When I walk out of the north door of Evans Hall, and the first person I see says, "I hear you're about to get a thorough remedial education in Bentham!"...
: Don’t Pet the Hyena: The main question with Zimbabwe now is the question we used to ask about Sani Abacha’s regime in Nigeria: namely, how bad can it get? As low as Zimbabwe has sunk lately, there are still further depths to mine. It is depressingly possible, even plausible, that events will continue to that point: mass starvation of the people lately forced out of the cities is conceivable. At the very least, many of them will redefine the standard of rural wretchedness if they are compelled to remain in rural areas.
One of my major jobs for this summer is to finish work on the chapter of my manuscript that deals with African nationalism and sovereignty in Zimbabwe. As I write, I continue to be haunted by the foreseeable nature of the current disaster. The mass evictions of recent weeks are no surprise at all to anyone familiar with Zimbabwe: they are neither a sudden or unanticipated development. Since the mid-1980s, before important international events, including the state visit of Queen Elizabeth II, the government has evicted or harassed squatters in Harare’s townships. Traders active in the informal sector have often been the target of arbitrary police action and confiscation of their property.
When I was working at the National Archives of Zimbabwe in 1990, another researcher asked me why maize was growing wild in so many parts of the city. I suppressed the urge to roll my eyes and replied that it wasn’t growing wild, that people were cultivating it in open fields and vacant areas as a cash crop or for food. The other scholar vehemently objected: “That can’t be: I’ve seen city workers burning the corn! Why would they do that?”
At the time, I just thought that response was an individually naïve one—-and that the abusive actions of officials in the case of maize burnings or squatter harassment were largely idiosyncratic activities of brutal, inefficient or rule-bound bureaucrats. I should have known better, not just because there was already ample evidence of the nature of the ruling elite of Zimbabwe but also because government mistreatment of urban populations and informal sector traders was a part of life in other postcolonial African nations.
The truly depressing thing is watching individual men and women who have previously simulated some degree of decency or political conviction sell that away so easily: people like former academic Jonathan Moyo, who sold away his soul so he could declare that a free press is undesired in Zimbabwean society and otherwise act the fool in his shameless pursuit of power. Now the scales have fallen from his eyes after he was cast aside for showing his political ambition openly. Mugabe pegged Moyo pretty well in a mocking speech after the minister’s fall: “Jonathan, you are clever, but you lack wisdom”. That sums up not just Moyo, but almost all of the scholars who wrote about the nationalist struggle and ZANU-PF in the 1970s and 1980s. Norma Kriger and a precious few others come out looking like they understood what was going on: the rest of us clever, not wise...
I understand the logic of state-building: reward your supporters, punish your enemies, make it clear that enthusiastic support for the government is the road to personal wealth and prosperity, and make it clear that opposition makes you poor, imprisoned, or dead. This is the way it worked under Henry IV or--in a much kinder, gentler way--George III. And it is clear that an era of state-building is not likely to be one of rapid economic growth: too many of the enterprising and entrepreneurial will not be supporters, and their wealth is one of the things that can be plucked and transferred to make supporters happy. Only states that are strong enough not to need to strain every nerve to assemble the coalition needed to survive can afford "soft rule," can relax control of resources now in order to provide incentives for growth that will produce a much more prosperous economy in a generation.
But what's going on in Zimbabwe today does not look anything at all like the logic of authoritarian state-building. Robert Mugabe is not Henry IV or George III or Pyotr the Great or even Dread Ivan. He's a character out of "Apocalypse Now":
Kurtz: "What did they tell you?"
Willard: "They told me that you had gone totally insane, and that your methods were unsound."
Kurtz: "Are my methods unsound?"
Willard: "I don't see any method, at all, sir."
From his June 16 Ways-and-Means testimony:
A single centralized system of accounts (which does not exist in any of the countries that have opted for privatization) could in principle lower costs, especially if it minimized workers’ choices in selecting investments and switching between investments. President Bush’s Social Security commission estimated that a bare-bones centralized system would cost roughly ten times as much as the current system. (There has been considerable confusion about this point because of how the commission framed its cost estimate. The commission estimated that the administrative cost would be 0.3 percent of the stock of money in an account. This means that the fee on a dollar placed in an account would be 0.3 percent for each year that dollar is in the account. Some dollars will be in an account for forty years, while some dollars placed, in the account just before a worker retirees, will be there for just a short time. If a dollar is a worker’s account for an average of twenty years, then this 0.3 percent fee will be paid twenty times, making a total administrative cost of 6.0 percent, compared to a cost of just 0.5 percent on the dollar placed in the Social Security...
Add in the risks beneficiaries bear and the trading losses from price pressure (unless they are prohibited from switching from bonds to stocks and back again), and it becomes hard to think of private accounts as in any way a good deal.
I'll stop calling the Bush administration Orwellian when they stop using 1984 as an operations manual:
RUMSFELD: "We know for a fact, I know for a fact that no one in the Administration lied about weapons of mass destruction." -- Fox News Radio, 6/21/05
RUMSFELD: We know where they [Saddam Hussein's weapons of mass destruction] are. The're in the area around Tikrit and Baghdad and east, west, south and north somewhat. -- ABC's This Week With George Stephanopoulos, 3/30/03
Professionally administered by Brian Weatherson:
Thoughts Arguments and Rants: Happiness is a Warm Book: Brad DeLong has two posts up defending Richard Layard's defence of Benthamism against criticism from Fontana Labs and Will Wilkinson. I think Brad is misinterpreting Bentham, so while his defence might be a defence of something interesting (say, preference utilitarianism) it isn't much of a defence of Bentham....
The problem with interpreting [Bentham] is that "advantage, pleasure, good, or happiness" do not really come to the same thing. At the very least, it is clear that advantage and pleasure do not come to the same thing, and which (if either) of these good and happiness are is part of what's at dispute. But for interpreting Bentham, it's very important to realise that he did view them as the same thing....
What matters for [Brad] is "what people would choose for themselves", i.e. preferences, and preference satisfaction isn't a kind of experience. If people choose different kinds of experiences, or even things that do't maximise their own chances for good experiences (as when people take life-endangering jobs so as to provide goods for their children) they are getting what they choose, but not maximising utility as Bentham saw it. In principle my preferences can be satisfied by things that happen after I die, even if I don't get any extra experiences after I die, in which case we certainly couldn't identify preference satisfaction with any kind of experience.
As I said, I don't want to get into the pros or cons of the moral view Brad is espousing here. I just want to make an historical point, that it's a mistake to think Bentham viewed preferences rather than experiences as the core of utilitarianism. It was a great advance over Bentham (I think) when later philosophers made this move.
The philosophical sharks are circling the swimming Richard Layard. Their dorsal fins make a sinister pattern as they cut through the waves. The top philosophical predators close in on the naive utilitarian:
Unfogged: It would be more fun to disagree, but I'm afraid Will Wilkinson's negative evaluation of Richard Layard's Happiness is correct. This is not a good book. The results from economics and psychology are interesting (if reported elsewhere), but Layard really botches just about every philosophical discussion he attempts. On the other hand, there's some novelty in the sentiment You know who got it pretty much right? Jeremy Bentham. So props for that.
And Will Wilkinson:
Will Wilkinson / The Fly Bottle: Value Monism & Public Reason: More Layard Flogging: I think I need to stop arguing with Layard about utilitarianism because he's really just too philosophically inept to take all that seriously. The chapter at the middle of Happiness defending the principle of utility as the sole standard for judging right action and public policy is just laughably dumb. If I was still TA-ing ethical theory classes, and Layard turned this in, he'd get a solid 'B':
Why should we take the greatest happiness as the goal for society? Why not some other goal--or indeed many? What about health, autonomy, accomplishment or freedom? The problem with many goals is that they often conflict, and then we have to balance them against each other. So we naturally look for one ultimate goal that enables us to judge other goals by how they contribute to it. Happiness is that ultimate goal because, unlike all other goals, it is self-evidently good.
How is it that health, autonomy, accomplishment, and freedom are not self-evidently good? Layard will want to insist that we only want these other things for the sake of happiness. But that is just so much table pounding, and it is false. I am, in fact, willing to sacrifice some measure of happiness to ensure my autonomy, or to accomplish something of great value. I would, in fact, be willing to face suffering and death if that was required to preserve my freedom. And it's pretty easy to point out that happiness is instrumental to other values. I want happiness because I will be motivated to accomplish great things if I am happy. I am more likely to be benevolent and kind if I am happy. I am more likely to have a meaningful, successful intimate relationship. I will live longer if I am happy, and it is good to live. Etc. If we are going to admit that it makes sense to talk about things being self-evidently good, then happiness surely is one of those things. And so are all the other goods Layard mentions. He gets nowhere....
Individual moral intelligence involves weighing competing values and making judgments about their ordering according to standards that vary with context, relationship, social role, and more. It is hard to be a good person because it is hard to make out all the morally relevant characteristics of one's situation, and it is hard to know how to trade values against each other, and to be modest but resolute in the face of complexity--not because it is hard to be motivated to maximize something ridiculous like net aggregate utility....
Will no one save him?! I will!
The response--against which Wilkinson has no defense except to issue squidlike clouds of obfuscating ink--would be that Wilkinson believes that if he were to sacrifice his freedom for his happiness, that if he were to do so he would then look back on the choices he made and look ahead to his future life, and that he would be unhappy. If Wilkinson says otherwise--that he would look back on the choices he made and look ahead to his future life and be happy, but that he would still regret what he had done and wish he had done otherwise--Wilkinson is simply saying, "Baa baa buff." He would be demonstrating that he does not understand the rules of conversation using the English language.
Happiness--utility--plays a very special role in Bentham's philosophy. It is defined to be that which is maximized by the choices of a rational and reasonable person with enough time for reflection and sufficient information about the situation. To say "I would rather be unhappy and free than happy and a slave, and thus I have refuted Bentham" is to miss the point entirely.
At its core utilitarianism is two commands:
Respect people's choices--those made with enough information, after sufficient deliberation, when they are in possession of their faculties. You want to know what is good for someone? Watch the choices that he or she makes. Watch them carefully.
A good society is one in which as much of what people would choose for themselves--with enough information, after sufficient deliberation, when they are in possession of their faculties--is attained, taking care that when there is a tradeoff between one person's preferences and another's, each one counts equally.
Those seem to be obvious and unexceptionable foundations for morality. Thus: You know who got it pretty much right? Jeremy Bentham.
UPDATE: Wilkinson wants to dig himself deeper into his hole:
Will Wilkinson / The Fly Bottle: DeLong Shot: DeLong's argument... is that the following proposition [is incoherent]: "(a) Happiness without freedom is not worth having".
...Well, if 'worth having' in English means 'conducive to pleasure' it sure does. But that's not what 'worth having' means in English. That's what it means in Benthamese, the vulgar dialect of the morally insensate (economists, Asperger's cases, etc.) 'Worth having' in English means something like' valuable' or 'good,' and there is surpassingly little evidence to be gleaned from the semantic practice of competent English speakers that 'valuable' and 'good' are synonymous with 'pleasurable' or 'happy making'...
I would say my argument is that sentences like: "I would be happy to sacrifice my freedom for material comfort--but I won't do so, because I think freedom is more important than material comfort," are incoherent.
And my argument is true: such sentences are incoherent. In English, at least.
