broader national policies to promote overall economic growth. The introduction of pure water explains between 30 and 50 percent of Chicago's mortality decline, and that other interventions, such as the introduction of the diphtheria antitoxin and milk inspection had much smaller effects. These findings have important implications for current policy debates and economic development strategies.

Le Grand Blond Aardvark avec Une Chasseure [Ahem! Chaussure] Noire

Abu Aardvark sends coded messages through his choice of footwear:

Abu Aardvark: Observations on visiting DC : (1) If you have two young kids and you're really exhausted, pay extra attention to what you pack. Maybe even do it the night before instead of waiting until the last minute. That way, you might not find yourself with two different shoes when you go to put on your work clothes. Because of all the things which might impress a high-powered government panel, wearing two different shoes - both black, but not even a little bit similar in design - probably is not one of them.

(2) Starbucks is getting out of hand. Down in the GWU / Foggy Bottom area, I swear to god there really is a Starbucks on every single corner. So when your friend says "let's meet at the Starbucks down by GW", it might be a good idea to get more details in advance...

Department of "Huh?" (Iraqi Casualties Edition)

Rising Hegemon tries to make sense of Veterans Affairs' claim that it projects a need to provide care for 103,000 patients who are veterans of the wars in Afghanistan and Iraq. That seems a very large number indeed:

Rising Hegemon: Holy Shite!: Jim Nicholson is a GOP shill who has been known to tell a lie or two to say the least. And I think there is a solid lie within this as well, but still WOW, just WOW, this is disturbing:

As the numbers of U.S. war injured in Iraq and Afghanistan soared, the Bush administration admitted to lawmakers on Tuesday it had underestimated funds to cover health care costs for veterans and Congress would have to plug a $2.6 billion hole. "The bottom line is there is a surge in demand in VA (health) services across the board," said Veterans Affairs Secretary James Nicholson.The Veterans Administration assumed it would have to take care of 23,553 patients who are veterans from the wars in Iraq and Afghanistan but that number had been revised upward to 103,000, Nicholson told a House of Representatives panel.Nicholson told a House Appropriations subcommittee that his agency's estimate of Iraq and Afghanistan veterans in need of health care services was now four times greater than thought.

The updated figures underscored how the costs of the Iraq war, approaching $300 billion, were rippling through other parts of a federal budget already under tight spending limits. Nicholson's testimony, coming after his assurance to Congress in April that veterans' health programs were being adequately funded, angered some lawmakers.

They estimated 23,000 in APRIL 2005 --- Two months later it turned out to be 103,000!!! The lie of Nicholson is undoubtedly the "across the board" reference to the use of services. It's unlikely that Vietnam and peacetime vets are running to the VA in a huge surge. I'm not a conspiracist on the unreported deaths issue -- but something unreported is obviously going on when it comes to "wounded". Sure would be nice if the media looked into this before Atrios has to call for another conference on blogger ethics.

I, Too, Want My Technorati Back

Let me join those complaining about the quality of the free ice cream that is Techorati these days:

Making Light: Baby, pull yourself together: Technorati... gives me the same set of outdated incoming links over and over again, reshuffling their order, sometimes swapping one out only to swap it back in again an hour later. I wrote my post about the giant popsicle meltdown yesterday morning. By early evening I learned that it was picking up considerable linkage. How? Not from Technorati... it gave me the same old reshuffled links it'd been showing me all week. The links it had missed, at least the ones I know about, included BoingBoing, Metafilter, Crooked Timber, Majikthise, and Sisyphus Shrugged.... When Technorati can't tell you that you've been simultaneously BoingBoinged and Metafiltered--an event that can shut down a low-bandwidth site--it is formally useless.

Bummer. I am definitely in the market for a replacement....

Patrick Nielsen Hayden... (My experience with the beta site is that large parts of it, like "sort incoming links by 'most authority,'" simply don't work at all; you wait forever for no result.) (We both realize this is arguably a variety of complaining about the free ice cream, and yet.)

Unusual Juxtapositions

Note to self:

Turning the "shuffle" function on on an iPod that has Bach's St. Matthew Passion loaded onto it can produce some interesting juxtapositions:

Then saith Caiaphas... "Didn't I make you feel like you were my only man?"

Ben Bernanke Holds the Fort Alone

I didn't know that Kristen Forbes had left the CEA:

Council of Economic Advisers: Ben S. Bernanke is Chairman of the Council of Economic Advisers (CEA). Two positions on the council are currently vacant. The CEA was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues. The CEA includes three members who are appointed by the President, by and with the advice and consent of the Senate. The President shall designate one of the members as Chairman...

No news as to successors to her, or to Harvey Rosen.

Gourinchas and Rey on Exorbitant Privilege

Pierre-Olivier Gourinchas and Helene Rey say some very smart things:

Gourinchas and Rey: "From World Banker to World Venture Capitalist: The US External Adjustment and The Exorbitant Privilege": Does the center country of the International Monetary System enjoy an “exorbitant privilege” that significantly weakens its external constraint, as has been asserted in some European quarters? Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return has increased after the collapse of the Bretton Woods fixed exchange rate system. It is mainly due to a “return discount”: within each class of assets, the total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also find evidence of a “composition effect”: the US tends to borrow short and lend long. As financial globalization accelerated its pace, the US transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of the current global imbalances.

In my view, the "exorbitant privilege"--in the words, it turns out, not of Charles de Gaulle but of Valery Giscard d'Estaing, as transmitted by Raymond Aron via Le Monde--of the U.S. as international financial linchpin has four components:

  1. Seigniorage: The Federal Reserve and the Treasury can issue a lot more high-powered money than other countries, and thus effectively borrow interest-free on a not insubstantial scale.
  2. Returns: The U.S. and its citizens can borrow in any given asset class for less than other countries can because of the dollar's key role and thus superior liquidity--according to Gourinchas and Rey, 1.7% per year in excess returns.
  3. Composition: Because the U.S. does not have to worry (much) about a collapse of its currency's raising the real value of its foreign debt, it and its citizens can safely hold international asset positions whose composition would be ludicrously risky for any other country--worth, according to Gourinchas and Rey, 0.5% per year in excess returns.
  4. Policy: By virtue of the first three, the U.S. has much more macroeconomic policy running room than anyone else.

Gourinchas and Rey focus on (2) and (3), but (1) and (4) are also important. Especially (4).

Unexpected Email of the Day

Well. This is certainly the unexpected email of the day:

Why is the pricey sleepaway summer camp in Santa Cruz we are sending the kids to sending us an email with the following subject:

Circus Trapeze Arts Liability Waiver


Why Are We Ruled by These Fools? (Duty, Honor, Country Edition)

Lucian Trucott points out that the Bush administration has not been loyal to the army:

The Not-So-Long Gray Line - New York Times: My class, that of 1969, set a record with more than 50 percent resigning within a few years of completing the service commitment.... And now, from what I've heard from friends still in the military and during the two years I spent reporting from Iraq and Afghanistan, it seems we may be on the verge of a similar exodus of officers.... The Los Angeles Times reported on "an undercurrent of discontent within the Army's young officer corps that the Pentagon's statistics do not yet capture."

I'm not surprised.... [M]y classmates were disillusioned with more than being sent to fight an unpopular war.... [W]e were taught that the academy's honor code was what separated West Point from a mere college.... We were taught that in combat, lies could kill.... [S]oldiers are given few rights, grave responsibilities, and lots and lots of power. The honor code serves as the Bill of Rights of the Army, protecting soldiers from betraying one another and the rest of us from their terrifying power to destroy....

