## Partha Dasgupta Makes a Mistake in His Critique of the Stern Review

Partha Dasgupta makes a mistake. This is a rare, rare, rare event. Dasgupta writes, criticizing the Stern Review:

http://www.econ.cam.ac.uk/faculty/dasgupta/Stern.pdf: To give you an example of what I mean, suppose, following the Review, we set delta equal to 0.1% per year and eta equal to 1 in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels...

In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity as it has this year. With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that the growth rate g(Y) of a zero-population-growth economy is:

g(Y) = r(1 - C/Y)

Take the expression for the rate of growth of consumption g(C) as a function of the parameters δ and η:

g(C) = (r - δ)/η

And see that the assumed values for r, δ, and η give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:

C/Y = .025

because with r=4% per year that is the only way to get g(Y)=3.9%

But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:

g(Y) = r(1 - C/Y) + g(A)

with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:

3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%

which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption.

A consumption-to-output ratio of 77.5% is far from absurd, and so Dasgupta's critique of Stern fails. His mistake is in failing to remember that in his model Haig-Simons output is very, very different indeed from standard reported GDP.

That being said, I agree with most of Dasgupta's major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.

(I'm also enough of a utilitarian fundamentalist to believe that the right value for δ is zero, and that Nordhaus's δ of 3% per year is unconscionable--it means that somebody born in 1960 "counts" for twice as much as somebody born in 1995, who in turn "counts" for twice as much as somebody born in 2020; somebody born in 1960 "counts" for 256 times as much as somebody born in 2160. That's not utilitarianism.)

## Annals of Low-Quality Sociometry

People who are too eager to believe that Black-White test score gaps are immutable and permanent, episode MMCCLXXIV:

The Washington Monthly: CLICK THE LINK....Here is a complete post from Andrew Sullivan last night:

The Black-White Test Score Gap: It isn't going away. Charles Murray and James Flynn debate why here.

Really?

The fact that Charles Murray thinks the gap isn't going away is hardly news, but does James Flynn agree? That would be dispiriting indeed.

But there's no need to give up hope. Here's what Flynn really said:

We analyzed data from nine standardization samples for four major tests of cognitive ability. These data suggest that Blacks gained 4 to 7 IQ points on non-Hispanic Whites between 1972 and 2002. Gains have been fairly uniform across the entire range of Black cognitive ability.

That sure doesn't sound like "it isn't going away" to me. Murray and Flynn aren't debating "why," they're debating "whether." And Flynn has the better of the argument.

## The Iraq Study Group

Blake Hounshell gets it:

The Plan - American Footprints: Here's the nut of the Iraq Study Group's report, which comes out on December 6th:

Committee members struggled with ways, short of a deadline, to signal to the Iraqis that Washington would not prop up the government with military forces endlessly, and that if sectarian warfare continued the pressure to withdraw American forces would become overwhelming. What they ended up with appears to be a classic Washington compromise: a report that sets no explicit timetable but, between the lines, appears to have one built in.

As one senior American military officer involved in Iraq strategy said, “The question is whether it doesn’t look like a timeline to Bush, and does to Maliki.”

Of course, they have failed. It will look like a timeline to Bush, and like not-a-timeline to Maliki.

What the Iraq Study Group should have done, of course--if they wanted to serve their country--was to call for two things, immediately:

1. The resignation of Richard Cheney.
2. The appointment of a "national security czar," whose decisions Bush would rubber-stamp--no longer the "Decider" but the "Approver."

## Cu'atyhv Ztyj'ansu Puevf Syblq E'ylru Jnu'anty Sugnta!

Chris Floyd is the shrillest creature who was, or is, or is to come. It's Tom Friedman's fault. It is a thing of beauty in its own way.

That is all. Words fail me else.

## Do I Need This?

Is it worth it just to be able to say that I was the first on my block to have a terabyte of digital storage in my house?