It is interesting to note Wilkinson's admission that he knows perfectly well that to Layard vocabulary "happiness," "utility," "worthwhile," "valuable," and "good" are more-or-less synonymous, and that his critique is based on a misreading of Layard, on his forcing a narrow meaning of "happiness" into the place of Layard's broad meaning...
Will Wilkinson criticizes Richard Layard concerning Nozick's "experience machine":
Will Wilkinson / The Fly Bottle: Value Monism & Public Reason: More Layard Flogging: Here's what [Layard] says about Nozick's famous experience machine:
If offered the chance, asks Nozick, would you plug in? Of course, many people would not, for all sorts of reasons. They would not trust the machine to deliver what it promised, so they would prefer to keep their real autonomy. Or they might have obligations to others that they could not perform if they were inert. And so on. Thus this is a weak test case, especially because it describes a situation so far from our reality that we have almost become a different animal.
That the machine perfectly delivers as promised is stipulated. Inability to entertain the counterfactual--to actually conduct the thought esperiment--is not an argument against it. And 'obligations to others they could not perform'? Well, yes. This is precisely the sort of thing people might worry about because people generally think they ought to meet their obligations, regardless of the hedonic payoff. That's part of Nozick's point, dipshit. If Layard was honest, he would bite the bullet and say, yes, plug in. And if there was an experience machine for each of us that would maximize the hedonic quality of our experience, then we would be obligated individually and collectively to forgo a real life of actual action and actual engagement, and instead climb into our pods on the Matrix pod farm, and dream sweet virtual dreams until we die. If Layard will not deign to explain to us why, despite our deep sense of revulsion, we ought to see this scenario as the happiest of all possible circumstance, he cannot expect us to acquiesce to his Benthamite Philosopher Technocrat fantasy.
I find this very interesting.
Wilkinson doesn't seem to have a clue about just how much time we already spend plugged into "experience machines."
I, for example, just spent an hour and a half lying largely motionless on my bed, plugged into a low-tech experience machine. Although my physical body was motionless and largely unstimulated, the experiences that my mind was having as I was plugged in was of going back in time to May 1979, of teleporting across an ocean to a seminar room in King's College, Cambridge, and of listening to thinkers like Michael Ignatieff, J.G.A. Pocock, Donald Winch, and Nicholas Phillipson expound their respective takes on political economy and the Scottish Enlightenment. The experience wasn't "real"--I wasn't really in King's College, it wasn't really 1979, there was no conference I was present at, et cetera. But the fact that I was jacked into a low-tech experience machine rather than present at a conference did not make my experience "bad" or second-rate or not worthwhile. In fact, it was a much better experience than I would have had at the real conference: I could fast-forward through the boring talks; I could pause and rewind the action to make sure I grasped important points. And I could speed things up.
I read, after all, perhaps five times as fast as people typically talk--ten times as fast as if they are not well prepared, and using lots of filler and recapitulation as they try to figure out what to say next.
It's much more pleasant to lie on one's bed in the cool California evening and read Istvan Hont and Michael Ignatieff, eds. (1983), Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment (Cambridge: Cambridge University Press: 0521312140) http://www.amazon.com/exec/obidos/asin/052131240/, than it would have been to have to shlepp all the way to the fens of East Anglia in the rainy month of May for the conference.
So, yes, we would choose to plug into the "experience machine." We do so every day, even though our current instantiations of the technology are very crude and extremely low tech and unconvincing. Wilkinson does too.
Of course, we don't plug into our experience machines 24/7. We are good Aristotelians as well as Benthamites: moderation in all things. But the fact that we are not jacked in all the time is not an argument against experience machines: food is good, and we don't eat 24/7 either.
Or perhaps what I am really saying is that we are already effectively completely jacked in, that the Singularity has already happened: that it in fact had happened by the time of Machiavelli's "Letter to Francesco Vettori."
Freedom of speech:
RConversation: Confirmed: All Typepad blogs blocked in China: Asiapundit first sounded the alarm. Now it's confirmed. All Typepad blogs, including this one, cannot be seen in China. (Note that Blogger has been blocked in China for some time.) I asked some people in China to attempt accessing this blog and a long list of other random Typepad blogs (including ones that never discuss China), without using a proxy. None could be accessed. Now all Typepad blogs wanting to be seen in China will have to migrate to another blog hosting service or onto an independent server...
Which is why I should remind people that I'm still keeping a local mirror of my weblog on my office machine. Its RSS feed is: http://www.j-bradford-delong.net/movable_type/index.rdf
And the Wall Street Journal editorial page has reverted to type and is once again bats--- insane. Brad Setser reports:
Brad Setser's Web Log: Fantasy based opeds in the Wall Street Journal: ...the Wall Street Journal 's Tuesday oped 'The IMF's Debt Ambitions'... is premised on the following argument:
investors were conditioned by bailouts in Mexico, Thailand and South Korea, and by the IMF's ever expanding loan portfolio in Argentina to believe that no matter how many times Buenos Aires broke its promises it would not be allowed to fail. The money poured in, not irrationally, until the Bush Administration ended the bailout habits of the IMF.
The Bush Administration ended the bailout habits of the IMF. Hmm.
Let us hold that statement up to the standards of the reality-based world.
- In early 2001 the Bush Administration approved a $10 billion IMF loan to Turkey. That loan was augmented the fall of 2001 and again in 2002. Last I checked, the Bush Administration was in charge of the US government then. All told, Turkey got about $23 billion from the IMF -- a bailout that was far larger, in relation to Turkey's GDP (total disbursements were equal to 11.5% of pre-crisis GDP), than the Clinton Administration's bailout of Mexico (total disbursements, including direct disbursements from the US, equal to 7% of pre-crisis GDP). And Mexico paid its loan back far faster than Turkey has been able to repay.
Don't believe me? Check out the IMF's financial data, which shows it outstanding exposure to Turkey quite clearly (data in SDR). Full disclosure -- I worked for the Treasury in 2001, so I know this story quite well.
In the summer of 2001 the Bush Administration supported an IMF loan to Brazil in an effort to protect Brazil from 'contagion' from Argentina. That loan was expanded significantly in the summer of 2002 when Brazil came under intense pressure prior to the election of Lula. All told, Brazil received an IMF credit line of $35 billion, and most of that -- $30 billion -- was lent out. That is far more than Brazil received in 1998-99 with the backing of the Clinton Administration (peak lending then was about $17 billion). This bailout has worked pretty well -- Brazil recovered and is now making significant payments back to the Fund. But so did the bailout of Mexico. A successful bailout is still a bailout....
Uruguay. It got about $3 billion from the Fund in 2002, along with a (very short-term) bilateral bridge loan from the US. $3 billion does not sound like a lot, but it is about 15% of Uruguay's small GDP. That's a big bailout in my book.
In the summer of 2001, the Bush Administration backed a $8 billion augmentation of the Argentina's existing $15 billion IMF package -- a decision that the IIE's Mike Mussa has called one of the worst in Fund history. That $8 billion -- $5 billion of which was disbursed immediately-- effectively provided about 1/2 of the total net financing that the IMF provided to Argentina from the end of 2000 on. Look at the surge in IMF lending to Argentina in September of 2001 -- a surge that was the direct product of a decision make by the Bush Administration.
Remember that part of the initial $15 billion package just refinanced maturing IMF debt, and the $15 billion was more backloaded than the $8 billion augmentation, so not all of it was disbursed.
All in all, the Bush Administration consistently backed bigger loans to more indebted countries that the Clinton Administration. Those IMF loans have been repaid more slowly. Those are the facts. Verifiable on the IMF's web page. Or, if you trust Roubini and Setser, nicely packaged in Bailouts or Bail-ins.
We have a Windows machine in the study, largely for playing games that do not run on the Macintosh. Yesterday it caught a virus: it kept launching large video advertisements for the Kinsey movie. After beating it with a rubber hose for about twenty minutes, the ad virus succumbed and joined the choir invisible.
I then thought that I should perhaps upgrade the McAfee virus-protection program on the machine. That turned out to be a nasty and nearly impossible process: McAfee kept throwing pop-up windows up on the screen trying to "improve" my order from $35 to $95 or $125, warning me of all the horrible things that would happen to me if I did not "upgrade" my order. Only by clever parsing of sentences and clicking the correct buttons was I able to repulse this social engineering attack. Then I noticed that the black-inkjet cartridge in the Epson printer attached to the machine was low. I replaced it--and my printer driver promptly threw a warning box up on the screen: I had installed a non-Epson print cartridge, Epson "could not guarantee print quality," and would I like to order genuine Epson print cartridges off of the Epson website? No.
I don't like it when strange movies take over my computer and use it to display adware. I don't like it when Epson lies to me about the quality of Epson-compatible inkjet cartridges. I don't like it when McAfee makes it hard to avoid spending more on virus protection than I need to.
It's a jungle out there in the Windows world. Have Microsoft and Epson and McAfee considered the long-run consequences of the reputations that they are so eagerly creating?
Recommended: Rick Pearlstein et al. (2005), The Stock Ticker and the Superjumbo: How the Democrats Can Once Again Become America's Dominant Political Party (Chicago: Prickly Paradigm Press: 0976147505) http://www.amazon.com/exec/obidos/asin/0976147505
That I recommend it does not mean that I agree with it. I'm a Democrat, and I believe that I will always be a Democrat: Richard Nixon's decision that the appropriate reaction to Lyndon Johnson's commitment to Civil Rights was to turn the Republican Party into The Party for People Who Don't Like Black People was a sufficiently evil action to make it next to impossible for me to think of situations in which I would vote Republican (and it may well have destroyed the soul of the Republican Party). But I would be happy to build bipartisan coalitions from the center outward, based on what policies are likely to work and achieve agreed-on long-run prosperity and security. I would, that is, if there were grownup Republicans to be found...
In my view, the Democratic Party is doing OK in an age of high income and wealth inequality. The rich are spending lots of money to brainwash the rest, and the Democrats have to hold on against that tide. The Democratic Party is doing OK given its extraordinary success over the past two generations in pushing social equality and liberty--for African-Americans, women, homosexuals, Hispanics... pretty much anyone who isn't white and male--faster and further than large components of the electorate are comfortable with. Twenty-seven percent of Americans still disapprove of interracial marriage. They aren't going to vote Democratic. That's a powerful Republican base.
The real catastrophe in today's America is what has happened to the Republican Party. Fixing that is job #1.
Offshoring is a very big deal, not for the next five years, but for the next fifty.
David Wessel writes about McKinsey's forecasts:
WSJ.com - Capital: In Spite of Offshoring, U.S. Students Can Still Engineer a Career: By 2008, more than half the jobs in engineering could be done anywhere in the world, according to an intriguing new analysis... by McKinsey & Co.'s in-house think tank. Many of them will... be done in... low-wage countries. Yet... engineering still looks like a winning profession for Americans -- in contrast to some other occupations. "There is this myth that the last thing you should do is go into engineering," says Diana Farrell, head of McKinsey Global Institute. "But the underlying growth of demand for engineers is so great that even when you consider the potential of offshoring, there will be demand in the U.S."...
There are already twice as many young university-trained professionals in low-wage countries as in high-wage countries.... India has nearly as many young engineers as the U.S.; China has twice as many.... [But] fewer than one in five engineers in low-wage countries [are] potential [multinational] hires. The others don't speak the language, don't live in the right cities or near airports, aren't practical enough or otherwise just don't fit....
