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June 2006

Conspiracy of Fools

The pile shrinks further:

Kurt Eichenwald (2005), Conspiracy of Fools: A True Story (New York: Broadway: 0767911792).

It's interesting. Eichenwald writes a huge book--800 pages--and at the end of it a casual reader has no understanding of why Enron went bankrupt. Enron reported $11 billion of stockholders' equity as of the end of 2000. It made an additional $2 billion or so during the Great Raid on California in early 2001. Yet by September of 2001 it had $30 billion in debt, $10 billion of which was coming due in the next year, and no net cash flow.

Andy Fastow and his friends didn't take that much via their Raptor and LJM vehicles: $250 million tops. Andy Fastow and company didn't lose all that much by using Raptor, LJM, and other vehicles to place bets on Enron stock on behalf of Enron--$1.25 billion, max. There's still some $11.5 billion of reported stockholders' equity that went missing.

Enron used what it claimed was "mark to market" accounting. Each time a contract was completed, the contract was valued as if it were a liquid security, and the value imputed in that as if process was booked as revenue. This meant that a negotiator desperate to reach a deal could (a) give away the store to the counterparty, and still (b) make assumptions in his "mark to market" valuation that made the deal look really profitable.

Now at least the first generation of Enroners were not profoundly stupid fools: they had people in charge of reviewing and monitoring the contracts made--experts in figuring out what the contract would be worth if it were a liquid security. People like Vince Kaminski, who one day, Eichenwald reports, got a call from Enron President Jeff Skilling:

"There have been some complaints, Vince, that you're not helping people do transactions," Skilling said. "Instead, you are spending all your time acting like cops." A pause. "We don't need cops, Vince."

Skilling's predecessor as President of Enron, Richard Kinder, quit Enron in 1996 when the board of directors refused to anoint him as CEO-heir-apparent. He went out and founded Kinder Morgan, buying up Enron's pipeline operations in 1997 Today Kinder Morgan is a profitable energy transportation and distribution company with a current market value of roughly $25 billion--of which $2.4 billion is Kinder's. You can bet that Richard Kinder very much believes that his company needs "cops."

Nevertheless, $11.5 billion in reported stockholders' equity gone? That's a lot of money to lose because you are allowing your traders and executives to assign optimistic valuations to their own deals.


A Utilitarian Comments Policy

Marginal Revolution outlines its comments policy:

Marginal Revolution: Comments policy: In response to a few inquiries, here is a reminder about our comments policy. Having "comments on" is neither a default nor a right for the reader. Usually the quality of the comments is excellent; I read them with learning and real joy. But some topics attract, or have attracted, poorly thought out or overly emotional comments. Some topics fall into very predictable debates. In other cases previous comments already have attracted significant and noteworthy discussion. Paul Krugman, free will, religion, Iraq, and yes immigration are a few examples of these tendencies. Once low-quality comments get started, they tend to feed upon themselves, sometimes for days at a time. We know that good comments attract readers to this blog, so we wish to maximize the average quality of comments. Sometimes this means no comments, but that is in the interests of good debate, stochastically speaking and properly construed over time.

Don't overanalyze this. Other times comments are turned off simply because neither of us is available to monitor for spam. There is also something to be said for randomization per se. We also do not favor off-topic comments, which tend to be deleted. "Comments off" is not an attempt to stifle debate; there are thousands and indeed millions of other outlets for your views and that is debate too.

I would like to know the algorithm they have for predicting when the average quality of comments on a thread will be negative...


Neoclassical Finance

One of the nice things about the summer is that the pile of books to be read actually shrinks:

Stephen Ross (2006), Neoclassical Finance (Princeton: Princeton University Press: 0691121389)

is excellent, although in many places I find it ultimately unconvincing.

:-)


On the Maintenance of a Healthy Public Sphere...

In what may be, I think, my last link to The New Republic, Jonathan Chait has an excellent article on the shrill screeds of Bush hatred emanating from the right:

TNR Online | Binge and Purge (1 of 2) (print): by Jonathan Chait: In "The Man Who Would Be King," the late-nineteenth-century Rudyard Kipling story later turned into a movie, an English adventurer named Daniel Dravot becomes the regent of Kafiristan, a remote mountainous region north of India. Dravot leads the Kafiri people to a string of battlefield victories, and they receive him as a God, the son of Alexander the Great, and turn their treasure over to him. But then they see him bleed, and--discovering he is mortal after all--turn on him with unbridled rage. Mobs of tribesmen denounce him as a fraud, chase him out of the temple, and ultimately send him plummeting to his doom.

Something similar is happening now to George W. Bush. Not long ago, conservatives hailed him as a fearless leader in the war on terrorism, a great man of history, Reagan's son. Long after the patriotic upsurge following September 11 had crested, the conservative base held him in awe. "George W. Bush has been a resolute and even heroic president in a terrifying time," wrote David Frum. Bush is "not only a good and trusted war leader, but a cunning and bold political leader," editorialized The Washington Times.

Now his former acolytes are furiously denouncing him. The American Spectator recently published a special issue devoted mostly to detailing the litany of Bush sins. One recent book (Impostor, by conservative columnist Bruce Bartlett), a forthcoming book (Conservatives Betrayed, by right-wing activist Richard Viguerie), and innumerable op-eds (e.g., "how the gop lost its way," by Reagan biographer Craig Shirley) condemn the president as an ideological turncoat...

Why my last link? Because I also read in the New Republic tonight:

The Plank: [Juan Cole's] writing and speaking had a not inconsiderable anti-Semitic whiff.

Juan Cole writes a lot that I think is wrong, a lot that I think is ill-phrased, and has I believe many illusions about the Middle East. But his writing and speaking do not have "a considerable anti-Semitic whiff."

There do need to be sanctions against organizations that--like the New Republic--defecate into the stream of reasonable debate. What should they be?


"Lazy-Minded Evangelical Romanticism." That's Good. "Spared Major Embarrassment... by the Slightness of My Own Reputation." That's Better.

Crawling out of the pages of National Review is something I never thought I would see:

The lazy-minded evangelico-romanticism of George W. Bush, the bureaucratic will to power of Donald Rumsfeld, the avuncular condescension of Dick Cheney, and the reflexive military deference of Colin Powell combined to get us into a situation we never wanted to be in, a situation no self-respecting nation ought to be in.... The place we are at is surely not a place anyone in 2003 wanted us to be at--not even Vic Davis Hanson.... I am spared major embarrassment not only by the slightness of my own reputation, as by the fact that... I never thought much of the nation-building exercise that followed.... My fault was in not grasping the scale of the administration’s multiculturalist ambitions...


Brad Setser Unpacks the Good News on the Trade Deficig

Good news on the trade deficit:

Roubini Global Economics (RGE) Monitor: Not quite as bad as I expected (the April trade numbers) Brad Setser | Jun 09, 2006: A $63.4b trade deficit isn't small. But it is a bit smaller than the average $65b deficit of the fourth quarter. And, in all honesty, I expected a bit higher number.

The dog that didn't bark: oil

Oil imports (seasonally adjusted) rose to $23.85b in April, but I certainly expected a bit higher number. The average US oil import price was $56.8 a barrel. The import price is typically lower than the spot price. But it was well below the $70 average market price in April -- I don't think the US oil import bill has peaked.

As importantly, oil import volumes in April were quite weak....

The story on non-oil imports isn't as good. Non-oil goods imports have been around $127-128b all year -- with the exception of February. And non-oil goods exports have also been stalled around $80b. In July of 2005, non-oil imports were around $117b, and non-oil goods exports were around $73.5...


Why Oh Why Can't We Have a Better Press Corps? (The New York Times Lowers the Bar for Bush Yet Again)

Steve Benen watches the New York Times bring out the backhoe to dig a hole in the ground so that it can lower the bar for Bush to less than zero:

The Washington Monthly: BUSH TRIES DIPLOMACY -- WITH REPUBLICANS....Talk about your soft bigotry of low expectations; the New York Times ran a lengthy article today that offers the president credit for -- get this -- schmoozing with Republican lawmakers.

Sheryl Gay Stolberg: Senator John W. Warner and his wife were at the White House for a Memorial Day photo session with veterans.... What followed, said Mr. Warner, a Virginia Republican and chairman of the Senate Armed Services Committee, was a rare 15 minutes alone with the president, no aides or staff in sight.

Mr. Bush escorted the couple to a private garden that President Ronald Reagan had built -- "I never knew it was back there," said Mr. Warner, whose public service dates to the Eisenhower administration -- and, just as important, solicited Mr. Warner's views on Iraq. "It was a nice way of doing things," Mr. Warner said.

The Bush-Warner chat was noteworthy.... Now, with Bush's political capital gone and his agenda stalled, Chief of Staff Josh Bolten has convinced the president to try "a more personal touch." What does this include? Apparently, Bush is suddenly willing to talk to Republican members of Congress about issues that are on their minds. He's also willing to host "intimate cocktail parties" on the Truman Balcony and take lawmakers and their spouses for tours of the White House residence.

There's nothing wrong with this, of course, but it's odd that the paper of record seems to find it so remarkable... it's hardly a striking development for a Republican president to talk to Republicans in Congress about policy matters.

To put it another way, Sheryl Gay Stolberg misses the news. The real news is the fact that "Republican president talks to Republican senators" is news.

But it would take a different organization than today's New York Times to understand what the real news is, wouldn't it?


Bill Niskanen and Starve the Beast

Jonathan Chait writes about Bill Niskanen and "starve the beast":

Jonathan Chait: Your silence is deafening, conservatives - Los Angeles Times: A FEW WEEKS ago, I wrote a column about a paper that decimated the conservative worldview. The study, by William Niskanen of the Cato Institute, found that the conservative "starve the beast" strategy does not work. Indeed, since 1981, he found that tax cuts tend to produce more spending, while tax hikes produce less.

I wrote that it would be interesting to see how conservatives reacted to having the factual basis for their entire domestic strategy exposed as a fraud. And it is interesting because "starve the beast" is so central to the GOP approach to governing and because the reaction is a case study in how the conservative movement reacts when its views are disproved.

Out of the reams of conservative commentary published over the last month, I have found exactly two items reacting to Niskanen's research. Given his paper's devastating implications, the response is quantitatively--and qualitatively--pathetic.