[T]he honor code broke down before our eyes as staff and faculty jobs at West Point began filling with officers returning from Vietnam... bogus medals... inflating body counts... drug abuse... racial discrimination, and worst of all, telling everyone above them in the chain of command that we were winning a war they knew we were losing. The lies became embedded in the curriculum of the academy, and finally in its moral DNA.... The mistake the Army made then is the same mistake it is making now: how can you educate a group of handpicked students at one of the best universities in the world and then treat them as if they are too stupid to know when they have been told a lie?...

In the fall of 2003 I was embedded with the 101st Airborne Division in northern Iraq, and its West Point lieutenants were among the most gung-ho soldiers I have ever encountered, yet most were already talking about getting out of the Army. I talked late into one night.... "I feel like politicians have created a difficult situation for us," he told me. "I know I'm going to be coming back here about a year from now. I want to get married. I want to have a life. But I feel like if I get out when my commitment is up, who's going to be coming here in my place? I feel this obligation to see it through, but everybody over here knows we're just targets. Sooner or later, your luck's going to run out."

At the time, he was commanding three vehicle convoys a day down a treacherous road to pick up hot food for his troops from the civilian contractors who never left their company's "dining facility" about five miles away. He walked daily patrols through the old city of Mosul.... The Army will need this lieutenant 20 years from now when he could be a colonel, or 30 years from now when he could have four stars on his collar. But I doubt he will be in uniform long enough to make captain....

A couple of weeks ago, I got an e-mail message from another West Point lieutenant.... "I'm getting out as soon as I can," he wrote. "Everyone I know plans on getting out, with a few exceptions. What have you got to look forward to? If you come back from a tour of getting the job done in war, it's to a battalion commander who cares more about the shine on your boots and how your trucks are parked."...

If you keep faith with soldiers and tell them the truth even when it threatens their beliefs, you run the risk of losing them. But if you peddle cleverly manipulated talking points to people who trust you not to lie, you won't merely lose them, you'll break their hearts.

Intellectual Garbage Pickup

Yes, it's time for our once-every-three months websurf over to Donald Luskin. Why? As a public service: somebody needs to lay down a marker that he simply does not know what he is talking about, and that anyone who believes anything he writes without very careful verification is asking for big trouble.

And it is unbelievable. You don't have to read a dozen paragraphs before you run across something so bats--- ignorant that it should cause every National Review editor and writer to resign in shame, move to Rwanda, and take up a life of anonymous service to others.

This time Luskin denies the existence of the entire discipline of statistics--the idea that a properly designed random sample can tell you important things aout a much, much larger population:

The Conspiracy to Keep You Poor and Stupid: The Times and the Journal cite many authoritative-sounding studies.... But to get an accurate picture... you'd have to track hundreds of millions of individuals.... [N]one of this is reliable... the Panel Study of Income Dynamics... tracks only 8,000 families out of a U.S. population of 295 million individuals.

And then goes on to reveal that he has never eyeballed the time series on growth and inequality:

Times of great prosperity have been associated with greater income inequality (for example, the 1920s), and conversely times of economic decline have been associated with greater equality (the 1930s). The lines of causality here are complex, and no doubt run in both directions: Prosperity is both the cause and the effect of inequality, and decline is both the cause and the effect of equality. So ideological advocates of income equality for its own sake ought to be careful what they wish for...

The relationship between growth and inequality in the U.S. in the twentieth century? None--neither positive nor negative: inequality is high in the fast-growing 1920s and low in the faster-growing late 1950s and 1960s; inequality is not low but high in the depressed 1930s.

Stupidest man alive.

A Fan of Ayatollah Sistani (Why Oh Why Can't We Have a Better Press Corps? New York Times Edition)

My college roommate Robert Waldmann is a fan:

Robert's Stochastic thoughts: I'm back in the Sistani fan club. Ayatollah Sistani just argued in favor of provincial lists for future parliaments as opposed to a national list. This would mean that predominantly Sunni areas will be represented proportional to population even if turnout was low. I argued that, of course, the election of the constitutional assembly should have been on a provincial basis. So, I just learned did Ayatollah Sistani. Unfortunately the crack UN elections team considered the national system easier to set up and the rest is in the daily papers....

Oddly.... Sabina Tavernise repeats the line that Sistani's efforts have been focused on maximizing power of Shi'ites. The logic of this is that Sistani had the crazy idea that Democracy involves elections. Since Shi'ite Arabs are the majority, this exposed him to claims that he wanted absolute power of the majority. The evidence is that he opposed fake Democracy in which Paul Bremer would appoint the people who appointed the people who elected the people who would claim to represent The People.

The latest evidence would tend to undermine this theory, since Sistani is advocating a change... which would give Shi'ites less overwhelming power. One could argue that this is a... concession... [to] the insurgency.... Tavernise manages to argue this:

The statements by Ayatollah Sistani are the latest foray into Iraqi politics by the Shiite leader. Pressure from him was a major factor in establishing an accelerated timetable for the elections in January. That pace, however, largely dictated the election's countrywide system, because United Nations organizers considered it the simplest and quickest way to organize the vote. When United Nations officials met with the ayatollah in March, he chastised them for choosing the system, and said he favored setting assembly seats aside district by district, a preference he reiterated Monday. Mr. Yasiri, the Shiite politician, said Ayatollah Sistani had characterized the January election as flawed. In the past, the ayatollah has reserved his efforts to pushing for measures, like nationwide elections, that were likely to enhance the power of Iraq's Shiite majority.

Try to make sense of that quote. In particular try really hard not to notice that the last two sentences directly contradict each other. I am correct that "March" is currently "in the past". Weird. Also the idea that it is Sistani's fault that after the CPA stalled for months the UN organizers had to rush and so needed to make a national list because... they "considered it the simplest and quickest way to organize the vote." Odd I thought the problem was the census, not ballots and such.

Unhappy is the country that needs heroes. Especially the country that needs foreign born, reclusive clerical heroes with bad hearts. Still I say buy that man some Caspian Sturgeon Caviar (and remind him who explained that it is halal).

Why Oh Why Are We Ruled by These Idiots? (The Italian Situation Edition)

Robert Waldmann tells us what is going on in Italy:

Robert's Stochastic Thoughts: Hassan Osama Nasr was kidnapped in Milan on February 17 2003. On the 23rd of June the Italian GIP Chiara Nobile issued 13 arrest warrents for CIA agents who participated in the kidnapping.... [P]olice and magistrates in Italy are furious with the CIA and the Bush administration.... [T]he person doing [the leaking] (cough Armando cough Spataro) knows that he or she will not be able to bring the agents to trial, and is determined convince the court of public opinion to inflict as much punishment as possible... campaign of leaks... likely to be devastating. In particular, the leakers are... stressing that the CIA has sabotaged the war against terror... CIA agents... incompetent and self indulgent....

Some key nuggets.... "The abduction of Abu Omar forced Italian authorities to abort an extensive case they were building against him. His arrest had been imminent, they said, and formal charges against him are pending." "Abu Omar's disappearance angered several officials who thought they had always cooperated fully with U.S. anti-terrorism efforts, only to be trampled on in this operation." "'Kidnapping Abu Omar was not only a crime against the state of Italy, but also it did great damage to the war on terrorism,' said Spataro, the prosecutor. 'We could have continued the investigation and found evidence on other people. He would be on trial by now instead of missing.'"...

Spataro is going for blood. He also clearly understands which arguments are effective in convincing people in the US who are not convinced already. The next day, anonymous sources opened a new line of attack... CIA agents... incompetent and corrupt.... "[T]abs of thousands of dollars at some of Milan's best hotels and restaurants. They chatted easily on their cellular telephones and gave out passport, frequent-flier and driver's license numbers when booking flights or renting cars. And now they are fugitives....

