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July 2005

A Few Unemployment Details

Barry Ritholz talks about unemployment:

The Big Picture: Drilling beneath the BLS Headlines : One of the fascinating things about the US Goverment's data producers... is that they don't seem to hide anything.... Its all there if you have the temerity to dig.... The amazing thing is that most people don't bother... economists, journalists, strategists and fund managers who trade off of this data. So let's do a little digging....

  • Once again, we see the Birth Death adjustment -- thats the hedonic guesstimate which supposes the number of new jobs created by businesses so new they have yet to be measured -- actually exceeded the number of new jobs. This month, its 184k. That's about on par with last June's B/D adj....
  • Household survey shows another 240,000 people left the Labor Force last month.... We still see unemployment going down because more people are dropping out of the labor than obtaining new jobs. That's hardly cause for celebration.
  • U-6, the broadest measure of unemployment, actually ticked up to 9.0%. This measure includes: Total unemployed, plus discouraged workers, plus all other marginally attached workers, plus total employed part time for economic reasons.
  • Lastly, here's an oddity I just noticed: The jobless rates by race shows that Whites are no longer enjoy the lowest unemployment rate.... Asians: 4.0%. Whites 4.3%. Hispanics 5.8%. Blacks 10.3%...

Mark Thoma Finds William Poole and Milton Friedman Thinking About the Greenspan Succession

Mark Thoma writes about people's preliminary thoughts on the Greenspan Succession--not people but processes. Noteworthy is Milton Friedman's shift of ground from rigid quantity targets--as things that ought to produce good results and that cannot be gamed--toward some version of inflation-rate targeting:

Economist's View: William Poole and Milton Friedman on Inflation Targeting and the Post-Greenspan Fed: Interesting comments by St. Louis Federal Reserve Bank President William Poole on his support of inflation targeting, the transition to a new Fed chair and how that might affect the Fed’s credibility, his discomfort with language such as “measured,” and other matters. Comments by Milton Friedman in support of inflation targeting are also noteworthy given his long-standing advocacy of quantity targets...

A paragraph from Poole:

As far as I know, there has been no comprehensive study of the characteristics of the Greenspan regime. To extend the regime will require an understanding of just what the regime is. My purpose is to outline some thoughts on that issue by discussing four key characteristics of the Greenspan regime. First on my list is low-inflation credibility--that is, market confidence that the Federal Reserve will conduct policy to yield low inflation averaged over any span of a few years. The other three characteristics of the Greenspan regime are successful crisis management, empirical understanding of the economy, and predictability of monetary policy. I'll comment on all four, but concentrate on predictability issues as these are, I believe, the most interesting of the characteristics of the Greenspan regime...


We Mourn with the Citizens of London

We mourn with the citizens of London.

We pledge to help track down and kill the perpetrators, the planners, and their helpers.

We note that it is 46 months after September 11, 2001, and that Osama bin Laden is still alive and at liberty. That somebody can plan September 11, 2001 and remain alive and at liberty provides powerful encouragement to those who think of following in his footsteps--including those who planned, aided, and carried out today's atrocity in London.

More attention to Osama bin Laden and his ilk, please. And less attention to using Osama bin Laden as a pretext for launching hair-brained neoconservative schemes, please.


Open CRS Network - CRS Reports for the People

The Open Congressional Research Service Website:

Open CRS Network - CRS Reports for the People: About Open CRS: American taxpayers spend nearly $100 million a year to fund the Congressional Research Service, a "think tank" that provides reports to members of Congress on a variety of topics relevant to current political events. Yet these reports are not made available to the public in a way that they can be easily obtained. A project of the Center for Democracy & Technology through the cooperation of several organizations and collectors of CRS Reports, Open CRS provides citizens access to CRS Reports already in the public domain and encourages Congress to provide public access to all CRS Reports....


The Stock Market Suffers from Money Illusion

Randy Cohen politely inquires why I haven't read his--excellent--Modigliani-Cohn paper in the QJE.

Ummm... Indolence? Forgetfulness?... It is embarrassing because it is directly on point to what I regard as one of my core competences, and because I now remember that Bob Hall was praising it at lunch at the Women's Faculty Club in... April?

You may be interested to know that Tuomo Vuolteenaho did not feel his paper with John Campbell on Modigliani and Cohn closed the case. The problem was that although their results are compelling, they admit of a plausible rational explanation: high-inflation periods are times of high risk, and so the equity premium is rationally high at those times. To test this possibility, Tuomo, Christopher Polk and I wrote the attached paper, which is in the May 2005 QJE. The paper takes advantage of the fact that if the equity premium is high for risk-related reasons, then there is a cross-sectional implication: high-beta stocks should greatly outperform low-beta stocks in these periods. On the other hand, if M-C are right the inflation-driven mispricing will apply to all stocks equally, causing all stocks to be equally underpriced. The tests clearly show the latter is the case. This provides powerful confirmation of M-C, since it relies on a prediction about the relative performance of high- and low-beta stocks which was almost certainly not considered by M-C when they formulated their hypothesis.

As a side benefit, the paper shows that the basic failure of the CAPM (the failure of high-beta stocks to have much higher returns than low-beta) is explained by the M-C hypothesis. Indeed this failure only occurs in the high-inflation periods of the past century; the rest of the time the beta-return relationship works as the CAPM predicts.

Here's the abstract:

Randolph B. Cohen, Christopher Polk, and Tuomo Vuolteenaho (2005), "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," Quarterly Journal of Economics (May): Modigliani and Cohn [1979] hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors towards risk. Our empirical resuts support the hypothesis that the stock market suffers from money illusion.

There is, I think, one potential hole: the possibility that times of high inflation are times of high perceived political risk--of confiscatory corporate taxation, for example--but that this risk has a very different distribution across corporations than "normal" beta-systematic risk.


More Reason Not to Buy Anything from Microsoft

Company behaving very badly:

Boing Boing: MSFT acquires spyware firm, changes antispyware app to ignore its products: Microsoft is rumored to be acquiring a spyware company called Claria (known for its spyware product, Gator). They have since updated Windows' antispyware app so that it advises users to ignore Gator spyware. Spyware researchers have noticed that the Windows antispyware application has downgraded Claria's Gator detections and changed the recommended action from 'quarantine' to 'ignore.'...


Why Oh Why Can't We Have a Better Press Corps? (Jonathan Weisman Leaves Ezra Klein Flabbergasted Edition)

Aha. A correspondent writes that Daniel Drezner does not have a reading comprehension problem, he just didn't read far enough to notice that the body of the article contradicts its lead paragraphs:

Twelve years ago, amid heated rhetoric over job losses and heavy union pressure, the House passed the North American Free Trade Agreement with 102 Democratic votes. This month, as President Bush pushes the far less economically significant Central American Free Trade Agreement, he will be lucky to get more than 10.

A long, slow erosion of Democratic support for trade legislation in the House is turning into a rout, as Democrats who have never voted against trade deals vow to turn their backs on CAFTA. The sea change -- driven by redistricting, mounting partisanship and real questions about the results of a decade's worth of trade liberalization -- is creating a major headache for Bush and Republican leaders as they scramble to salvage their embattled trade agreement. A trade deal that passed the Senate last Thursday, 54 to 45, with 10 Democratic votes, could very well fail in the House this month.

But the Democrats' near-unanimous stand against CAFTA carries long-term risks for a party leadership struggling to regain the appearance of a moderate governing force, some Democrats acknowledge. A swing toward isolationism could reinforce voters' suspicions that the party is beholden to organized labor and is anti-business, while jeopardizing campaign contributions, especially from Wall Street.

Without control of the White House or either chamber of Congress, the "competition for the microphone" has intensified in the party, said Dave McCurdy, a former Democratic congressman from Oklahoma who heads the Electronic Industries Alliance. And the moderates are losing...

A lead that did a better job of telling the real story would make these points:

(i) Bush makes trade policy subservient to the intellectual-property interests of the drug companies, (ii) Bush shows great concern for CAFTA's effect on sugar-baron campaign contributor and no concern for potential losers among American workers, (iii) Bush doesn't even consult the free-trade Democrats (like my own representative Ellen Tauscher) whose votes he needs to pass CAFTA, but instead (iv) tries to smear them as anti-business in order to drive them into his corner, and (v) it doesn't seem to be working as the overwhelming majority of Democrats who are usually safe votes for trade agreements balk.


UPDATE:Ezra Klein's reads it, and his mind boggles as he confronts this Jonathan Weisman special from the Washington Post:

Ezra Klein: Why Is This Trade Bill Different Than All Other Trade Bills? :

This, from the Washington Post's big piece on CAFTA, strikes me as a very strange paragraph:

But the Democrats' near-unanimous stand against CAFTA carries long-term risks for a party leadership struggling to regain the appearance of a moderate governing force, some Democrats acknowledge. A swing toward isolationism could reinforce voters' suspicions that the party is beholden to organized labor and is anti-business, while jeopardizing campaign contributions, especially from Wall Street.

First, what's up with "acknowledge"? Doesn't that mean to recognize a truth? Aren't newspapers supposed to pretend that there is no truth, or at least that they don't know what it is? So called liberal media indeed. Second, is there really some voter roundtable desperately puzzling out whether Democrats are too beholden to Big Labor? As I remember it, voters didn't exactly reward us for passing NAFTA in 1993. 1994 was not our finest year.

The rest of the article is the usual spin from the usual suspects, decrying Democratic swings from moderation and divining the deepest, most hidden, and surprisingly sophisticated values judgments being made by the average voter. Of course, no mention is given to the many polls showing the public's split on NAFTA. The article simply speaks to those who know that on a truer, more subconscious level, the American voter flees the protectionist politician...

The fact that the White House likes a lead that says:

Democrats are not voting for Bush's CAFTA and are thus demonstrating that they are not responsible: isolationists, union puppets, not to be trusted with office, extremists.

is not a reason for a *Post* editor to let such lead paragraphs into the newspaper.


London Pride

Daniel Davies writes:

Crooked Timber: Noel Coward was a fine Englishman:

London Pride has been handed down to us.
London Pride is a flower that is free.
London Pride means our own dear town to us,
And our pride it for ever will be.

Oh Liza! See the coster barrows,
Vegetable marrows and the fruit piled high.
Oh Liza! Little London sparrows,
Covent Garden Market where the costers cry.

Cockney feet mark the beat of history.
Every street pins a memory down.
Nothing ever can quite replace
The grace of London Town.

There's a little city flower every spring unfailing
Growing in the crevices by some London railing,
Though it has a Latin name, in town and country-side
We in England call it London Pride.

London Pride has been handed down to us.
London Pride is a flower that is free.
London Pride means our own dear town to us,
And our pride it for ever will be.

Hey, lady! When the day is dawning
See the policeman yawning on his lonely beat.
Gay lady! Mayfair in the morning,
Hear your footsteps echo in the empty street.

Early rain and the pavement's glistening.
All Park Lane in a shimmering gown.
Nothing ever could break or harm
The charm of London Town.