LaCie - Big Disk Extreme with Triple Interface - USB 2.0, FireWire 400, FireWire 800: The LaCie Big Disk Extreme with Triple Interface delivers seriously impressive capacity while reaching never-before-seen transfer rates that are up to 50 percent faster than 1st regular generation FireWire 800 drives*. With FireWire 800, FireWire 400, and Hi-Speed USB 2.0 interfaces, this plug & play hard drive can help you share data among the widest range of user platforms. Achieve a transparent, built-in RAID 0 array without complicated configuration with its compact 5.25” 1U design. Use it to store presentations, archive image banks or pre-press files, or exchange audio/video projects. The combination of Extreme speed and huge capacity make it ideal for audio/video professionals working on large-scale editing projects or wanting to chain FireWire or iLink DV cameras.

It probably isn't even a real terabyte--that is, it's probably just 1,000,000,000,000 rather than 1,099,511,627,776 bytes.

## Econ 210a: 2006-2007: Memo Question for December 6

What is Alexander Gerschenkron's view of the role of financial markets and institutions in economic development? How might he have modified it had he known about the four decades of development experience that now post-dates his article?

## Econ 210a: 2006-2007: The Spread of Industrialization: November 29

Nov. 29. The Spread of Industrialization [DeLong]

The Five Karl Marxes:

Communist revolution is necessary and inevitable because...

The Technology Marx: ...capital is not a complement to but a substitute for labor, and so technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system cannot and will be seen to be unable to deliver the good society we all deserve, and it will be overthrown.

The Market Extent Marx: ...businessmen continually extend the domain of captalism, and competition from poor workers in newly-incorporated peripheral regions puts a lid on the wages of labor. Hence inequality grows in the core, and triggers revolution.

The Unveiling Marx: ...previous systems of hierarchy and domination maintained control by hypnotizing the poor into believing that the rich in some sense "deserved" their high seats in the temple of civilization. Capitalism unveils all--replaces masked exploitation by naked exploitation--and without its ideological legitimation, unequal class society cannot survive.

The Ideology Marx: ...although the ruling class could appease the working class by sharing the fruits of economic growth, they will not. They are trapped by their own ideological legitimation--they really do believe that it is in some sense "unjust" for a factor of production to earn more than its marginal product. Hence social democracy will inevitably collapse before an ideologically-based right-wing assault, income inequality will rise, and the system will be overthrown.

The Solidarity Marx: ...factory work--lots of people living in cities living alongside each other working alongside each other develop a sense of their common interest and of class solidarity, hence they will be able to organize, and revolt.

Who is the real Marx? Ah, grasshopper, not until you have learned not to ask that question will you be able to snatch the pebble from my hand...

Total Installed Steam Horsepower in Britain:

In 1800: the equivalent of seven SUVs
In 1870: the equivalent of the motor vehicles registered in Berkeley today...

## Polonium, Fresh from the Reactor

Charlie Stross is frightened by the Litvinenko assassination:

Astute readers of the daily fishwraps will have no doubt been aware of the Litvinenko poisoning. (Synopsis for aliens: a former FSB colonel, resident in London and noted for making serious accusations of terrorism at the Russian government, fell ill a month ago and died last week. The cause of death is now believed to be poisoning with radioactive Polonium 210, and police are treating the death as "suspicious" — legalese for "we think he was probably murdered but we don't have any evidence pointing to a specific third party so it's not technically a murder investigation, yet.")

Polonium 210 is interesting stuff. As noted in a variety of places on the web, it is entirely artificial — it doesn't occur naturally, but has to be created by irradiating bismuth in a nuclear reactor or particle accelerator — and it has a half life of 138 days, decaying via alpha emission. To do any damage, it needs to be up close and personal, inside the victim, because alpha particles are absorbed very rapidly: but the biological damage they cause is much more severe than gamma radiation, neutrons, or beta radiation, precisely because all their energy gets dumped into bodily tissues promptly, rather than most of it zipping right through the victim and dissipating harmlessly in mid-air.