Note that it is a crime for officials in the prosecutorìs office to talk to the press (it is like revealing grand jury testimony). [The Italian police and prosecutors[ are angry enough not to mind the NY Times reporting the detail that people both with the police and at the procura are talking.... [T]he Italians... had leads useful for an investigation of an international network... this investigation was sacrificed for a chance to torture the one key player who had been identified and placed under surveilance but seems not to have known that he wa giving the Italian police invaluable information until the CIA ruined everything by kidnapping him...

Paul Krugman Says Defense Is More Important than Opulence

He says that control of oil resources, possibly very scarce in the future, is more important than the value of the Chinese Communist Party as an agency of corporate control. As I read Paul, he says that if we did not need Chinese help on North Korea and if we were not very vulnerable to a cut-off of capital inflows, then it would be a no-brainer. In fact, he says, it's a close call. But he still would argue against allowing the Chinese bid for Unocal on the grounds that there are possible future states of the world in which control of oil flows will turn out to be very important indeed.

But we do need Chinese help on North Korea, and we are very vulnerable to a cut-off of capital inflows

The Chinese Challenge - New York Times : Maytag is a piece of American business history, [but] it isn't a prestige buy for Haier, the Chinese appliance manufacturer. Instead, it's a reasonable way to acquire a brand name and a distribution network to serve Haier's growing manufacturing capability.... Maytag's stockholders will gain, and the company will probably shed fewer American workers under Chinese ownership than it would have otherwise....

The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources - which makes last week's other big Chinese offer more than just a business proposition.

The China National Offshore Oil Corporation, a company that is 70 percent owned by the Chinese government, is seeking to acquire control of Unocal, an energy company with global reach. In particular, Unocal has a history -- oddly ignored in much reporting on the Chinese offer -- of doing business with problematic regimes in difficult places, including the Burmese junta and the Taliban....

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.

If it were up to me, I'd block the Chinese bid for Unocal. But it would be a lot easier to take that position if the United States weren't so dependent on China right now, not just to buy our I.O.U.'s, but to help us deal with North Korea now that our military is bogged down in Iraq.

Why Oh Why Can't We Have a Better Press Corps? (Google at $300 a Share Edition)

In order for anybody to believe that it is worth paying $300 a share for Google, they must believe that:

Google's profits will quadruple from current levels in the next several years, and thereafter it will continue to grow at a very healthy pace--a healthy enough pace to earn a rate of return of 5% per year or more on reinvested profits.


Google stock can be sold in a couple of months to a greater fool who will pay more than $300 a share.

If you were a newspaper reporter writing a story intended to inform those concerned about making profitable investments, your story would lay out the current high price-earnings ratio of Google--70--and sketch out the likelihood of various scenarios for Google's future sales and earnings growth. It would talk about the likelihood of Google's erecting powerful enough barriers to entry to preserve its current high margins--35% of revenues. It would talk about the plans of potential competitors to grab some of this high-margin search gravy train, and whether Google's margins might be forced down as a result.

Gary Rivlin of the New York Times tells us absolutely nothing about this. He doesn't care enough about informing his readers to even get the most important and interesting measure of Google's current valuation--its price-earnings ratio--into his article. It wouldn't be hard. All he'd have to do is to say that Google is valued at as much as Time-Warner although Google has less than one-third the profits, less than one-eighth the sales, and something over three times the profit margins, and ask his interviewees to assess the likelihood of scenarios in which Google's profits are as big as Time-Warner's.

But that's not even a minimal priority for Mr. Rivlin and his editors:

At $300 a Share, Google Looks Pricey and Still Irresistible - New York Times: By GARY RIVLIN: [H]ow do you embrace a stock that has more than tripled in 10 months and cracked the $300-a-share barrier so quickly since going public that much of its growth potential seems already built into the price? In early May, when Google was trading for $236, Mr. Edwards sent a note to clients of his firm, a group that includes wealthy individuals and money managers, recommending that they buy Google stock. But Mr. Edwards, who has been analyzing publicly traded stocks for two decades, acknowledges that Google has him flummoxed now.... [M]any of his counterparts, including those working for more prominent investment banks, continue to recommend the stock.

Heath P. Terry... Credit Suisse First Boston... raised his target price to $350.... Mr. Edwards... describes himself as stumped.... He does not have the conviction to advise clients to buy the stock, nor is he pessimistic enough to advise them to sell. "Let's just say if I was owning Google stock right now, I'd be selling some," he said....

[E]venome of those who were bullish on Google when it went public in August, at $85 a share, wonder if investors have forgotten some of the lessons of the 1990's.... John Tinker... ThinkEquity... uses the "B" word - bubble - when describing the market's giddy embrace of Google, even as he has a price target of $330 on Google....

Comparisons are also being made between Google and Time Warner, another company deriving the bulk of its revenue from advertising. Time Warner had a market capitalization of $79.19 billion at the close of the market on Monday, below Google's though it posted first-quarter revenue eight times that of Google, and profits about three times as large....

Any number of theories might explain the most recent run-up in Google's stock, which has risen 67 percent since April 1. Those range from data suggesting that Internet advertising revenue is rising by as much as 40 percent a year - a trend sure to benefit Google - to a herd mentality among mutual fund managers ready to declare that resistance is futile: to post the kind of returns that would put them in the upper echelons of performance tables, they need to own shares in Google....

Mr. Terry of Credit Suisse thinks that even at its current price, Google is still worth buying, noting the company's aggressive moves to extend its core search business. On Monday, for example, it announced a new bit of software called the Google Video Viewer, complementing its effort to encourage users to submit their own video to its database and adding a "search within the video" feature.

John Battelle, the author of a book on Google called "The Search," to be published in September by Portfolio Hardcover, says it is only natural that people want to believe in Google.... "If you really believe in something, you're looking for a place where you can prove you were right the first time," he said. "And Google is such a place."

Why Oh Why Can't We Have a Better Republican Party?

A real Republican economist on the DeMint Social Security plan: Andrew Samwick:

Andrew Samwick: But I Can't Follow the Money: A group of Republicans... Chairman McCrery and Representatives Johnson, Shaw, and Ryan... Senators Sununu and DeMint, have offered a proposal to do... something .. with the Social Security surplus.... Let's start with the summary. It begins with three principles:

  1. Social Security taxes should only be used for Social Security.
  2. The Social Security surplus should not be used to fund other government programs.
  3. The surplus should not be used to mask the true size of the national deficit.

I don't know if we have three unique principles here, but we get the idea. The presence of surpluses in the Social Security system should not facilitate higher expenditures elsewhere in the government's budget. One way to do that would be to proactively announce and adhere to a policy that balances the budget--measured excluding the Social Security surplus--over the business cycle. I noted this in my testimony to the Subcommittee on Tuesday. This proposal... [i]nstead... requires that all Social Security surpluses be used to fund accounts invested in Treasuries. Here's where my confusion comes in. It cannot simultaneously be the case that:

  1. Actual money goes into these accounts.
  2. The trajectory of the Trust Fund is not lowered.
  3. The reported budget deficit is not increased.
  4. And government expenditures are not lowered.

The hope is the #4 is the one that won't hold--government expenditures should fall.... If they [do], I will applaud very loudly. But I remain confused.... For example, about 15 minutes into the press conference, a reporter asks McCrery (the key question of) how he will fund the programs that are now being funded by the Social Security surplus once the SS surplus is channeled to these accounts. He gives a non-answer and then says that "there is no change in the deficit whatsoever as a result of this legislation" but that "there will be an increase in the debt." That seems like a gimmick to get around #3 above.... If anyone working at the Subcommittee would like to explain what I am missing, I would be happy to post a follow-up.

Time to take back your party, guys.

The Bush Administration Clown Show Continues

Michael Froomkin reports: Back to Normal at the VA:

I missed the news that Anthony Principi, the only member of the Bush cabinet I respected, had resigned as VA Secretary. It seems he went on the chair the base closure commission.