In our city darkened now, street and square and crescent,
We can feel our living past in our shadowed present,
Ghosts beside our starlit Thames who lived and loved and died
Keep throughout the ages London Pride.

London Pride has been handed down to us.
London Pride is a flower that's free.
London Pride means our own dear town to us,
And our pride it for ever will be.

Grey city! Stubbornly implanted,
Taken so for granted for a thousand years.
Stay, city! Smokily enchanted,
Cradle of our memories and hopes and fears.

Every Blitz your resistance toughening,
From the Ritz to the Anchor and Crown,
Nothing ever could override
The pride of London Town.


The Psychotic Creeps of Fox News (Why Oh Why Can't We Have a Better Press Corps?)

Duncan Black follows the psychotic creeps at Fox News so we don't have to:

John Gibson of Fox: [P]eople have been saying to me, "Wasn't it great they didn't pick Paris?" And I've been saying, "No, no, no."

Paris was exactly the right place to pick and the Olympic committee screwed up. Why? Simple. It would have been a three-week period where we wouldn't have had to worry about terrorism.

First, the French think they are so good at dealing with the Arab world that they would have gone out and paid every terrorist off. And things would have been calm.Or another way to look at it is the French are already up to their eyeballs in terrorists. The French hide them in miserable slums, out of sight of the rich people in Paris.

So it would have been a treat, actually, to watch the French dealing with the problem of their own homegrown Islamist terrorists living in France already.... But, alas, they picked London. I like the Brits. I like London. I hate to see them going through all this garbage when it would have been just fine in Paris.

C'est la vie. Goes to show the Olympic committee doesn't recognize the perfect opportunity when it presents itself.

That's My Word.


The Stars of Casablanca

It is a fact that we are nine minutes into the movie "Casablanca" before we first catch sight of Humphrey Bogart. And we are twenty-five minutes into the movie before we catch sight of Ingrid Bergman, or of the third headliner, Paul Henried.

This means that for the first nine minutes, first-time viewers have--unless they are keyed-in enough to 1940s Hollywood to no that because no star has yet appeared they are being held in suspended animation--no clue as to what the movie is going to be about. From minute ten on, it is clear that the movie is going to be about Humphrey Bogart--Rick Blaine--and what happens to him. But it is not until almost half an hour is gone that we have the first beginnings of an inkling of what has happened and will happen to him, as--in Rick Blaine's words--"Of all the gin joints in the world, she had to walk into mine."

Would anything like that happen today? Would anyone in Hollywood today construct a movie in which the female lead is offstage for nearly the first half-hour? Would anyone in Hollywood today construct a movie in which the first ten minutes are starless? The first ten minutes--Casablanca under Vichy--are marvelous, perhaps in large part because the camera's attention is fixed on supporting players like Peter Lorre, Claude Raines, and Sidney Greenstreet. The next fifteen minutes--Rick Blaine: the man who sticks his neck out for nobody--are brilliant too as character study and puzzle-posing.

Now I'm curious. Anybody have any examples of "modern" Hollywood movies in which the stars are kept offstage for so long in the beginning?


Charismatic Fauna

There are fifteen quail chicks--and two hens--on the road, milling about and peeping.

The California quail is "threatened" (although we must have some 25 or so on our property alone).

The California quail is "threatened" because it nests on the ground. Its evolutionary strategy appears to be to nest on the ground, have lots of chicks, and hope that the local predators are sated before they have eaten all the chicks. The problem is that we East African Plains Apes have added a lot of local predators--cats and dogs--to the California mix.

Its sole advantages are (a) that even young chicks can run quite fast, and (b) that we have lots of blackberry bushes with thorns that make up a fearsome barrier to coyotes, raccoons, cats, dogs (but not rats). The adults are amazing runners, and can fly--although they do so only at the last extremity.

We won't speak of the one among our adult male quails that has two legs but only one foot. Its days appear quite numbered...


The "Hold Your Nose and Vote for CAFTA" Caucus

Bruce Bartlett and Tyler Cowen are the "hold your nose and support CAFTA" caucus:

Bruce Bartlett: ...the Central American Free Trade Agreement. The White House is putting heavy pressure on Congress to support this agreement, which it should. But one cannot help feeling that the Bush administration’s own missteps on trade are what have gotten it to the point.... The problem for many free traders, like myself, is that the Bush administration has played politics with trade since day one. This has done serious damage to the fragile alliance that still supports free trade. The administration imposed utterly unjustified tariffs on steel, torpedoed the Doha round of multilateral trade talks by supporting a huge increase in agriculture subsidies, and has never missed an opportunity to demagogue China for all our trade woes.

Having destroyed the prospects for a multilateral trade agreement, which was primarily to be about eliminating agriculture subsidies, the Bush administration has tried to salvage some semblance of a free-trade agenda by pursuing bilateral trade agreements... the results are not very great.... Jagdish Bhagwati, America’s leading trade economist, has gone so far as to call [bilateral] free trade agreements “a sham” that are actually undermining the world trading system.... A 2003 study by the Congressional Budget Office found that the economic potential of bilateral agreements is very limited....

Indeed, it would appear that foreign policy is the best reason to support CAFTA. It is clearly in this country’s interest to encourage economic growth and reform in Central America even if the economic benefit for us is minimal. It also keeps alive the principle of free trade, which this administration has done so much to undermine....

Free traders have no choice but to support CAFTA. Its failure would be seen as a victory for protectionism and would crush the hopes of economic reformers throughout Latin America. I agree with economist Tyler Cowen: “This is probably a treaty we should pass, but it is not a treaty we should be proud of.”...


A Real Ownership Society

Matthew Yglesias calls for a real Ownership Society:

He writes:

TPMCafe || Capital and Inequality: [Such] policies... would help curb inequality in the rather straightforward way that they involve net transfers of money from richer people to poorer people.... [W]hy... would [you] do this through... asset ownership and special accounts rather than cash benefits[?]... [P]olitical culture. Americans are very taken with the idea of "equality of opportunity"... [so] it's always useful to frame efforts to help poor people as efforts to help poor children who are innocent of whatever sins against the Protestant ethic and the spirit of capitalism poor adults are imagined to be guilty of....

[I]t's more politically powerful to put together programs with universal benefits.... Handing out cash benefits on a universal basis, however, is illogical in a way that handing out a universal lump-sum of assets at birth isn't... a "property-owning democracy" brought down into the muck of real-world policymaking.... [S]ubsidizing the purchase of wealth-generating assets... [is] America's historical approach to public policy...


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

The mind boggles:

The Quiet Man - New York Times: The Op-Ed page in some copies of Wednesday's newspaper carried an incorrect version of the below article about military recruitment. The article also briefly appeared on NYTimes.com before it was removed. The writer, an Army reserve officer, did not say, "Imagine my surprise the other day when I received orders to report to Fort Campbell, Ky., next Sunday," nor did he characterize his recent call-up to active duty as the precursor to a "surprise tour of Iraq." That language was added by an editor and was to have been removed before the article was published. Because of a production error, it was not. The Times regrets the error. A corrected version of the article appears below.

In what kind of circus is an "error" like this even possible?


So Who Are the Activists? - New York Times

Gewirtz and Golder on "judicial activism":

So Who Are the Activists? - New York Times: By PAUL GEWIRTZ and CHAD GOLDER: WHEN Democrats or Republicans seek to criticize... nominees, they often... say that the judge is "activist." But the word "activist" is rarely defined.... [W]e've identified one reasonably objective and quantifiable measure of a judge's activism, and we've used it to assess the records of the justices on the current Supreme Court.... How often has each justice voted to strike down a law passed by Congress?

Declaring an act of Congress unconstitutional is the boldest thing a judge can do.... Until 1991, the court struck down an average of about one Congressional statute every two years. Between 1791 and 1858, only two such invalidations occurred....

Since the Supreme Court assumed its current composition in 1994, by our count it has upheld or struck down 64 Congressional provisions... justices vary widely in their inclination to strike down Congressional laws.... The tally for all the justices appears below.

Thomas 65.63 %
Kennedy 64.06 %
Scalia 56.25 %
Rehnquist 46.88 %
O%u2019Connor 46.77 %
Souter 42.19 %
Stevens 39.34 %
Ginsburg 39.06 %
Breyer 28.13 %

...[T]hose justices often considered more "liberal" - Justices Breyer, Ruth Bader Ginsburg, David Souter and John Paul Stevens - vote least frequently to overturn Congressional statutes, while those often labeled "conservative" vote more frequently to do so.... To say that a justice is activist under this definition is not itself negative... some activism is necessary and proper. We can decide whether a particular degree of activism is appropriate only by assessing the merits of a judge's particular decisions....

These differences in the degree of intervention and in temperament tell us far more about "judicial activism" than we commonly understand from the term's use as a mere epithet...


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

From the Carpetbagger Report, who (which?) reads the Washington Times:

Carpetbagger Report: I have assumed for months that the White House, and probably the president himself, are aware of the fact that the drive to privatize Social Security is a complete debacle. Perhaps I misjudged their capacity for self-deception.... [T]hey can read polls just like everyone else, and surely they know this is a fiasco, right? Apparently not.

When congressional leaders met with Mr. Bush last week, they were surprised that the president didn't know how much trouble his plan was in, said a source close to the meeting who requested anonymity. "The more he talked about it, the worse it got," said the source, who worked in previous Republican administrations. "This White House does not encourage negative feedback. You know that Bush's legislative affairs office is dysfunctional because they weren't bringing any of the warning signs back to the White House."

When Bush speaks on the issue publicly, I expect him to deny reality and insist he's making progress on privatizing Social Security. This president has no policy expertise, so cheerleading is expected when he holds publicly-funded private rallies with pre-screened sycophants. But when he meets with his fellow Republicans on the Hill, and there are no cameras or reporters, Bush should be willing to acknowledge reality and adapt for the future.

Except he's not. Bush apparently isn't even aware of the political problem he's created for himself and his party. It's stunning...


Why No Democratic Support for CAFTA?

Daniel Drezner has a reading comprehension problem.

He writes:

danieldrezner.com :: Daniel W. Drezner :: Free trade democrats, R.I.P. (1934-2005): Beginning with the passage of the 1934 Reciprocal Trade Agreements Act, there has always been a signifcant contingent of Democrats who supported the expansion of foreign trade -- even when Republicans were mostly protectionist. That was then.... Look, CAFTA is not perfect.... [W]hile it's undoubtedly true that one can point to protectionist Republicans who are members of Congress, one can't say that the entire party is behaving in a protectionist manner. That's no longer true of Congressional Democrats.

Drezner's wrong. And the story he cites does not say what he claims it says. It does not say that free-trade Democrats are gone. Its conclusion is very different, very different indeed:

CAFTA: [A] core group of as many as 50 pro-trade Democrats are voting against CAFTA.... They complain that the administration failed to consult them during negotiations, taking their votes for granted. And they say past trade agreements were accompanied by increased support for worker-retraining programs, education efforts and aid to dislocated workers -- support that the president has not provided.