And the Wikipedia section on Polonium toxicity makes for sobering reading. ("250 billion times as toxic as hydrogen cyanide" is not a typo!)

Anyway, I digress.

The point is, someone with access to fresh Polonium 210 (read: less than a year old, hot from the reactor) decided to use it to bump off an enemy.

And the terrorism alert status hasn't risen a notch? Pull the other one.

Anyway, to the point: this wasn't simply an assassination. There are any number of poisons out there that would do the job painfully well but much more rapidly, and without the same scope for a diplomatic incident. Likewise, a bullet to the back of the head would have worked just as well (as witness the assassination of Anna Politkovskaya).

What this is, is a warning: "we have the capability to detonate a dirty bomb in central London any time we feel like it, so don't fuck with us". (Just take Polonium and add a little TNT.)

Who the warning is from, and who the intended recipient is, are another question entirely. I don't think it's any accident that the COBRA committee was convened the day after Litvinenko's death (on a Saturday, no less). And I don't think it's any accident that the British press have been very carefully pretending the phrase "dirty bomb" is not part of their vocabulary for the past week.

We're actually facing a national security nightmare: someone has demonstrated the capability to use radiological weapons on the streets of London and we don't know who they are. (Although we can make a couple of guesses.)

Given that Litvinenko was promoting a book that asserted FSB agents blew up two apartment buildings in Moscow and pointed the finger at Chechen rebels in order to justify Putin's subsequent war on Chechnya, one possibility that must be considered is that elements of the FSB may be responsible — and willing to use radiological terrorism as a tool of foreign affairs. It may well not have been ordered by the Kremlin: all it takes is for Vladimir Putin to mutter "will nobody rid me of this turbulent priest?" over his breakfast one morning, and Shit Happens in a foreign capital thousands of kilometres away. (Or it may be entirely deliberate, merely "plausibly deniable", to use the charming CIA-surplus weasel words for "we did it but you can't prove it".)

But we don't know that. It's just a guess. It might be wrong.

And what disturbs me most is that all the other possibilities I've been able to think of are worse ...

## The Budget Process Gets More Deranged

Stan Collender:

BUDGET BATTLES : Punt, Pass And Kick By Stan Collender, NationalJournal.com Tuesday, Nov. 28, 2006: After the House and Senate passed their own versions of a FY07 budget resolution earlier this year, they made virtually no attempt to compromise and come up with a conference report. Instead of developing a budget plan, the leadership decided not to do anything. In other words, they punted.

Congress punted again on the budget after Labor Day when there was no push to get any appropriations other than Defense and Homeland Security to the White House before the election.... Therefore, it is hardly surprising that after the election Congress has again decided to punt. The decision apparently made by the House and Senate leadership last week not to consider any of the remaining FY07 spending bills is completely in line with what it has done all year.

Instead of trying to enact even some of the remaining appropriations, Congress will adopt a continuing resolution that will keep the government funded until sometime in January or February. In other words, the Republican leadership has decided to pass the budget decisions to next year's Democrat-controlled Congress.... [I]t still seems strange that rather than try to take advantage of their final days in power, congressional Republicans would pass the decisions to the other team.

There is talk that this is actually a deliberate plan by some Republican fiscal conservatives in the Senate to strengthen their party’s budget credentials. By not voting for any individual appropriations and instead only going on record in favor of a continuing resolution with a spending level that is way below what will be approved in the individual bills, they supposedly believe that Democrats will be blamed for the increase in spending in the individual bills even though it likely would have been approved by a Republican majority anyway.... Their assumption is that the narrow Democratic majorities in both houses will make a veto override extremely unlikely, forcing Democrats to lower the appropriations while the White House and congressional Republicans get credit for forcing the reductions.