Meanwhile, it's back to the bad old days at the VA. Last week they revealed they are facing a $1 billion health funding shorfall, which you would think is something of crisis -- two months after the new Secretary, Jim Nicholson, told Congress "I can assure you that VA does not need [additional funds] to continue to provide timely, quality service...." Now, the Washington Post reports that the VA Deputy Undersecretary told VA hospitals and clinics that their "highest priority" should be--wait for it%--to make sure that Principi's picture is replaced with Nicholson%u2019s. (spotted via The Carpetbagger Report)

Stephen Roach on Bubble-World

Stephen Roach writes:

Morgan Stanley: Long ago, when America’s Asset Economy was in its infancy, Alan Greenspan worried about “irrational exuberance.” But he quickly changed his mind and went on to champion the equity culture spawned by the New Economy. In my view, that was a policy blunder of monumental proportions.

The rest is history -- and a sad history at that. By electing to condone the greatest equity bubble since the late 1920s, the Fed has been snared in a low real interest rate trap -- in effect, locking itself in to a serial bubble-blowing strategy. To counter post-equity bubble aftershocks, the Fed slashed its policy rate by 550 basis points to 1% -- vowing that it had learned the tough lessons of Japan (see the now-seminal research report by the Fed’s research staff, “Preventing Deflation: Lessons From Japan's Experience in the 1990s” by Alan Ahearne; Joseph Gagnon; Jane Haltmaier; Steve Kamin, et. al., June 2002). And then in the face of a full-blown deflation scare -- a classic and predictable symptom of a post-bubble shakeout -- the Fed maintained an uber-accomodative policy stance that is still in place today. It pushed the real federal funds rate into negative territory for three years (2002-04) before finally taking it up to the zero threshold, where it remains today...

But what is the appropriate real interest rate for America--and the world--today? It's not as if the United States or the world has a large demand for investment. Would we really wish that investment worldwide be lower? Investment in America?

Stephen Roach asks good questions. But I'm not sure what the answers are.

Full Communism!

Eric Umansky watches the news from Cuba:

Eric Umansky: Cuban Coke Factory Raided: Yes yes, as in Coca-Cola:

SANTA CLARA, Cuba - June 23 (Ramón González Abreu, Cubanacán Press / - Special police forces here raided a clandestine soft-drink factory operating out of a home in the El Condado neighborhood, arrested the occupants and seized products and equipment.

Forces of the Interior Ministry Special Brigades found cases of soft drinks, a bottle-filling machine, carbonation equipment and other tools.

The occupants were charged with possession of equipment in pursuit of an illegal economic activity, but they claimed the equipment was all lawfully acquired in hard-currency stores.

Ahhh the joys of entrepreneurship in Cuba. Here's what I wrote last year during my trip to the island:

Walk around downtown and there appears to be at least a smattering of private enterprise. There are multiple car rental companies, even seemingly competing fast food joints (El Rapido and Burgui). Some are run by one government ministry, others by another (for example, some car rental companies are overseen by the tourist department; others are overseen by the ministry of transportation), but in the end all the businesses are owned by the state. "It's the Duff Beer economy," says one expat. "It might all look different, but it's all coming from the same spout."

Ezra Klein on the Incapacity of the Press (Why Oh WHy Can't We Have a Better Press Corps?)

Ezra Klein writes about the incapacity of the Washington press corps to cover the real story of American governance:

Ezra Klein: The Survivor : John Harris, author of the Clinton assessment The Survivor... a fun read.... Harris's insights, though, are more interesting for what they say about him than the Administration he's discussing.

Harris was the Washington Post's lead reporter on Clinton during the President's second term.... Harris's focus is the same now as then: process, personalities, and politics all come before policy. No one reading the book could count themselves uninformed on how the administration's internal debates played out, but the flip side is that no one reading could call themselves experts on the policies that drove those debates....

A budget surplus and a strong job market only become stories when they change. Otherwise, they don't fill newspaper pages that need to keep coming out.... Liberals today rage that Bush's legion of f* ups lack the lavish coverage given to Clinton's. They shouldn't be surprised. Bush's f* ups are substantive. They simply exist. They can be told in a sidebar, with numbers, in an article. They require little investigation and less detective work. They... remain substantively the same a week, a month, a year later, with only the numbers showing ....

Funnily enough, however, the public is less insipid than the press.... Americans, it would seem, like peace and prosperity, are happy with job growth, are content without invasions. That's not to say they're particularly unforgiving when those things aren't around, but they don't ignore the good news, either....

Harris's book in a nutshell [is] stories, tales, drama, plot. Gingrich's machinations, Clinton's jokes, Morris's eccentricities... past 440 pages. Policy... takes up only a smidge... it's well hidden amidst all the color.... [The] book... gives surface insight into the Clinton presidency, offers deep insight into the media's mind. Read as an example of what catches the press's attention, it's well worth the time spent and surprisingly relevant to the largely successful press management practiced by the Bush Administration. And that's not meant as bitter or judgmental, merely realistic. The world works a certain way, and though we'd all like for it to run different, we might as well read the rulebook while we wait.

Daniel Gross Reads the FT

He writes

Daniel Gross: June 26, 2005 - July 02, 2005 Archives: Christopher Brown-Humes and Gillian Tett of the FT report: "A big increase in corporate saving explains the current global savings glut and has been more important than emerging market savingsi n driving bond yields to ultra-low levels, a study by JPMorgan, the US investment bank, has found. Having gone on a spending spree in the late 1990s, companies have hoarded an extra $1,091 bn during the past four years -- a shift five times larger than the $208bn change in emerging market savings between 2001 and 2005, according to the study. In explaining the low bond yield conundrum, "higher corporate savings have had twice as much impact as high emerging market savings," said Jan Loeys, global markets strategist at JPMorgan.

I suspect there's some apples and oranges here: companies have been hoarding $250 bn a year, about the same order of magnitude as the growth in emerging-market savings.

Bush Has a Difficult Job?

Daniel Froomkin writes:

Just More of the Same?: Dana Milbank highlights Bush's new rhetorical device in his Washington Post column: "It's 'a difficult chore, and it's hard work' in Iraq, Bush asserted. 'It's hard to stop suicide bombers, and it's hard to stop these people that, in many cases, are being smuggled into Iraq from outside Iraq. It's hard to stop them.'"Bush alluded to high levels of difficulty no fewer than 19 times in his 33-minute appearance. The Iraqi government faces 'monumental tasks,' he said. 'The way ahead is not going to be easy.' In case somebody napped through that, he repeated: 'It's difficult. . . . It's tough work, and it's hard.'

It's hard work to fight risk death in Iraq. It's not hard work to send a third of the troops needed to Iraq. It's not hard work to misuse the finest high-tech soldiers in the world as military policy in a country where they don't speak the language. It's not hard work to lie.

Glenn Hubbard on the Global Investment Deficiency

The core argument of Glenn Hubbard's recent Wall Street Journal op-ed is another of those extremely rare pieces in that space that is both coherent and insightful. Its core argument seems a definite possible factor at work: - A Paradox of Interest : [T]the large increase in the U.S. current account deficit in recent years has mirrored large increases in current account surpluses in the rest of the world, principally in Asia. Over the same period, world real interest rates have declined.... The rise in the global saving rate is more than accounted for by a higher saving rate in emerging economies, particularly in Asia. I say "more than accounted for" because the U.S.... reduced its national saving....

[M]aking the transition from a global savings glut to a policy prescription requires delicacy. Taken seriously, this argument can be used to justify fiscal "pump priming"... [i]ncreases in public spending or temporary tax cuts... absorbing excess saving while increasing aggregate demand.... [But a] weak financial system -- reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets -- yields a high cost of financial intermediation.... In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds -- the U.S., for example....