"Free and open trade is an important component to widening the winner's circle for all Americans, but it's not a Johnny One Note part of the puzzle," said Rep. Ellen Tauscher (Calif.), a co-chairman of the centrist New Democrat Coalition, who voted for the most contentious trade bills of the past half-dozen years....

When Clinton pushed permanent normalized trade relations with China in 2000, he secured the support of 73 Democrats.... The tally on CAFTA, expected after the Fourth of July recess if the White House can find the votes, could yield just 10 Democratic supporters.... [O]pponents say the deal steps back from previous commitments to stronger environmental and labor standards....

Administration officials are inoculating themselves against Democratic attacks with a letter from former president Jimmy Carter imploring support for CAFTA. "Some improvements could be made in the trade bill, particularly on the labor protection side," Carter wrote, "but, more importantly, our own national security and hemispheric influence will be enhanced" by passage. Other Democratic supporters include a who's who list from the Clinton administration, including former national security adviser Samuel R. "Sandy" Berger and Cabinet members Warren M. Christopher, Henry G. Cisneros, Dan Glickman, William J. Perry and Donna E. Shalala, not to mention the presidents of the CAFTA countries....

Two business lobbyists -- one Republican, one Democrat -- said some corporate groups will be sympathetic to the Democrats' position. In a highly charged partisan atmosphere, Republicans intentionally marginalized free-trade Democrats during negotiations and then presented them with a take-it-or-leave it deal, goading them to oppose it, said the lobbyists, who spoke on the condition of anonymity to avoid harming relationships on Capitol Hill....


Catalan-Trans-Pacific-California Cuisine

Q: Is Va de Vi as good as they say it is?

A: The place next to Tiffany's in Walnut Creek? Yes.

Q: Is it important that it's next to Tiffany's?

A: I think Tiffany's is losing a bet here. If I were them I'd stay open late--or at least have a pushcart outside Va de Vi for people coming out after finishing dinner. The wine list is good enough that they could rely on a healthy flow of post-dinner impulse purchases...


Why Oh Why Are We Ruled by These Very Strange People? (Social Security Edition)

Stan Collender is once again bemused by the Republicans in Congress:

BUDGET BATTLES: Budget Buffet: By secollender@nationaljournal.com Stan Collender, NationalJournal.com: You have to admire the audacity of the latest Social Security proposal. After months of the White House saying that there is nothing but worthless IOUs in the Social Security trust fund, the latest congressional Republican plan proposes to use those worthless IOUs to pay for the private investment accounts.... In other words, there is no trust fund surplus -- but we're going to use it to pay for the trillions of dollars in Social Security changes we are seeking....

This latest Social Security proposal also makes it clear that the White House's insistence that its plan will not increase the deficit, federal spending, or government borrowing is wrong. Using the Social Security trust fund to pay for private accounts will increase the spending in that program, reduce the surplus it was projected to run in the coming years and increase the unified federal budget deficit.

The Office of Management and Budget projected in the most recent Bush budget that the overall deficit in fiscal 2006 would be $390 billion. That included a $560 billion "on-budget" deficit and about a $170 billion "off-budget" surplus. Almost all of that surplus is in Social Security. But if some of the fiscal 2006 trust fund surplus is used to pay for anything... the unified budget deficit increases.... [I]f the private accounts require $100 billion... the 2006 federal [unified] budget deficit would be $490 billion instead of $390 billion. This would be financed with additional borrowing from the private sector....

The problem with funding Social Security private accounts is... due to the Bush administration's own choices. Back in 2001, the White House used what it said was a $5.6 trillion budget surplus over the coming decade to pay for the tax cuts the president wanted.... [W]hen the administration and Congress repeatedly chose tax cuts over Social Security, that choice was eliminated and the die was cast...


The Ideal Social Security System

Josh Marshall asks a question:

TPMCafe || Politics, Ideas & Lots Of Caffeine: By Josh Marshall: Imagine there were no Social Security and there never had been. And figure we were starting from scratch. Why would we pick a program more or less like the one we have to today with Social Security? What parts of today's economy would be reacting to? Assuming we would pick a system more or less like this one, why? And how would we argue for it?

If this isn't the system we'd pick I think we should have the courage to play out that conversation too. But assuming we would want to create Social Security again, let's refine the arguments for why we would do so. Once we can do that, I think a lot of our broader 'narrative' will fall into place.

I think we would design a system in which:

  1. Substantial prefunding--that is, a large trust fund balance protected by keeping the program "off budget" in the sense of making it illegal to spend any government monies to calculate, publish, or disseminate budget or debt totals that count Social Security taxes as revenues or offsetting receipts, or that do not include Social Security assets as liabilities of the government.
  2. A substantial mandatory "defined benefit" component, very much like that of our current Social Security system.
  3. Automatic adjustments to tax rates, benefit formulas, and retirement ages to keep the system in automatic long-run balance.
  4. A substantial optional (but encouraged and default) add-on system in which a proportion of your payroll earnings into a low-fee diversified unchurnable private account invested in index funds--unless you check the "I do not wish to participate" box on your IRS form 1040.

The system we would design would have substantial prefunding because our current national savings rate is very low and our economic growth rate is not high enough to make pay-as-you-go clearly the best option. The system we would design would have a Social Security-like "defined benefit" component because people really value a retirement income component not heavily subject to market vicissitudes, and the government is the only organization that can offer such a "defined benefit" plan. The system would have automatic adjustments to prevent episodes when it falls out of actuarial balance to provide an excuse for clown shows like the one the Bush administration is still putting on. The system would have add-on private accounts because it is a scandal and a disgrace that the poorer half of Americans have essentially no investments in the stock market.

It is a shame that we have been unable to use this year's debate to move us closer to an ideal system. But--given the manifold incompetencies and mendacities of the Bush administration--it was never more than a one-in-twenty shot anyway.


On the "Ownership Society"

Mark Schmitt's view of economic security:

TPMCafe || Politics, Ideas & Lots Of Caffeine: Beyond Mush and Muddle By Mark Schmitt: I don't want to limit the question to Social Security or retirement security. When I say that we need a broader vision of economic security, I mean the whole system of social insurance that can protect working Americans from the sharpest edges of capitalism, without impeding the dynamism of capitalism. Even if you wouldn't change anything about the specific program known as Social Security (and I'll come back to that), there are more risks than just old-age poverty.

To take an example of a program that should be updated for the present, consider Unemployment Insurance. UI provides 26 weeks of income support to a very limited number of established workers. Why? Because it was designed for a very particular economic situation: the U.S. manufacturing sector of the 1950s....

The cornerstone of an economic security platform would be a system that protects you when you lose your job for any reason -- technology, trade, business cycle, outsourcing, even incompetence -- by which I mean not only your boss's incompetence, but the possibility that you weren't adequately trained for the demands of the job. It would involve income support (like UI and trade adjustment), but also opportunities for retraining, and it might be partially based in private accounts, partly in a competitive system that rewards the companies or community colleges that were most successful at placing people back in the workforce, and partly in a traditional social insurance model....

I would retain the core social insurance function, virtually unchanged... but I would develop a private account system, which would either be an add-on, or could serve to finance early retirement, at 62, on s simpler version of the model proposed by my colleagues Phil Longman and Ted Halstead, so that people could use an account either to retire early or to supplement their later income.... But that narrow policy proposal raises the question: Why might some form of private account be appropriate to the current circumstances, when it wouldn't have been in an earlier decade? The answer, I think, lies in the tremendous imbalance between the returns to capital in the current economy, and the returns to labor. One way to boost the security of individual workers is to help them share in those returns to capital....

[But] why shouldn't labor get its reward, even its reward at the 1970 level? Are private accounts and "ownership" just a way of covering up the fact that only "ownership" currently captures any of the value of the productivity gains in the economy? Would we be better off forcing some of the returns to shift to labor, which would lead to policies such as living wage (e.g. $10/hour instead of the shocking level of $5.15), universal health care, and real pensions?

These are real alternatives, not "mush and muddle." But they also imply choices -- one approach is confiscatory, the other probably more regulatory. Either one can form the basis for a new vision, but the choice cannot be avoided.

Let me briefly comment on this--particularly on Mark Schmitt's apparent belief that boosting "ownership" through having wage-earners save more is a way to a less unequal distribution of income.

I think Mark is wrong.

I don't think that an "ownership society" in any form is a way of equalizing the distribution of income. Capital income is currently very high, yes. But asset prices are also currently very, very high. Buy capital, and you get expected returns that are lower looking forward than they have been on the past. You see, the value of the large future income streams flowing to capital that people anticipate are already largely incorporated into the prices of the assets you buy with your "ownership society" money: there is (probably) some money on the table--the poorer half of Americans should have some stock-market investments, and right now they don't--but there's not enough money on the table to shift the income distribution in anything but the smallest ways.

In my view, the answer to Mark's question, "Why weren't [add on] private accounts appropriate in earlier decades?" is simple: they were appropriate. They would have been a good idea. Nothing has changed to boost the rewards to savings that has changed whether add-on private accounts are a good idea or not.


Educational Offshoring

Offshoring of the educational system, part XVIIII:

http://online.wsj.com/public/article/0,,SB112052870627477026-1DMgflZ9RVqMtnbLdqA443LHSPA_20060705,00.html?mod=blogs

Enter the next phase of outsourcing: online math education. Not only does the U.S. increasingly lag behind other countries on international math scores, it's also short of qualified math teachers. This could make it tough for America to improve its grade and retain the competitive edge that keeps good jobs at home.

Into the breach step a handful of Indian companies like Career Launcher India Ltd., which provide math tutoring through two U.S. online tutoring companies and directly to students like Ms. Basu...


The People Pawning Their Grey Flannel Suits

Louis Uchitelle writes what is, I think, one of the best summary articles in the Peter Gosselin vein--that is, on class and insecurity in America today:

Were the Good Old Days That Good? - New York Times: By LOUIS UCHITELLE: TOM RATH, the protagonist in Sloan Wilson's 1955 novel, "The Man in the Gray Flannel Suit," certainly had his share of troubles: the stressful conformity, the constant striving for success, the superficial suburban friendships, the war experiences he kept hidden from his wife. It all ate away at him. But Tom, like most Americans in the first three decades after World War II, took a rising standard of living for granted.... Tom didn't fret about medical bills, job security or the quality of public schools for his three children.

Fast forward to Tom and Marie DeSisto in 2005. They are real people in their early 50's, living in a three-bedroom condominium in Newton, Mass.... Pushed into early retirement last year by his employer, Verizon, Mr. DeSisto's salary plummeted from more than $100,000 as a manager to $36,000 as a first-year math teacher at Newton High School. His wife, on the other hand, has just been promoted to director of nursing in the Framingham public schools. Her salary rose by nearly $4,000, to $67,000 a year, but she is also adding eight working days a year to handle the additional responsibilities.... [T]he DeSistos sold their four-bedroom colonial.... "We planned carefully," Mrs. DeSisto said, "and we downsized successfully."