McKinsey bets that the U.S. will lose 225,000 service-sector jobs a year to offshoring, but that's a very small fraction of the jobs created each year.... McKinsey expects the global supply of accountants and finance whizzes to overwhelm the demand, it doesn't expect the same for skilled engineers... demand for engineering talent from the U.S. and U.K. alone could absorb the "suitable supply" [this decade] of engineers in China, India and the Philippines, it says.... [H]igher wages for Asian engineers will bring them up to the levels of engineers in Mexico, Brazil and Poland, encouraging multinational companies to hire there.
It would be simpler for American engineers if they didn't have to worry about all those bright, ambitious folks in China and India. But as Brad DeLong, an economist and blogger at the University of California at Berkeley, puts it: "A world 60 years from now in which Chinese schoolchildren are taught that the U.S. did what it could to speed their economic growth is a much safer world for my great-grandchildren than a world in which Chinese schoolchildren are taught that the U.S. did all it could to keep China poor."
Decrying or trying to stop globalization isn't a winning strategy. Analyses like McKinsey's are a step toward more promising national -- and personal -- responses to global realities. Understand the competition, and then do something you can do better than they can.
The Economist's Buttonwood seems to think that it is a bad thing for companies to have to fund the pensions that they provide as part of compensation in the wage bargain--or at least that whether companies should be responsible for making sure pensions are funded is an open question:
Economist.com: Who should be responsible for honouring the promises that companies make to their workers?
Pension plans depend on company contributions and investment returns for their funding. Actuaries’ assessments of mortality rates give a guide to future liabilities. Bond yields provide the discount rate that broadly determines what current assets the plans must hold in order to meet those liabilities. The situation has been dire all round. Returns on investment have been lower than expected. Bond yields have been too, thus swelling the amount of current assets plans must hold. Beneficiaries are living longer than anyone thought they would.
True, companies could have spent more of their recent record profits topping up their pension plans and less of them pleasing shareholders with dividend increases and share buybacks....
[I]n America... people are speaking openly of a taxpayer bail-out to rival the rescue of America’s savings-and-loan (S&L) sector in the late 1980s. The pensions insured with the PBGC showed a shortfall... the PBGC needs an infusion of $92 billion in today's dollars to meet its future obligations....
Companies and asset managers have tended to take a laid-back approach to pension underfunding.... What is worrying about the latest numbers is that we are seeing them towards the end of a period of strong economic growth and corporate profitability, neither of which is likely to continue....
Should workers just be forced to accept the bad hand that fate dealt them? That looks rash as well as unfair: in America, the workers who would be thus left to their own devices fall disproportionately in swing electoral states.... Should a company’s current shareholders bear the brunt? If so, more firms than ever will close their defined-benefit schemes... and the investment risk inherent in saving for retirement will fall on the untrained individual. Or the taxpayer could foot the bill.... “All the choices are ugly.”
Buttonwood's general principle that it is "ugly" to make companies fulfill their contracts is capable of much wider application than just to the pension issue.
Via Mark Thoma
Mark Thoma: John M. Berry reports that two Fed presidents, Gary Stern of Minneapolis and Jeffrey Lacker of Richmond, expect continued tightening in the face of robust growth:
The Fed Will Make Several More Rate Increases: John M. Berry, Bloomberg: Federal Reserve officials see U.S. economic growth continuing at around a 3.5 percent pace into 2006 with inflation pressures strong enough to merit several more increases in the Fed's target for the overnight lending rate. Gary Stern, president of the Minneapolis Federal Reserve Bank, summed up the thinking of many of his Fed colleagues when he said in a June 20 interview with a Japanese newspaper (Nihon Keizai), "Right now there's no reason to stop tightening credit"... inflation pressures -- while still "contained," in the view of Fed Chairman Alan Greenspan and other officials -- are still strong enough to be worrisome. Companies appear to have regained some of their power to pass cost increases on to their customers... And oil prices have kept rising.... "I have been happy that the pass-through to core has been less than we feared, and that the expectations embedded in the yield curve have subsided noticeably," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters on June 20 after a speech to a bankers group in Hot Springs. Virginia. Nevertheless, like Stern, Lacker said, "I think a moderate pace of continued tightening is a sensible outlook at this point and that it is too soon to say when we are going to stop."...
At least one knowledgeable observer, James Hamilton, says of the [possibility of a] 4% [medium-run] target "I hope that the market guess of a 4% fed funds rate is wrong, and think it probably will be. The Fed couldn't be that stupid, could it?" We shall see.
Third-year Berkeley graduate students who pass their oral exams and advance to candidacy for the Ph.D. by the end of their third year in residence--i.e., by June 30--get tuition waivers and stipends for the next two years funded by the Graduate School. Those who don't, don't. Hence there are a lot of oral exams going on right now.
Today's was John Tang (2005), "Zaibatsu Affiliation and Industry Development in Meiji Japan" (Berkeley: Diss. Prospectus). He has a great data set: corporate "genealogies" well back into the Meiji Era. He has great questions: all of the Gerschenkronian late-industrialization finance-capitalism vs. the Anglo-Saxon model questions about economic and industrial development in comparative historical perspective. But there is a big problem: because of the hard deadline, the exam is taking place too early for it to be a success as an intellectual enterprise. It's too early for the data to speak in even a preliminary way, let alone for solid discussions about what questions the data might be capable of answering and how to firm up the logic and evidence behind the stories that the data turn out to tell.
(The exam was, however, a great success as a bureaucratic hurdle-jumping and fellowship-gaining exercise.)
More and more of the press corps seem willing to say that the Bush administration lies all the time, about everything--and that this habit of lying is not a good thing:
The White House spin cycle - Hardball with Chris Matthews - MSNBC.com: David Schuster writes: I don't know if things are getting better or worse in Iraq. But I do know the Bush administration is now in total panic mode over the erosion of public support for the occupation. How else could one explain the President's bizarre radio address this past Saturday or the even more surreal comments recently from other administration officials?
First, the president's radio address: On Saturday President Bush defended the war in Iraq saying, "We went to war because we were attacked." Huh? In September 2003, the President himself stated, "We've had no evidence that Saddam Hussein was involved with the September 11th attacks." (For the record, the 9/11 Commission is on the side of the Sept. 2003 President Bush — The commission found there was "no collaborative relationship between Iraq and Al-Qaeda.")
On Sunday, Secretary of State Condoleezza Rice said criticism of the handling of the war isn't justified because "The administration, I think, has said to the American people that it is a generational commitment to Iraq." What? That was said... but it came from Senators pouring cold water on the administration's optimistic pre-war predictions. What were those predictions? Vice President Cheney (March 16, 2003) said, "My belief is we will, in fact, be greeted as liberators... I think it will go relatively quickly... in weeks rather than months." Secretary of Defense Rumsfeld on Feb. 7, 2003 said, "It is unknowable how long that conflict will last. It could last six days, six weeks. I doubt six months." Former Budget director Mitch Daniels (March 28, 2003) stated, "The United States is committed to helping Iraq recover from the conflict, but Iraq will not require sustained aid."
Iraq will not require sustained aid? Hmmm. Today, Congress voted to send the Pentagon another $45 billion for operations in Iraq. That brings the total amount appropriated so far, for the wars in Iraq and Afghanistan, to $322.40 billion.
The administration seems to think that by shifting the justification for the war or changing what administration officials said 3 years ago, the president's poll numbers will magically turn around. The pretzel shaped logic of this strategy is mind-boggling. And one begins to wonder if the gang that helped President Bush win a 2nd term has been stuffed into a closet.
The math on this is simple. If the war was going well, the public would support the occupation of Iraq, regardless of whatever reasons the administration gave for the invasion. The problem is, according to republican Senator Chuck Hagel, "The White House is completely disconnected from reality. It's like they're just making it up as they go along."
And now, the public is tired of this deadly trip through fantasyland — a place where White House P.R. strategies seem to matter more than holding anybody accountable for the war's mistakes and mismanagement.
Impeach them. Do it now:
Simianbrain: Oldie but a Goodie: Tangentially tied to the Downing Street Memos, from October of last year: Ghostwriter of Bush Autobiography says:
"He was thinking about invading Iraq in 1999," said author and journalist Mickey Herskowitz. "It was on his mind. He said to me: 'One of the keys to being seen as a great leader is to be seen as a commander-in-chief.' And he said, 'My father had all this political capital built up when he drove the Iraqis out of Kuwait and he wasted it.' He said, 'If I have a chance to invade... if I had that much capital, I'm not going to waste it. I'm going to get everything passed that I want to get passed and I'm going to have a successful presidency.'"
Herskowitz said that Bush expressed frustration at a lifetime as an underachiever in the shadow of an accomplished father. In aggressive military action, he saw the opportunity to emerge from his father's shadow. The moment, Herskowitz said, came in the wake of the September 11 attacks. "Suddenly, he's at 91 percent in the polls, and he'd barely crawled out of the bunker." It's interesting how this came into play the week before the election last year (I don't think I was aware of it at the time) with that now-trademark boast of 'political capital to spend' actually coming from Bush's mouth just days later.
Economist's View: Time to Toss Samuelson: Where do I start? I will agree with Samuelson on one point. One of us does not understand macroeconomics:
Time to Toss the Textbooks, by Robert J. Samuelson, Washington Post: Our ideas for explaining trends in output, employment and living standards -- what we call 'macroeconomics' -- are in a state of disarray.... Let me give you three examples. We once thought we understood consumer spending, the economy's mainstay. For decades, disposable income and consumption spending advanced in lock step. Americans spent a bit more than 90 percent of their after-tax income and saved about 8 to 10 percent.... But since 1990, consumer spending has changed. It has consistently outpaced income growth.... The main cause is the 'wealth effect.' In the 1990s higher stock prices caused Americans to spend more; now higher home values... are doing the same. So consumer spending increasingly depends on 'asset markets' -- stocks and homes -- and not just income...
So [Samuelson] says we don't understand consumer spending and then he explains it... [by] mak[ing] consumption a function of wealth, something we've been doing since the 1950's....
We can't determine 'full employment.'' Economists call full employment the 'natural rate of unemployment' -- the lowest rate consistent with stable inflation. Go lower and tight labor markets trigger a wage-price spiral. Unfortunately, we don't know what full employment is. The Congressional Budget Office now puts it at 5.2 percent. But past estimates have been too high and too low, because the 'natural rate'... constantly changes. It's influenced by population changes (younger workers have higher unemployment rates) and government policies, among other things....
So what's the point? Because it's hard to estimate exactly (even though he presumes to list the important factors that ought to go into a model of the natural rate) we shouldn't even try? That instead we should operate with no information at all about the target level of output?... [This isn't] a theoretical failing; this is a problem of measurement. We can't measure the ex-ante real interest rate exactly either (because it depends upon expectations), but that doesn%'t imply theory is wrong. Not at all.
Fourteen baby turkeys... turklings? turklets?... up on the hillside, watched by two hens. No toms in the vicinity, however.
That's impressive fecundity for a large, ugly, nearly flghtless bird.
Note to self:
The deer-resistant dwarf olives... are not.
Eight-point bucks are *hungry*.
There is actually something worth reading on the Wall Street Journal editorial page. Mirabile visu:
WSJ.com - The 'Conundrum' Explained: Roger Altman: The obvious challenge is to explain these unprecedented interest rate responses. This brings us to a discussion of the relative merits of the three popular explanations mentioned earlier.