The Republican "punt, pass and kick" budget strategy points to a number of things happening early next year. First, there will probably be a big confrontation between the White House and Congress on the budget early in the year. The fighting and rhetoric could be vicious. No matter what spending levels are approved by the Democrat-controlled Congress, the White House and congressional Republicans will try to label them as excessive... this could easily be the first real battle between the new Congress and the White House next year.

Second... a government shutdown early next year is possible. The best way for Democrats to take away the advantage the veto will give the president will be to... combine the remaining FY07 appropriations into a single omnibus bill and to send it to the White House just hours before the continuing resolution expires.

That would force the White House either to agree with the spending levels or to take the blame for shutting down almost all federal domestic departments and agencies. That proved to be politically devastating in 1995 for a group of congressional Republicans who were far more popular, had a higher job approval rating and better fiscal credentials and spokespeople than the current administration. It's hard to imagine how a government shutdown in 2007 would turn out any better.

Third, the "punt, pass and kick" budget strategy is almost guaranteed to eliminate any possibility of increased political comity...

## The Madmen in the Attic...

Here Mark Thoma watches Tony Giddens in the Guardian discourse on conditions for a "revival of sociology." I listen for a while, and then I want to sidle quietly away before I am noticed:

Economist's View: Did Economics Crowd Out Sociology?: A call to arms, by Anthony Giddens, Commentary, The Guardian:

All you sociologists out there! All you ex-students of sociology! All of you (if there are such people) who are simply interested in sociology and its future! I'd like to hear from you. We live in a world of extraordinary change, in everyday life, family relationships, politics, communications and in global society. We are witnessing, among other things, a return of the gods, as religion re-emerges as a major force in our societies, locally and on a worldwide level.... [W]hy isn't sociology again right at the forefront of intellectual life and public debate?...

I would suggest two main ones. First, sociology's star was dimmed by the rise of market-based philosophies from the early 1980s onwards. As a phase of government, market fundamentalism lasted some twenty years - roughly the period covered by the Reagan and Thatcher governments.... If markets settle most aspects of social life, including social justice, the scope of social factors - the prime province of sociology - is correspondingly reduced. The economic, as it were, predominates heavily over the social.

A second reason I would single out is the impotence many people feel in the face of the future. There are no longer utopian projects that would supply a source of direction.... [S]ociological thinking... was regularly stimulated by an engagement with those who wanted to change the world for the better. ...

What is the remedy...? Market fundamentalism is disappearing from the scene. The stage is set for a return to the social. After all, even the IMF these days gives social and political factors a significant place in development processes - and Mrs Thatcher is long gone....

The answer for me is a return to the style of thinking that originally drove the sociological enterprise. A little bit more utopian thinking might help too... We need more positive ideals in the world... that link to realistic possibilities of change...

I would be less alarmed by Tony Giddens if I were sure that he knew that of the two Bretton Woods institutions it is the IMF--the "Fund"--that is focused on international capital flows, reserves, and exchange rates; and that it is the IBRD--the "World Bank"--that is focused on development processes.

I would be less frightened of Tony Giddens if I believed he took the extraordinary reach and power of market exchange in our world to be something important and interesting to analyze, rather than something regrettable that we mention as little as possible now that Mrs. T. no longer lives in Downing Street, and that we deal with by boxing it up into obsolete Marxist categories.

And I might even be comfortable with Tony Giddens's having access to metal and not just plastic knives if there was less visible nostalgia for the days when so many sociologists were stooges in search of a... well, that's not fair. But let us roll the videotape, and remember just what the "utopian thinking" of the 1970s that Giddens sees as a source of energy for sociology really was--from The Capitalist World Economy that I was assigned in my junior year:

Immanuel Wallerstein, "Modernization: Requiescat in Pace": [Modernization theory] was unquestionably a worthy parable... manipulated by the masters of the world.... [T]he time has come to put away childish things... look reality in the face. We do not live in a modernizing world but in a capitalist world.... The problem for oppressed strata is not how to communicate within this world but how to overthrow it....