So, did the Raths, that quintessential 1950's family, enjoy a higher standard of living than middle-class families like the DeSistos do today?... No economist, demographer or historian would make that case. Living standards, after all, almost never go backward, at least not in a material sense. Indeed, the economy today is growing, consumer spending is plentiful and new technologies - from the Internet to laparoscopic surgery - make life better than ever, as they do in every generation. BUT for the DeSistos and their contemporaries, the trajectory is no longer the steadily upward line that the Rath family enjoyed....

"When you talk about living standards, you have to focus on people in the middle," said Robert Gordon.... "A lot of the goodies that we think of as raising living standards have gone to the people at the top at the expense of the broad mass of Americans in the middle.".... Life expectancy in the United States, while still rising, has fallen behind that in France, Germany and Japan. Home ownership is at a record high for the population as a whole, but it has dropped since the 1970's for some groups - working families with children, for example.... And in many cases, public services are not holding their own. "Thirty years ago a lot of public goods were free, and now they are fee-based," said Michael Hout, a sociologist at the University of California, Berkeley....

The revival that started in 1995 brought productivity growth back to its old rate of increase, and for five years incomes also rose smartly. What happened next is tough for economists to explain. The productivity growth rate has stayed strong - rising at an average annual rate of just under 3 percent since 1995, according to the Bureau of Labor Statistics. But starting in 2000, median income, adjusted for inflation, has grown more slowly every year - and this year the increase is almost imperceptible. "There is no question that a huge gap has opened up between productivity and living standards," said Jared Bernstein, a senior labor economist at the Economic Policy Institute. Not since World War II have productivity and income diverged so sharply, yet that phenomenon barely registers in public opinion surveys....

"We had much less income inequality in the first couple of decades after World War II because of strong unions, restricted trade and a decline in immigration," Mr. Gordon said. "Then all three reversed, which means that the income from productivity falls to the bottom line and for the time being stays there." To him and others, living standards cannot be truly rising if the improvement is so unevenly distributed; in addition, they say, earning a living has become increasingly stressful....

The quality of public school education, measured by test scores, is in fact holding up quite well, on average. The National Assessment of Education Progress, a federally sponsored testing program that started in the 1960's, periodically measures the skills and achievements of students at the ages of 9, 13 and 17. Scores have risen slightly since the early 1980's, on average, but so, too, has the disparity in school performance. "The variation is extraordinary across school districts and even across schools in the same district," said Richard Murnane, an economist at Harvard's Graduate School of Education, "so when you ask about how good the schools are, the measure of central tendency is less interesting than the variation around the average."...


Metaphysical Cage Match!

In this corner, Mark A.R. Kleiman, assisted by an anonymous professional philosopher!

Mark A. R. Kleiman: Wittgenstein on religous belief: A reader who is a professional philosopher writes:

...Wittgenstein held a view of religious belief quite similar to your own. From Culture and Value.... "Christianity is not based on a historical truth; rather, it offers us a (historical) narrative and says: 'now believe!' But not, 'believe this narrative with the belief that is appropriate to a historical narrative', rather: 'believe, through thick and thin, which you can do only as the result of a life'. Here you have a message!--don't treat it as you would another historical message! Make a quite different place for it in your life.--There is nothing paradoxical about that!

"[...]

"Queer as it sounds: the historical accounts of the Gospels might, in the historical sense, be demonstrably false, and yet belief would lose nothing through this: not, however, because it has to do with 'universal truths of reason'! Rather, because historical proof (the historical proof-game) is irrelevant to belief..."

In that corner, St. Paul, who thinks that the truth of the historical narrative has everything to do with belief!

Douay-Rheims Bible Online, First Epistle Of Saint Paul To The Corinthians: He rose again the third day... was seen by Cephas... after that by the eleven... by more than five hundred brethren at once: of whom many remain until this present.... After that... James, then by all the apostles. And last of all... by me....

[I]f Christ be not risen again, then is our preaching vain, and your faith is also vain. Yea, and we are found false witnesses of God: because we have given testimony against God, that he hath raised up Christ; whom he hath not raised up.... [I]f Christ be not risen again... you are yet in your sins... they also that are fallen asleep in Christ, are perished. If in this life only we have hope in Christ, we are of all men most miserable...

To those who say that his teachings are historically false but metaphysically true, St. Paul gives this answer: "[I]f Christ be not risen again, then is our preaching vain, and your faith is also vain. Yea, and we are found false witnesses of God..."


For the Bushes, Loyalty Runs One Way Only

Susan Madrak watches the submissive Tony Blair in action:

Susan Madrak: You really have to wonder what's going on in this S&M relationship:

LONDON, July 4: President Bush told British Prime Minister Tony Blair to expect no favors at this week's Group of Eight summit of major industrialized countries in return for backing the war in Iraq. Blair, who has made tackling global warming and relieving African poverty the goals of his year-long presidency of the G-8, will host fellow leaders at the Gleneagles Hotel in Scotland from Wednesday to Friday.

"I really don't view our relationship as one of quid pro quo," Bush told Britain's ITV1 television in an interview. "Tony Blair made decisions on what he thought was best for keeping the peace and winning the war on terror, as I did."

Silly Tony Blair. Didn't anybody tell him that where the Bush family is concerned, loyalty runs one way and one way only?


Where Oh Where Is Our Peak-Load Electricity Pricing?

On the radio, right now, a cricket is chirping in an attempt to convince me to "flex my power" and buy a more energy-efficient washing machine. This kind of campaign is driving Jim Hamilton (and me) up the wall:

Hamilton writes:

Econbrowser: Some like it hot: And thus we continue in the great tradition of California regulators, who seek with great diligence, earnestness and, dare I say, ingenuity, to try to balance supply and demand every day by telling each one of us exactly what we need to do. As long as we all maintain the proper spirit and check up on the Conserve-O-Meter as the day progresses, I'm certain that all Californians can be counted on to do the right thing, ensuring the equality of supply and demand as a result of conscientious attention to civic duty.

I suppose that it's because I'm an economist that I find this mindset a bit baffling. I do not understand why the California Energy Commission assumes that people will pay more attention to "flex your power now" alerts than they would to something that actually affects their pocketbook. Call me cynical, but I somehow figure that adding to the dandy phrase "flex your power now" the explanatory sequel "because if you don't, it will cost you more" could give the program just a bit more effectiveness.

As noted by Peak Oil Optimist, some stabs at peak load pricing are being explored in the state on a piecemeal basis, such as our local San Diego supplier's plan to charge the largest electricity users a higher rate when the need for conservation is greatest. But there seems to be considerable reluctance to implement such schemes for all electricity users. In part I suppose this represents the view that regular people (as opposed to heartless big companies) don't like to have to pay for more for electricity at some times than others. But regular people don't like to turn down their air conditioners when it's hot, either, and they like it even less when there's a general blackout and nothing happens when you flip any switches. My big idea is to let people choose between (a) and (b) in order to make sure that (c) doesn't happen.

Or maybe the regulators reckon that companies are smart enough to figure out how to lower their electricity use when there's a strong enough financial incentive to do so, but ordinary people aren't. Though one wonders, if they trust me with a Conserve-O-Meter, why don't they trust me with an electric bill?...


Poverty Reduction in China

Simon World reads Ravallion and Chen on poverty in China:

Simon World :: China's (Uneven) Progress against poverty: Martin Ravallion and Shaohua Chen (2004), "China's (Uneven) Progress Against Poverty" (Washington: World Bank Policy Research Working Paper No. 3408): During the discussion about China's New Left, Dylan pointed out the above working paper from a couple of economists at the World Bank. Over the weekend I finally had time to read it, and it is a remarkable piece of work for anyone interested in China's income gap, the split between rural and urban and the remarkable poverty alleviation in China. Worth reading in full if you have the time (skip the equations), but Dylan nicely summarised...

  1. China has made huge progress against poverty, but it has been uneven progress. Half of the decline in poverty achieved since reform and opening up came in the first few years of the 1980s. Poverty reduction stalled in the 1990s.
  2. Inequality has been rising. In marked contrast to most developing countries, relative inequality is higher in China's rural areas than in urban areas. Absolute inequality has increased appreciably over time between and within both rural and urban areas.
  3. The pattern of growth matters. Growth in the primary sector (mainly agriculture) did more to reduce poverty and inequality than either the manufacturing or service sectors. Rural economic growth reduced inequality in both the urban and rural areas, as well as between them.
  4. Inequality is a concern both for economic growth and poverty reduction. With the same historical economic growth rates and no rise in inequality in rural areas alone, the number of poor in China would have been less than 1/4 of its actual value today.... [P]eriods of more rapid growth did not bring more rapid increases in inequality... more unequal provinces will face a double handicap... lower growth and poverty will respond less to that growth.

... Putting some numbers on... poverty fell from 76% in 1980 (thank you, Mao) to 23% in 1985. But... the late 80s and early 90s actually saw rises in poverty before another fall in the mid 90s. Most interestingly coming into the late 90s there were signs of rising poverty in rural areas.... Unsurprisingly the authors find that growth in the agricultural sector has been the primary driver of poverty alleviation....

The authors... conclude there is no sign of a short-term trade off between growth and equity.... [T]he only growth that matters for China's poor is in agriculture.... Most interesting of all is the assertion it would appear reasonable to attribute the bulk of rural poverty reduction between 1981 and 1985 to this set of agrarian reforms. Which reforms? De-collectivization and the privitisation of land use rights. That's right. Simply undoing the worst of Mao's madness and giving people some kind of property rights resulted in the biggest reduction of poverty in human history... 77% of the total poverty reduction.

Next comes the government's agricultural prices policy. Raising the compulsary purchase prices of agricultural goods (effectively a tax cut)... reduced poverty....

When it comes to regions... Guangdong, home to Shenzhen (the first "liberated" Chinese city), saw significant and outsized reductions of poverty compared to everywhere else.... Guangdong... showed no uptrend in inequality and thus had the highest rate of poverty reduction despite only slightly above average growth and relatively high initial inequality. The rest of China needs to learn from Guangdong...

Ravallion and Chen's belief that agricultural productivity is the entire game as far as poverty reduction in China is concerned is true in the past, but my guess is that it is unlikely to be true in the future. At some point more rapid urban growth is going to make surplus agricultural labor go away, and start raising the wages and living standards of those in the countryside without access to good land. When? Within a decade is my guess, if present trends continue.


Why Oh Why Can't We Have a Better Press Corps--and Better Brookings Senior Fellows? (Yet Another Kevin Drum vs. Diane Ravitch Edition)

Kevin Drum writes:

The Washington Monthly: [Re] Diane Ravitch's op-ed about math instruction in the Wall Street Journal, I've now learned of two [more errors]: [Ravitch writes:] "Attempts to solve problems without basic skills caused some critics, especially professional mathematicians, to deride the 'new, new math' as 'rainforest algebra'." This is woefully misleading. The person who coined the term "rainforest algebra" was Marianne Jennings. She isn't a professional mathematician, she's a business professor at Arizona State University and a well known conservative columnist. [Ravitch writes:] "A new textbook, Rethinking Mathematics: Teaching Social Justice by the Numbers, shows how problem solving, ethnomathematics and political action can be merged." Rethinking Mathematics is not a textbook. It's a collection of articles that provide suggestions for math projects to be used at various grade levels.... "Textbook" implies a primary text... suggests that it's meant to be the sole text used. A resource book, conversely, is meant for occasional use.... There's nothing insidious about a math resource book that focuses on social justice, just as there's nothing insidious about a resource book aimed at Christian schools that focuses on math problems taken from the Bible. I Kings 7:23 might make a good geometry unit, for example.*

That's three factual errors in the first four paragraphs of Ravitch's op-ed. This is not a good track record.