The first is an Op-Ed column by Nick Schulz in National Review Online. Schulz found Niskanen's finding a big puzzle. "Why would tax cuts prompt more spending?" he asks. "The only explanation so far comes from Niskanen himself," who hypothesizes that tax cuts make government cheaper, so voters want more of it.

The only explanation? My column, which Schulz cites but apparently has not read, offered a different and (if I do say so myself) convincing explanation. I argued that Democrats are willing to inflict pain on constituents in the form of spending cuts in order to balance the budget but not in order to give tax cuts to the rich. So, when Republicans agree to raise taxes, large numbers of Democrats will join them to cut spending. This happened in 1982, '83 and '90. Democrats did it themselves in '93.

But when Republicans cut taxes, Democrats refuse to give them cover to make politically unpopular spending cuts. Republicans feel obliged to prove to voters that tax cuts aren't hurting their cherished programs. The latest case in point: the Bush tax cuts resulted in a Bush spending boom....

The only other response I could find comes in the form of a single-paragraph mini-editorial from National Review.

Niskanen's point--that since 1981 tax cuts go with spending increases, not spending restraint--is a fact. It is not a statistically significant fact, however--it may well be just our bad luck, where piece one of bad luck is named "Reagan" and piece two is named "Bush."

In my view, it's not that tax cuts provoke spending increases, it's that politicians--overwhelmingly Republican politicians these days--who seek to unbalance the budget unbalance it on both sides: tax cuts for the rich and Medicare spending that enriches PhRMA.

Over at his weblog, Greg Mankiw defends "starve the beast," protesting that:

Greg Mankiw's Blog: Starving the Beast: it is (as [Mark] Thoma suggests) premature for anyone (like [Jonathan] Chait) to conclude that Niskanen has the last, or even the most persuasive, word on the topic...

without recalling his stint in the White House in 2003, when the Bush administration's second round of tax cuts and Medicare drug benefit rolled forward without ever making any kind of contact with each other.s


Sense on Immigration from Cowen and Rothschild

Tyler Cowen and Dan Rothschild talk sense on immigration:

Blending In, Moving Up: By Tyler Cowen and Daniel M. Rothschild: Beneath the surface of the immigration debate is a debate about shared values. If we look at just three of those values -- the English language, family and hard work -- we see a higher level of Latino assimilation than is often presumed. Despite claims to the contrary, census data show that most Latino immigrants learn and speak English quite well. Only about 2.5 percent of American residents speak Spanish but not English. The majority of residents of Spanish-speaking households speak English "very well." Only 7 percent of the children of Latino immigrants speak Spanish as a primary language, and virtually none of their children do. Just as they did a century ago, immigrants largely come knowing little English. But they learn, and their children use it as a primary language. The United States is not becoming a bilingual nation.


Larry Summers's Views on Harvard

Larry Summers's views on Harvard University:

2006 Commencement Address: The world that today's Harvard's graduates are entering is a profoundly different one than the world administrators like me, the faculty, and all but the most recent alumni of Harvard entered.

It is a world where opportunities have never been greater for those who know how to teach children to read, or those who know how to distribute financial risk; never greater for those who understand the cell and the pixel; never greater for those who can master, and navigate between, legal codes, faith traditions, computer platforms, political viewpoints.

It is also a world where some are left further and further behind - those who are not educated, those trapped in poverty and violence, those for whom equal opportunity is just a hollow phrase.... At the same time, today, the actions, and inaction, of human beings imperil not only life on the planet, but the very life of the planet.

Globalization is making the world smaller, faster and richer. One-third of human beings now live in places where the standards of living may increase 30 fold in a single human lifespan - a transformation that dwarfs what we call the Industrial Revolution. Still, 9/11, avian flu, Darfur, and Iran remind us that a smaller, faster world is not necessarily a safer world.

Our world is bursting with knowledge - but desperately in need of wisdom.... For all these reasons I believed - and I believe even more strongly today - in the unique and irreplaceable mission of universities.... And among universities, Harvard stands out....

America today misunderstands the world and is misunderstood in the world in ways without precedent since World War II. A great university like ours has a profoundly important role to play in promoting international understanding.... I look forward to the day when Harvard sets a standard for future leaders of our country by assuring that all students have meaningful international experiences before they graduate.

There is much more to be done, too, in truly integrating Harvard with the world. Students from abroad coming here to study return home changed people, and those they meet here are changed by them. Remember a few years ago the rescue of a doomed Russian submarine crew? This rescue was only made possible by a contact between a Russian admiral and an American admiral - two who never would have communicated if they had not met in a Kennedy School joint military program....

I believe that... the Faculty of the College will need to put individual prerogatives behind larger priorities and to embrace new structures and norms of teaching and learning. To provide the closer student-faculty contact our students deserve, faculty will need to take a greater role in leading discussions, in responding to student writing, in advising student concentrators. They will need to provide the broad introductions to large bodies of knowledge the students are right to demand.... I look forward to the day when Harvard is... the best undergraduate education in the world--the day when once again what we do here in this Yard defines the ideal of liberal education.

Yes, I have these last years been a man in hurry. My urgency boils down to this: For an institution like ours to make the great contributions the world rightly expects of us, we cannot rest complacent on this, the more comfortable side of innovation; on this, the more familiar side of the lectern; or, even, on this, the reassuringly red brick side of the river....

I am honored to have served as your president during the early days of what I hope - and believe - will be Harvard's greatest epoch. I have loved my work here, and I am sad to leave it. There was much more I wanted, felt inspired, to do. I know, as you do, that there are many within this community who have the wisdom, the love of Harvard, the spirit of service, and the energy that will be necessary to mount the collective efforts that this moment in history demands.

I bid you farewell with faith that even after 370 years, with the courage to change, Harvard's greatest contributions lie in its future.


On Tom DeLay

Ruth Marcus provides the coverage of Tom DeLay that you rarely, rarely got in the Washington Post's news pages--or on the editorial pages, for that matter. Kevin Drum says that he "will always remember [DeLay] best for his reaction to the Columbine shootings in 1999: 'Guns have little or nothing to do with juvenile violence. The causes of youth violence are working parents who put their kids into daycare, the teaching of evolution in the schools, and working mothers who take birth control pills.'"

As Kevin says, the big lesson is that "the man who said this has been one of the most powerful leaders of the Republican Party for over a decade and was treated seriously by the DC press corps the entire time. Never forget that--about either the Republican Party or the press. All the rest is trivia."

Here's Ruth Marcus:

DeLay Exits, Stage (Hard) Right: No one who's seen Tom DeLay operate over the years could have expected the Texas Republican to go gently: The Hammer always comes down hard. But DeLay's farewell address on the House floor last week was nonetheless stunning for its sneering, belligerent partisanship.

This was not the case of a politician who happened to hit a jarring note at just the wrong time. DeLay made clear that he wanted to leave the way he behaved throughout his 22 years in Washington -- contemptuous of the opposition and unrepentant about his cutthroat tactics.

"In preparing for today, I found that it is customary in speeches such as these to reminisce about the good old days of political harmony and across-the-aisle camaraderie, and to lament the bitter, divisive partisan rancor that supposedly now weakens our democracy," DeLay said.

"Well, I can't do that," he said, and that statement had the ring of truth, as if his allergy to bipartisanship is an almost physical limitation. In DeLay's world, "It is not the principled partisan, however obnoxious he may seem to his opponents, who degrades our public debate, but the preening, self-styled statesman who elevates compromise to a first principle."

This is a man who -- now that he's had time to take in the monuments -- sees Lincoln's statue and fixates on the one hand clenched in a "perpetual fist."

I hadn't planned to write about DeLay's departure. He's under indictment in Texas and out of power in Washington; it seemed gratuitous to kick the man on his way out. But DeLay's speech cries out for, if nothing else, a review of the ethical and political wreckage left behind...


Over at Economist's View: Tim Duy Hears the Keening of the Inflation Hawks at the Fed


Source: Tim Duy: http://economistsview.typepad.com/economistsview/images/duy61106.gif

Tim Duy is puzzled by the Fed. So am I. The inflation hawks appear to be ascendant, and, looking at unit labor costs as a leading indicator of the next six months' price numbers, it is very hard to figure out why.

Economist's View: Fed Watch: Ascendancy of the Hawks: Ascendancy of the Hawks, by Tim Duy: My time of capitulation has come. After the weak labor report, I would have thought a pause in at the next [FOMC] meeting a sure thing.... Since then, however, the din of Fedspeak has become deafening, and it speaks a single message--look for yet another Fed rate hike at the end of the month.... [T]he Fed promised us data dependency, and no one can argue they didn’t deliver, but, as I have argued in the past, they left out something critical: They simply failed to inform us about their underlying economic model. In other words, market participants were unable to grasp the implications of incoming data as far as it affected the Fed’s economic outlook....

[P]olicymakers... came out in force, with Moskow followed by Bernanke, Governor Bies, St. Louis Fed President William Poole, and Governor Kohn. The message: When we said data dependent, we didn’t mean all of the data, we meant just the inflation data. More seriously, David Altig succinctly summarized the message for us:

To paraphrase, yes we are pleased that the recent levels of measured inflation have not unmoored the public's belief in the FOMC's commitment to price stability. But yes, we also realize that the recent inflationary experience is not consistent with those beliefs--or the Committee's own objectives--and we do not take our credibility for granted.

In short, those of us drawn into the direction of a pause (see also Caroline Baum and John Berry) followed the increasing Fed chatter proclaiming the forecast for slower growth, assuming it was a signal from a new Fed Chairman known to be a proponent of inflation targeting.... The first mistake is that even if this was what Bernanke had intended, he does not have the political capital within the FOMC.... The second mistake is more fundamental: Barring clear evidence that the economy has rolled over, central bankers will always weigh incoming inflation data over all other data....

Note that three District Banks--Kansas City (Hoenig), Philadelphia, and New York--wanted to keep the discount rate steady last month.... New York’s interest in holding the discount rate steady is intriguing. Bank President Timothy Geithner’s position puts him in steady contact with global financial markets, and one wonders what he is hearing.... [I]n addition to the ECB, the central banks of Turkey, India, Korea, and South Africa all tightened. Global markets have swooned, and the yield curve in the US has slipped into inversion between the two year and the ten year Treasury rates. If the long end doesn’t starting selling off over the next few weeks, the Fed is setting itself up for a significant inversion....