The first is simply that the bond market is wrong. All major financial markets periodically overshoot on both the upside and the downside. Now, it is argued, bond prices, which move inversely to yields, have overshot on the upside. It follows that there will soon be a typical correction which will move longer-term rates back up.
But, there is no empirical evidence of an obvious overshoot.
Another popular explanation is that the consensus economic forecast for 2006 is overly optimistic. The leading forecasters are calling for another year of steady GDP growth in the 3.0% to 3.5% range. Since a third consecutive year of such healthy growth normally will move interest rates upward, they are forecasting that result. Others dissent and envision a weaker economy next year. They see the index of leading indicators in decline, weak manufacturing data and a possible housing slowdown and thus anticipate a growth rate falling into the 2% range, especially during the latter months of 2006. Since financial markets historically discount future economic developments by at least nine months, this would explain why longer-term rates have been declining. Yet, the positive economic signs, as detailed in Mr. Greenspan's latest testimony, are far more prevalent and make this a dubious case.
The third explanation involves the so-called savings glut outside the U.S. While America is running big international deficits, much of the world is incurring surpluses. It is not uncommon for mature economies like Japan, Switzerland and Taiwan to run such surpluses. Their aging populations save at high rates and their slow economies don't offer proportionate investment opportunities.
What is uncommon is for developing regions to run positive international accounts. Historically, they have grown rapidly and consumed foreign capital on a net basis. But today the opposite is true. Remarkably, Latin America, China, Africa and the Middle East are in surplus, as shown in the chart nearby.
By definition, such unprecedented foreign liquidity must be invested, and more of such capital usually flows into fixed income instruments than equities. Believe it or not, comparable rates outside the U.S. are even lower than ours. Economic growth is so anemic in Europe and Japan, for example, that the yield on Japan's 10-year government bond is 1.3%, while the 10-year German Bund is at 3.3%. At the margin, therefore, the highest returns are realized on American bonds. That is why this excess foreign liquidity has nowhere else to go.
This is the one aspect of our overall financial picture which is both new and carries significant impact. On that basis, it is a more likely explanation of the conundrum than either a misguided bond market or an incorrect consensus economic forecast.
The final question is whether this unprecedented phenomenon will continue to suppress U.S. long-term interest rates. The logical answer is yes -- but not indefinitely. At some point, foreign investors' holdings of dollar-based assets will rise beyond any prudent standard of diversification. They will then, at minimum, stop adding to these holdings. If nothing else changes in the interim, that will end our interest-rate honeymoon.
Nevertheless, I'm not satisfied with Roger Altman's explanation. Long-term bonds are long-term assets: they should be pricing into their values today what will happen in five (or less?) years when the U.S. current account shrinks and foreigners begin to worry about their large holdings of dollar-denominated assets.
And Roger does not pay attention to the important fact that a great many of the dollar-denominated securities added to foreign portfolios in the past four years have been added not by private investors but by governments boosting their reserves beyond reason.
This time he directs his ire at moderate Republicans who talk the talk but do not walk the walk:
TAPPED: June 2005 Archives: WHERE'S THE BEEF? I'm working on a whole article about this general theme, but Steve Clemons' post on some recent remarks by Lindsey Graham strikes me as worth highlighting. Worth highlighting for the purposes of condemning. Look, it's nice that Graham is saying smart, dissenting things about the direction of national policy. But he keeps voting for the policy. Just like Chuck Hagel, Richard Lugar, and the rest of the gang, he has done nothing -- absolutely nothing -- to correct the situation. Instead, he's actively collaborated in generating the problems he cites. The things he claims to regret would have been somewhat mitigated had Graham lost his race to become a U.S. senator. He could help improve the situation tomorrow by resigning his seat and letting Mike Easley appoint a replacement.
A smaller step might be to use his votes on various committees to help restart the process of congressional oversight. But he hasn't done anything like that and he won't. I don't know exactly what's wrong with these people, but they deserve to be attacked more, not less, harshly than your ordinary party-line Republicans. Voting for bad policies you agree with is bad. Voting for bad policies that, when asked, you say are bad is ridiculous. Liberals should direct nothing but scorn at this crew unless and until they start doing something instead of offering nice remarks to film screening audiences.
Can this be true?
Rising Hegemon: What the Hell?: Kos put up this Arizona Republic story, but perhaps someone in the mainstream media might want to give it their attention.
John Tod of Mesa had been prepared to face Father's Day worrying about his son's pending date with the war in Iraq. Then Uncle Sam stepped in with more disappointing developments. Marine Pfc. Jeremy Tod called home with news that his superiors were urging him and fellow Marines to buy special military equipment, including flak jackets with armor plating, to enhance the prospects of their survival. The message was that such purchases were to be made by Marines with their own money. 'He said they strongly suggested he get this equipment because when they get to Iraq they will wish they had,' Tod said.
Total estimated cost: $600. Tod said his son's call about two weeks ago from the Marine Corps Air Station-Yuma was a sobering reminder that the military is not prepared to equip Pfc. Tod and fellow Marines with the best equipment.... It's not the cost that concerns him, even though the self-employed home repairman will have to dig deep for the cash.'We're supposed to have a professional army,' he said, 'the best in the world. And we're not providing them with the type of gear they need to protect themselves as they do their jobs.'...
This story comes with an additional word of caution... "Told about the Marine request, U.S. Rep. J. D. Hayworth, the Republican whose 5th District includes Mesa, said he has never heard of a service person being told to buy his own equipment."
That caution, of course, is that J.D. Hayworth is perhaps the dumbest man in America.
Fontana Labs is unhappy:
Unfogged: Did I pay too much for this content? This gives you some evidence that this week's Economist really does include a column advising 'America should stay, but stay to win.' I read this at the gym yesterday, and, if I remember it right, it says nothing substantive about what 'staying to win' might be or how to accomplish it. Really? Stay to win? I was thinking maybe we should stay to draw out the quagmire or to further our loss of international prestige. Most importantly, the column says nothing about the real problem, namely, that a satisfying outcome can be achieved only with resources (troop levels, in particular) that we simply don't have. Without that nonexisting supplement, we're only postponing disaster, at best.
I really need to rethink my subscription priorities.
Ed Hugh catches some very alarming advice from Vicenzo Guzzo: large-scale deflation is never a good idea. Looser monetary policy at the ECB level is a good idea:
A Fistful of Euros: Italy: Devaluation or Deflation: Italy is in recession. There is nothing extraordinary about this, as Donald Rumsfeld notoriously said ’stuff happens’, and economies do have their ups and downs. But this recession is a little different, since it is structural and not cyclical. For the Italian economy to return to a better trajectory something has to be done, but what? Morgan Stanley’s Vicenzo Guzzo offers two alternatives: devaluation, or deflation (actually the way he puts the alternatives it sounds to me more like a case of: “with which instrument would you prefer I cut your throat sir, the stanley knife or the chain saw”?).
”If Italy intended to restore the pre-1999 competitiveness level, it would have to experience a 25% currency depreciation. While the euro is now down over 5% from the start of the year, such a large correction appears unlikely at this stage. In addition, the economy has steadily lost ground also vis-à-vis its euro area trading partners, as the breakdown of the trade data suggests. Euro depreciation would provide no oxygen on that front. In order to return to pre-1999 competitiveness levels, Italy would have to abandon the current exchange arrangements. To put it bluntly, it would have to drop out of EMU. A 25% devaluation is equivalent to what the economy experienced between 1991 and 1995. Exports scored double-digit gains in the aftermath of the realignment, but domestic demand fell heavily and debt services costs hit 12.5% of GDP. In a replay of those years, Italy would either default on its debt or run toxically tight fiscal policy. This is simply not an option, in my view.”
So Italy is caught. To devalue it would have to leave EMU. But then even if it could and did, it would go bust. So, on Guzzo’s reading, the only remedy left is substantial deflation, that is an ongoing reduction of wages and prices which would enable competitiveness to be restored. This sounds very much like the 1930’s and an Italy stuck with a modern version of the gold standard. It also sounds like going through a recession which could turning out lasting for a number of years, even if this was politically feasible it would be extraordinarily painful for many of those most immediately affected. This, of course, is a question which is widely treated in the textbooks. So would anyone like to suggest a rival ’escape strategy’?
More reality-based monetary policy in Europe:
FT.com / Europe - Sweden cuts rates to 1.5% adding to ECB pressure: By Reuters: Sweden's central bank cut interest rates by a surprisingly large 50 basis points to a new historic low of 1.50 percent on Tuesday and some analysts said the door was open to further easing. The decision sent ripples through Swedish markets and beyond, into the euro zone government bond market, where traders said the Riksbank had turned the spotlight on Europe's economic woes and added to pressure on the European Central Bank to cut rates. Like the ECB, the Swedish central has been under pressure to cut rates to boost sluggish job market with inflation running low....
The bank, announcing its decision after a rate-setting meeting on Monday, said it was cutting its growth and inflation forecasts for this year, warranting a 50 point reduction. "The future direction for monetary policy will depend on new information on economic developments in Sweden and abroad and the effects this may have on inflation in Sweden. Monetary policy is now considered to be well-balanced," it said.
Edward Hugh sees a first chink of light:
A Fistful of Euros: The First Chink of Light: There is a very interesting article in todays Financial Times. For the first time an executive board member of the ECB - Lucas Papademos - has spoken openly about the difficulties presented by having a single monetary policy for such a diverse set of economies. In fact these comments take on more significance in the light of the fact that Papademos is vice President of the ECB, and widely tipped to replace Otmar Issing as Chief Economist when Issing retires.
In a speech at an ECB conference in Frankfurt, Mr Papademos argued that economic growth and inflation differentials within the eurozone since the introduction of the euro had been similar to regional variation in the US.But Mr Papademos observed "significant and persistent divergences in measures of competitiveness between member countries". The extent and cumulative effects of such differences "raise concerns about their impact on growth...suggest the adjustment mechanisms are functioning slowly". Eurozone divergences were... "the result of structural factors."...
The entire speech can be found here. It is clear that the emphasis is on the need to force through the structural reforms, nevertheless the admissions are significant.
Daniel Gross writes about the "savings glut." But world savings are not that high: the swing of the U.S. federal budget from $200 billion annual surplus to $350 billion deficit alone--that's a decline in savings equal to 30% of China's entire current exchange rate GDP. It's not so much a global savings glut as a worldwide investment shortfall.
Savings Glut - The self-serving explanation for America's bad habits. By Daniel Gross: Why are there imbalances in the global economy?.... Newly emerging conventional wisdom takes the opposite view. The problem in today's global economy is that the rest of the world, in particular people in Asia, consume too little and save way too much.... The lead article in today's Wall Street Journal speaks of a global housing boom spurred by a "saving glut."... Ricardo Hausmann... notes that "excessive savings are at the root of the imbalance in China."... the FT applauds a tentative sign that the Japanese... are showing signs of spending and investing more.
The savings-glut meme, which could soon become an important part of our monetary policy, has emerged from economists' efforts to come to grips with what Federal Reserve Chairman Alan Greenspan has labeled "the conundrum."... [L]ong-term interest rates should be higher. But they've fallen...