[O]nce capitalism was consolidated as a system and there was no turnback... the proletarianization of labor and the commercialization of land.... It will in fact only be with a socialist world-system that we will realize true freedom (including the free flow of the factors of production). This is indeed what lies behind Marx's phrase about moving from the 'realm of necessity into the realm of freedom'.

I do not intend here to preach a faith. Those who wish will believe. And those who do not will struggle against it. I wish rather to suggest an agenda of intellectual work for those who are seeking to understand the world-systemic transition from capitalism to socialism in which we are living, and thereby to contribute to it....

This then brings me to the fourth system based on a socialist mode of production, our future world government. We are living in the transition to it, which will continue for some time to come. But how are we relating to it? As rational militants contributing to it or as clever obstructors of it (whether of the malicious or cynical variety)?...

## We Lie When George W. Bush Wants Us To--Dana Priest

Yep. That's what Washington Post reporter Dana Priest tells Chris Matthews she and the other writers for the Washington Post do. When George W. Bush's flunkies--"our elected government"--want them to avoid calling a spade a spade, they call it a bouquet of flowers.

You see, Dana Priest thinks Iraq is in a "civil war." But she won't call it that in her prose for the Washington Post. Why not?

MATTHEWS: It seems to me the President's afraid that people will begin to think it is a civil war and not the way he wants to define it, which is we gotta fight them there before they fight us here.

PRIEST: Well, I think one of the reasons the President resists that label is because it equates almost with a failure of U.S. policy. I will say for the Washington Post, we have not labeled it a civil war. I have asked around to see why not or see what's the thinking on that and really our reporters have not filed that. We try to avoid the labels, particularly when the elected government itself does not call its situation a civil war. I certainly -- and I would agree with General McCaffrey on this -- absolutely the level of violence equals a civil war.

Journamalism. Why oh why can't we have a better press corps?

## I Belong to No Organized Political Party

Matthew Yglesias says: can't we all just get along? In the process he confirms some of my fears.

Matthew Yglesias / proudly eponymous since 2002: Both/And Not Either/Or: With regard to the split between the Economic Policy Institute's populists and the Hamilton Project's centrists, I would hope that both sides of this debate would see that they need each other. On issue after issue, there's simply no way you're going to build a constituency, politically speaking, for Hamilton-style technocratic tinkering unless moderate Republicans and the business community see a credible risk of something more far-reaching happening. On trade, for example, if folks thing anger at the downside of these agreements really may cause the agreements to fall apart then suddenly you'll find its possible to do lots of stuff to mitigate downsides.

Conversely, it's useful to populists for there to be a moderate left out there offering non-sweeping proposals for progressive change. Absent some kind of giant crisis, the odds of congress finding itself inspired to make a giant leap to social democracy are just incredibly tiny. I'm all for universal health care and most of the rest of this agenda, but while some folks are off building support for sweeping reform, it's good to have other people around slicing the salami thinner such that something could actually be achieved in the short run.

One area where the rubber really does hit the road here is the deficit. If Democrats take the view that first we must balance the budget, then we must bring the budget into surplus, and then we can institute new programs, the country is going to be stuck forever in the Reagan-Clinton-Bush loop where the time for new programs never comes. On fiscal responsibility, it takes two to tango, and insofar as the GOP doesn't want to dance, Democrats can't afford to take sole responsibility.

The most interesting part of this, for me, is the last paragraph. Matthew Yglesias is serving notice that, at least as far as he is concerned, Rubinomics is dead. Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But whatwe turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality.

We will try to argue for fiscal prudence and stability in the councils of the Democratic Party. But I fear this is a bellwether--that we will lose, because the choice will be presented as between (i) left-wing things that are good for the nation, and (ii) centrist things that simply enable another round of right-wing class war by the rich and their minions a decade hence.