An expectation that the Fed would not go too far may have been simply naïve. One contact simply noted with a sigh, “But they always go too far.” What will drive them to go too far? We can start making a list:

  1. Fed officials on average will discount financial market signals... dismiss concerns about the yield curve.
  2. Fed officials will discount the impact of the housing slowdown.
  3. Talk of inflation targeting aside, Fed officials will place a high weight on current inflation numbers. Even if the numbers this week look tamer, the hawks will fixate on the last two months of data.
  4. Fed officials will want clear signs in the data before they acknowledge that a slowdown is actually underway. It can take awhile for such data to build. Economists, me included, are prone to this error.

Do I sound somewhat pessimistic? I would rest easier if the economy didn’t look to be slowing, or if experience had not taught me to be wary of asset market (in this case housing) reversals. I would also feel better without the ascendancy of the hawks at the FOMC. Time will tell, but with growth moderating, I am not seeing the inflation threat. The slowdown in nonfarm payrolls eased my mind considerably--it seems unlikely that inflation will get out of hand without considerably higher nominal wage growth than we are seeing. Nor did the last reading on productivity suggest an inflationary surge is at hand...


University Vacations Are Longer than They Used to Be

Academic summer vacations have sure grown since the old days:

Statutes of Gregory IX for the University of Paris 1231: We also forbid [imprisoning one] student for a debt contracted by another....

Neither the bishop nor his official, nor the chancellor shall exact a pecuniary penalty for removing an excommunication.... Nor shall the chancellor demand from the masters... any emolument... for granting a license [to teach]....

Also the vacation in summer is not to exceed one month, and the bachelors, if they wish, can continue their lectures in vacation time....

[W]e prohibit... students from carrying weapons in the city, and the university from protecting those who disturb peace and study. And those who call themselves students but do not frequent the schools, or acknowledge any master, are in no way to enjoy the liberties of the students.

Moreover, we order that the masters in arts shall always read one lecture on Priscian, and one book after the other in regular courses.... The masters and students in theology... shall not show themselves philosophers but strive to become God's learned. And they shall not speak in the language of the people, confounding the sacred language with the profane. In the schools they shall dispute only on such questions as can be determined by the theological books and the writings of the holy fathers.

It is not lawful for any whatever to infringe this deed of our provision, constitution, concession, prohibition and inhibition or to act contrary to it, from rash presumption. If anyone, however, should dare attempt this, let him know that he incurs the wrath of almighty God and of the blessed Peter and Paul, his apostles.

Given at the Lateran, on the Ides of April [April 13], in the fifth year of our pontificate [1231].


The Medicare Drug Benefit Once Again

Robert Pear--who knows these issues in a way he doesn't know budget issues--files a good report:

In Texas Town, New Drug Plan Baffles Patient and Provider Alike - New York Times: By ROBERT PEAR: McALLEN, Tex. — In Washington, Bush administration officials say Medicare's new prescription drug program is humming along smoothly, filling more than three million prescriptions a day and cutting costs by an average of 50 percent for each beneficiary. But here in the Rio Grande Valley, the picture is different.

Many patients say they have difficulty getting the drugs they need. Pharmacists, swamped with questions and complaints from beneficiaries, have run into many practical problems as they try to navigate a complex program administered by dozens of prescription drug plans, each with its own policies and procedures. Doctors and pharmacists are struggling to figure out which drugs are covered by which plans.

"Intellectually, the program is a good idea," said Dr. E. Linda Villarreal, a former president of the Hidalgo-Starr County Medical Society. "But there's been total chaos and confusion among most of my patients, who do not understand the system and how to work it."... Jose M. Flores, a Medicare beneficiary who lives outside McAllen, used the new drug benefit four times from January to April to purchase Byetta, an injectable medicine for diabetes. Each time he paid $40. So when he went to the pharmacy on May 25, he was dismayed to be told that he owed $167.56 for the next month's supply. Mr. Flores had reached the notorious gap in Medicare's drug coverage. He had to pay the full price of Byetta. His Medicare drug plan paid nothing. "It's almost useless," said Mr. Flores, a 66-year-old school bus mechanic who was interviewed at his home in La Joya, Tex. "I'm paying the premium, but not getting protection."

In coming months, millions of beneficiaries will have similar experiences, as the cost of their drugs reaches the initial coverage limit of $2,250. Like Mr. Flores, they will have to pay the full cost of each medicine until their out-of-pocket costs reach $3,600. At that point, Medicare coverage resumes, paying 95 percent of the cost of each prescription....

Mr. Flores is angry with Medicare, with his drug plan and even with the pharmacists who try to help him. He says no one told him about the coverage gap when he signed up. Vanessa M. Recio, a pharmacist at Saenz Medical Pharmacy in Mission, Tex., said: "All I do all day is talk to angry patients. I process insurance claims and try to solve problems with Medicare."...

Competition among Medicare drug plans drove down premiums, but has complicated operation of the program. Pharmacists here say that most of their low-income Medicare customers have insurance cards from several Medicare drug plans. "They come in and ask, 'Which card should I use?' " said John P. Calvillo, a pharmacist at the Cornerstone Pharmacy in Edinburg, Tex., outside McAllen. That question is not always easy to answer. "Doctors and pharmacists often have trouble finding out what drugs are on the formularies," Mr. Calvillo said. "It's a crapshoot every day."

Typically, a doctor writes a prescription, and the patient takes it to a pharmacist, who submits a claim to the insurer. In many cases, the doctor learns the drug is not covered only after the claim is rejected. The doctor and the pharmacist may repeat the process three or four times until they find a drug that is covered. "This is a huge problem," Ms. Recio said. "In many cases, when doctors write a prescription, they do not have a list of what medicines are covered. They don't even know what plan the patient is in."...

Many doctors are eager to help patients. A few use handheld devices loaded with the formulary for each plan. Some check the Internet to see which drugs are covered by a particular plan. But others said they did not have time to do such research...


John Thornhill Channels Tony Judt

John Thornhill gives us Tony Judt's view of western Europe:

FT.com / Comment & analysis / Comment - Economists are from Mars, Europeans from Venus: By John Thornhill Published: June 9 2006 20:44 | Last updated: June 9 2006 20:44

A Martian economist visits earth. Not only does its arrival prove -- as many suspected -- that some economists really do live on other planets, it also provides fresh perspectives on our world.

Earthling economists chatter excitedly to our visitor about the stunning growth rates in China. This miracle economy of the 21st century has overtaken France and the UK.... Our Martian friend scratches its heads.

When my economics professor last visited earth in 1945 he told me that the Europeans had just experienced a terrible civil war in which 36m people had been killed, including many of their most brilliant minds. Now you tell me that 60m French people produce almost as much economic output each year as 1.3bn Chinese, who have been the dominant economic power for most of your planet's history. What is more, the French can do this while working 35-hour weeks and producing 246 different types of cheese. How did this economic miracle come about?

The earthling economists stare at each other and then down at their feet. "We don't normally look at things that way. We tend to say that Europe is suffering from 'eurosclerosis', you know, low growth, high unemployment, bloated welfare states and a looming demographic crisis."

"Maybe I need to talk to historians rather than economists to see how all this came about," says our Martian friend, blinking his eyes and flitting back several months in time to hear a lecture in Washington on The Future of Decadent Europe.

Tony Judt, the British historian, is talking about the dangers of conflating economic "inevitability" and geo-strategic prediction.... Mr Judt stresses the primacy of politics in human affairs and explains how postwar Europe created something novel in human history by transforming a tax-raising, military-spending state into a social state devoting huge amounts of money to health, education, pensions, housing, welfare and public facilities. Europe built these liberal welfare states, Mr Judt reminds his audience, not as a vision of a utopian socialist future but as a means of securing political stability and preventing a recurrence of its terrible past....

Europe today is a compromise caught somewhere between the lessons of memory and the distractions of prosperity, between prophylactic social provisions and the attraction of maximising profit. Like all such compromises, it is deeply contradictory and flawed. But of all the models that are on offer in the world today, it is the one most likely to be well-equipped to face the coming century,"

Mr Judt concludes.

Our visiting economist beams back a telepathic memo to the Martian Council of Economic Advisers:

The US economy is impressive -- as previous reports have indicated -- but its model is unique, not universal.... [E]ven our voters would balk at corporate bosses paying themselves huge bonuses while reneging on promises to pay their employees' pensions. Nor would our Red House be best advised to emulate the White House in its management of public finances. Eating tomorrow's lunch today makes for economic indigestion.

China's economy is astonishing.... But... any figure divided by 1.3bn ends up being rather small.... The Chinese may become collectively rich, but many will remain individually poor. And, if politics really does take primacy over economics, we may well be in for some surprises.

In their funny way, it is the Europeans who are at least discussing the big questions we Martians are facing too: how to reinvent the state's functions and strengthen the realm of collective international (interplanetary) action. For sure, Europeans will have to swallow their medicine by cutting wasteful state spending, liberalising labour markets and revolutionising higher education. But, as the Nordic economies have shown, the state's provision of public goods serves an economic purpose. Social justice can help maximise an economy's potential and sharpen its competitiveness...


Tyler Cowen Brings Down the Word on Net Neutrality

Tyler Cowen has an informed view on net neutrality. I think I'll "borrow" it: he knows more about this than I do:

Marginal Revolution: Net neutrality, part II: Many readers have been asking me to clarify my stance on net neutrality. Here are a few qiuck but key points:

  1. I favor net neutrality in the current environment. Without neutrality, Comcast and Verizon would use differential pricing schemes to extract more revenue and thus diminish some forms of Net output, including Google, Amazon, ebay, and possibly blogs.
  2. If the cable and telecom companies had no legally-backed monopoly powers, I would not favor legally enforced net neutrality. "Let the market decide" would be a good answer.
  3. Those powers are eroding with time but still the market for high-speed connections is far from contestable. Municipal wireless would matter a great deal but that is not a pure market solution either.
  4. Ex ante, it is hard to predict what will "stick" on the Net. I see positive and uninternalized social value in the level of experimentation which we currently enjoy. Profit-maximizing pricing from Verizon and Comcast would choke this off to some degree.
  5. Bandwidth might become so scarce that differential pricing is needed to give companies the incentive to create more of it. Then net neutrality could be a bad idea, even in spite of #1-4. But we are not there now and maybe we will never be. Municipal wireless, or some related idea, probably will arrive first. In the meantime stop watching those silly videos.
  6. A related question is this: we all know that road pricing can make economic sense. But should we favor differential and profit-maximizing pricing on non-contestable roads? At low levels of congestion, probably not. It is better to let people get to work.