Ben Bernanke... has come up with an explanation... a "global saving glut."... A bigger and more powerful source of excess savings, however, is found in newly industrializing countries like China.... Richard Clarida, the former assistant treasury secretary and a candidate to be a Federal Reserve Governor, advanced the meme by arguing that our twin deficits are an example of good global citizenship. When there's more savings relative to investment, he wrote in the Wall Street Journal... "not only will real interest rates be driven down, but some country or group of countries must run current-account deficits to absorb the excess saving."...
On his blog, economist Brad Setser raises some interesting questions about Bernanke's argument. More curious is what Bernanke—-and other saving-glut champions—-want us to conclude.... The savings-glut meme changes the terms of the conversation about global imbalances. It's not our fault that we rely on foreigners to fund our desire to spend in excess of our resources.... The savings glut may be an accurate and subtle take on the world's economic imbalances. But less subtly, it minimizes the impact of the potentially destructive monetary and fiscal policies pursued by the U.S. over the last five years. It also lays the responsibility for change squarely on the backs of foreigners and makes a virtue out of what appear to be our own failings...
Our Central Planners
Steven Pearlstein watches one of America's two most important economic central planners at work. The most important is, of course, Alan Greenspan, who sets interest rates. The second most important, however is Mark McClellan, who sets the prices at which the federal health programs pay for Medicare and Medicaid services.
It's safe to say that neither is enthusiastic about the idea of having the government decide on what the cost of capital should be, or how much health care providers should earn. Both of them are close to the "market fundamentalist" end of the spectrum of economists, and economists are at the "market fundamentalist" end of the spectrum of people.
Perhaps this is what makes both of them good central planners--that they are scared of their roles, and thus cautious and thoughtful.
Anyway, here's Steve:
Free-Market Philosophy Doesn't Always Work for Health Care: By Steven PearlsteinPostWednesday, June 8, 2005; D01: As the head of Medicare and Medicaid, Mark McClellan may be the most powerful man anywhere, in control of about 7 percent of the U.S. economy. And today was to be the deadline for him to rule on one of the most heavily lobbied issues of the past year: whether to lift an 18-month moratorium on creating new physician-owned specialty hospitals.
It's all very technical and bureaucratic, to be sure. But in deciding the issue, McClellan is being asked to choose between two competing and fundamentally irreconcilable models for the U.S. health care system. One model would rely even more on competition among self-interested providers for the business of increasingly empowered consumers to restrain prices, assure quality and spur innovation. That, after all, is how it works in nearly every other industry. The other model is based on the premise that competition in health care will always be highly imperfect, and that too much competition will have socially unacceptable consequences. This model envisions even more government regulation and stronger management by public and private health plans.
In a decision that seems only fitting for a Harvard-trained physician and MIT-trained economist, McClellan has decided to kick the can down the road, extending the moratorium until year-end.
There are about 130 physician-owned specialty hospitals, most of them focused on heart, orthopedic or other types of surgery. There is some evidence that by doing large numbers of the same kinds of operations, the tightly focused hospitals lower costs, improve medical outcomes and deliver more patient satisfaction. And, in theory, giving doctors a stake in the enterprise not only gives them greater control over their professional lives, but also offers extra incentive to innovate and improve service. General hospitals, by contrast, see the move toward specialty hospitals as nothing more than cream-skimming by self-dealing doctors that will put community hospitals into an economic death spiral. They argue that doctors referring patients to hospitals they own is an unacceptable conflict of interest. And by siphoning off the most profitable patients in the most profitable parts of medicine, the specialists rob general hospitals of the scale, scope and profit they need to operate unprofitable departments such as burn units and emergency rooms 24/7.
In truth, the arguments tend to jumble different issues that need to be pulled apart.
While specialized, high-volume units are probably a better way to provide some health services, they don't need to be owned by physicians. There are plenty of other sources of investment capital. And the experience with doctor-owned labs and MRI machines suggests that physician ownership of surgical hospitals will inflate total health care spending by increasing the number of unnecessary operations.
At the same time, community hospitals are probably right that specialty hospitals cream-skim the most profitable business. But the larger question is why the system doesn't allow hospitals to price their services so that 'hard' cases are just as profitable as 'easy' ones and emergency rooms enjoy the same operating margins as cardiac units. Eliminating cross-subsidization within hospitals would significantly reduce the amount of 'cream' available for 'skimming.'
McClellan hopes that by adjusting and refining Medicare reimbursement rates for different categories of services, and allowing general hospitals to offer 'gains-sharing' payments to doctors that could substitute for ownership of their departments, he can level the playing field enough to diffuse the specialty hospital issue. Like many conservatives, he looks to specialty hospitals, consumer-driven health savings accounts and new reimbursement schemes that pay doctors and hospitals for the quality rather than the quantity of care they provide to push the U.S. health care system toward the market model.
McClellan's crusade is likely to fail, however, if he doesn't resolve a fundamental question about the proper role of doctors in the health care system. When they are vilifying insurers and managed-care companies, physicians like to present themselves as Dr. Welby -- selfless professionals whose medical judgments would never, ever be colored by their financial interests. But in lining up behind physician ownership of specialty hospitals, the doctors essentially acknowledge that they are just like the rest of us, their behavior swayed by even modest financial incentives.
You can't have it both ways. And the way the people would have it is to pay their doctors well, put them in the central decision-making role in the health care system -- and then demand that they give up the right to invest in MRI machines or specialty hospitals or get incentive payments from drug companies.
For most Americans, providing health care ought to be different from selling soap; they won't tolerate doctors acting like commissioned salesmen and investment bankers. And if that means having less market competition and more regulation in the health care system, it seems to be a trade-off they're willing to make.
Alex Tabarrok writes that it would be irrational for the Prophet Isaiah to believe in evolution. For Isaiah writes:
In the year that king Uzziah died, I saw also the LORD sitting upon a throne, high and lifted up, and his train filled the temple. Above it stood the Burning Ones: each one had six wings; with two each covered his face, and with two each covered his feet, and with two each did fly. And one cried unto another, and said, "Holy, holy, holy, is the LORD of hosts: the whole earth is full of his glory." And the posts of the door moved at the voice of him that cried, and the house was filled with smoke.
Then said I, "Woe is me! for I am undone; because I am a man of unclean lips, and I dwell in the midst of a people of unclean lips: for mine eyes have seen the King, the LORD of hosts."
Then flew one of the Burning Ones unto me, having a live coal in his hand, which he had taken with the tongs from off the altar: And he laid it upon my mouth, and said, "Lo, this hath touched thy lips; and thine iniquity is taken away, and thy sin purged."
Also I heard the voice of the Lord, saying, "Whom shall I send, and who will go for us?"
Then said I, "Here am I; send me."
And Alex writes:
Suppose that you find a watch in the forest. If you know there is no watchmaker then the theory of evolution is a brilliant and compelling explanation for the presence of complexity without design. But suppose that you know a watchmaker exists: then surely the simplest and most compelling explanation is that the watchmaker made the watch. Any other explanation, particularly one so improbable (see extension) as evolution would seem to be preposterous and beside the point. Thus for someone who knows, really knows, that god(s) exists... creationism (see the extension) follows as a rational deduction from the premises.... If god(s) exists then evolution is almost certainly false, if not in every particular then surely in the grand claims of a undesigned nature...
But who is Alex to say how the Watchmaker makes the watch? Was he present when the foundations of the earth were laid, when the morning stars sang together? If a whole bunch of paleontological and biochemical evidence very strongly suggests that the Watchmaker uses the genetic algorithm in Her work, who are we to quibble and say that the paleontological and biochemical evidence of how the Watchmaker does business is false?
To disbelieve in evolution you need much more than to believe in a Watchmaker--much more than to have had the Vision of Isaiah (whose Seated One doesn't seem terribly concerned with issues of biological science). You need not only to believe in a Watchmaker, but also to believe in the inerrancy of Genesis and its account of creation. And there you run into big problems immediately. For example, the "where are the dinosaurs?" Ark problem.
Genesis tells us:
"And, behold, I, even I, do bring a flood of waters upon the earth, to destroy all flesh, wherein is the breath of life, from under heaven; and every thing that is in the earth shall die. But with thee will I establish my covenant; and thou shalt come into the ark, thou, and thy sons, and thy wife, and thy sons' wives with thee.
"And of every living thing of all flesh, two of every sort shalt thou bring into the ark, to keep them alive with thee; they shall be male and female. Of fowls after their kind, and of cattle after their kind, of every creeping thing of the earth after his kind, two of every sort shall come unto thee, to keep them alive.
And take thou unto thee of all food that is eaten, and thou shalt gather it to thee; and it shall be for food for thee, and for them.
Thus did Noah; according to all that God commanded him, so did he...
Genesis thus tells us--explicitly--that Noah did what God commanded: that he took two of each kind of animal into the ark with him! Including dinosaurs. (Let's not inquire how you fit even a single apatosaurus onto an ark that's only 300 cubits long.) Where are they now? This is an insuperable obstacle for a believer in biology-according-to-Genesis.
No rational and reasonable being can look upon the hipbones of a whale and the skeleton of a Tyrannosaurid, contrast them with a 2500-year-old text in which the redactor did not care enough about plausibility to notice that two of each animal could not physically fit into an Ark 300 cubits long, and conclude that there is any reason to not believe in evolution.
Susan Madrak writes:
Fooled: I was following some Google link to a post on a Motley Fool message board. In order to read it, you had to register, so I did. Big mistake. Ever since then, I've been swamped with penny-stock emails -- over 100 a day. Be warned.
There has been a big change on the Internet in the past decade. A decade ago, the Internet seemed to be a place that exemplified the left-anarchist utopian doctrines of Prince Kropotkin--friendly and helpful people coming together to create things for the common good, expecting that their contributions would be more than matched by those of others and that all would benefit.
Today? Today the Internet seems dominated by people like--well, like the proprietors of the Motley Fool, who don't care how much of Susan Madrak's time their clients' emails waste as long as they can make a few ¢¢¢¢ by selling her registration info. It is, to me, surprising how *many* people there are out on the Internet who do not care how large a burden their actions impose on others as long as they hold some promise of gaining them a trivial advantage. It's the State of Nature out there.
And so today it teaches a different lesson: not Prince Kropotkin but instead Joseph de Maistre, who in his Soirees from St. Petersburg wrote that behind every stable and peaceful social order stands the shadow of the executioner.
Fontana Labs of Unfogged calls for help!
Unfogged: In which I use the blog for (almost) scholarly purposes.
I'm teaching a class on well-being soon, and I'd like to cover some of the literature on the relationship between economic status and subjective happiness. In particular, I'm interested in a question that sometimes appears in 'Paul Krugman vs. The Corner' form: does, say, the increasing availability of cheap consumer goods make up for a decline in adjusted income? (Yes, real wages have fallen, but TVs are so much cheaper, etc.) If you know good (accessible) literature on this-- or on related issues-- and you give me references, I'll be grateful.
Hmmmm... Well, first of all, the "adjustments" to nominal wages and incomes in order to turn them into real wages and incomes are supposed to already take this into account: real wages are your nominal wages divided by the Consumer Price Index, and the CPI is supposed to be the price of purchasing a representative constant basket of commodities (a basket that they do change over time: "constant" is in conflict with "representative").
Whether the CPI actually does this or not is a disputed issue. And then there are all the other issues revolving around relative incomes...