Ah well:

Hige sceal þe heardra,
heorte þe cenre,
mod sceal þe mare,
þe ure mægen lytlað

## The Tolkein Translation

Will shall be the sterner,
heart the bolder,
spirit the greater
as our strength lessens

RGE - Salvaging Doha: Brown and Paulson have a go: Salvaging Doha: Brown and Paulson have a go Stefan Geens | Nov 27, 2006 A strangely depressing op-ed piece in the Wall Street Journal this morning: Two intelligent grown men -- U.K. chancellor of the Exchequer Gordon Brown and U.S. Treasury secretary Hank Paulson -- reduced to arguing for free trade from first principles in a bid to salvage the Doha round of trade talks from protectionists among their own ranks. They're eloquent, however:

Despite the successes of trade and liberalization, protectionist forces would have us believe that increased trade and openness hurt the U.S. and the U.K. Maintaining rules and regulations that inhibit competition may appear to be a measure of self-preservation for domestic workers and companies. It is, in fact, self-defeating.

Nations are linked by trade more closely than ever before. So protectionist policies do not work, and the collateral damage from these policies is high. We must have the education and assistance to minimize and soften the dislocations that come from trade. But we must not, in the name of jobs that are becoming uncompetitive and unsustainable today, eliminate more jobs and higher wages tomorrow.

This is so self-evident, and yet here we are in 2006 making arguments for something that should have been settled conclusively decades ago.

## Why Oh Why Are We Ruled by These Liars?

Duncan Black notices one:

Eschaton: Snap: Booby Woodward just called Laura Bush a liar (not with that word of course). Funny.... and the transcript just landed in my inbox:

LAURA BUSH, FIRST LADY: Andy Card, also went on television and said that's not true. And let me just say the one thing about that book: Those quote of mine, were in quotes, and the author didn't call me and fact check. And it just didn't happen.

WOODWARD: Well, first of all, Andy Card, as you know, has gone on television and said the quotes are accurate. And that they did happen. And the first lady is saying that what she said and -- again, there is a way, and a habit they have in the White House of you write something and then they kind of pick it up one step, then they deny the version that they say you wrote.

## Why Oh Why Can't We Have a Better Press Corps? (Sebastian Mallaby/Washington Post Edition)

A reason why I don't think the Washington Post will last a decade: the opening of Sebastian Mallaby's column:

Sebastian Mallaby - A Fix for Social Security? - washingtonpost.com: How Personal Accounts Could Please Both Sides: By Sebastian Mallaby: Monday, November 27, 2006; A19: The next six months could be a productive time for economic policy.... The [Bush] administration, now led by a practical Treasury secretary with the heft to sideline ideologues, may be willing to make concessions.... The most interesting debate will revolve around retirement.... Top administration officials... no longer regard "privatization" -- the diversion of payroll taxes into personal accounts -- as the starting point for negotiation. The solvency of Social Security, not a desire to promote an "ownership society," is their main concern...

The most important thing about Mallaby's opening is that he has no idea whether what he is saying is correct or not.

Sebastian Mallaby does not know whether or not the Bush administration's decision makers are more concerned with Social Security's solvency than with promoting an "ownership society": he does not know who the Bush administration's real decision makers are. Sebastian Mallaby does not know whether or not Treasury Secretary Henry Paulson has the "heft to sideline ideologues": Paulson will certainly try, but O'Neill and Snow tried before him and failed. Sebastian Mallaby does not know whether the Bush administration will be willing to "make concessions" on economic policy issues like Social Security reform: the Bush administration probably does not know itself, yet.

Mallaby hopes that all of these will be the case. And he hopes that by confidently asserting that they are the case, he increases the likelihood that they will become the case. So he confidently asserts that they are the case while still clueless about whether what he is writing is right or wrong.

Respect for your readers? Take care to inform your readers? Don't claim that things are true when you have no idea whether they are true or not?

That's not the business Mallaby is in.