Here is my previous post on net neutrality. Here is one good summary of the issues.

Posted by Tyler Cowen


Department of "Huh?"

Progressive Liberal and Mark Thoma both get medieval (and not in a good, Chaucerian way) on Tom Nugent and Robert Clarke of National Review:

Angry Bear: if Nugent & Clarke think that issuing options to CEOs does not have a cost to the shareholders of the company, there are not qualified to write about executive compensation. Which is of course why they get to write for the National Review.

I think that Nugent and Clarke are trying to be clever: they think they can dance around and say that "compensating [CEOs with options]... has not come at the expense of company profits" because stock issues and repurchases are not income-statement but balance-sheet events. Hence what they say has truthiness: the loss of shareholder value that comes about through ownership dilution produced by CEO options does not "come at the expense of corporate profits." However, it has the same effect on shareholder wealth as an equivalent salary payment to CEOs that does come at the expense of company profits.

They hope that their readers will overlook this.

Which is, of course, why they get to write for National Review. If you're fooled once by believing something you read in National Review, shame in them. If you're fooled twice, shame on you.


General Motors Complains About the New York Times

As I've said before, I am wondering if there will be a New York Times in twenty years. If they want to remain as gatekeepers, they have to start building a reputation as honest gatekeepers. It may well be too late:

FYI Blog: The Ban on 'Rubbish' in The New York Times: By Brian Akre: GM Corporate Communications

I've spent much of the past week trying to get a letter to the editor published in The New York Times in response to the recent Tom Friedman rant.... I failed.... Friedman spent 800 words on the Times op/ed page to accuse GM of supporting terrorists, buying votes in Congress and being a corporate "crack dealer" that posed a serious threat to America's future. He suggested the nation would be better off if Japan's Toyota took over GM. Mr. Friedman later acknowledged in television interviews that the column was a bit "over the top," but that he wanted to get our attention.

He got it.

Part of our response was to send a letter from my boss, Steve Harris.... You'd think it would be relatively easy to get a letter from a GM vice president published in the Times.... Just a matter of simple journalistic fairness, right? You'd also think that the newspaper's editing of letters would be minimal -- to fix grammar, remove any profane language, that sort of thing. Not so....

First, there's the word limit. Our first letter came in at 490 words... after the Times ran four letters in support of Friedman's column on Friday, June 2, totaling 480 words.

The Times told us it would "consider" our response only if it were limited to 175 words max.... I note that today's (June 8) Times has a 304-word letter from two Democratic senators, Hillary Clinton and Charles Schumer). We countered by offering to cut our letter to 300 words. They offered to go up to 200 words. OK, we reluctantly concluded, 200 is better than nothing.

Then came the editing.

They removed our invitation to Mr. Friedman to come to Detroit to learn the facts.... They removed a sentence in which Steve said falsely accusing GM of "buying votes" in Congress was irresponsible.... Our letter opened with a paragraph that accurately summarized the most bizarre elements of Mr. Friedman's attack, then reacted with this one-word sentence: "Rubbish."...

The Times suggested "rubbish" be changed first to, "We beg to differ." We objected. The Times then suggested it be changed to, "Not so." We stood our ground. In the end, the Times refused to let us call the column "rubbish."

Why? "It's not the tone we use in Letters," wrote Mary Drohan, a letters editor.

What rubbish.


A Clerk Ther Was of Oxenford...

And, of course, the most well-known text about medieval literacy, scholarship, and universities:

Geoffrey Chaucer, General Prologue to The Canterbury Tales:

A CLERK ther was of Oxenford also,
That unto logyk hadde longe ygo.
As leene was his hors as is a rake,
And he nas nat right fat, I undertake,
But looked holwe, and therto sobrely.
Ful thredbare was his overeste courtepy,
For he hadde geten hym yet no benefice,
Ne was so worldly for to have office.
For hym was levere have at his beddes heed
Twenty bookes, clad in blak or reed,
Of Aristotle and his philosophie
Than robes riche, or fithele, or gay sautrie.
But al be that he was a philosophre,
Yet hadde he but litel gold in cofre;
But al that he myghte of his freendes hente,
On bookes and on lernynge he it spente,
And bisily gan for the soules preye
Of studie took he moost cure and moost heede.
Noght o word spak he moore than was neede,
And that was seyd in forme and reverence,
And short and quyk and ful of hy sentence;
Sownynge in moral vertu was his speche,
And gladly wolde he lerne and gladly teche.

How do you read this passage differently if you focus on the fact that the Oxford clerk's "twenty books, clad in blak or reed" piled by his bed represent as large a share of society's wealth then as $300,000 would represent today?

Emaciated and underfed, yes. Ill-dressed, yes. Sponging off his friends, yes. But this is not a person who is poor in the sense of being without resources. He just uses his resources in peculiar ways.

What is the twenty-first century equivalent?


"The Student Will Not Leave the City... [without Giving] Back [to His Creditors] the... Books"

A note on Frederick II Hohenstaufen's 1224 Statues establishing the University of Naples:

Medieval Sourcebook: Frederick II: Lictere Generales, establishing the University of Naples, 1224: These are the conditions that we offer to the students: First, that there will be doctors and teachers in every Faculty. We assure the students, wherever they come from, that they will be able to come, stay and return without any risk to their persons or goods. The best houses will be given to them, and their rent will be at most two ounces of gold. All the houses will be rented for a sum up to that amount, based on an estimate by two citizens and two students. There will be loans given to students, based on their needs, by those who are designated to do so, with their books pawned as collateral, which books will be temporarily returned to the student after receiving appropriate guarantees from other students. The student will not leave the city until he has paid back his debt, or has given back the pawned books returned to him temporarily. Such pawns will not be requested by the creditor as long as the student remains in school...

If you finish your term at university and haven't repaid your student loans, your creditors will take your books and hold them hostage until you do repay your debts.

According to Greg Clark, by the eighteenth century in England there was one book copy printed per year for every five people in the country. Go back to the late fifteenth century--just post-Gutenberg--and there is one book copy printed each year for every 200 people. Go back to 1300 or so, and there is one book copy each year hand-copied for every 1000 people. Or so we guess.

In the eighteenth century, a book copy sold for the same share of national productivity that $500 is today: not an overwhelming expense, but a significant one--the cost of a good but not extravagant TV, say. At the end of the fifteenth century, a book copy sold for the same share of national productivity that $1400 is today--the equivalent relative expense to this laptop I am typing on. Back in the thirteenth century, a book copy sold for the same share of national product that $14,000 is today. It was a substantial deal.

Thus back in the thirteenth century people took books seriously. Here, from 1271, is a document recording a success of the University of Paris's development office:

Medieval Sourcebook: University of Paris: Courses in Theology [1271] and Medicine [1270-74]: To all the officers of the court at Paris who shall read this document, greeting. in the Lord. We make known that John of Orleans, constituted master in our presence, canon and chancellor of Paris, acknowledges and admits that he has received and had from the venerable master Nicholas, archdeacon of the church at Paris, formerly chancellor of the aforesaid church at Paris, the books named below - to be lent to the poor students studying theology, according to a certain clause contained in the will of master Stephen of blessed memory, formerly arch-deacon of Canterbury, which is inserted in the present document, as follows:

I will and command that my books on theology shall be delivered to the chancellor of Paris who, for the sake of piety, shall lend them to poor students studying theology at Paris who are without books; in such a manner, however, that each chancellor each year, shall receive back the aforesaid books and after receiving them shall again deliver and lend them, each year, to the poor students, as shall seem expedient.

The names of the books are as follows: the Bible complete with a glossary. Also, Genesis and Exodus, glossed, in one volume. Also, the books of Solomon, glossed, in one volume. Also, Exodus, glossed by itself. Also, Job, glossed by itself. Also, Ezekiel, glossed by itself. Also, the Gospels, glossed by themselves, in one volume. Also, the psalter, with a complete glossary. Also, the four books of Sentences [of Peter Lombard]. Also, the books of Numbers. Also, Joshua, Judith, Ruth, Deuteronomy, glossed, in one volume. Also, the four books of Kings, Chronicles, first and second. Also, Esdras, first and second of Maccabees, Amos, glossed, in one volume. Also, the Twelve Prophets, glossed, in one volume. Also, the Psalter, glossed and complete. Also, the Epistles of Paul, glossed. Also, the Psalter, glossed and complete. Also, the Scholastic Histories. [probably the Scholastic history of Peter le Mangeur] Also the four Gospels, glossed. Also, the Epistles of Paul, glossed, with a smaller glossary. Also, the Psalter, glossed and complete. Also, the first and second books of Maccabees, glossed as far as the tenth chapter. Also, the Gospel of Mark. The Gospels, glossed.

We, the above-mentioned official, have thought indeed that, in testimony and witness of all the above-mentioned, we ought to place on the present writing the seal of the court at Paris, together with the seal of the aforesaid chancellor; hoping and asking that his successors, who shall be chancellors, shall order and do with the aforesaid books, for the sake of the divine piety, according to the contents of the aforesaid clause.

Done in the year of our Lord, I271, Wednesday, the feast of the Apostles Simon and Jude.

Also, the Bible, in two volumes, with marginal notes, bishop Stephen presented. Also, the original of the Sentences of master Peter Lombard, in a certain volume, bound in calf, now somewhat worn, with round copper nails in the covers.


An Early Student Loan Program...

From 1224. Frederick II Hohenstaufen wants bureaucrats, and wants them enough to do something about it--including an early student loan program, and dire threats against either students or professors who go out-of-state:

Medieval Sourcebook: Frederick II: Lictere Generales, establishing the University of Naples, 1224: Frederick [II Hohenstaufen] etc. to all the Archbishops, Bishops, priests, counts, barons, judges, executors of Justice, bailiffs, and all authorities of the Kingdom [of Naples]:

With the favor of God, thanks to Whom we live and reign, and to Whom we attribute all good deeds done by us, we wish that in all parts of the Kingdom many will become wise and knowledgeable, by having access to a fountain of knowledge, and a seminary of doctrine, so that they, made proficient by study and observation, will serve divine justice, and will become useful to us for the administration of justice and of the laws which we urge everyone to obey.