If I were going to cover this, I would make people read:
- Something of the Boskin Commission on the CPI's report: http://www.ssa.gov/history/reports/boskinrpt.html
- A section of The Road to Wigan Pier where George Orwell talks about the "cheap luxuries" created by modern technologies and their effects on perceptions of well being.... My copy of Wigan Pier is at the office (if I haven't loaned it out, that is)... Ah, here we are: chapter 5: http://etext.library.adelaide.edu.au/o/orwell/george/o79r/chapter5.html
- Something by Amartya Sen on commodities vs. capabilities... perhaps from Development as Freedom? http://www.amazon.com/exec/obidos/asin/0385720270/
- Tibor Scitovsky's old The Joyless Economy: http://www.amazon.com/exec/obidos/asin/0195073479/.
Nice to see: The Road to Wigan Pier - George Orwell
The right-wing Tacitus writes:
t a c i t u s || Battle fatigue.: I just spent an evening with a friend recently back from Iraq. Her stories were depressing enough -- she was running an aid station near Baqubah -- and now that she's back in the US, she's getting to follow up with many of the soldiers whose lives she helped save. They're without legs, or arms, or significant portions of skull, for the most part. Another peculiar trauma is one that is disproportionately affecting officers -- I forget the specific name -- in which a blast basically shakes your head so violently you suffer brain damage: shaken baby syndrome in adults. Horrifying all around. That's war, and that's what war does.
As troubling are the decisions taken by people like her to leave the Army as soon as possible. She told me when her unit is going back, and it's ridiculously soon. These young people in their twenties are volunteers, well educated, and tired of rotating in and out of war. My friend is lucky -- she's only been to war once. I know others who have been to war twice, and probably a third time before the year is out. It's not that these people have no sense of duty: to the contrary. But they don't see the sense in the open-ended mission, plagued by strategic incoherence, and chronically undermanned. It's impossible to blame them. "I've read about the recruiting problems," she said, "And I think, no joke."
The volunteer soldiers have proven themselves fine warriors. But the volunteer Army has failed. This is its first war of any meaningful length, and its lessons are clear: it cannot sustain this effort, through no fault of its own, because, in the end, its discrete parts are rational actors. It is impossible to externally incentivize war. The choice is therefore between that Army's continuance and a draft. If the choice is for its continuance, then the subsequent choice will probably be between losing Iraq and losing the Army. Losing Iraq will be a strategic disaster for the United States. But losing the Army would be the end.
I think Tacitus is wrong.
I would not say that the volunteer army has failed. The volunteer army has done fine in many of its missions. We have only run into trouble when the Bushies took America's volunteer army--the finest high-tech soldiers in the world--and deploy them as military police in a country where they do not speak the language on an open-ended mission with only one-third as many forces as they need.
The volunteer army has done fine at limited-duration war-fighting missions where its high-tech strengths are useful. The volunteer army has done fine at low-risk peace-keeping missions in the Balkans and elsewhere. The volunteer army would do fine at what ought to be its principal task: holding the line while the rest of us mobilize when something truly serious happens.
It's not the volunteer army that has failed. It's the Bush administration.
The young and brilliant Stefano della Vigna (whom I never see because he's a fifth-floor person and I'm a sixth floor person) has what looks to me like a serious finance research hit--extra bases and RBIs:
Looking Long Term? Get Your Glasses - New York Times: [F]ew investors can focus on events more than five years ahead, even when those events are very predictable and almost certainly will have a big impact on a company's earnings. The study, 'Attention, Demographics and the Stock Market,' was conducted by Stefano della Vigna, an assistant professor of economics at the University of California at Berkeley, and Joshua M. Pollet, an assistant professor of finance at the University of Illinois at Urbana-Champaign. A copy is at http://www.nber.org/papers/w11211
The study is attracting much interest because researchers for many years couldn't figure out how to disentangle the attention span of investors from other factors that could also explain their behaviors. How, for example, to interpret why investors are unimpressed with a company's announcement of a new research and development effort that it says will lead to higher profits in 10 years?.... Della Vigna and Professor Pollet solved this problem by focusing on industries whose profitability depends heavily on the age distribution of the population. Bicycle makers are a good example... people in their late 30's or early 40's bought bicycles at nearly twice the rate of the overall population, in large part because they were buying them for their children. By contrast, consumers under 27 or over 55 bought bicycles at rates far below the national average.
The professors focused on two dozen age-sensitive industries - from toy and beer makers to nursing home operators and funeral homes - from January 1935 through December 2003. For each industry, they built a model of the year-by-year changes in demand caused by shifts in the age distribution of the population. On average, they found that when their model predicted a one percentage point increase in demand for an industry's goods or services, its profits that year were 5 to 10 percent higher.
If investors conformed to the completely rational, fully informed ideal described in an economics textbook, they would immediately take into account the long-term effects of a changing population. The stock prices of age-sensitive companies would thus be bid up or down soon after major changes in the country's birth rate, for example, even if the changes' effect on companies' earnings was not felt for several decades.
The professors found, however, that virtually no investors conformed to this ideal. Instead, the study found that the price of a stock began to change only about five years before shifts in age distribution started to have big effects on that company's earnings.... [O]ver the 68 years studied, competition did not eliminate the extra profitability in age-sensitive industries. One reason, the professors suspect, is the entry barriers to at least some of them.
The Synecdochic Professor writes:
The Synecdochic Prof: Pleasure and alternate history: Turtledove has some interesting ideas about the other ways that North American history could have developed. Turtledove is not really a great stylist... But I still keep reading... there's something compelling about the way that Turtledove has used this alternate universe to comment on the relationships among Americans that interest me: the history of race and class, for instance; the impact of organized labor and the lack of a profound presence of socialism among the leading political parties; and the relationship of national politics to the international aspirations of the U.S.
Moreover, Turtledove is a realist at heart. He knows that his readers want the dramatic turns of his alternate history (the book I'm reading know has a Hitleresque Confederate president leading his country to war), but he's really more interested in the quotidian: how small changes in technology affect daily life, the slow evolution of spoken language; the nuanced stratification of status in supposedly egalitarian societies. I would have a hard time recommending this to someone who wasn't (as I am) a certain kind of history geek, but I think I'll slogging through the final three books (3 books x 600 pages means 1800 more to go) of this...
The Belgravia Dipatch writes:
THE BELGRAVIA DISPATCH: Vakil Trumps Pletka: Underwhelmed by Danielle Pletka's boiler-plate, cliched op-ed piece in today's NYT? Have no fear! The FT--which incidentally, and for my money, produces significantly higher quality opinion journalism in its pages, day in; day out, than the New York Times--has a much more, er, nuanced Iran analysis from Sanam Vakil...:
The emergence of a reformist movement... forced the clerical elite... to acknowledge the link between demography and democracy. With 70 per cent of the population under the age of 30 and with no memory of the revolution or its nationalising ideology, the government recognised that it was sitting on a ticking time bomb. Mr Rafsanjani's re-emergence signifies an essential and often overlooked change... a weakening in the position of the rahbar or supreme leader.... Ayatollah Ali Khamenei, Iran's supreme leader, did not want Mr Rafsanjani to re-enter the political scene....
As a born-again pragmatist, Mr Rafsanjani has abandoned his revolutionary ideals for national-interest oriented objectives. Potential rapprochement with the US - an anathema for many traditional revolutionary adherents... is an idea Mr Rafsanjani has flirted with for years and is now one of the main pillars of his campaign. Increased economic liberalisation is another policy issue that reveals the ideological divide between Mr Rafsanjani and the clerical apparatchiks. Both of these issues are not only on his agenda but critical for gaining mass popular support.
It is not just in opinion journalism that the Financial Times outstrips the New York Times: the first is simply a much, much better newspaper.
Michael Smith of the "Sunday Times" chats online about the Downing Street Memos. He is particularly hard on those like Michael Kinsley who claim that the head of M.I.6 was simply reading the newspapers and listening to "the usual freelance chatterboxes," and on those like Mark Memmott who claim that saying that intelligence was "fixed" meant merely that it was "'bolted on' rather than altered." Smith finds the "self-serving nonsense from people who should know better in some, and it is now only some, of the U.S. media" to be "frankly depressing":
The Downing Street Memo: Michael Smith, Reporter, Sunday Times of London, Thursday, June 16, 2005:
Two top-secret British documents that were leaked to the press recently suggest that the Bush administration "fixed" intelligence about Iraq and that actions at the United Nations were designed to give legal cover to British Prime Minister Tony Blair before an invasion to oust Saddam Hussein .
Michael Smith, a reporter for the Sunday Times of London, has led the coverage, starting with his report of the so-called Downing Street Memo on May 1.
Smith was online Thursday, June 16, at 10 a.m. ET to discuss the Downing Street Memo and his reporting.
Michael Smith: I think it is clear from the documents themselves that the whole [Iraq] venture was widely viewed [in Britain] as being highly dubious with no certainty of what would come out of it. The administration ensured that it only got the answers it wanted... ignored the advice they were getting on the likely cost or managed to filter it out with this highly pressurized regime of come up with the right answers, or we will be on your back...
Michael Smith: ...there was a feeling of "well we said that way back when."... "We have said this before, if you the reader didn't listen well what can we do", seemed to be the attitude.... The attitude they have taken is just flat wrong.... It is one thing for the New York Times or The Washington Post to say that we were being told that the intelligence was being fixed by sources inside the CIA or Pentagon or the NSC and quite another to have documentary confirmation in the form of the minutes of a key meeting with the Prime Minister's office. Think of it this way, all the key players were there. This was the equivalent of an NSC meeting.... They say the evidence against Saddam Hussein is thin, the Brits think regime change is illegal under international law so we are going to have to go to the U.N. to get an ultimatum, not as a way of averting war but as an excuse to make the war legal, and oh by the way we aren't preparing for what happens after and no-one has the faintest idea what Iraq will be like after a war. Not reportable, are you kidding me?...
Michael Smith: I personally believe there are grounds for [impeachment of Bush] but not... in the memos we've seen.... If the Brits said that there weren't enough preparations in place for what comes after, what was the reaction back in Washington? Who was it who overruled the arguments coming out of London?...
Michael Smith: I think Blair will go.... I personally think Bush is much more at risk.... There is no doubt in my mind that the administration lied and distorted the truth, one Congress begins to realise the scale of it, Bush could be in serious trouble....
Michael Smith: [T]here are other facts you still don't know and the media should be using these public documents as a base from which to find them out because it is those facts that will really damage Bush....
Michael Smith: [T]hat meeting [is the equivalent of] an NSC meeting. That is its significance, that is its equivalent. It is highly damning and some of the self-serving nonsense from people who should know better in some, and it is now only some, of the U.S. media is frankly depressing....
Michael Smith: There are number of people asking about fixed and its meaning. This is a real joke. I do not know anyone in the UK who took it to mean anything other than fixed as in fixed a race, fixed an election, fixed the intelligence. If you fix something, you make it the way you want it.... [A]s for the reports that said this was one British official. Pleeeaaassee! This was the head of MI6. How much authority do you want the man to have? He has just been to Washington, he has just talked to George Tenet. He said the intelligence and facts were being fixed... cooked to match what the administration wanted it to say to justify invading Iraq....
Michael Smith: [L]ook I am not some mealy-mouthed left-wing apologist. I vote Conservative in elections for parliament and Liberal-Democrat (the term Liberal does not have the same connotations over here) in the local elections. I actually backed the idea of the war. I have just finished a book on an American military unit which is very admiring of that unit. I cant go into details as it is not published until March. I am just a reporter doing my job.... The information in the documents is damning enough. I don't believe that Republicans want US soldiers to die for no good cause in an insurgency that could have been avoided anymore than Democrats do. This isn't about politics. It's about common sense and honesty....