But this quality work is about what we have seen over and over again from the Wall Street Journal editorial page, no? The surprising thing is not that a writer for the Journal editorial page is so... misleading, but that the Brookings Institution doesn't have better... quality control.


*Kevin is undertaking high-class snark here, intelligible only to those who know the Hebrew Bible extremely well. The verse is:

And [Solomon] made a molten sea, ten cubits from the one brim to the other: it was round all about, and his height was five cubits: and a line of thirty cubits did compass it round about.

It's round--it's a circle. It's ten cubits across. It's thirty cubits in circumference. In short, the Hebrew Bible says pi = 3. Not 3.14, 3. Not 22/7, 3.


Modigliani-Cohn's Hypothesis that the Stock Market Is Confused Receives More Support

Expertly done. Campbell and Vuolteenaho take sides with Modigliani and Cohn: the U.S. stock market simply doesn't--or didn't--understand the difference between nominal and real interest rates. Since nominal rates are real rates plus inflation, this means the stock market is low when inflation is high, and high when inflation is low.

Their model does, however, does not work for the 1990s: the close association between their estimates of mispricing and inflation breaks down in the past decade and a half.

John Y. Campbell and Tuomo Vuolteenaho (2004), "Inflation Illusion and Stock Prices" (Cambridge: NBER Working Paper 10263) http://www.nber.org/papers/w10263.

ABSTRACT:* We empirically decompose the S&P 500's dividend yield into (1) a rational forecast of long-run real dividend growth, (2) the subjectively expected risk premium, and (3) residual mispricing attributed to the market's forecast of dividend growth deviating from the rational forecast. Modigliani and Cohn's (1979) hypothesis and the persistent use of the "Fed model" by Wall Street suggest that the stock market incorrectly extrapolates past nominal growth rates without taking into account the impact of time-varying inflation. Consistent with the Modigliani-Cohn hypothesis, we find that the level of inflation explains almost 80% of the time-series variation in stock-market mispricing.

Other related references:

  • Clifford Asness (2000), "Stocks versus Bonds: Explaining the Equity Risk Premium," Financial Analysts Journal March/April, 96-113.
  • Clifford Asness (2003), "Fight the Fed Model: The Relationship between Future Returns and Stock and Bond Market Yields, Journal of Portfolio Management Fall, 11-24.
  • John Y. Campbell and John Ammer (1993), "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance 48, 3—37.
  • John Y. Campbell and Robert J. Shiller (1988), The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies 1, 195—228.
  • Franco Modigliani and Richard Cohn (1979), "Inflation, Rational Valuation, and the Market," Financial Analysts’ Journal.
  • Christopher Polk, Samuel Thompson, and Tuomo Vuolteenaho (2003), "New Forecasts of the Equity Premium" (Evanston, IL: Northwestern University).
  • John Burr Williams (1938), "Evaluation by the Rule of Present Worth," in The Theory of Investment Value, 55-75.

Optimal Amounts of Foreign Travel

Alex Tabarrok heads for Machu Picchu:

Marginal Revolution: Lunch Matters: At lunch with Bryan and Tyler last week the question arose as to what we would do differently if we were immortal.  After a nerdy discussion to clarify what sort of immorality we were talking about; the kind where you can't be killed but can be imprisoned or the kind where you are forever young but may be hit by a truck?  (it was the former) -  I answered that I would travel more.

Later the question was asked, what would you do differently if you found out you had only a short time to live.  I answered again that I would travel more.  Click, buzz, whirr...does not compute, does not compute.  Even before Bryan or Tyler could point out the inconsistency I realized there was a problem.  Given that I would travel more if I was to live either less or more the probability that I was at just that level of mortality that I should not be traveling now must be vanishingly small. >I leave for a solo trek to Machu Picchu July 25.  Lunch matters.


The Battle of Ideas

Even the neoconservative New Republic agrees that the Democrats have won the battle of ideas!

Ezra Klein quotes from the excellent Jonathan Chait:

Ezra Klein: Ideas: In a piece full of very good parts, this has to be my favorite of Jon Chait's many perfect paragraphs knifing the "Democrats lack ideas" meme:

A related assumption is that new ideas are better than old ones. This meme has gained particular currency during the Social Security debate. For instance, conservative privatization advocate Peter Ferrara dismissed liberal foe Robert Ball as a "well-meaning gentleman who hasn't had a new idea in 40 years." The accusation resonates with many liberals. The Democrats' economic policy, as labor leader Andrew Stern told Matt Bai of The New York Times Magazine, "is basically being opposed to Republicans and protecting the New Deal. It makes me realize how vibrant the Republicans are in creating twenty-first-century ideas, and how sad it is that we're defending 60-year-old ideas."

The elevation of new over old is one of those beliefs that can only survive as a background assumption, without any critical scrutiny. Nobody tries to explain why new is inherently better, because the notion is obviously ridiculous. Take Social Security, for instance. Whatever you think of the general virtues of privatization, the program has actually grown more, not less, suited to the character of the U.S. economy over the last several decades. Social Security is designed to safeguard individuals from various risks. As the economy has grown significantly riskier, the need for a program that offers people a risk-free financial bedrock has grown stronger, and the case for subjecting the program itself to more market risk has grown more dubious.

And goes on to say:

I can't tell you the enjoyment I get from watching professed followers of Edmund Burke demand that Democrats stop protecting old ideas and realize the many virtues of newness. That no policy or idea can last more than 70 years without requiring radical overhaul is such a violent attack on the philosophical foundations of conservatism, not to mention the dictionary's definition of the word, that it's beyond belief, particularly in a party where so many sniff about their deep immersion in conservative intellectual traditions. But as Chait says elsewhere in the piece, the conservative superiority in "ideas" often reflects nothing more than a greater capacity for hypocrisy. Seems the same would go for their advantage in philosophy...


Declaration of Independence

In Congress, July 4, 1776

The Unanimous Declaration of the thirteen United States of America

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect for the opinions of mankind requires that they should declare the cause which impel them to the separation.

We hold these truths to be self-evident: that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.

That whenever any Form of government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundations upon such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shown, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent shall be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accomodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants alone.

He has called togethe rlegislative bodies at plaes unusual, uncomfortable, and distant from the depository of the public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavored to prevent the population of these States; for that purpose obstructng the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migration hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing judiciary powers.

He has made judges dependent on his Will alone, for their tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.

He has kept among us, in time of peace, Standing Armies, without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil power.

He has combined with others to subject us to a jurisdiction foreign to our constitution and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us, in many cases, of the benefits of Trial by Jury:

For transporting us beyond the Seas to be tried for pretended offences:

For abolishing the free system of English Laws in a neighboring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:

For taking away our Charters, abolishing our most valuable Laws, and altering Fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War agains us.

He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty and perfidy scarcely paralleled in the most barbarous ages, and totally unworthy of the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high seas to bear arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes, and conditions.

In every stage of these Oppressions We have Petititioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people. Nor have We been wanting in atentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

WE, THEREFORE, the REPRESENTATIVES of the UNITED STATES OF AMERICA, in General Congress, Assebled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the name, and by Authority of the good Poeple of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be FREE AND INDEPENDENT STATES; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally disolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do.

And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.


John Hancock--Geo. Taylor--Button Gwinnett--James Wilson--Lyman Hall--Geo. Ross--Geo. Walton--Caesar Rodney--Wm. Hooper--Geo. Read--Joseph Hewes--Tho. M. Kean--John Penn--Wm. Floyd--Edward Rutledge--Phil. Livingston--Thos. Heyward, Jr.--Fras. Lewis--Thomas Lynch, Jr.--Lewis Morris--Arthur Middleton--Richd. Stockton--Samuel Chase--Jno. Witherspoon--Thos. Stone--John Hart--Charles Carroll of Carrollton--Abra. Clak--Josiah Bartlett--George Wythe--Wm. Whipple--Richard Henry Lee--Saml. Adams--Th. Jefferson--John Adams--Benj. Harrison--Robt. Treat Paine--Thos. Nelson, Jr.--Elbridge Gerry--Francis Lightfoot Lee--Step. Hopkins--Carter Braxton--William Ellery--Robt. Morris--Roger Sherman--Benjain Rush--Sam. Huntington--Benj. Franklin--Wm.Williams--John Morton--Oliver Wolcott--Geo. Clymer--Matthew Thornton--Jas. Smith


Why Is Nobody Willing to Kill Over the Language of Administration in Strassburg?

The highly-intelligent Daniel Nexon restates the "realist" position in foreign affairs, and brings to mind all the reasons that I think it is profoundly misguided:

The Duck of Minerva: Rising Powers, War and the Economists: Given that war is always costly (in terms of revenue, resources, lost consumer production, damage, death, etc.) two rational actors always ought to find some negotiated settlement preferable to going to war. Of course, the presence of an indivisible issue, incorrect information about a rival's objectives, or the inability of one (or both) sides to make a credible commitment to upholding the settlement all may lead rational states to opt for war.

Moreover, we often forget just how close Germany came to winning World War I. The Schlieffen Plan almost worked. Germany would probably have won the war - and, ironically, the next few decades would almost certainly have been much better for humankind - if the United States had not intervened on the side of the Entente. I am not suggesting the war would have been "worth it" in economic terms... but that's the whole problem with Angell's and Brad's analysis: wars are almost never worth the costs, and yet states keep on fighting them.

It seems to me that Daniel's final claim--that "wars are almost never worth the costs" they impose on both sides--is simply false before 1850 or so. To the decision makers and to those who choose them, wars before 1850 or so are not negative-sum but positive-sum contests:

  • Consider the War of the Austrian succession. The expected value to Friedrich from attacking was positive: he might well gain a province, and what else was he to do with the army his father had built? And the expected value to Maria Theresa from resisting to the utmost was positive: to compromise with Prussia by revising the Pragmatic Sanction would break the dam holding back a host of other territorial demands on the Habsburg Empire.
  • Consider Henry V's reopening of the Hundred Years' War, which Shakespeare traces to advice given by his father Henry IV to "busy giddy minds with foreign quarrels." The Lancastrian dynasty is illegitimate and insecure: getting the young hotbloods who would otherwise be recruitment fodder for revolts out of the kingdom was a big plus. Indeed, had the Lancastrians only made the Yorkists a generation later their viceroys for France...
  • Consider the Wars of the Counter-Reformation, where death--on either side--guarantees a martyr's crown and a special high place in Heaven.
  • Consider the Wars of the French Revolution, where the attitude of the Convention was that it was glorious for Frenchmen to die for Liberty, and the attitude of Emperors, Kings, and Czars was that it was honorable to die in the punishing of the Godless French regicides.