We have therefore decided that in the most pleasant city of Naples there should be teaching of the arts and of all disciplines, so that those who are starved for knowledge will find it in our own kingdom, and will not be forced in their search for knowledge to become pilgrims to beg in foreign lands. We intend to provide for the good of those of our subjects who after having become learned will hope to acquire wealth, since the acquisition of what is good cannot be sterile, and will be followed by nobility, the halls of the tribunals, wealth, and the grace and favors of friendship. Therefore we will invite those scholars who are not without merit, and without doubt we will entrust them with the administration of justice once they have become able to do so. Therefore be happy and ready for the teachings that scholars desire.

We will allow you to live in a place where everything is in abundance, where the homes are sufficiently spacious, where the customs of everyone are affable, and where one can easily transport by sea or land what is necessary to human life. To them we offer all useful things, good conditions, for them we will look for teachers, promise goods, and offer prizes to those who are worthy of it. We will keep them under the gaze of their parents, we will free them from many labors, and from the necessity of long trips--almost pilgrimages. We will protect them from the dangers of brigands who would deprive them of their goods on the long roads. Among the teachers that we have assigned to the School we have Roffredo of Benevento, a faithful judge, professor of civil law, a man of great science and proven loyalty.

We order therefore to all of you who govern provinces and preside over administrations, to let all these things be known to all and everywhere, and to command, under danger of persons and goods, that no student will dare leave the Kingdom for reasons of study and that no one dare to teach in other places of the kingdom. And that, through their parents, you order to those students who are outside the Kingdom, to return here by the Feast of St Michael.

These are the conditions that we offer to the students: First, that there will be doctors and teachers in every Faculty. We assure the students, wherever they come from, that they will be able to come, stay and return without any risk to their persons or goods. The best houses will be given to them, and their rent will be at most two ounces of gold. All the houses will be rented for a sum up to that amount, based on an estimate by two citizens and two students. There will be loans given to students, based on their needs, by those who are designated to do so, with the pawning of the books, which will be temporarily returned after receiving the guarantee from other students. The student will not leave the city until he has paid back his debt, or has given back the pawns given to him temporarily. Such pawns will not be requested by the creditor as long as the student remains in school. In civil trials all will have to appear before their teachers.

As for grain, meat, fish, wine and other things that students need, we will not make any rule, since the province has all these things in abundance, and all will be sold to students as it is to citizens. We invite the students to such a laudable and great task, we promise to respect these conditions, to honor your persons and to order universally that you should be honored by all.

Syracuse 5 June 1224.


Morning Coffee Videocast: Ben Bernanke and Inflation

In which I hog Google's bandwidth, drink my morning coffee, and express my support for Ben Bernanke's policy of telling the financial press what he is thinking about the economy and monetary policy:

Ben Bernanke and Inflation: Brad DeLong 3 min 22 sec - Jun 8, 2006

Ben Bernanke is neither an inflation dove nor an (excessive) inflation hawk. He is prudent. The market will learn to deal with this. The financial press corps may not.


The Mystique of Central Banking

New Economist sends us to the work of the excellent Petra Geraats:

Oesterreichische Nationalbank %u2013 Working Papers: Working Paper 123: The Mystique of Central Bank Speak: In this paper Petra Geraats argues that despite the recent trend towards greater transparency of monetary policy, in many respects mystique still prevails in central bank speak. It is shown that the resulting perception of ambiguity could be desirable. Under the plausible assumption of imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial while it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak...


Rules for Monetary Policy

Mark Thoma points out to Greg Mankiw and myself that Michael Woodford is the real "state of the art" on the problem of what the central bank should try to stabilize.

Woodford speaks:

Rules for Monetary Policy: I have shown that in familiar classes of sticky-price dynamic stochastic general equilibrium (DSGE) models --- models that incorporate key elements of the current generation of empirical models of the monetary transmission mechanism, and even some relatively small complete macro models --- it is possible to show that the expected utility of the representative household varies inversely with the expected discounted value of a quadratic loss function, the arguments of which are measures of price and wage inflation on the one hand and measures of real activity relative to a (time-varying) target level of activity on the other.) Thus, it makes sense to rank alternative monetary policies according to how well they stabilize (an appropriate measure of) inflation on the one hand, and how well they stabilize (an appropriate measure of) the output gap on the other. The theory clarifies both the appropriate definition of these stabilization objectives, and the appropriate relative weights to assign to them when a choice must be made between them.

The answer obtained depends, of course, on the structure of the economy. In particular, inflation variability reduces welfare because of the presence of nominal rigidities; the precise nature of these rigidities determines the appropriate form of the inflation-stabilization objective. For example, if wages are flexible (or there are efficient contracts in the labor market), and price adjustments are staggered in the way assumed in the popular specification proposed by Guillermo Calvo (with an equal probability of any given price being revised in any time period), then inflation variation results in distortions caused by the misalignment of prices that are adjusted at different times. The resulting welfare losses are proportional to the expected discounted sum of squared deviations of the inflation rate from zero.

Other assumptions about the timing of price adjustments also imply that inflation variations reduce welfare, but with a different form of loss function, and thus a different ranking of equilibria in which prices are not completely constant. For example, if the probability of adjustment of an individual price is increasing in the time since that price was last reviewed -- a specification that is both intuitively plausible and more consistent than the simple Calvo specification with empirical models of inflation dynamics -- then welfare losses are proportional to a discounted sum of squared deviations of the current inflation rate from a moving average of recent past inflation rates, rather than deviations from zero. The goal of policy then should be to keep inflation from differing too greatly from the current "inertial" rate of inflation, which implies that inflation should not be reduced too abruptly if it has been allowed to exceed its optimal long-run level.

A similar conclusion is obtained if prices are assumed to be automatically indexed to a lagged price index, as in the well-known empirical model of Christiano, Eichenbaum, and Evans and related studies, or if some prices are adjusted in accordance with a backward-looking "rule of thumb," as proposed in the empirical model of inflation dynamics of Jordi Gali and Mark Gertler.

The theory also provides important insights into the question of which price index or indexes it is more important to stabilize. Again, the answer depends on the nature of the nominal rigidities. If prices are adjusted more frequently in some sectors of the economy than in others, then the welfare-theoretic loss function puts more weight on variations in prices in the sectors where prices are stickier, as first shown by Kosuke Aoki. This provides a theoretical basis for seeking to stabilize an appropriately defined measure of "core" inflation rather than an equally weighted price index.... [I]f wages are sticky as are goods prices, as implied by many empirical DSGE models, then instability in the rate of growth of a broad index of nominal wages results in distortions similar to those created by variations in goods price inflation. If wages are staggered in accordance with the Calvo specification, then the welfare-theoretic loss function includes a term proportional to the squared rate of goods price inflation and another term proportional to the squared rate of wage inflation each period. In this case, optimal policy involves a tradeoff between inflation stabilization, nominal wage growth stabilization, and output-gap stabilization, as first shown by Chris Erceg, Dale Henderson, and Andy Levin....

My research has emphasized that, when choosing a policy to best serve the goal of stabilization, it is crucial to take account of the effects of the policy's systematic component on people's expectations.... [W]hen one takes account of forward-looking behavior, it can be desirable for a central bank to only gradually adjust its operating target for overnight interest rates when underlying fundamentals change, rather than jumping immediately to a new level that depends only on current conditions. This kind of policy inertia -- often argued to characterize actual central bank behavior, but frequently assumed to indicate a failure of central bankers to fully optimize -- can reduce the amplitude of the swings in short-term interest rates required to stabilize inflation and real activity in response to real disturbances. It allows market participants to anticipate that the movements in short rates that occur will be more persistent, resulting in a larger effect on long rates and other asset prices, which are what matter for the effect of policy on aggregate demand....

The criteria used by inflation-forecast targeting central banks, such as the Bank of England (which seeks to ensure that CPI inflation is always projected to reach its target level of 2 percent per year at a horizon two to three years in the future), are an example of commitments... represent the closest approximation to the ideal of rule-based policymaking yet observed.... In the case of a canonical "New Keynesian" model, with an aggregate-supply relation of the kind implied by flexible wages and Calvo-style staggered pricing, the optimal target criterion is a "flexible inflation target," under which short-run departures of the inflation rate from a constant long-run target level should vary inversely with the projected growth in the output gap....

[I]f the likelihood of a price revision increases with the time since the last revision, then... temporary increases in inflation should not be immediately reversed.... [O]ne important conclusion from my study of this topic is that an optimal target criterion almost surely will not be focused so exclusively on projected outcomes two or more years in the future, as are the criteria that currently are used at the leading inflation-targeting central banks, at least according to their official rhetoric...


A National Review Trifecta

If National Review did not exist, it would be beyond the wit of humanity--beyond the wit of all intelligences in the universe--to invent it:

Matthew Yglesias watches Jonah Goldberg:

The New Journalism | TPMCafe: Jonah Goldberg misquotes John Murtha, truncating his statement in a manner that substantially alters the meaning. Following up, he justifies his action by noting that The New York Times did the same thing later. We're not even in "two wrongs don't make a right" territory here.

Meanwhile, Rich Lowry appears not to know that "crucial" means "decisive: will settle things one way or another":

The Corner on National Review Online: Tom Friedman['s saying] "the next six months will be crucial." When his repetition of that phrase over and over was pointed out in The Corner, I said I would have agreed with him every time he said it. Some readers asked why. Because every time Friedman said it, it was true. It was and is true because Iraq has never decisively tilted one way or the other. ..

And Iain Murray makes me sorry I named John Derbyshire the Stupidest Man Alive:

The Corner on National Review Online: A meteorite hit a remote area of northern Norway yesterday. The explosive force of the impact was equivalent to that of the atom bomb dropped on Hiroshima. I wonder if they'll try to blame this on global warming?


The Prussian Way of War

Here is something thought provoking:

Consider, if you will, this practically forgotten scene from the pages of German military history:

They came up out of the dark forests, mounted and mobile, driving deep into the flank and rear of their enemy. The shock and surprise of their sudden assault carried all before them. So rapid was the advance that it overtook every attempt by their defenders to form a cohesive position. The attackers were not simply faster than their opponents. Moving in a compact, mobile column, they were also more agile, more flexible, and far more responsive to the commands of their officers.