The efficient financial system of the U.S., liquid bond markets, and a stable nominal anchor have attracted large international capital flows. These inflows have financed large U.S. current account deficits. And this arrangement has been particularly strong between emerging Asian economies and the U.S.

While the U.S. needs to raise domestic saving gradually to fund entitlement promises in Social Security and Medicare, getting America's fiscal house in order provides little short-term solution to global saving and investment imbalances. Increases in U.S. saving, with unchanged investment opportunities or financial system efficiency around the world, puts further downward pressure on the world real interest rate.

To address the global saving and investment imbalance meaningfully, domestic financial systems must be able to shift capital where it can be most profitably employed.... Mercantilist trade policies in emerging Asian economies have played a large role in sustaining high domestic saving.... Official sector acquisition of dollar assets... strategies to promote export growth combined with direct intervention in credit markets have limited the domestic economy's ability to absorb its own savings....

[S]uch policies sacrifice long-term growth. Essentially, relatively poor citizens of China and other emerging Asian economies are lending funds to the more affluent U.S., where lower interest rates can facilitate a property boom.... The U.S. financial system stands as a beacon for the possibility of a virtuous relationship between capital markets and sustainable economic growth.... [T]he bigger immediate challenge is to address the imbalance of saving and investment in international capital markets by encouraging the development of efficient banking and securities markets.... [S]ustainable improvements in living standards require a financial system as modern as one of the region's new airports.

Glenn Hubbard's argument is roughly this: Emerging Asia is now big enough that its savings are weighty, but who can its savers entrust their money to? "Underdeveloped financial systems"--a euphemism for "it's not obvious the people you entrust your money to will give it back"--make investments in dollar assets housed in the United States seem very attractive, even with the long-run expectation that the real value of the dollar vis-a-vis other countries will fall. The best way to fix this is to work on institution building in emerging Asia: securities regulation, accounting rules, honest courts, clear lines of corporate control. Don't worry so much about soaking up excess saving. Worry instead about how to create modern financial institutions to boost the financial system's ability to boost investment, and so fix deficient investment in the rapidly-growing emerging market economies.

This may well be an important piece of the puzzle.

Yes, Virginia, Demand Curves for Bonds Slope Down

On the Wall Street Journal editorial page, Glenn Hubbard writes that if the U.S. budget deficit were not so big--i.e., if domestic savings were higher--that would put downward pressure on interest rates:

> - A Paradox of Interest : While the U.S. needs to raise domestic saving gradually to fund entitlement promises in Social Security and Medicare, getting America's fiscal house in order provides little short-term solution to global saving and investment imbalances. Increases in U.S. saving, with unchanged investment opportunities or financial system efficiency around the world, puts further downward pressure on the world real interest rate...

In the fall of 2002, you will remember, Glenn Hubbard had a different view--that changes in the budget deficit had little or no effect on interest rates. Let me quote from Bob Davis:

Bob Davis: To sell a package of tax cuts that will further deepen the budget deficit, the White House says that deficits don't matter. Is that true? Certainly, says Glenn Hubbard, chairman of the White House's Council of Economic Advisers. He derides the "current fixation" with budget deficits, and labels as "nonsense" and "Rubinomics" the view espoused by former Clinton Treasury Secretary Robert Rubin that higher deficits lead to lower growth.... By labeling the deficits-matter argument as "Rubinomics," the White House hopes to give a partisan edge to the fight...

And let me quote from Brookings's Bill Gale:

Bill Gale: Glenn Hubbard recently stated, "I don't buy that there's a link between swings in the budget deficit of the size that we see in the United States and interest rates. There's just no evidence." This is not an isolated comment on Hubbard's part. In a series of speeches, articles and interviews he's ridiculed the notion that deficits matter. He's called it Rubinomics, called it nonsense, and so on. So this is part of what appears to be a pretty concerted Administration effort to downplay the cost of budget deficits... [argue] that the change in fiscal status is not a concern...

The ever-gullible Washington Post even wrote big articles giving prominent place to all the economists saying that the effects of changes in U.S. budget deficits on interest rates were small and unimportant: Reagan Policies Gave Green Light to Red Ink : By Jonathan Weisman Washington Post Staff Writer. Wednesday, June 9, 2004; Page A11: [W]hen Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.... [S]ome economists... [say] [t]he argument against deficits is more about self-righteous moralism than economics.... With rising global prosperity, even a federal deficit as large as the United States' would present little competition for would-be investors.... Eric M. Engen and Columbia University economist R. Glenn Hubbard.... "The world's capital markets are lot more sophisticated and flexible than they were then," said N. Gregory Mankiw, the current chairman of Bush's economic council. "That probably means that other things being equal, changes in domestic fiscal situations have less impact."...

Still, it is nice to see that there are still some economists who call themselves Republicans who will admit that demand curves for bonds slope down.

Fareed Zakaria is making sense | Liberals Against Terrorism

Praktike writes::

Fareed Zakaria is making sense | Liberals Against Terrorism : Here's a paragraph that I've probably written myself in one form or another: I realize that it feels morally righteous and satisfying to "do something" about cruel regimes. But in doing what we so often do, we cut these countries off from the most powerful agents of change in the modern world%u2014commerce, contact, information. To change a regime, short of waging war, you have to shift the balance of power between the state and society. Society needs to be empowered. It is civil society%u2014private business, media, civic associations, nongovernmental organizations%u2014that can create an atmosphere which forces change in a country. But by piling on sanctions and ensuring that a country is isolated, Washington only ensures that the state becomes ever more powerful and society remains weak and dysfunctional. In addition, the government benefits from nationalist sentiment as it stands up to the global superpower.

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

Paging Gail Collins: today having this clown show on your op-ed page cost you 25 of your limited supply of reputation points.

Henry Farrell deals with David Brooks in the appropriate way:

Crooked Timber : David Brooks on the merits of Bush's Africa policy.

The Bush folks, at least when it comes to Africa policy, have learned from centuries of conservative teaching -- from Burke to Oakeshott to Hayek -- to be skeptical of Sachsian grand plans. Conservatives emphasize that it is a fatal conceit to think we can understand complex societies, or rescue them from above with technocratic planning. ... The Bush folks, like most conservatives, tend to emphasize nonmaterial causes of poverty: corrupt governments, perverse incentives, institutions that crush freedom. Conservatives appreciate the crooked timber of humanity -- that human beings are not simply organisms within systems, but have minds and inclinations of their own that usually defy planners. You can give people mosquito nets to prevent malaria, but they might use them instead to catch fish.

The crucial... disingenuous... qualifier is "at least when it comes to Africa policy." Even Brooks doesn't have the chutzpah to defend Bush's overall foreign policy approach as an exemplar of Burkean prudence....

But even on Brooks' chosen turf -- the Bush administration's Africa policy and the Millenium Challenge Account initiative -- there'9s little positive to be said from a principled conservative stance.... [T]he Millennium Challenge Account has yielded plenty of airy rhetoric, but no practical results... for the simple reason that it still scarcely exists.... [T]he Bush administration has obligated only 2% of the Millennium Challenge funds. Nor has the administration requested the $5 billion that Bush promised.... As of April 29 not one dollar of Millennium Challenge Account money had reached a developing nation....

While an appreciation... [of the limits of] technocratic planning% is a fine... place to begin thinking about... development aid, it can also be a highly convenient excuse for doing nothing. For all the bluster about Burke, Hayek and Oakeshott, the development-aid-as-vaporware approach seems at the moment to be well explained by a simpler theory... [conservatism's] primary characteristic is "the search for a superior moral justification for selfishness."

The New Yorker Archive

This will be fun:

Boing Boing: All 4000 issues of the New Yorker on DVD set: $100: All 4000 issues of the New Yorker on DVD set: $100:

The New Yorker is selling a limited edition set of 8 DVDs containing every page of the magazine from its inception in February 1925 to February 2005: 'from full-color covers to spot drawings, from poetry to Profiles, from cartoons to advertisements -- on reader friendly and highly searchable DVDs.' It'll be available in September, and will run on Windows and Macs.