Michael Smith: Thank you for giving me the chance to answer this question. I am very pro-defence you're right. All right-thinking people should be. Saddam Hussein might not have been the threat he was painted but there are plenty out there who would be given the chance.... Bin Laden is a legitimate target, Iraq, even an Iraq led by Saddam Hussein, was not. This was an illegal war but the most criminal part of it all was the lazy, arrogant way they went into it. (British tanks crossing the start lines, in a war being fought about WMD, did not even have any chemical or biological filters fitted because the Ministry of Defence failed to buy them in time.) Just look at all those memos again.... Just look at the lack of preparation, look how right all those experts who said it would all turn out badly were and then wonder how many British and American soldiers died because those politicians were too arrogant to take the advice of the experts...
Oil prices on their way back up:
WSJ.com - Crude Prices Hit Record Highs On Fears of Low Gas Supplies: 'This market is being driven by fear of supply shortages in the future, and fear of increased demand outstripping supply in the fourth quarter,' said Anthony Lerner, manager of energy derivatives for Arc Oil LLC, a Stamford, Conn., brokerage firm. Hedge funds led buying in crude and refined products, traders said, with many betting oil prices would keep climbing toward $60 a barrel. 'This is really being driven by hedge-fund money,' Mr. Lerner said. 'We're seeing new hedge-fund money coming in every day. Energy is the hot market and hedge funds are allocating money for it.'
Benchmark light, sweet crude oil prices for July settled at $58.47 a barrel, up $1.89 on the New York Mercantile Exchange, topping the April 1 record-high settlement of $57.27 a barrel. At its intraday high, crude touched $58.60, also beating the all-time record high. Crude's back months traded at a hefty premium to July, with the December contract hitting the highest price ever registered for a Nymex oil contract at $60.40 a barrel.... Oil prices have gained nearly $5 a barrel this week, buttressed by rising gasoline and heating-oil prices. U.S. gasoline inventories, while adequate, have fallen in the past two weeks, while distillate stocks, which include heating oil and diesel fuel, remain at below-average levels.
From the Carpetbagger Report:
Earlier this week, Cheney told CNN's Larry King that the insurgency in Iraq is 'in the last throes,' and insisted that violence in the country 'will clearly decline.' It's prompted some to suggest that the vice president is, unfortunately, delusional.
At yesterday's press briefing, ABC correspondent Terry Moran asked McClellan to explain what Cheney meant and why the nation should believe him. It didn't go well.
Q Scott, is the insurgency in Iraq in its 'last throes'?
McClellan: Terry, you have a desperate group of terrorists in Iraq that are doing everything they can to try to derail the transition to democracy. The Iraqi people have made it clear that they want a free and democratic and peaceful future. And that's why we're doing everything we can, along with other countries, to support the Iraqi people as they move forward%u2026.
Q But the insurgency is in its last throes?
McClellan: The Vice President talked about that the other day %u2014 you have a desperate group of terrorists who recognize how high the stakes are in Iraq. A free Iraq will be a significant blow to their ambitions.
Q But they're killing more Americans, they're killing more Iraqis. That's the last throes?
McClellan: Innocent %u2014 I say innocent civilians. And it doesn't take a lot of people to cause mass damage when you're willing to strap a bomb onto yourself, get in a car and go and attack innocent civilians. That's the kind of people that we're dealing with. That's what I say when we're talking about a determined enemy.
Q Right. What is the evidence that the insurgency is in its last throes?
McClellan: I think I just explained to you the desperation of terrorists and their tactics.
Q What's the evidence on the ground that it's being extinguished?
McClellan: Terry, we're making great progress to defeat the terrorist and regime elements. You're seeing Iraqis now playing more of a role in addressing the security threats that they face. They're working side by side with our coalition forces. They're working on their own. There are a lot of special forces in Iraq that are taking the battle to the enemy in Iraq. And so this is a period when they are in a desperate mode.
Q Well, I'm just wondering what the metric is for measuring the defeat of the insurgency.
McClellan: Well, you can go back and look at the Vice President's remarks. I think he talked about it.
Q Yes. Is there any idea how long a 'last throe' lasts for?
McClellan: Go ahead, Steve...
Not news, but still worth noting:
WSJ.com - U.S. Current-Account Deficit Hit $195 Billion in 1st Quarter: The Commerce Department said the current-account deficit totaled $195.1 billion in the January through March period, up from a revised $188.4 billion in the fourth quarter of 2004. The shortfall was equal to 6.4% of U.S. gross domestic product. 'Barring a growth miracle outside the U.S., or a slump in U.S. demand that does not spill over to the rest of the world (neither of which seems very likely in the near term), the U.S. current account deficit seems destined to continue to widen,' Joshua Shapiro, chief U.S. economist at MFR Inc.
It writes, about its excellent Hog Bay Notebook program:
Macworld, Four Stars: We've just had our first (I think) mention in Macworld magazine. I was just wandering through the bookstore checking out the latest issues (I mean reading my own copy that I subscribe too) when I saw an article on notebooks and outliners. I quickly browsed the article and saw the usual suspects (OmniOutliner, Circus Ponies, and NoteTaker) and grrrg... again no Hog Bay Notebook.
But yeah! I was wrong...
Hog Bay Notebook was listed in the article right along with the big boys, but with the major heading 'Notebook' since 'Hog Bay Notebook' is to hard to fit anywhere. Maybe it's been mentioned all along and I've just been missing it. Hopefully the next version 'Forest' will earn the elusive fifth star and have a more distinctive title so I recognize it when I see it.
Thanks Macworld, we will eat out tonight!
These numbers look pretty large to me--not in terms of effects on the unemployment rate, but in terms of the pace of structural change and the possible effect on wages:
FT.com / World - Anxiety over offshoring: By Peter Marsh: Debate about "Coffshoring" of service jobs to low-cost countries has reached fever pitch in the past few years.... A report from the McKinsey Global Institute... says the fears are overblown. Even though the supply of young people in low-wage economies with good educational qualifications is likely to increase substantially in the next decade, demand for employing them in their own nations in jobs transferred from rich countries is likely to be muted, the report says. On top of this, many young professionals in the 28 low-wage countries studied by the institute even though they may have university degrees lack the work-related experience and aptitude that foreign companies are looking for.
"A lot of developing countries are churning out new graduates but not giving enough thought to the practical skills they will need if they are to work for multinational companies," says Diana Farrell, director of the institute. The report indicates that even though many manufacturing jobs have migrated from rich countries to emerging economies over the past 10 years, due to cost-cutting pressure, the service sector is unlikely to see the same trend....
The degree to which individual jobs can be offshored depends on how "customer-facing" they are. In retailing... 3 per cent... in engineering and finance... 52 per cent and 31 per cent respectively. On the supply side, there is no doubt about the large number of potentially suitable candidates for service jobs done "remotely" in low-wage nations... 33m young professionals with degrees and up to seven years' work experience in fields such as engineering, finance and information technology in the 28 countries... compare[d] with just 15m in the rich countries....
The study says that in service support jobs covering fields such as administration only 2 per cent of all the notionally qualified people in the emerging economies will find work in multinationals in 2008. In analyst jobs and finance, the comparable figures are 3 per cent and 5 per cent respectively. However, the proportion is much higher in engineering, where it reaches 63 per cent.
Mark Thoma notes the very nice Christiano, Eichenbaum, and Evans paper in the February Journal of Political Economy:
Economist's View: The Dynamic Adjustment to Monetary Shocks: A paper in the February 2005 issue of the Journal of Political Economy by Lawrence J. Christiano and Martin Eichenbaum of Northwestern University, the NBER, and Federal Reserve Bank of Chicago, and Charles L. Evans of the Federal Reserve Bank of Chicago entitled "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy" provides evidence on this issue:
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, JPE: This paper seeks to understand the observed inertial behavior of inflation and persistence in aggregate quantities. To this end, we formulate and estimate a dynamic, general equilibrium model that incorporates staggered wage and price contracts. The model does a very good job of accounting quantitatively for the estimated response of the U.S. economy to a policy shock. Specifically, the model generates an inertial response in inflation and a persistent, hump-shaped response in output after a policy shock. In addition, the model generates hump-shaped responses in investment, consumption, employment, profits, and productivity, as well as a small response in the real wage. Also, the interest rate and the money growth rate move persistently in opposite directions after a monetary policy shock. A key finding of the analysis is that stickiness in nominal wages is crucial for the model's performance. Stickiness in prices plays a relatively small role.
The only problem I find with the paper--and it's not one that one can fix at all easily or well--is that it is not completely clear what a "monetary shock" really is.
Kevin Drum finally realizes that the Bush family are scum:
The Washington Monthly: JEB BUSH'S CHRISTIAN CHARITY.... I wasn't going to blog about this, but I can't myself. This is truly beyond belief:
Gov. Jeb Bush said Friday that a prosecutor has agreed to investigate why Terri Schiavo collapsed 15 years ago, citing an alleged time gap between when her husband found her and when he called 911.
.....In a letter faxed to Pinellas-Pasco County State Attorney Bernie McCabe, the governor said Michael Schiavo testified in a 1992 medical malpractice trial that he found his wife collapsed at 5 a.m. on Feb. 25, 1990, and he said in a 2003 television interview that he found her about 4:30 a.m. He called 911 at 5:40 a.m.
'Between 40 and 70 minutes elapsed before the call was made, and I am aware of no explanation for the delay,' Bush wrote. 'In light of this new information, I urge you to take a fresh look at this case without any preconceptions as to the outcome.'The Bush children have always been distinguished by a fiery unwillingness to back down combined with an almost bestial pursuit of revenge against anyone who has ever crossed them. They don't want to beat their opponents, they want to destroy them.
This, though, simply beggars the imagination. What kind of human being would keep a vendetta like this alive at this point?
A member of the Bush family, Kevin.
Louis Uchitelle reports:
Globalization: It's Not Just Wages - New York Times: Who is the biggest exporter of German-made washing machines to the United States?.... Whirlpool... pays high-wage workers to produce expensive front-loading washing machines.... Never mind the higher labor cost - $32 an hour, including benefits, versus $23 in the United States. The necessary technology existed in Germany when Whirlpool decided to sell front-loading washers to Americans. So did a trained work force and a Whirlpool factory already making a European version of the front loader. 'We were able to expand the capacity in Germany at a very incremental investment,' said Jeff M. Fettig, Whirlpool's chairman and chief executive. 'It was the fastest way to the American market.'
Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries. But the issue is more complex... a relatively new form of globalization that emphasizes first-rate centers of production and design in various countries - including the United States. Whirlpool's global network... microwave ovens engineered in Sweden and made in China for American consumers; stoves designed in America and made in Tulsa, Okla., for American consumers; refrigerators assembled in Brazil and exported to Europe; and top-loading washers made at a sprawling factory in Clyde, Ohio, for American consumers, although some are sold in Mexico....