This great mobile column chopped the bewildered enemy force in front of it into uncoordinated segments, each with little more on its mind than flight. It was a near-perfect marriage between the best available technology, a flexible system of command and control, and officers who understood the possibilities of both. It was war in a new, faster tempo.

And now, a quiz: from whence comes this scene?... the Tannenberg campaign of 1914?... the invasion of France in 1940?... Operation Barbarossa?...

Any of the three would certainly be a good guess, but each would be wrong.... Friedrich Wilhelm I, the "Great Elector" of Brandenburg... winter campaign of 1678-9.... The routed enemy was Swedish, and the mounted force launching the devastating mobile assault and pursuit was actually riding sleighs...

[...]

[T]here is indeed a German way of war and... it had its origins within the Kingdom of Prussia.... Prussian, and later German commanders, sought to maneuver their operational units... in a rapid and daring fashion. The Germans called it Bewegungskreig... the war of movement on the operational level.... Such a vigorous operational posture [required]... an army with an extremely high level of battlefield aggression, an officer corps that tended to launch attacks no matter what the odds, and a flexible system of command that left a great deal of initiative, sometimes too much, in the hands of lower ranking commanders.

Thus the Germans evolved a certain pattern of war making.... Other nations... evolved different patterns. Need to land a larg amphibious force on foreign shores? Call the Americans. Interested in deep strikes and consecutive operations on a vast scale of men and materiel? Study the Red Army in its prime. War as a means of colonial aggrandizement? Look to the British. Levels of firepower large enough to turn the enemy homeland into a parking lot? It's back to the Americans...

This is the beginning of Robert Citino (2005), The German Way of War: From the Thirty Years' War to the Third Reich (Lawrence, KS: University Press of Kansas: 0700614109).


Playing with Google Spreadsheets

Playing with Google Spreadsheets: http://spreadsheets.google.com/:

I've shared a spreadsheet with you - it is named: "DeLong All-Purpose Quadratic Equation Solver" Click on the following link to log into Google Spreadsheets and view the spreadsheet: http://spreadsheets.google.com/ccc?key=o15492383500274530193.8006390369701147059

I've shared a spreadsheet with you - it is named: "Black-Scholes Basics Spreadsheet (20060609)" Click on the following link to log into Google Spreadsheets and view the spreadsheet: http://spreadsheets.google.com/ccc?key=o15492383500274530193.6208879362082642290

Alas! Graphs don't work in Google Spreadsheets yet, which means it is not yet terribly useful for my purposes...


What Should the Federal Reserve Stabilize

Greg Mankiw writes:

Greg Mankiw's Blog: How should the Fed measure inflation?: If a central bank is to adopt inflation-targeting as a guide to policy, what inflation rate should it use? The Fed seems to focus on core PCE inflation--that is, inflation in the prices of consumer goods and services excluding certain volatile sectors, such as food and energy. From the standpoint of practical monetary policy, this choice seems sensible. But it is hard to square this common-sense decision with standard monetary theory, which doesn't readily yield a variable analogous to these empirical measures.

Steve Zeldes once observed that measures of core inflation are like the clues on the TV game show Jeopardy. The category is inflation. The answer is the CPI excluding food and energy. It is your job to figure out the question.

Some years ago, Ricardo Reis and I took a stab at this problem.... N. Gregory Mankiw and Ricardo Reis (2002), "What Measure of Inflation Should a Central Bank Target?" We developed a framework for thinking about the issue and applied it to U.S. data. We found that the price of labor (that is, the nominal wage) should be given substantial weight in the index used for monetary policy. But I will be the first to admit that this conclusion was too tentative to take to the (central) bank.

I (as I find myself doing so often these days) disagree with Greg Mankiw. The conclusions are tentative, yes, but they are very much worth taking to the (central) bank. The argument that central banks should focus mostly on stabilizing the growth rate of nominal wages is clear and convincing, as far as I know Mankiw-Reis is still state of the art, and it is an important and neglected problem that needs attention.


Friday Tyrannosaurus Blogging

Belle Waring pleads for knowledge:

John & Belle Have A Blog: Damn, He's Hot! Look At Those Tiny Arms! Or, Size Matters: This is really a question for PZ Meyers. Why did Tyrranosaurs have such dinky little front legs, so short they couldn't even use them to lift food to their mouths? It seems so dumb. I was considering it as I lay in bed last night and then I thought, aha, sexual selection! Their means of locomotion (rear legs) is such that they don't absolutely need front legs to get around. So maybe it was originally a signal, like, I'm so extrordinarily bad-ass that I can thrive even with these relatively wimpy arms! And then some kind of sexual selection feedback loop set in, and they were on a path to developing little nubbins and finally no arms at all, but they all got blown up by a meteor.

The End.

But then I thought, well, it can't really be the case that every time we see some apparent design flaw in a creature we're allowed to say about it, this is so stupid that only a really healthy, robust animal of this sort could survive, etc. You can't just claim sexual selection for everying, because chance ensures that lots of animals are just messed up from a teleological perspective. There's no guarantee that creatures will be optimally constructed; they just have to be good enough to stay alive and are saddled with all sorts of inherited templates which it is too late to change. So what do you guys think? Tell me what real scientists think so I can replace my imaginary version with a truer one.


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

I cannot believe my eyes...

Suppose somebody offers you a choice between two houses...

  1. House one costs $375,768.75, which you will finance by paying $75,153.75 down and borrowing the rest at 7% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.
  2. House two costs $447,716.75, which you will finance by paying $75,153.75 down and borrowing the rest at 5% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.

Floyd Norris of the New York Times says that the second house is much more expensive--after all, it costs 19% more. The Bureau of Labor Statistics has a different view: the amount of money you have to pay in order to buy the second house is exactly the same, in amounts and in dates, as the amount of money you have to pay in order to buy the first. The amount it would cost to rent the two houses are the same. How can you think of the prices of the two houses as being other than identical?

Floyd Norris appears to think that the Bureau of Labor Statistics is stupid:

What Happens if Inflation Is Overstated? - New York Times: [Y]ou don't have to be a conspiracy theorist to conclude that in the last decade, an important part of the [consumer price] index has been understated. That is the housing component. Since 1983, the government has measured the price of homes not by looking at house prices but by computing what it calls "owner's imputed rent." That is the rental value of the house you own. It accounts for nearly a quarter of the entire Consumer Price Index....

Since [1986] the home price index maintained by the Office of Federal Housing Enterprise Oversight has doubled, while the imputed rent figure has risen by less than a third. Had the government computed the Consumer Price Index using actual home prices since 1996, I estimate that it would have risen by an average of 4.1 percent a year, as opposed to the 2.5 percent reported. The core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.

Perhaps the Federal Reserve was too hesitant to raise rates, and thus allowed speculative bubbles to form, because it was seeing inflation through rose-tinted glasses. But now the problem could be the opposite. If the housing boom is ending, rental costs may start to catch up with house prices. The reported inflation rate would be higher than the real rate, at least to people who say the best way to measure home prices is by measuring home prices.

To be sure, some economists like the rental gauge, saying it measures consumption spending. Others think that the best measure is mortgage payments. When interest rates were declining, those rose slower than home prices but faster than imputed rents...

Floyd Norris gives absolutely no sign of understanding any of the issues here. House prices have the big drawback that they rise when interest rates fall even if no homeowner pays any more for a house. Mortgage payments have the drawback that when inflation rises mortgage payments rise too even though homeowners gain in nominal appreciation what they lose in extra monthly payments. Rental equivalent values are--the BLS thinks for very good reasons--the best way to construct the CPI. The BLS has thought about this a lot. I think they are right. If Floyd Norris is going to criticize the BLS, he at least owes them a chance to say why they have made the choices it has.

You won't get any of that thinking, or any idea of what the issues are, or any understanding of why the BLS has made the choices it has, by reading Floyd Norris's piece. You won't get any insight into the measurement issues. You won't get any quotes. You won't even get any names of economists who hold different positions.

All you will get is:

[Y]ou don't have to be a conspiracy theorist to conclude that... an important part of the [consumer price] index has been understated... the housing component.... Had the government computed the Consumer Price Index using actual home prices... [t]he core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.

Feh!


La Piovra Fascista ha Cantato il Suo Canto del Cigno

La Piovra Fascista ha Cantato il Suo Canto del Cigno

Il Polipo Fascista ha Cantato il Suo Canto del Cigno

Il Polipo Fascista ha Cantato la Relativa Canzone di Cygne

Patrick Nielsen Hayden loses patience with feckless young punditlets who misuse the English language:

Making Light: Where the feckless pundit class comes from: Where the feckless pundit class comes from: I lose patience (see comments) with one of the privileged young things at one of the blogs of the American Prospect.


Cosma Shalizi Is On Drugs

He's ODed on coffee, I think:

2006 06: Neuropharmacological Foundations of the Public Sphere: The importance of coffee-houses in the Enlightenment, and the rise of the public sphere, is a historical common-place. But it's also puzzling: historians can say a lot of sensible things about how, as a social setting, the cafe was conducive to the give and take of (more or less) rational argument, and (relative) indifference to social standing in favor of persuasion. But I've never heard a good story for why coffee houses had to be run that way, nor that (say) taverns weren't, or couldn't have been, run that way. So, while not denigrating the social factor, it doesn't seem to explain why this connection took hold. Now, at last, scientific proof that Enlightenment had a sound material basis (via Mind Hacks):

Pearl Y. Martin, Jenny Laing, Robin Martin, and Melanie Mitchell, "Caffeine, Cognition, and Persuasion: Evidence for Caffeine Increasing the Systematic Processing of Persuasive Messages", Journal of Applied Social Psychology 35 (2005): 160-18: Abstract: Caffeine is known to increase arousal, attention, and information processing--all factors implicated in facilitating persuasion. In a standard attitude-change paradigm, participants consumed an orange-juice drink that either contained caffeine (3.5 mg/kg body weight) or did not (placebo) prior to reading a counterattitudinal communication (anti-voluntary euthanasia). Participants then completed a thought-listing task and a number of attitude scales. The first experiment showed that those who consumed caffeine showed greater agreement with the communication (direct attitude: voluntary euthanasia) and on an issue related to, but not contained in, the communication (indirect attitude: abortion). The order in which direct and indirect attitudes were measured did not affect the results. A second experiment manipulated the quality of the arguments in the message (strong vs. weak) to determine whether systematic processing had occurred. There was evidence that systematic processing occurred in both drink conditions, but was greater for those who had consumed caffeine. In both experiments, the amount of message-congruent thinking mediated persuasion. These results show that caffeine can increase the extent to which people systematically process and are influenced by a persuasive communication.