## Duncan Black Nominates Brad DeLong for the Stupidest Men Alive Contest

National Treasure Duncan Black writes:

Eschaton: No. Look, people who advocate adding "personal accounts" to Social Security are just stupid people. Really, just morons. There's no reason to do it. There's no reason to take any part of Social Security contributions and put them in a little fund account with my name on it.

If you think some Social Security contributions should be invested in the stock market (I don't) to raise returns overall, then it can be stuck into an index fund or managed by a fund manager or whatever. I still think that's a bad idea, but there's a rationale for it. There's no rationale for dividing that up into millions of individual accounts. There's no rationale for letting individuals "control their own money" by letting them choose across some finite number of managed funds. Social Security is a lovely program which works just fine and really needs no changes other than extraordinarily nonurgent tweaks to the tax formula at some point.

And, no, there's no need for modest benefit cuts. There's no need for means testing it. There's no need for any of these things The Serious People like Bob Kerrey want to do. There's no need to strike a "grand bargain" which combines some stupid things with some smart things because there's no need to do so. Leave it alone.

There is no problem with the Social Security system. People who continue to argue that there is - and that the problem can be "solved" with the magic private accounts fairy - either have broken brains or are attempting to push an agenda for ideological reasons or for personal enrichment for themselves and their kind.

I would, to defend myself, say:

First, there is a chance--a 40% chance by 2050, and an 80% chance by 2100--that the Social Security system as currently structured will be in a deep financial hole someday. It would be best to make small changes to guard against this first possibility and then probability now rather than waiting until the changes have to be big. So there is, I think, a powerful argument for raising taxes a little--i.e., uncapping FICA so that it hits all wage-and-salary income and a good deal of in-lieu-of-salary income. And there is a powerful argument for cutting benefits a little--i.e., indexing the retirement age to some function of life expectancy so that Social Security benefit years do not go up one-for-one as life expectancy increases. And there is a powerful argument setting up automatic non-political mechanisms to keep the system in whack whether things turn out to be better or worse than we currently expect.

Second, there is a chance--I think a 70% chance--that half or nearly half of Americans are drastically undersaving. A forced saving plan thus seems to me to be a good idea.

Third, the poorer half of Americans have essentially no investments in equities, a historically very high-return asset class. So tax an extra 2% of wages and salaries. Match it one-for-two with money raised from uncapping FICA. And invest it in the U.S. government's Thrift Savings Plan.

That seems to me to be good public policy and to be an attainable political bargain. Or simply sit Diamond-Orszag-Liebman-MacGuineas-Samwick in a room until they all come out (ideally, alive). I'll sign on to whatever emerges.

## Running with Scissors

Edward Scissorhands -- the ballet. Highly recommended.

It does add whole new dimensions of meaning to the phrase "running with scissors."

## Social Security Reform

The Economist hopes for a grand bargain on Social Security reform:

Ingredients of a grand bargain? | Free exchange | Economist.com: So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg outside the government pension system. As part of their schtick on dealing with "middle class anxiety", Democratic wonks have all kinds of ideas for getting ordinary Americans to save more. Some stem from the insights of behavioural economics (such as automatically enrolling workers in 401(k) plans unless they explicitly choose to opt out). Others involve restructuring tax subsidies towards the less affluent by, for instance, replacing today's system of tax-deductions with a limited government match. A paper for the Brookings Institution's Hamilton Project by Bill Gale, Jonathan Gruber and Peter Orszag lays out the details.

If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise. One option: combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan. You can find all the details over at Vox Baby but it is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense.

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see. After 2000 Bush was interested in--well, it was never clear what Bush was interested in, for different advisors said very different things, and Bush never proposed a plan.

But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.

## A Question

When the two children and the dog are fighting over who gets to sit on the family room heating vent on Sunday morning, is this a sign that we have set the thermostat too low?