At the moment, the job growth and the expansion are mainly abroad. As its turns out, more than 40 percent of the nation's imports are from the overseas subsidiaries of American companies.... The 'global production footprints,' as Ms. Farrell calls them, draw on a growing network of first-rate suppliers in Mexico, China and elsewhere that allow manufacturers to go beyond mere assembly overseas into complex production. And the investment, once made, becomes an ancho... its factory in Schorndorf, Germany, which Whirlpool acquired in 1991 with the purchase of the appliance operations of Philips N.V. for more than $1 billion. Almost two million of the front loaders have been sold in the United States since 2001, at $1,200 apiece....
Whirlpool's executives take issue with analysts who declare that low foreign wages... will keep the global production networks mobile.... [T]he manpower required to make its appliances is declining.... One hour of labor, for example, goes into each of the 20,000 top-loaders coming off the line daily at Clyde, down from 2.5 hours five years ago.'We may pay $23 an hour in Clyde, including benefits, versus $3 in Mexico versus $1 in China,' Mr. Fettig said. 'But for one hour of labor, the difference won't begin to cover the shipping costs, let alone the investment it would take to build a new factory in Mexico or a new factory in China.'
The Clyde factory, which employs 2,000 people, is billed as a jewel in Whirlpool's production network - an efficient, partly automated operation whose experienced workers possess a 'tribal knowledge' of their product that pays off in quality and cost saving. But if the Clyde factory did not already exist, Mr. Fettig would not put it there. 'I'd probably put it in Mexico,' he said....
In the last 15 years, suppliers have set up shop in growing numbers near the new production centers in China, India, Southeast Asia and Latin America. Without their presence, Whirlpool says, it would not have been able to concentrate the manufacture of microwave ovens in southern China. 'It is much more difficult to operate outside of an industrial country without that supplier base,' said Mark Brown, senior vice president at Whirlpool for global sourcing. The concentration of suppliers in northern Mexico helps explain why Whirlpool has decided to produce a less-costly front-loading washing machine at its existing manufacturing complex in Monterrey. The high-end, $1,200 model will continue to come from Schorndorf. The smaller Mexican front loaders, on the other hand, will be for the majority of American consumers and will be priced several hundred dollars less, too low to absorb the $50 in freight to cross the Atlantic, the company says.... Because of the shipping cost, we knew we had to make them in Mexico or America, and since the suppliers were already in Mexico, we thought we might as well go there.... Mexican engineers, foremen and supervisors have gone to the German plant for 18 months of training....
Whirlpool differentiate[s] between skills that can be taught in a few weeks or months, and those that take longer to acquire. The harder-to-acquire skills anchor the one last Whirlpool factory in Benton Harbor, where the company got its start in 1911 and still has its headquarters... kept open a parts factory that makes the steel gears that are the heart of the washing machine's agitation mechanism. The machining to make the gears, and the nickel plating to prevent corrosion require a skill level not easily duplicated. 'You can find lots of machine shops and some plating operations, but you rarely find the two together,' Jim F. Spicer, the plant manager, said. 'And when you do find them together, you almost never find the volumes that we require.'...
Currently at the top of the pile:
Charles Kenny (2005), "Why Are We Worried About Income? Nearly Everything that Matters is Converging," World Development 33:1, pp. 1–19.
Summary. — Convergence of national GDP/capita numbers is a common, but narrow, measure of global success or failure in development. This paper takes a broader range of quality of life variables covering health, education, rights and infrastructure and examines if they are converging across countries. It ﬁnds that these measures are converging as a rule and (where we have data) that they have been converging for some time. The paper turns to a discussion of what might be driving convergence in quality of life even as incomes diverge, and what this might mean for the donor community.
Notes: URAP Project 2: Fall 2005: Analyzing Marty Weitzman, "A Unified Bayesian Theory of Equity 'Puzzles'"
Time to start setting out potential projects for undergraduate research assistants for the forthcoming fall...
Here's another possibility: one that requires somebody with enough statistics to not be scared of moment-generating functions, enough math to not be scared of stochastic Taylor expansions, and enough programming skills to run a number of Monte Carlo simulations:
Over the past century in the United States, the equity premium has been on average 5% per year. Over the past century in the United States, the standard deviation of a diversified portfolio of equities has--accounting for apparent mean reversion--compounded at a rate corresponding to about a 10% standard deviation per year.
This means that if you buy-and-hold stocks for sixteen years, you have a "t statistic" of 2: under a normal distribution, your portfolio will outperform the alternative risk-free portfolio 97.5% of the time. If you buy-and-hold stocks for thirty-six years, you have a "t-statistic" of 3: 99.5% of the time your portfolio will outperform the risk-free portfolio.
This is the asset market version of the equity-premium puzzle. Why don't agents--at least agents with secure other forms of wealth that they can pledge--borrow at nearly the risk-free rate and invest in stocks? Why don't they do this on a large enough scale to drive the risk-free rate up and the return on equities (and the equity premium) down, and so avoid the paradox of a market where it looks like there is a thirty-six-year portfolio strategy that earns you a sixfold profit on your original long position (and a sixty-fold profit if you were able to borrow 90% of your original investment)?
Now comes Marty Weitzman (2005) with a very impressive and well-worked out paper on the importance of taking into account our ignorance of the structure of the economy. His is the observation that investors do not know but have to estimate the parameters of the economy's structure, and that under Constant Relative Risk Aversion utility this structural uncertainty adds fat tails to the subjective return distribution and could easily account for the equity premium and for related puzzles.1
- Is this a reformulation of Rietz (1988)--and thus subject to the same critiques?
- Is this a reformulation of Geweke (2001)--and thus primarily a statement about the limited usefulness of CRRA utility (with its asymptote at Wealth = 0) in addressing economic questions?
- Or is this a statement about the way the world works--a successful assertion that our ignorance about the true structure of the economy is such that rational investors with reasonable preferences are right to be at least somewhat shy of equities?
Rietz's (1988) answer to the equity premium puzzle was this: a long, fat lower tail to the return distribution. A small probability of very bad things happening to stock returns could support both (a) a relatively small sample variance of returns, and (b) rational aversion to large-scale stock ownership large enough to produce the observed equity premium. The question that Rietz was unable to answer was: "What exactly are these very bad things?" Remember that the equity premium is a premium relative to the return on relatively short-period U.S. Treasury securities. Any macroeconomic factor to drive the equity premium must therefore be a factor that leaves the real value and real return on short-period U.S. Treasury securities unaffected. But almost all true macroeconomic disasters that could halve or do worse to the real value of equities are likely to produce at the very least rapid and substantial inflation, if not confiscatory taxes on or outright repudiation of government bonds.
Geweke's (2001) observation was that the CRRA utility function is an extraordinarily fragile tool when confronted with alternative distributions than the Gaussian Normal. We use CRRA utility because it buys us extraordinary analytical simplicity at the price of accepting:
lim(x->0) U(x)=-∞, U'(x)=+∞
but we are not thereby committed to riding the taxi of this vertical asymptote at Wealth=0 to its final destination. The CRRA implication that investors limit the size of their leveraged equity positions because bankruptcy is seen as infinitely painful does not appear to correspond with our world.
The third possibility is that Weitzman (2005) really is a profoundly powerful statement about the world: that structural uncertainty, even conditional on the requirement that whatever bad news comes does not materially affect the real rate of return on relatively short-term U.S. Treasury securities, combined with plausible preferences and risk aversion would lead us to expect a considerable equity premium.
It is pretty clear to me that Weitzman (2005) is saying considerably more than Rietz (1988)--that it is either the second or the third. It's clear to me that it's both, but I'm not sure of the weights. I'm not at all sure whether it's primarily the second (in which it is a very useful illustration of the fragility of CRRA-based models, and thus in most part, as Daniel Davies puts it, "a fact about applied math"), or primarily the third (in which case it is the solution to a puzzle that has stood effectively unanswered for a generation).
1Note: Weitzman's paper does not seem to me to deal with leverage properly. The re in the Consumption CAPM isn't the return on equities, but a return on a portfolio that is a claim on output as a whole--say, 60% labor income, 10% real estate, 20% bonds, 20% stocks... an equity premium of 2-3% per year instead of 5-6% per year...
How fat do the tails have to get to generate a large equity premium for preferences that do not regard bankruptcy as infinitely painful? I need somebody to run some simulations and calculate a bunch of Taylor moment expansions for different distributions
John Geweke (2001), "A Note on Some Limitations of CRRA Utility," Economics Letters 71, 341-345.
Rajnish Mehra and Edward Prescott (2003), "The Equity Premium in Retrospect," chapter 14 in Constantinides, Harris, and Stulz, eds., Handbook of the Economics of Finance (Amsterdam: Elsevier B.V.).
Rajnish Mehra and Edward Prescott (1985), "The Equity Premium: A Puzzle," Journal of Monetary Economics.
Tom Rietz (1988), "The Equity risk premium: a solution." Journal of Monetary Economics 21: 117-132.
Martin Weitzman (2005), "A Unified Bayesian Theory of Equity 'Puzzles'" (Cambridge: Harvard).
Sadly, No! notes:
Sadly, No!: Pretty much as I predicted, except that the other party won Senator Mel Martinez, the Florida Republican who pressed the case most, said he has since had second thoughts about Congress's involvement: "'I really probably come to the view this has to be more resolved at the state level, seems like the kind of issue the state courts deal with,' Mr. Martinez said."
Senator Martinez, March 16, 2005: "[M]any media reports have indicated that she is in a persistent vegetative state. There is evidence to the contrary. She is not on a respirator or other 24-hour-a-day medical equipment. She responds to voices, touch, and the presence of people. She can smile, cry, and establish eye contact. Last week, I introduced my first piece of legislation in the Senate: The Incapacitated Person's Legal Protection Act of 2005. This bill would ensure that incapacitated individuals -- like Terri Schiavo -- would have their due-process rights of habeas corpus when a court orders their death.... In essence, this legislation would give incapacitated individuals like Terri, who have been given what amounts to a death sentence by the courts, federal habeas corpus protections..."
Think of it: the first bill he ever introduced, and now he thinks the issue should never have been made a federal case at all.
Paul McLeary of CJR Daily is annoyed:
CJR Daily: Archives: This morning the New York Times' Glen Justice... writes that:
Expenses began increasing in 2004, when Mr. DeLay was admonished by the House ethics committee, and three of his political operatives were indicted in Texas. They face charges that include money laundering and raising illegal corporate contributions for a political action committee created by Mr. DeLay. The prosecutor, a Democrat, has not ruled out charges against Mr. DeLay
The prosecutor, Ronnie Earle, is indeed a Democrat, and an elected official -- a relevant part of the story... his record shows that he has prosecuted far more Democrats than Republicans in his 27-year tenure as Travis County, Texas, District Attorney.
The Christian Science Monitor pointed this out in December 2004, writing that 'Earle has prosecuted 12 Democrats and three Republicans' during his tenure. Earle... told Lesley Stahl of CBS's 60 Minutes... '15 cases involving elected officials, that my office has prosecuted. ... Of the 15, 12 were Democrats; three were Republican.'... [T]he Times is hardly alone in fingering Earle as a Democrat, while omitting his record.
In the final analysis, a little perspective is in order. One sentence in a news story isn't going to tilt the case one direction or the other, but significant omissions like this may well influence the court of public opinion -- and they don't reflect well on the basic reporting skills of those involved.
So does Glen Justice lack basic reporting skills? Or does he think that hinting that Ronnie Earle is on a positive witch hunt will gain him more cooperation from administration sources in the future? I would genuinely like to know which it is.