Before 1850, most leaders simply did not care about the death and destruction that make modern democratic states regard wars as negative-sum contests, or do not care enough for those considerations to outweigh others--different beliefs about the will of God, domestic political benefits from war, gaining a reputation as a tough guy in foreign affairs more broadly, or regarding battle as an honorable human enterprise and a short but glorious life as better than a long one--that make wars positive-sum contests.

Since 1850 things have changed. The death-and-destruction costs of war--even non-nuclear war--have multiplied beyond previous imagining. Those who choose leaders are now a broad set of voters rather than a narrow coterie of aristocrats. We--at least we who live in democracies--ought to have outgrown war outside of the limited cases of (i) Osama bin Laden and his ilk, and (ii) missions of mercy to overthrow tyrants.

Have we? Well, quite possibly.

It has been a hundred and ninety years since Britain and the United States fought a war--in spite of sharp conflicts of geopolitical interest and the usual "indivisible issue[s], incorrect information... inability... to make a credible commitment." It has also been a hundred and ninety years since Briton fought Frenchman (save for certain unpleasantnesses involving elements of the French fleet after the French surrender of 1940)--if you'd told the Duke of Wellington on the evening of June 18, 1815 that it was the beginning of more than 190 years of Franco-British peace, he would have choked on his soup. It has been eighty-five years ago since a U.S. president decided to send armed force across the Rio Grande to "teach the Mexicans... to elect good men." It has now been sixty years since an army crossed the Rhine bearing fire and sword. How long do you have to go back to find a previous period of sixty years without a watch on the Rhine? I think you have to go back to the second century BC, before the Cimbri and the Teutones crossed the Rhine to challenge the armies of the Consul Gaius Marius for control of the Rhone Valley.

Before I read any more "realists" writing about a Chinese-American cold (or hot) war in Asia, I want them to come up with an explanation of why the War of 1812 was the last Anglo-American war. Why not 54'40" or fight? The claim that "wars are almost never worth the costs, and yet states keep on fighting them" doesn't seem to apply to relationships between some states since 1850 or so.

The "realist" school has absolutely no clue as to why there has been no Franco-British or Anglo-American war in 190 years, no Mexican-American war in 85, and no Franco-German war in 60. The language of administration in Strasbourg is simply not something that people are willing to kill or die for these days. Which kinds of states study war (against each other at least) no more? And why not? Those are, I think, the most interesting questions in the academic study of international affairs.


New Math

Kevin Drum writes:

The Washington Monthly: MATH FOLLOWUP.... Normally I'd just post this as an update, but it seems like it deserves a separate post of its own. Yesterday I excerpted a Diane Ravitch op-ed about mathematics textbooks from the Wall Street Journal. One of the paragraphs in the op-ed was this one:

In a comparison of a 1973 algebra textbook and a 1998 "contemporary mathematics" textbook, Williamson Evers and Paul Clopton found a dramatic change in topics. In the 1973 book, for example, the index for the letter "F" included factors, factoring, fallacies, finite decimal, finite set, formulas, fractions and functions. In the 1998 book, the index listed families (in poverty data), fast food nutrition data, fat in fast food, feasibility study, feeding tours, ferris wheel, fish, fishing, flags, flight, floor plan, flower beds, food, football, Ford Mustang, franchises and fund-raising carnival.

That sounded pretty amusing indeed, but last night I got the following via email:

The 1998 "contemporary mathematics" textbook referenced [by Ravitch] actually has two distinct indexes -- one is called Index of Contexts, the other is called Index of Mathematical Topics. Now, let's see, in which index might a discerning reviewer look for a list of mathematical topics that start with the letter "F"?

This seems to be a hard question for Ravitch, Evers, and Clopton. They chose to look in the Index of Contexts. Let's use a bit more insight and look in the Index of Mathematical Topics. Under the letter "F" we find the following topics listed for this integrated mathematics textbook: Faces, Face-views (3-D drawing), Finding equations (using points, using regression, using situation, using slope and intercept), Five-number summary, Formula (area, perimeter, surface area), Four-color problem, Fractal, Fractional exponents, Frequency table, Front view (3-D drawing), and Function.

I don't know if Ravitch is an innocent victim of deliberate deception by Evers and Clopton, or if she knew what they were up to and passed it along anyway. In either case, it seems as if she and the Wall Street Journal owe their readers a retraction.

And the follow-up:

The Washington Monthly: ALGEBRA TEXTBOOK FINALE....Thanks to reader MH, we now have a definitive answer to last night's algebra textbook question: it turns out that Contemporary Mathematics in Context does indeed have two indexes, a "topic" index and a "context" index. The "F" section of the topic index is shown on the right, and it appears to have a fairly standard collection of high school math entries. A scanned image of both the topic and context indexes is here (warning: large PDF).

MH also provides a possible explanation for the initial citation of the wrong index by Evers and Clopton:

It is possible that Evers' and Clopton's error was inadvertent.... If they looked for the index... [by] open[ing] the book to the last page and flip[ping] backwards... they would encounter the context index first...

That could be. In any case, it appears that Evers and Clopton highlighted the index primarily as a substitute for a fair discussion of the books themselves. In fact, their main substantive complaint was about CMiC's lack of emphasis on factoring polynomials, and a reader who has contributed to CMiC emailed to explain that this was deliberate:

[Older texts use] what we would call a theory of equations approach (aka traditional with heavy emphasis on factoring)....That is, everything that you do is directed towards writing x= __.

....[CMiC] and other NSF funded projects...generally take approaches called the functions-based approach. The idea there is that you think about functions and analyze the relationship between input and outputs. It is only in the context of functions that you start to ask: where does this function hit the x-axis? Or, how can I make a function that hits the x-axis in these places (we'd call that interpolation)?

So, traditionally, students were exposed to page after page of 'how to factor this specific form' whereas in [CMiC] students are expected to make use of factoring, but it's not a huge focus.

I don't have any independent opinion about which approach is correct, since that's obviously a pretty technical pedagogical question. [Let me put in my two cents' worth: in the fifteen-year-old's--excellent--Algebra 1 course, they put a little too much emphasis on factoring and a little too little on functions and where they hit the x-axis.] Regardless, citing the context index as a measure of frivolity while ignoring the topic index is clearly unfair and misleading. Ravitch, Evers, Clopton, and the Wall Street Journal owe their readers a retraction.

But is it possible at this date for Diane Ravitch to be an "innocent victim of... deception" in her use of people from the Cato-Heritage-AEI-Hoover Republican smoke machine as sources? I think not. Surely nobody normal presumes that the Republican smoke machine is especially competent, or cares about playing it straight, or even knows what it is to work carefully.

Whenever you have good reason to suspect that your sources may be misleading, you have a duty to verify. Ravitch is old enough to know this.


Democratizing China in the Long Run

Greg Ip and Neil King have thoughts on Wilhelmine China:

Is China's Rapid Economic Development Good for U.S.?: By GREG IP and NEIL KING JR.: Chinese oil company Cnooc Ltd.'s takeover bid for Unocal Corp. has brought into sharp relief two opposing American views on China's rapid economic development. Many in Congress and the Pentagon think it may hasten an inevitable clash between the U.S. and China for economic and political leadership in the world. Many businessmen and academics, however, think China's growing wealth and international economic ties will make it more democratic and a force for global stability. Both have history on their side.

Brad DeLong, an economic historian at the University of California at Berkeley, sees a useful parallel in Britain's policy toward the emerging industrial colossus of the United States in the 19th century.... As late as the 1840s, he notes, the U.S. and Britain -- then the world's sole superpower -- came close to war over territorial disputes in the Pacific Northwest and the lucrative fur trade there. But in subsequent decades Britain chose to accommodate, rather than suppress, the U.S. By 1900, the notion of conflict was widely regarded "as silly, simply because the trade and economic connections were so tight and the political systems so compatible," Mr. DeLong said. Similarly, he argues the world will be safer if the Chinese in time see the U.S. as having aided, rather than hampered, their economic development.

History, though, also offers counterexamples. Germany was catching up to Britain at the same time as was the U.S. but that relationship ended in war. Similarly, Japan was more open to imports and foreign investment before World War II than after, yet its rapid industrialization, especially later under a nationalist military government, ultimately made it a more formidable adversary of the U.S. "There is no deterministic relation" between economic advance and war or peace, said Charles Maier, a Harvard University historian....

During the 1920s, Japan had low import tariffs and its democratic, civilian government encouraged domestic alliances with European and American companies to hasten Japan's technological catch-up, said Hideaki Miyajima, a Japanese economic historian at Waseda University in Tokyo and a visiting scholar at Harvard. General Motors Corp. and Ford Motor Co. operated Japan's only major automobile assembly plants. The heads of Japan's "zaibatsu" -- urban industrial conglomerates -- were pro-Western. Many sent their children to U.S. universities. But these pro-Western elites were too weak to resist the forces of militarism and imperial expansion.... In 1932, military-backed right-wing nationalists assassinated both Japan's prime minister and one of its leading business figures, Takuma Dan, the Massachusetts Institute of Technology-educated manager of the Mitsui Group zaibatsu. In 1936-37, the military completed its takeover....

Germany's rivalry with Britain is similarly complex.... Britain's old-line industrial elites saw Germany as a threat, while its emerging financial elites saw it as an opportunity. Within Germany, Ruhr-based heavy industry favored the army buildup and were more willing to risk conflict with Britain, while Hamburg-based trading interests were more pro-British, though supportive of the German fleet buildup....

The most important point, however, is that both Germany's and Japan's decisions to go to war were catastrophic mistakes. They lost. Moreover, Norman Angell was right: the decision to risk war was overwhelmingly stupid. They would still have been catastrophic decisions even had Germany or Japan won: nothing Germany could have gained from victory in World War I or Japan from victory in World War II would have been worth the suffering.


Later on in the article, Thomas Barnett tells something interesting:

The widely differing views of China were vividly evident in 2001 when military and Wall Street officials came together at the World Trade Center in New York to share thoughts on the impact of China's economic and military rise. The organizer, Thomas Barnett, then a teacher at the U.S. Naval War College, hoped to bring the two constituencies closer together. Instead, their opposing views were reinforced. Mr. Barnett, now a writer and consultant, says the Wall Street participants concluded, "'When I think of the security issues I realize how a strategic partnership with China is all the more imperative,' and the military guys would say, 'Wow, realizing all the economic competition, war with China is that much more inevitable.'"...


CAFTA and the Drug Lobby

CAFTA not as free trade but as intellectual property protection:

Drug Lobby Got a Victory in Trade Pact Vote - New York Times: By STEPHANIE SAUL: The sidewalk between the drug industry's headquarters in Washington and the United States trade representative's office has been taking a pounding from the wingtips of industry lobbyists. The work of these drug industry courtiers, who represent what is arguably Washington's biggest and wealthiest lobby, appears to have succeeded in the Central American Free Trade Agreement. The agreement would extend the monopolies of drug makers and, critics say, lead to higher drug prices for the mostly impoverished people of the six Latin American countries it covers....