I should perhaps add that the leap from their findings to the rise of modern rationalism is entirely my own.


IBM Outsources...

The spread of outsourcing continues:

Another blue chip changes color - Managing Globalization - Blogs - International Herald Tribune: Daniel Altman, the IHT's global economics correspondent, offers a look at the day's economic news with an eye to how individuals, companies and governments are coping with the challenges of globalization.

IBM announced Tuesday that it would invest $6 billion in India over the next three years. That is a stunning amount of money, almost enough to raise India's gross domestic product by a full percentage point. And as the article linked above tells us, IBM has hired 34,000 people in India in just the last two years.

Soon quite a few American household names may have more employees outside the 50 states than inside. Gillette already does, as I wrote last week. So who will be left working for IBM in the United States?

The answer probably consists of executives, marketing specialists and a bunch of tax lawyers. Yet this might not be such a bad thing for Americans. Just as India is a target for the outsourcing of customer service, programming and manufacturing, the United States could be the world's outsourcing destination for management expertise. In some ways, it already is - witness mammoth consulting firms like McKinsey and Accenture. As those guys know, there's nothing wrong with being an outsourced worker... when you're getting paid so handsomely.

So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?


Daniel Gross Writes About the Fed

He writes about how the markets, and the financial press, seem puzzled by the fact that Ben Bernanke can think about more than one thing at a time:

Daniel Gross: June 04, 2006 - June 10, 2006 Archives: HELICOPTER MAN: Federal Reserve Chairman Ben Bernanke earned his reputation for being more concerned about deflation than inflation in part because of this 2002 speech where he approvingly quoted a Milton Friedman phrase about the utility of a "helicopter drop" of money. Now that Bernanke is suggesting that inflation is, indeed, a problem, the stock markets are getting somewhat antsy. Traders apparently didn't realize that Bernanke's helicopter comes equipped with a high-powered, super-duper liquidity vacuum. And it looks like he might have to turn it on.

Ben Bernanke is smart enough to worry about all future possibilities--and both accelerating inflation and dangerous deflation are possibilities. It shouldn't take long before the markets realize this, even though the press corps doesn't.


Why Oh Why Can't We Have a Better Press Corps? (Jacob Weisberg Edition)

Outsourced to Lance Knobel (who I really must have coffee with sometime in the next two weeks):

Lance Knobel: Jacob Weisberg... gets awfully muddled by trying to be politically even-handed.

Any political party counts on having a few hot buttons it can push at those moments when it is a few points behind in the polls with not much time until election day. These issues have certain characteristics -- a whiff of pandering, the flavour of insincerity, an aura of desperation. They aim to stir passion but have little, if any, effect on most people's lives.... Flag-burning has long been such an issue for Republicans. Raising the minimum wage sometimes serves the same purpose for Democrats.

Huh? Raising the minimum wage may be a touchstone issue for Democrats and it almost surely does appeal to the party's base. But how on earth is it "pandering" or insincere? How can anyone argue that it has "little, if any, effect on most people's lives"? And how can anyone equate an issue that has a real economic rationale (whether you want to argue pro or con) with one that is purely stirring emotions?

If you did an analogy test and claimed "flag-burning: Republicans" most resembled "minimum wage: Democrats," you would certainly fail.


Has Henry Paulson Made a Mistake?

Adam Posen thinks Henry Paulson has made a mistake:

The Washington Note: Adam S. Posen: Putting Money on More of the Same from Economic Policy: Just as in foreign policy, economic policy under the Bush Administration has been waiting for adult supervision.... [O]lder wiser moderates, like Pete Peterson, have been pushing for greater fiscal restraint, multilateral approaches to international economic policy, and some regard for the domestic political impact of corporate excess....

Last week's nomination of Henry Paulson to be Treasury Secretary, supposedly due to the increased influence of Chief of Staff Josh Bolten, is supposed to be the sign of the adults finally taking charge of the nation's finances.... [S]ome market chatter has been that this is the turning point, at least on the fiscal issue. The earlier meritocratic appointment of Ben Bernanke as Fed Chairman, as opposed to some Harriet Miers of central banking from the Bush bench of obscure buddies... was also a hopeful sign....

Would that it were so. It could turn out that way.... [But] there remain several reasons for skepticism.... Lots of momentum towards deepening difficulties -- The US fiscal and international economic positions are not irretrievably or even critically bad, but the last five years of mismanagement have done quite a bit of harm.... Lack of credibility from within the tent -- One might think of Paulson as a Colin Powell for economic policy, in which case the limited impact of such an appointment should be self-evident. The claim is made that someone of Paulson's stature would never take the job unless s/he were guaranteed that s/he could speak truth to power and pursue mature policies; otherwise, s/he would resign.... [B]ut as an economist I do know something about incentives and time-consistency. Once a senior official is in the administration, all forces motivate him/her to keep the job.... Josh Bolten oversaw the budget binges at OMB without a squawk or at least any noticeable restraining effect. There is no reason to think Paulson will be immune.

Absence of risks to what the Bush administration values -- There are elected officials who do undertake painful fiscal measures for the sake of a country's economic well-being. George Bush the Elder did so with regard to raising taxes, and Bill Clinton also did so by pursuing 'Rubinomics' rather than the spending programs that his 1992 platform seemed to portend. In both cases, the Presidents and their core advisers believed that the US' best interest was served by an American economy integrated with the world, with sufficient government resources (or credit lines unused) to marshal military force as needed, and (moreso Clinton than Bush) the predominance of financial and technological efficiency over protection of older declining corporate interests. Fiscal rectitude and a strong dollar supported these values. On each of these counts George Bush the Younger, Cheney, and Rove have revealed the opposite priorities....

There are many reasons to hope that the Paulson nomination to Treasury is indicative of a reversal of the Bush Administration of the destructive fiscal policies of the last five years, but far fewer reasons to expect that those hopes will come to fruition.


Mark Schmitt on the Future of American Politics

Mark Schmitt writes:

New America Foundation: Printable Version: Parliament Lament: Suppose that you wanted to find a list of the 30 or 40 Republican members of Congress most vulnerable to defeat this fall.... Here's an easy trick: Take a particularly egregious piece of legislation passed by the House, then look at the Republicans who voted against it. For example, last year the House passed Congressman Richard Pombo's bill to "modernize" (repeal) the Endangered Species Act. Thirty-four Republicans voted no. That list is virtually identical to any list of Northeast, Midwest, and Rocky Mountain Republican incumbents considered vulnerable this year.

If there is a voter backlash against the GOP this November, it will be aimed at the far-right Republicans who've been running the party. But, like a quail-hunting Dick Cheney, it will instead take out an unintended target—the so-called "moderate" Republicans who are somewhat pro-environment, more or less pro-choice, and sometimes labor-friendly leftovers of the genteel GOP tradition. Generally speaking, these are the only Republicans in vulnerable districts.

Shed no tears for the Republican moderates. As Minority Leader Nancy Pelosi said at a Prospect-sponsored breakfast in May, they are "enablers" of the culture of corruption. But the disappearance of Republicans who were willing to deviate occasionally from right-wing orthodoxy will mark a major change in our political life and culture. Back in 1994, many conservative Democrats were wiped out in the election and the party switching that followed. This year, whether Democrats win enough seats to control the House or not, the second shoe will drop. The hardening of our country into a parliamentary democracy, with two parties representing distinct ideologies and political traditions, will be complete.

Is this a bad thing? Polarized partisanship makes it hard to get things done, unless one party controls everything, as in a real parliament. Or could it be a good thing? In 1950, political scientists issued a plea for American parties to become just like this—ideologically coherent and "responsible," modeled on the British parliamentary parties. The answer doesn't matter; this is the way it's going to be. It may turn out that the political framework of the 20th century—-in which conservative and moderate factions in each of the two parties overlapped, and shifting bipartisan coalitions were always the way things got done—-was the anomaly, a living fossil dating from the peculiar history of the post-Reconstruction South.

Anomalous or not, that framework is exactly what almost everyone in Washington was trained for. We were all brought up knowing that the first thing you must do to pass legislation is to build a solid bipartisan coalition. But soon, whether we choose partisanship or not, we will all be absorbed into a more partisan world, and those who fight that trend will be left behind....

[I]t's not that NARAL and the Sierra Club are idiots. Up to now, it made perfect sense for them to endorse Chafee. You reward your friends, especially when they have stood up to pressure from within their own party. But at a certain point, rewarding friendly Republicans crosses the line into desperately trying to prop up a few so that you can still seem bipartisan—-at the price of legitimating a majority whose highest priority after tax cuts is the evisceration of environmental regulation....

One of the arguments of the 1950 political scientists was for this very result, to reduce the influence of "the pressure groups," because ideas would move through the parties rather than through external, unaccountable groups. But the political framework of the late 20th century had a lot going for it. In theory if not always in practice, it could find consensus and more stable solutions to public problems. But it's going, and in its place we will have a more rigid system in which the parties themselves dominate. The conservatives probably figured this out first and embraced it, thus explaining much of their political success in the last decade. Liberals can lament the loss of the old pluralist world, but we had better move on and deal with the new.

We've had all the defects of a presidential system and all the defects of first-past-the-post voting. Now we are about to add to them all the defects of a strong-party parliamentary system as well.


Estate Tax: Very Nice to See

Very nice to see. Especially Senator Voinovich: "Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest."

Senate Rejects Effort to Cut Estate Tax: WASHINGTON -- Senators voted Thursday to reject a Republican effort to abolish taxes on inherited estates during an election year with control of Congress at stake. GOP leaders had pushed senators to permanently eliminate the estate tax, which disappears in 2010 under President Bush's first tax cut, but rears up again a year later. A 57-41 vote fell three votes short of advancing the bill. Senate Majority Leader Bill Frist, R-Tenn., said the Senate will vote again this year....