He's Got a Little List

Gregory Djerejian writes:

THE BELGRAVIA DISPATCH: B.D.'s Conscience Caucus : B.D. is thinking of compiling a list of center-right folks who are seriously and honestly grappling with the full panoply of issues presented by the torture/abuse scandals of the past several years. These would not just be bloggers, but any commentators that, you know, don't breezily describe how rosy it all is in the "tropics." I can think of Andrew Sullivan, Jon Henke, John Cole, and Tacitus right off the top of my head. Who else? Both in the blogosphere and outside in academia, business, law, journalism? Thanks for your help.

P.S. These kinds of transparently reluctant, weak-kneed and so ministerial denunciations of Abu Ghraib etc. don't fit the bill. I consider the deaths of detainees in U.S. captivity "serious torture", after all. Don't you?

The Godfather, Part II

Note to self: "The Godfather, Part II" is truly an amazing, amazing film:

The Godfather DVD Collection (2001): The first film remains a towering achievement.... And it turned out to be merely prologue; two years later The Godfather, Part II balanced Michael's ever-greater acquisition of power and influence during the fall of Cuba with the story of his father's own youthful rise from immigrant slums. The stakes were higher, the story's construction more elaborate, and the isolated despair at the end wholly earned. (Has there ever been a cinematic performance greater than Al Pacino's Michael, so smart and ambitious, marching through the years into what he knows is his own doom with eyes open and hungry?)...

Karl Rove Is Right! The U.S. Army Has Been Stabbed in the Back

The U.S. army has been stabbed in the back. It has been stabbed in the back by those who assigned the finest high-tech mechanized force in the world a mission--that of being military police in an Arabic-speaking country--that it is not designed to fulfill, by sending only one-third of the troops necessary for the mission if they did speak Arabic, and by dragging their feet at getting the troops on the ground the tools and protection they need.

The U.S. Army has been stabbed in the back by those--George W. Bush, Richard Cheney, Karl Rove, Donald Rumsfeld, Paul Wolfowitz, Condi Rice, and company--who pretend that the forces in Iraq are ample, and that their equipment and capabilities are adequate:

Safer Vehicles for Soldiers: A Tale of Delays and Glitches - New York Times : By MICHAEL MOSS: When Defense Secretary Donald H. Rumsfeld visited Iraq last year to tour the Abu Ghraib prison camp, military officials did not rely on a government-issued Humvee to transport him safely on the ground. Instead, they turned to Halliburton, the oil services contractor, which lent the Pentagon a rolling fortress of steel called the Rhino Runner. State Department officials traveling in Iraq use armored vehicles that are built with V-shaped hulls to better deflect bullets and bombs. Members of Congress favor another model, called the M1117, which can endure 12-pound explosives and .50-caliber armor-piercing rounds.

Unlike the Humvee, the Pentagon's vehicle of choice for American troops, the others were designed from scratch to withstand attacks in battlefields like Iraq with no safe zones. Last fall, for instance, a Rhino traveling the treacherous airport road in Baghdad endured a bomb that left a six-foot-wide crater. The passengers walked away unscathed. "I have no doubt should I have been in any other vehicle," wrote an Army captain, the lone military passenger, "the results would have been catastrophically different." Yet more than two years into the war, efforts by United States military units to obtain large numbers of these stronger vehicles for soldiers have faltered - even as the Pentagon's program to armor Humvees continues to be plagued by delays.... [T]he M1117 lost its Pentagon money just before the invasion, and the manufacturer is now scrambling to fill rush orders from the military. The company making one of the V-shaped vehicles, the Cougar, said it had to lay off highly skilled welders last year as it waited for the contract to be completed... paid only enough to fill half the order. And the Rhino.... The company said it provided the Army with testing data that demonstrate the Rhino's viability, and is using the defense secretary's visit as a seal of approval in its contract pitches to the Defense Department....

Nearly a decade ago, the Pentagon was warned by its own experts that superior vehicles would be needed to protect American troops. The Army's vehicle-program manager urged the Pentagon in 1996 to move beyond the Humvee, interviews and Army records show, saying it was built for the cold war. Its flat-bottom-chassis design is 25 years old, never intended for combat, and the added armor at best protects only the front end from the heftier insurgent bombs, military officials concede.... Today, commuting from post to post in Iraq is one of the deadliest tasks for soldiers. At least 73 American military personnel were killed on the roads of Iraq in May and June as insurgent attacks spiked.... Last winter, 135 convoys were attacked on the Baghdad airport road alon....

The Pentagon has repeatedly said no vehicle leaves camp without armor. But according to military records and interviews with officials, about half of the Army's 20,000 Humvees have improvised shielding that typically leaves the underside unprotected, while only one in six Humvees used by the Marines is armored at the highest level of protection. The Defense Department continues to rely on just one small company in Ohio to armor Humvees.... The Marine Corps, for example, is still awaiting the 498 armored Humvees it sought last fall....

By the time an Army National Guard member complained to Mr. Rumsfeld in December that troops were still scrounging for steel to fortify their Humvees, the Pentagon's troubles with armoring vehicles had been years in the making.... "This decision is based upon budget priorities," Claude M. Bolton Jr., an assistant Army secretary, wrote to Congress in 2002. Existing vehicles, he added, can be used instead "without exposing our soldiers to an unacceptable level of risk."... "We never intended to up-armor all the Humvees," said Les Brownlee, who was the acting Army secretary from 2001 until late last year. "The Humvee is a carrier and derives its advantage from having cross-country mobility, and when you load it down with armor plating, you lose that."...

Asked why the Marine Corps is still waiting for the 498 Humvees it ordered last year, O'Gara acknowledged that it told the Marines it was backed up with Army orders, and has only begun filling the Marines' request this month. But the company says the Marine Corps never asked it to rush. The Marine Corps denies this, but acknowledges that it did not get the money to actually place the order until this February. Officials now say they need to buy 2,600 to replace their Humvees in Iraq that still have only improvised armor....

Labock Technologies, which makes the Rhino Runner in Israel, thought it had the best advertising ever. Besides posting photographs of Mr. Rumsfeld aboard the Rhino at Abu Ghraib, the company has pictures of a shackled Saddam Hussein going to court last summer, with the headline: "So safe. ... some V.I.P. won't ride anything else." The Defense Department says some military personnel are using the privately owned Rhinos that run the gantlet of bombs on the airport road. But with the Army not accepting the company's test results, and Labock not wanting to destroy a Rhino on the chance of getting orders...

The Greenspan Era

In this morning's mail. And drat--it happens after school starts for the kids:

The Greenspan Era: Lessons for the Future

A Symposium Sponsored by the Federal Reserve Bank of Kansas City
Jackson Hole, Wyoming, August 25-27, 2005

Friday August 26: Chair: Roger Ferguson (FRB)

Alan Blinder (Princeton) and Ricardo Reis (Princeton), "Economic Performance in the Greenspan Era: The Evolution of Events and Ideas." Discussants: Alan Meltzer (Carnegie-Mellon), John Taylor (Stanford).

Robert Hall (Stanford), "Business Cycle Dynamics and Monetary Policy." Discussants: Charles Bean (Bank of England), Greg Mankiw (Harvard).

Sebastian Edwards, "Current Account Imbalances: How Will They End?" Discussants: Barry Eichengreen (Berkeley), Catherine Mann (IIE).

Robert Rubin (Citigroup), Lunch.

Saturday August 27: Chair: Malcolm Knight (BIS)

Raghuram Rajan (IMF), "Financial Marketws, Financial Fragility, and Central Banking." Discussants: Donald Kohn (FRB), Hyun Hong Shin (LSE).