The six countries affected by the pact "understand that the net effect of these pharmaceutical provisions will be to raise the price of medicine," said Frederick M. Abbott, a professor of international law at Florida State University. "The way they have to view it is that they're getting something out of the agreement that will give them a net trade benefit." The problem with such an analysis, Professor Abbott said, is that the textile employers and agricultural producers gain, but the economic benefits may never flow down to the people who cannot afford medicines....

In defending their efforts to extend intellectual property protection abroad, industry officials point out that pharmaceutical companies subsidize treatment for millions of people in developing countries. Bristol-Myers, for example, has invested $150 million to set up AIDS clinics and other charitable programs in Africa....

One of the most contentious provisions in the trade pact is a requirement that gives brand-name manufacturers market exclusivity for five years after a drug is registered in the countries, even if the 20-year patent has expired. A similar five-year period exists in the United States, but the trade agreement would require countries to enforce the five-year period even if the exclusivity period in the United States has already expired. During that period, manufacturers who ultimately wanted to register a generic equivalent to the drug in that country would be barred from using the animal and human test data submitted for the drug's approval, a provision that critics say could delay the approval of generics beyond the five-year period....

Critics of the trade agreement say it sets up barriers to compulsory licensing in the countries it covers - the Dominican Republic as well as Nicaragua, Guatemala, El Salvador, Honduras and Costa Rica...


100 Interesting Mathematical Problems, Exercises, Puzzles, and Diversions

Rudbekia Hirta has worries about problems that turn her students off math:

Learning Curves: Contest Problems: I've also been given a book produced at the University of Delaware in 1986 called "Resource Problems to Enhance the Teaching of Mathematics." Here's a randomly selected problem:

In a 5 by 12 rectangle, one of the diagonals is drawn and circles are inscribed in both right triangles thus formed. Find the distance between the centers of the two circles.

I can't use problems like this. Most of the problems in the book are what I would categorize as contest problems for general-population high school students. These might be fine for high school students who already like math, but those are not my students. I'll definitely have a bunch of pre-engineers who need to learn an ambitious amount of calculus in a short period of time (dictated by the departmental syllabus), and the other bunch is an unknown. The regular gen-ed class would mutiny over this sort of problem (these are the students so averse to doing unfamiliar problems that they will leave questions blank on the exam and leave early). The honors version of the gen-ed class does not have a math placement prerequisite -- just an overall standardized test score -- so I have no information about how good they are at math. I'm guessing, though, that if I were to give them puzzle problems that they'd be more appreciative of the LSAT puzzle problems or problems from the quantitative section of the GMAT.

This book also features word problems about completely fanciful nonsense situations:

Sally is having a party. The first time the doorbell rings, one guest enters. If on each successive ring a group enters that has two more persons than the group that entered on the previous ring, how many guests will have arrived after the 20th ring?

It's problems like this that make my weaker students hate word problems....

So what are some problems that have clear and immediate payoffs, or that will be of interest to somebody with a normal level of curiosity? This question is of interest to me as well, for two reasons:

  1. I want the sophomores and juniors I teach to understand that math is a useful tool--which means assigning them problems that they can do and understand the substantive payoff.
  2. I want to persuade the kids that the payoff to math is high.

I used to have a wiki that I hoped would become a place where people could contribute and edit interesting math problems. But, alas, it got caught in the great wiki-crash of 2004, as the spam-robots became more and more sophisticated. I had to shut it down.

This is as far as I had gotten:

One Hundred Interesting Math Calculations: How do you convince adolescents that there is a big long-run payoff from math? Teaching them (mine at least) that there is a huge short-run payoff from reading and a huge medium-run payoff to writing is easy. But math is harder.

  1. [World War II Bomber Pilot Survival Odds]
  2. [How Many Extraterrestrial Civilizations Are There?]
  3. [Gravity and "Weighing the Earth"]
  4. [Economic Growth Since 1500]
  5. [Exponential Growth and Human Populations]
  6. [How Much Blood Is There in the World?]
  7. [Julius Caesar's Last Breath]
  8. [The Birthday Fact]
  9. [The False-Positive Problem]
  10. [The Grass-Is-Greener Paradox]
  11. [The All-Knowing Alien Paradox]
  12. [Repeating Decimals]
  13. [Introduction to Compound Growth]
  14. [Elementary Ballistics: The Kinematics of Falling Bodies]
  15. [Elementary Ballistics: What Goes Up Must Come Down]
  16. [How Rich Is Fitzwilliam Darcy?]
  17. [The Clock Hands Problem]
  18. [Sunscreen, or the Freak Mutant Near-Albino Problem]
  19. [The Distributive Law, or the Get-Out-of-the-Way Problem]
  20. [The Federal Reserve Problem]
  21. [The Ancestor Problem]
  22. [Strategy Secrets of ENRON]
  23. [The Muddy Parent Problem]
  24. [The Kissing Problem]
  25. [Understanding "Risk Arbitrage"]
  26. [Orbiting the Earth]

And here are some suggestions from others for problems it would be interesting to write up:

Suggestions For Entries:

  1. How long can Moore's Law go on? Starting from the average distance between atoms in a silicon crystal, find the time when chip features will be (supposedly) one atom wide.
  2. Intro to counting and combinatorics. Suppose there were 14 (or 12) cards in one suit. Suppose there were 5 (or 3) suits in a standard deck of playing cards. How would the relative ranking of poker hands change? They don't all scale the same way. Do most of the work by cancellation, so you don't have to perform a lot of the (tedious, error-prone) multiplication.
  3. Simple bits of probability, especially conditional probability from games -- card games (poker), dice games (craps), whatever. For example, understanding why it is harder to make your point the hard way (with a pair) when it is 8 rather than 4. As a grad student, I spent a lot of time teaching basic concepts to undergrads (at MIT!) that I mastered in middle school because i thought about the games i spent my time playing.
  4. Consider the mathematics of triage versus parity policies as described by Garrett Hardin in Chapter 4 of "Promethean Ethics," University of Washington Press, 1980.
  5. If you try something unlikely a few times, you might fail every time -- but it's commonly said "Even if the odds are a thousand to one against you, you try it a thousand times, you're sure to get it." Right? Wrong. If the odds are 50-50, and you can have two tries, you've got a 75% chance of a win. But it's downhill from there. One in a thou chance with up to a thousand tries? Only a 63.23% chance of a win. One in a million over a million tries? You're down to 63.21%, and it keeps dropping from there. How low can it go?
  6. Xeno's paradox came about because the Ancient Greeks did not know how to sum an infinite series. I've always used it to illustrate the concept of limits approaching infinity, because it puts the complex math on the side of common sense.
  7. For "Exponential Growth and Human Populations" set the end point as filling up the Americas by a colonizing group of 100 people, it's more interesting.
  8. Richard Dawkins has an interesting calculation on human ancestors in the book "River out of Eden" (1995). Figuring 20 years per generation, calculate the number of ancestors you have 2000 generations ago if none of your ancestors appear more than once in your family tree (no inbreeding).
  9. If the kids are into science fiction, have them work out dimensions of their favorite space ship based on extrapolation from the sizes of particular features (e.g. if the bridge of the Enterprise is so many feet across, how long is the whole ship?). Have them make upper and lower bound estimates to teach them error margins. It's not so great for web page presentation, though...
  10. Small business economics. Next time you and the kids are at the ice cream shop or other restaurant, have them work out the typical number of customers per hour (from typical customers-in-store and customer-visit-time). From this and the amount spent by a typical customer you get typical revenue. Guess at employee wages and commercial space leasing costs. Ask them why the place closes at 9 instead of staying open all night.
  11. Bridges of Konigsberg. Requires an illustration. The fundamental problem of graph theory.
  12. Predator/Prey? balancing over time.
  13. The different coin problem. N coins or objects of the same weight, one object of a different weight (in the simpler form lighter or heavier is known, in the slightly more difficult, just that it is "different"), a scale, and a limited number of weighings. Teaches binary group comparions. (Similarly, the switchback problem - You are at a fork in the road. You know your destination lies an unknown distance from the fork down one fork. What is the fastest way to surely find your destination?)
  14. Gabriel's Horn. A mathematical object with finite volume, but infinite surface area. Thus you can conclude that if you wish to paint Gabriel's horn, it's much wiser (and less costly) to fill the horn with paint than to try to coat the outside. Full appreciation will require calculus experience. [Link] [Link]

Gabriel's Horn, alas! is too sophisticated for my purposes--but it is wonderful:

Gabriel's Horn - Wikipedia, the free encyclopedia: Gabriel's Horn (also called Torricelli's trumpet) is a figure invented by Evangelista Torricelli which has infinite surface area, but finite volume. Gabriel's horn is formed by taking the graph of y = 1/x, with the range x ≥ 1 (thus avoiding the asymptote at x = 0), and rotating it in three dimensions about the x axis...


A "Greenspan Put"?

Four years ago Barry Eichengreen and I wondered whether the "Greenspan Put" had been a powerful force pushing up lending to high-risk countries in the mid-1990s and pushing up stock prices during the dot-com bubble. But we found a problem: we couldn't find significant evidence that this was the case--indeed, we couldn't find that many mentions of the "Greenspan Put" in the financial press or the financial newsletters in the first place. If it was part of the Zeitgeist, it wasn't in any place very visible to us.

The idea of an important "Greenspan Put" lost plausibility as the Federal Reserve did not take steps to lower interest rates as the NASDAQ fell, but instead waited until it saw signs of slackening investment growth. How could anyone in the aftermath of the NASDAQ crash could speak--as John Makin does--of the Fed as providing "free insurance for aggressive risk-taking"?

Nevertheless, the Washington Post's Nell Henderson thinks it is back. But she rapidly gets badly confused between the effects of (i) good, stabilizing monetary policy which should make one optimistic about the future and cause appropriate rises in asset prices (which seems to be what James Grant is talking about), and (ii) the "Greenspan Put" proper--the belief that government rescues are in the offing--which would cause inappropriate rises in asset prices (which seems to be what John Makin is talking about).

And so the article dissolves into incoherence.

Backstopping the Economy Too Well?: Some Experts Worry Greenspan's Success Bequeaths Risky Overconfidence. By Nell Henderson: In financial markets, they call it "the Greenspan put" -- a belief that if stock or bond prices fall too much, the Federal Reserve will help prop them up with quick interest rate cuts to pump more cash into the system.... But according to some Fed observers, this confidence is a worrisome legacy after Greenspan's nearly 18 years helping to steer the economy through a variety of storms... people can take bigger financial risks because the chairman can and will save them if their bets go sour.

Greenspan... and other Fed officials have expressed concern about increasingly risky financial behavior, stepping up their warnings about exotic investment strategies, real estate speculation and loose lending practices. The chairman even felt compelled to state recently that he cannot foresee the future and prevent all bad things from happening. "The economic and financial world is changing in ways that we still do not fully comprehend," Greenspan told a bankers' conference in Beijing. "Policymakers accordingly cannot always count on an ability to anticipate potentially adverse developments sufficiently in advance to effectively address them."