"The estate tax is an extremely costly tax for a wealthy few that comes at the expense of every other American born and yet to be born for decades to come," said Senate Minority Leader Harry Reid, D-Nev.... Under current law this year, the first $2 million of a person's estate or $4 million of a couple's, escapes taxation. The remainder can be taxed at rates up to 46 percent. According to the most recent statistics available from the Internal Revenue Service, 1.17 percent of people who died in 2002 left a taxable estate....

Two Republicans, Sen. Lincoln Chafee of Rhode Island and Sen. George Voinovich of Ohio, broke with their party. "Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest," Voinovich said.

There is an argument--not a very strong argument, but an argument--that a deficit-neutral repeal of the estate tax would boost saving and capital accumulation enough to be a good thing. I see no argument that an unpaid for repeal of the estate tax is a good thing.


Br'er Furman and Br'er Mankiw

Over at Greg Mankiw's weblog, Jason Furman begs him to become a supporter of PAYGO--the principle that tax cuts need to be paid for by accompanying spending reductions, and that spending increases need to be paid for by accompanying tax hikes. He even offers Greg a special deal: PAYGO is to apply only to policies proposed by congress members and by future presidents--George W. Bush's policy proposals get a free pass, and are exempt:

Jason Furman @ Greg Mankiw's Blog: You don't need a lexicographic preference for deficit reduction to join Alan Greenspan, GAO Comptroller David Walker and me in supporting PAYGO rules for tax cuts and spending increases. You should give sincere thought to this, you would have a positive impact on current debates and do tangible good.... In the 1990s, PAYGO was commonsense. Dole and Gingrich supported it -- that's why they proposed Medicare and Medicaid cuts to pay for their tax cuts. Clinton supported it when we had a deficit -- his original prescription drug plan was fully paid for and even the later versions were explicitly contingent on being enacted together with a plan to ensure Social Security solvency. And John McCain, who you traveled on the bus with in 2000, remains a strong supporter of PAYGO.

The 1997 Balanced Budget Act was one product of this consensus. You would be heartened to know that it included about $400 billion in Medicare and Medicaid cuts and $400 billion in gross tax cuts (including capital gains, estate tax, and IRA expansions you would like).

I wouldn't expect you to agree with Alan Greenspan and me that PAYGO should apply to the extension of the tax cuts already enacted. Instead, you could agree with George Bush and the implicit position of the Kerry-Edwards campaign budget that these tax cuts were never intended to be temporary, that not extending them would be a tax increase, and that the baseline should assume they are extended....

It would be consistent with your philosophy -- and helpful in actual debates going on in Washington and not just on economics blogs -- if you argued that PAYGO should apply to all new tax cuts and spending increases. Admittedly it would put some constraint on tax cuts, but it also might put more pressure on Congress to reduce spending -- since they would need to eat their spinach contemporaneously in order to have their desert.

It's not going to happen. To admit that PAYGO discipline is an indispensable help for good fiscal policy--that's too great an implicit critique of George W. Bush for Mankiw to swallow, and the explicit pass for Bush makes it worse. Greg Mankiw is not going to accept Jason Furman's invitation to come into the PAYGO briar patch.


Inflation and the Federal Reserve

I am on KQED Forum at 9 AM tomorrow, June 8, 2006, 88.5 FM, to talk about inflation, the Federal Reserve, and related topics. Susan Rasky moderates.

KQED | Forum: Inflation and the California Economy: Thu, Jun 8, 2006. Host: Susan Rasky

Guests:

  • Brad DeLong, professor of economics at UC-Berkeley and former Deputy Assistant Secretary of the Treasury for Economic Policy
  • Brad Williams, director of fiscal forecasting at the California Legislative Analyst Office
  • Dave Shulman, chief economist at the UCLA Anderson Forecast

Al Gore Deserves More Credit, Guys

Afternoon Tea Audio Podcasts:

Al Gore Deserves More Credit, Guys: June 7, 2006:

I have observed in the past that it takes nerve to criticize Al Gore in one breath, call for a carbon tax in the next, and yet have neither the honor, the grace, nor the guts to remind readers that Al Gore was the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993...


Morning Coffee Videocast: The Estate Tax

In which I hog bandwidth, drink my morning coffee, and express my frustration at the fact that estate tax repeal is even on the agenda:

Estate Tax Repeal: Brad DeLong June 7, 2006:

Brad DeLong's Morning Coffee. Why would we want to raise other Americans' taxes by $600 a year in order to allow the heirs of the superrich to inherit an extra $5,000,000 per estate?

Continue reading "Morning Coffee Videocast: The Estate Tax" »


Gene Sperling on the Estate Tax

He writes:

The Estate of Misguided Choices | TPMCafe: If only I were a more talented writer, I might be able to do justice to describing how distorted the priorities and values are that motivated the US Senate's decision today to move forward in the efforts to repeal (or nearly repeal) the estate tax.... [W]hat [does] it sas about our commitment to the value of economic mobility when we are shortchanging pre-school for those who start life with the least at the same time we give a massive tax cut to those who end life with the most[?]...

After Katrina, even the most ardent estate tax repeal advocates decided it was unseemly to push for complete repeal. Thus one started to hear so called compromises.... Let's see. The nation is at war and troops have been having trouble getting the safest equipment. Child poverty has been on the rise for four straight years. Deficits are projected to total $4 trillion in the next ten years, our entitlement challenge is unresolved, working wages have been stagnating or declining, and fixing the estate tax for the top 3 of every 1000 estates in 2011 is what we should rush to the floor of the Senate in the summer of 2006?... Why in the world then should the United Senates decide that only the most expensive, regressive tax cut perhaps ever proposed is the sole one that must be rushed to the floor?...

[Y]ou will not hear a word this week from supporters about how to pay for this tax cut so that it does not increase the deficit.... [W]e are... passing on the debt and interest payments to the 99.7% of Americans -- including our children and grandchildren -- who will not benefit one penny from these proposals.


Tyler Cowen on Global Warming

Tyler Cowen's current views on global warming:

Marginal Revolution: My views on global warming: My views on global warming

  1. It is by now pointless to deny that global warming is man-made to a considerable degree.
  2. It is a very real problem. If you don't believe me, go visit the deltas of East Bengal or Bangladesh and think about it again. Sweden I am not worried about and Greenland may become valuable, but where do we put the losers and no this isn't just a few small islands in the Pacific.
  3. I can imagine Manhattan and other major cities taking protective action against rising water levels, much as the Dutch do today. I recall reading that the Dutch spend about as a high a percentage of their gdp defending themselves from water as the U.S. does on national defense. That is quite a burden, but it is better than forsaking economic growth.
  4. Like Arnold Kling, I do not much trust climate models. Perhaps I have spent too much time doing macro, and the experience carries over. Nonetheless uncertainty about final effects gives us more to worry about, not less. It is the worst-case scenarios for global warming which worry me, not the middling scenarios. Variance is our enemy in this matter.
  5. I don't have a good plan for what to do. Imagine passing and extending Kyoto and turning 2/3 of the U.S. energy supply into nuclear, wind, and solar power. Heroic achievements, to be sure. But if China and India continue to industrialize, global warming will likely continue and perhaps accelerate, as I understand current knowledge.
  6. I have yet to see a real plan which recognizes three points: a) without continued economic growth the world will probably fall apart, b) the problem is real and significant, c) any good preventive solution would require an enormous amount of concerted action across both time and across nations.
  7. How much does the framing of the problem contribute to our political views on the matter? How much would we spend, or how intensively would we organize global action, if a typhoon were headed right for Bangladesh? An earthquake? A war? A much slower set of changes, not fully our fault? An out-of-control American nuclear weapon? Should it matter?
  8. If we could relocate all the losers-to-be into freer and richer countries, should we consider this a satisfactory solution? Or are we still massive and unjustified aggressors if they are crying to us: "Don't let it happen, don't let it happen!"?

Stan Collender Has Advice for Hank Paulson

Stan Collender has advice for Treasury Secretary nominee Hank Paulson:

Treasury secretaries have little ability to make an immediate impact. This will be especially true in your case.... The House and Senate already adopted their own versions of a FY07 budget resolution; asking them to vote again would be politically naïve and infuriate many congressional Republicans who are already extremely angry with the White House. Asking Congress to consider a new budget also would be seen as an admission by the White House that its original plan was somehow inappropriate or incorrect. As you know, this is an administration that does not like to admit that it made a mistake....

Assuming the reports are correct and you have worked out an agreement with the White House to be involved in policymaking, you will eventually [have] influence.... The problem... is that [until]... Election Day this November, everything you will be asked to do will have a short-term perspective.... The White House will be asking... the Treasury secretary to be part of its campaign effort.... [Y]our main job will be to convince everyone in the United States they’re better off economically.

This will not be an easy task.... Focus solely on official statistics and you will likely have the same problem your predecessor at Treasury did sounding credible. That’s what made Treasury Secretary John Snow sound like a cheerleader.... That made it exceptionally difficult for Snow to represent the administration on issues on which the Treasury secretary had to be taken seriously. By the time he resigned, his official messages... were both largely ignored and treated with derision....

Rubin had something you will not have: credibility... a solid reputation as one of the president’s closest advisers and as someone who could be trusted... an “honest broker.”... He did not speak publicly that often so that, when he did speak, he was listened to carefully. You will not have any of these luxuries.... [Y]our need to campaign for the president over the next five months will mean you will... be seen as being far more political....

Here are three things you should consider to deal with this predicament: First, you absolutely need to limit the spin. For example, saying the deficit is falling precipitously because it is way below the forecast made in the president’s budget may sound good on the campaign trail, but it will also irrevocably establish your credentials as a hack. Second, use good numbers... if you tell Congress a debt ceiling increase is needed by October 1, be certain that the deadline you are imposing is real. Third... start thinking about the long-term; that is, in problems and issues that will arise after George W. Bush leaves office in January 2009.... [D]emonstrating a real interest in things that will blow up in the future will make you a real asset for the country who will quickly become indispensable to the president.

It's a problem. Paulson is coming in too late for the 2007 budget cycle. The 2009 budget cycle will be--because of the presidential campaign--a placeholder. He only has one budget where he can materially affect priorities.

It's a problem.