Michael Woodford (Princeton), "Central Bank Transparency and Monetary Policy." Discussant: Tiff Macklem (Bank of Canada).

Kazumasa Iwata (Bank of Japan), Mervyn King (Bank of England), Jean-Claude Trichet (ECB), "Monetary Policy Strategies: A Central Bank Panel."

Alan Greenspan (FRB), "Reflections on Central Banking."

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

Hilzoy has convinced me that National Review is not fit for birdcage liner: parakeets deserve much better:

Obsidian Wings: Stop Me Before I Spend Again! : By a strange coincidence, the National Review had an article yesterday advocating the same approach to Social Security that the Republican Congressional leadership just adopted. It's too completely disingenuous to merit fisking, but it does contain one crucial falsehood that it's important to point out:

"The gradual phase-in of personal accounts funded by the surplus would force Congress to cut spending by the amount it currently takes from the surplus %u2014 about $85 billion a year, or roughly 3 percent of the total $2.5 trillion federal budget."

Taking the Social Security surplus and using it to create personal accounts does not force Congress to cut spending by one dime. The Republicans in Congress have rescinded the PAYGO rules, which would have required any new spending to be paid for. There is no other law or rule that requires that any new spending be matched either by tax hikes or spending cuts. So adding a trillion dollars' worth of new spending over the next ten years would not in any way require corresponding cuts in other government spending.... [T]he only thing that could... cut spending is... fiscal responsibility. If members of Congress were unwilling to charge their spending to the national credit card... they would... make up the costs.... But if they had a sense of fiscal responsibility... they would exercise restraint all by themselves.... [I]f one wants to reduce the size of government, cutting spending is a much better way to do it than cutting taxes in the hopes that eventually you will be "forced" to cut spending.... It's like trying to lose weight by giving up on exercise, hoping that once you are no longer able to eat much of anything without gaining weight, your weight will shoot upwards, you'll develop serious health problems, and then you'll finally develop enough motivation to go on a diet. That's a stupid thing to do to yourself, and an even more stupid thing to do to your country...

Market Expectations of the FOMC

Mark Thoma quotes from the Chicago Board of Trade:

From :

Economist's View: The CBOT's Fed Funds Rate Target Probabilities : "[T]he CBOT 30-Day Federal Funds futures contract for the July 2005 expiration is currently pricing in a 100 percent probability that the FOMC will increase the target rate by at least 25 basis points from 3 percent to 3 1/4 percent at the FOMC meeting on June 30. In addition, the CBOT 30-Day Federal Funds futures contract is pricing in a 4 percent probability of a further 25-basis point increase in the target rate to 3-1/2 percent (versus a 96 percent probability of just a 25-basis point rate increase)."

Eminent Domain

I don't know whether the Supreme Court's eminent domain decision was, substantively, a good thing or a bad thing. I don't know whether there are too few obstacles in the way of regional development and redevelopment (and that there should be more obstacles to reduce the impact of corrupt ties between local governments and developers) or whether there are too many obstacles (and too little gets done because opportunities for hold-up are just too great).

I do know that the reasoning of the majority opinion seems to be really dumb.

A correspondent writes:

Re: footnote 6:

And while the City intends to transfer certain of the parcels to a private developer in a long-term lease--which developer, in turn, is expected to lease the office space and so forth to other private tenants--the identities of those private parties were not known when the plan was adopted. It is, of course, difficult to accuse the government of having taken A's property to benefit the private interests of B when the identity of B was unknown.

Well, I guess that proves that anyone who takes the time to read the chapter of Robert Caro's The Power Broker assigned in American History doesn't have enough time to suck up to law school con law professors and deans to get a Supreme Court clerkship; for it seems self-evident that no one with a hand in this opinion has ever read The Power Broker.

I mean, I like retail productivity as much as the next guy. But it does seem a bit fetishistic to sacrifice the Bill of Rights for it. Somebody needs to tell Justice Breyer and his merry band of statists that New Dealers don't control the government any more. This is the Second Gilded Age. And aspiring Robber Barons will parse the decision with care, after first summoning and taking counsel with the shade of Leland Stanford, Sr.

And Steve Pearlstein writes...

...about what's going on over there in Yurp:

Two Economies, Two Mind-Sets: Germany Gets It, France Doesn't : The Germans are better off than they fear, while the French are in worse shape than they smugly presume.... [W]hat growth there is in Germany comes from a growing and competitive export sector, while France's growth comes from private consumption, with almost no contribution from exports. Several factors are at work here, among them lower benefit costs, tamer inflation and higher productivity growth.... And while hand-wringing Germans might be better off in the short run if they stopped saving so much and splurged on a sporty new Ford coming off the assembly line just outside Cologne, they are likely to be better off in the long run than the profligate French, many of whom believe their country can spend its way out of double-digit unemployment.

The industrialized world, as we know, is moving toward a service economy.... Germans... take pride in providing efficient service.... In France... it's all about producers rather than consumers, whether the consumers are visitors renting a car at the Lyon train station, or thousands of Lyon residents forced to pass up the annual music festival this week because of a transit strike. It tells you a lot that local airport authorities and Air France have made sure that low-cost airlines have made few inroads in France. Or consider that the great triumph of French marketing in recent years has been to persuade the rest of the world to get excited about drinking foul-tasting Beaujolais nouveau....

At the Lyon chamber of commerce, the new, young director general, Jean Martin Jaspers, outlined the city's aspirations to be a player in global markets and a center of biotech, venture capital and nanotechnology. Then, when he almost had me convinced there might indeed be a "new France," Jaspers announced confidently that Lyon would be a big winner when the French government announced its new industrial policy next month, designating the clusters deserving of government subsidies, encouragement and protections. "We don't make the distinctions you do between government and markets," Jean-Paul Giraud, president of Grenoble's gas and electric utility, explained to me later that day.

But while France may not have broken free from its dirigiste roots, Germany is noticeably further along toward much-needed market reform.... Martin Welcker, president of... a maker of complex tooling machines.... "The companies and workers are way ahead of the politicians.

On the other hand, it's been twenty-five years since I first read--in a book by Jeffrey Sachs and the late Michael Bruno, Economics of Worldwide Stagflation--that the corporatist economic system built up in the first post-WWII generation in Western Europe had awful weaknesses and could not cope with the shocks of the present and future without economic and then political catastrophe. The Western European corporate-social-democratic model has taken plenty of lickings, but it keeps on ticking--so far.

Henry Farrell on Rick Perlstein

Someday, someday, I swear, I will reliably and correctly distinguish Rick Perlstein from Steve Pearlstein.

Henry Farrell already does. Here he writes about the first:

: I just finished reading Rick Perlstei's The Stock Ticker and the Super Jumbo yesterday (an earlier version of the essay and the various responses is available here). It's a great read, and a smart essay.... Perlstein tells the Democratic party that it needs to be like Boeing in the 1960s and 1970s, and not like Boeing in the 1990s.... In the 1960s and 1970s... Boeing won incredible profits through building the 747, but... had its shares trade at a... discount.... In the 1990s, it signalled its willingness to kow-tow to the short term demands of the stock market, by refusing to... build a new super-jumbo. The stock market loved it... Boeing also missed out on a crucial opportunity....

Thus, the main contrast that he draws in the essay is between short term thinking and long term thinking... hiring Dick Morris... [and] muddying the Democrats' appeal... [vs] building a set of coherent policies that build on... strengths.... Perlstein is using the right metaphor... is also right on the main underlying argument. But short term thinking versus long term thinking is the wrong way to connect.... What Perlstein is really trying to get at, I think, is what one might call the difference between market making and market taking....