Now you tell us.

"The essential Greenspan legacy . . . is the idea that the Fed will allow nothing to go really wrong," said James Grant.... Investors have come to perceive the Fed's policies of recent years as "free insurance for aggressive risk-taking," said John H. Makin, an economist at the American Enterprise Institute. "Who doubts that a sharp drop in the market for housing or in the stock market would cause Fed [credit] tightening to stop or even to be reversed?"

See also Mark Thoma: Economist's View: The "Greenspan Put" and Excessive Risk Taking.


Why Oh Why Can't We Have a Better Press Corps? (Way of the Leprechaun Edition)

Henry Farrell is unhappy with Tom Friedman's belief that six-week vacations and stable employment are bad for Europe:

The Way of the Leprechaun: Posted by Henry Farrell: An indubitable Airmiles [i.e., Tom Friedman] classic:

There is a huge debate roiling in Europe today over which economic model to follow: the Franco-German shorter-workweek-six-weeks'-vacation-never-fire-anyone-but-high-unemployment social model or the less protected but more innovative, high-employment Anglo-Saxon model preferred by Britain, Ireland and Eastern Europe. It is obvious to me that the Irish-British model is the way of the future, and the only question is when Germany and France will face reality: either they become Ireland or they become museums. That is their real choice over the next few years -- it's either the leprechaun way or the Louvre.

Now those familiar with leprechauns will recall that they%u2019re untrustworthy little bastards.... The same is true of dodgy generalizations constructed around trite metaphors... by someone who clearly doesn't know what he's talking about.... Ireland is not an exemplar of the "Anglo Saxon model."... Lane Kenworthy... argues convincingly that Ireland doesn't fit well into either the Anglo-Saxon... or Rhenish... models.... Ireland is an especially poor fit with the Anglo-Saxon model in the area of labour market policy, a fact which rather undercuts the argument Friedman is trying to make. Again, Dr. Kenworthy:

beginning in the late 1980s and continuing throughout the 1990s, [Ireland] has had a highly coordinated system of wage setting (Baccaro and Simoni 2004). In addition, Ireland has higher levels of employment and unemployment protection than other liberal market economies and longer median job tenure (Estevez-Abe et al. 2001, pp. 165, 168, 170).

Finally... it is exactly the non-Anglo-Saxon features of the Irish economy -- and in particular the systematized concertation between trade unions, management, government and other social actors -- that was at the heart of Ireland's economic success in the 1990's. This system, unbeloved of free market economists, set the broad parameters for wage and income tax policy, and provided Ireland with the necessary stability for economic growth. It's now coming under strain... but insofar as [Ireland] does set an example, it isn't the kind of example that Friedman thinks it is.

I confess I too had a "Huh?" moment here. Ireland in the past decade and a half looks, I think, more like a Scandinavian economy than like Great Britain.


Ed Glaeser on New York City

The Very Smart Edward Glaeser on New York City:

Edward L. Glaeser (2005), "Urban Colossus: Why is New York America's Largest City?" (Cambridge: NBER Working Paper 11398).

Abstract: New York has been remarkably successful relative to any other large city outside of the sunbelt and it remains the nation's premier metropolis. What accounts for New York's rise and continuing success? The rise of New York in the early nineteenth century is the result of technological changes that moved ocean shipping from a point-to-point system to a hub and spoke system; New York's geography made it the natural hub of this system. Manufacturing then centered in New York because the hub of a transport system is, in many cases, the ideal place to transform raw materials into finished goods. This initial dominance was entrenched by New York's role as the hub for immigration. In the late 20th century, New York's survival is based almost entirely on finance and business services, which are also legacies of the port. In this period, New York's role as a hub still matters, but it is far less important than the edge that density and agglomeration give to the acquisition of knowledge.


...the distribution of employment in Manhattan in 2002. 28 percent of the payroll of the city is in a single three digit industry: "security, commodity contracts and like activity." This level of concentration is higher even than the commitment of the city to the garment trade during the height of that industry. Another 28.5 percent of total payroll is in three other industries: business, scientific and services (mostly lawyers and accountants), credit intermediation and company management. Together, these four industries account for 56.6 percent of total payroll in the isle of Manhattan. When Benjamin Chinitz (1961) compared agglomeration in New York and Pittsburgh, he emphasized the remarkably diverse nature of the New York economy. This is no longer the case. Manhattan employment is remarkably depended on finance, business management and business services.

This is not true in the outlying boroughs that are primarily in non-traded service sectors... health care, for example... these are both much smaller economic areas and are much more oriented towards providing services towards the residents of the greater New York area.

New York’s move into finance and management is not really paralleled by any of the other older cities. Perhaps the closest parallel to New York is Chicago which, during the last decade, has somewhat remade itself around business services. Boston’s post-1980 renaissance is completely different and should be seen as the result of small scale entrepreneurship in a number of disparate, high human capital sectors. The other large cities are still in decline and cannot be said to have found any meaningful replacement for the manufacturing firms that once employed thousands of their citizens.

The success of New York as a financial city suggests three questions. How did New York become the financial capital of the world? Why has New York’s dominance managed to expand in the modern era? Will New York manage to continue to survive on the basis of its financial industries?...


Vain Hopes for International Policy Coordination

Brad Setser quotes from Martin Wolf--and I find that Martin Wolf's reactions to the BIS are (a) very smart, and (b) close--embarrassingly close, in fact--to what I have written in a column that has not yet appeared...

Brad Setser's Web Log: More wisdom from Martin Wolf: More wisdom from Martin Wolf Having laid out the problem on Monday, Martin Wolf offers his solutions in tomorrow's Financial Times. He presents three answers to the question "what is to be done":

One answer... nothing. Let each country choose the policies that make sense to it.... The problem: Without big change in policies, the situation seems certain to deteriorate: US net liabilities will continue to rise in relation to GDP; and so, quite possibly, will the current account deficit. The longer this goes on, the larger the ultimate adjustment will be.

Option 2... the US would bully China into making a big adjustment of its exchange rate and macroeconomic policies. The problem: First, China is far from the only country that needs to change its policies... the Chinese... would almost certainly do the bare minimum, which would exacerbate ill will without rectifying the situation.

Which leaves only one viable policy course:

Serious multilateral discussion in which the US leads but does not attempt to dictate... discussing their responsibility for the health of an open world economy on which all depend. As a rising power, China should be invited to share in these discussions, by both exercising its voice and implementing its share of policy changes. Those changes must be large. They should include reform of the International Monetary Fund, to make it relevant to today's world, and a radical restructuring of the increasingly absurd Group of Eight. A forum must be found, together with a permanent secretariat, that makes possible serious discussion of how to proceed among the players that matter.

[...]

The US cannot dictate the policy changes or the pattern of global payments it desires to its partners. It must rely on institutions of co-operation, instead. The exchange rate and macroeconomic policies of east Asia are indeed destabilising. But a... successful response... [requires] a shared recognition of the dangers.... [and] determination to reach an agreed solution. US leadership is missing in action but remains indispensable....

That strikes me as right.

The odds of it happening strike me as low.

The difference between me and Wolf is that Wolf believes in institutions and secretariats whereas I believe in pressure to get the hegemon--the United States--to fulfill rather than ignore its leadership role. I am, after all, a student of Charlie Kindleberger.

The failure, in my mind at least, is not that we lack international institutions. It is that we here in the U.S. lack a Treasury and an OMB who are powerful and committed to fiscal sanity; it is that we lack economic advisers within the White House willing to say "worry a lot: be very unhappy" about the budget outlook and its consequences; it is that we lack finance and banking legislative committees that take their oversight-of-economic-policy role seriously; and it is that we have no political advisors who dare tell Bush that he should think about how the political careers of Carlos Salinas de Gortari and Suharto came to an end.


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

Tim Noah has some questions:

Malek's Free Ride, Cont'd. - Think the New York Times might be interested in a story about anti-Semitism? Naaah. By Timothy Noah: Page One New York Times story by Sheryl Gay Stolberg about the inevitable partisan battle over who will get to own the Nationals... an attack by Rep. Tom Davis, a Virginia Republican, on George Soros, who is a minority investor in a group led by Jonathan Ledecky, a Washington, D.C.-based financial tycoon who used to be part owner of Washington's hockey and basketball teams (and who, like Soros, gives a lot of money to Democrats). Here is what Davis said would happen if a sale to a group includin Soros went through, "I don't think it's the Nats that get hurt. I think it's Major League Baseball that gets hurt. They enjoy all sorts of [antitrust law] exemptions."...

Stolberg didn't quote this... lending credence to Davis'... false claim that "he never intended any threat." But... [Stolberg] repeated the... objection to Soros (apparently he was convicted of insider trading in France; Soros is appealing the decision) while... [calling] Fred Malek—-who leads the Washington Baseball Club, the group Davis clearly wants to prevail--... "a major Republican donor" and "a former aide to President Richard M. Nixon."... Fred Malek.... I'll let [Sally] Jenkins tell it: "You want a wart? Malek... was summoned by Nixon to discuss a 'Jewish cabal' in the Bureau of Labor Statistics.... He wanted to know how many Jews there were in the bureau, and he wanted Malek to count them. Malek... produced a list. Some of them were later demoted or transferred."...

If you're going to write about Republicans saying George Soros is unfit to be minority owner of a baseball team because of an insider-trading conviction, you're morally obliged to point out the mote-beam problem inherent in this line of attack...


Cooking in California

My sister says that, in California, cooking is largely superfluous. Oh, you do have to heat-treat some foods in order to make them soft enough for weaky East African Plains Ape teeth and to break down some of the big molecules so they are simple enough for weaky East African Plains Ape stomachs. But otherwise? No. Cooking is what you do when you have to find some way to make yet another round of cabbage half-appetizing, or to make yet another round of dried corn into something the family can face, and have nearly-unlimited supplies of oppressed and exploited low-market-value female household labor at your disposal.

And in California that's simply not necessary.

Looking at these heirloom tomatoes that I am now chopping, I agree with her: I am gilding the lily here.

On the other hand, the gazpacho that results should be very, very good indeed...


The Leisure of Europe's Middle Class

Nicely done:

Alberto Alesina, Edward Glaeser, and Bruce Sacerdote (2005), "Work and Leisure in the U.S. and Europe: Why So Different?" (Cambridge: Harvard University).

Abstract: Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European “culture,” but Europeans worked more than Americans as late as the 1960s.

In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued “work less, work all” explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.


Hausmann, Rodrik, and Velasco on Growth Constraints

Steven Smith from GW writes to say:

I think that http://ksghome.harvard.edu/~drodrik/barcelonafinalmarch2005.pdf is very smart and well done... a nuanced way to think about identifying and responding to a sequence of constraints on growth. Even in East Asia it is not a matter of finding and getting onto a single high growth path, but of a set of strategies for relaxing a sequence of binding constraints...