What was important about... the jumbo-jet... [was] that it was an act of market making.... [N]ew technologies provided it with the opportunity to... summon customers... out of thin air. And... [b]ecause it had created the market, it... secure[d] a long term advantage. In contrast, most firms most of the time are market takers.... The Democratic Party, at the moment, is a market taker.... But Perlstein's key point (and again, you need to read his book on Goldwater [Before the Storm] to properly understand this) is that the current conservative bias of US politics is itself a political artefact... [an] initiative by right wing Republicans to reorient the political debate around a set of ideas that once seemed bizarre and unnatural to most Americans.... They set the rules... (protecting the poor becomes "class warfare")....

Barry Goldwater's people changed the rules of American politics.... Ever since, the Democrats have been fighting a holding action.... Perlstein's prescription -- a return to economic populism -- seems to me to be the right and obvious way for Democrats to start remaking politics on their own terms.

Rick Perlstein--see! I can get it right--replied:

Damn, Farrell, you're not supposed to tell them they can get the preliminary version for free on the Internets!

Great points. I should have talked to you in 3/04 when I wrote the thing.

It's REALLY important to understand the ways in which the notion of conservative dominance is in itself a political artifact. I did a reading in Chicago yesteray and someone asked me about a point by Woolridge and Micklethwaite's (bad) recent book on American conservatism The Right Nation that Dennis Hastert's district is "normal" America, and Nancy Pelosi's, the urban Democrat's, is not.

I said: My, have those conservatives punked the media elite. I pointed out that many of the most popular national radio sitcoms that took place in teeming cities were moved to suburbs when they moved to TV. And now people buy the notion that conservatives have been selling: that cities aren't really American.... Buy the book... when uttering the phrase "culture war" is as illegitimate as uttering the phrase "class war," the Republicans can not possibly win.

Advice for Substance People

Max Sawicky has some very good Dutch-uncle advice for those of us who care primarily about the substance of government policy:

MaxSpeak, You Listen!: COMMON SENSE: Determine the major policy challenges to come, fasten on the best solutions, and hammer away in the confidence that time will validate your message.... Three examples:

  • The U.S. has to get out of Iraq, ASAP.
  • The U.S. must have national health insurance.
  • The Federal Gov will need to increase taxes -- over the next 75 years -- by about ten percentage points of GDP.

I think the arguments supporting these are very solid. If nobody makes them, we'll never get there. I don't have to run for public office, so I can make them. Politics is beyond me...

Oil Supply

Another piece of bad news: / Markets data & tools / Funds - Crude oil prices touch $60 a barrel: US oil futures on Thursday rose above $60 a barrel amid high demand for petrol and diesel in the US and market worries about lack of spare refining capacity.The Dow Jones Industrial Average slid more 100 points as transport shares fell. Delta Air Lines was down 4 per cent, Continental Airlines slipped 3 per cent, and FedEx, which warned on Thursday about rising fuel costs, fell 7 per cent.

The new nominal all-time high was supported with futures contracts for delivery later this year and in the beginning of 2006 trading between $60 and $61. The US Department of Energy reported a jump in consumption in spite of high oil prices. Diesel consumption is up 6.9 per cent in the last four weeks compared with the same period a year ago. Petrol demand is 2.5 per cent up. "Those numbers are incredible strong considering the high prices for both petrol and diesel," said Phil Flynn of Alaron Trading in Chicago.The strong demand has dented US crude oil inventories, which fell last week for the third time in a row, in spite of the Organisations of the Petroleum Exporting Countries pumping at its highest rate in 25 years. 'No buffer stock has been built up during the second quarter and robust demand continues to reinforce our view of the likelihood of further price increases,' said Kevin Norrish, of Barclays Capital in London. The price spike would put pressure into Opec to consider an increase it its production ceiling, only a week after the rising it by 500,000 barrels a day, to 28m b/d...

Hope for the Future

Barack Obama is a class act:

Commencement Address: Today, on this day of possibility, we stand in the shadow of a lanky, raw-boned man with little formal education who once took the stage at Old Main and told the nation that if anyone did not believe the American principles of freedom and equality, that those principles were timeless and all-inclusive, they should go rip that page out of the Declaration of Independence....

When You Look into the Abyss...

Body and Soul writes:

Body and Soul: "Tactics reminiscent of Saddam":

Can you tell... which group of torturers is on our side? From today's New York Times:

He was having a lunch of lettuce and cucumbers in the kitchen of his home in the small desert village of Rabot with his mother and brother. An Opel sedan pulled up. Two men in masks carrying machine guns got out, seized him, and, leaving his mother sobbing, put him in the trunk of their car.The drove to the house here. They taped his face, put cotton in his ears, and began to beat him.

The men tended to talk in whispers, he said, telling him five times a day, in low voices in his ear, to pray, and offering him sand, instead of water, to wash himself. Just once, he asked if he could see his mother, and one of them said to him, 'You won't leave until you are dead.'Mr. Fathil did not know there were other hostages. He found out only after the captors left and he was able to remove the tape from his eyes.

The routine in the house was regular. Because of the windows, it was always dark inside. Mr. Fathil said he was fed once a day, and allowed to use a bathroom as necessary in the back of the house.

Marks from beatings criss-crossed his back, and deep pocks, apparently from electric shock burns, were gouged in his skin.The shocks, he said, felt 'like my soul is being ripped out of my body.' But when he would start to scream, and his body would pull up from the shock, they would begin to beat him, he said.

From the Los Angeles Times:

There are beatings, punching, electric shocks to the body, including sensitive areas, hanging prisoners upside down and beating them and dragging them on the ground

[T]hey lashed him with cables, broke his nose and promised to soak their uniforms with his blood.

'I stayed there with 19 other people in a very small room with no windows,' said Guheithi, who added that he was often blindfolded and beaten.

The New York Times, in the first piece, writes about the 'torture houses' of Iraqi insurgents. The LAT fronts a mirror image article on how Iraq's police and security forces are beating and torturing the majority, perhaps as much as 60%, of its prisoners. The security units' tactics, the LAT notes, are similar to those used by Saddam Hussein's secret intelligence squads, which is not surprising since, according to Saad Sultan, the head of a board overseeing the treatment of prisoners at Iraq's Human Rights Ministry, most of the police officers 'come from a culture of torture' that they imbibed while working for Saddam."...

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

Now the Republicans have stopped pretending that even they think their Social Security proposals would be good for the country. Matthew Yglesias reports:

TAPPED: June 2005 Archives: THROUGH THE LOOKING GLASS. Well, the House leadership... a variant of Social Security privatization whose irresponsibility is so prodigious as to beggar the imagination... private accounts... but only out of the Social Security surplus... bizarre... slightly horrifying. Every American will get an account, but the amount of cash in it will be tiny -- $400 to $600 a year... administrative fees... an enormous percentage of account value... by 2018 or so the accounts will just go away along with the surplus.

In the meantime... massive increase in the government's unified deficit... adverse impact on economic growth...

As Jason Furman says, it's 'the worst of all worlds,' with 'all the problems of any private accounts proposal with none of the benefits for solvency.'

Republican strategists... open... ploy to try and force Democrats to negotiate some kind of deal... putting something... catastrophic on the table in the hopes that Democrats will thereby agree to a pernicious but non-crazy plan.... It'll also be interesting to see if the... press who've spent the past 15 years greasing the skids for privatization... wake up and realize the folks they've been supporting are out of their minds. I won't be holding my breath...

A Battle of Wits: Yuppie Grocery Store vs. Unarmed Man

I detoured to Andronicos on the way home, thinking I should take advantage of their corn offer: 8 local ears for $1.

The total at the cashier: $45.24. And that was after I had seen which way the wind was blowing, and ditched the Medjool dates and the Ducktrap River smoked salmon.

u'(c) must be very high today...

Advantage: Andronicos!