## The Dollar Looks 40% too High, and Long Treasury Yields Look 200 Basis Points too Low

John Fernald and Bharat Trehan worry about the possibility of a recession:

Is a Recession Imminent? (2006-32, 11/24/2006): The sharp slowdown in housing and the inverted yield curve have led to concerns that the odds of a recession have risen.... Our review of the evidence suggests two conclusions: First, recessions appear difficult to predict; second, while the probability of a recession over the next year may now be somewhat elevated, it does not appear to be nearly as high as the yield curve suggests....

The yield curve is perhaps the best known of all the indicator models used to predict recessions.... [A] model developed by Wright (2006) that uses information on the term spread and the funds rate... estimates a 47% probability of recession over the next four quarters....

There is reason to be skeptical about the current high estimate of the probability of recession, because the unusually low rates at the long end of the yield curve are not well understood....

[T]he ability of the yield curve to forecast recessions is often attributed to the fact that the long-term rate reflects market expectations about future developments in the economy. But in that case, one would expect professional forecasters to have this information as well, leading to survey probabilities similar to those from the yield curve. At a minimum, forecasters should be incorporating information from the yield curve into their forecasts...

In my view, there is (some chance of) three things happening as a result of the fact that long-term U.S. Treasury interest rates are nearly 200 basis points lower than historical average patterns suggest they should be:

1. U.S. short-term interest rates are about to fall by an expected 200 basis points or so--in other words, a recession is about to begin and the Federal Reserve will cut interest rates in response.
2. Investors today are not nearly as averse to liquidity and price risk associated with holding long-term bonds, and as a result there has been a large permanent decline in the term premium.
3. Investors believe in (1) or (2) or some chance of each, but they are wrong: there are huge amounts of money left on the table for people willing to short long-term Treasuries, go long short-term Treasuries, and wait for price relationships to return to normal.

Menzie Chinn worries about the possibility of a dollar crash:

Econbrowser: Will the Dollar Plunge? Would that Be So Bad?: One of the enduring oddities of the international economy is the willingness of foreign investors -- both private, official, and quasi-state -- to hold dollar assets despite the very low returns on such assets, even when comparing in common currency terms. It is this anomaly that Krugman disucusses in an academic paper asessening the possibility of a dollar crisis.

Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences? The answer to the first question depends on whether there is investor myopia, a failure to take into account the requirement that the dollar eventually fall enough to stabilize U.S. external debt at a feasible level. Although it's always dangerous to second guess markets, the data do seem to suggest such myopia: it's hard to reconcile the willingness of investors to hold dollar assets with a very small premium in real interest rates with the apparent necessity for fairly rapid dollar decline to contain growing foreign debt.

The various rationales and rationalizations for the U.S. current account deficit that have been advanced in recent years don't seem to help us avoid the conclusion that investors aren't taking the need for future dollar decline into account. So it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar's value doesn't make sense, and that value plunges.

The presumption that there is investor myopia means that median measures of exchange rate expectations might provide very inaccurate indicators of what will happen in the future. Right now, typical forecasts are for gradual dollar depreciation -- 8 percent over the next twelve months (in log terms) from November 17th, according to DeutscheBank. The USD/EUR rate is forecasted to depreciate by 5.3 percent. In contrast, the Economist reports JP Morgan forecast of zero USD/EUR depreciation over the next year from November 23rd.

Investor myopia might explain -- or at least is consistent with -- the finding that uncovered interest parity (UIP) doesn't hold. Indeed, the failure of UIP is one reason why the "carry trade" is so profitable [see Mike Rosenberg's (Bloomberg) discussion of the long standing nature of carry trade profitability at the end of this chapter]. Of course, in a portfolio balance model common currency returns need not be equalized. But the extent to which the rate of return on USD denominated assets is less than those on other assets is too large to be rationalized by standard portfolio balance models.

On the second question posed, Krugman is much more sanguine. Since balance sheet effects are not relevant (or more accurately, work to the benefit of the US via valuation effects), the dollar decline should have a net positive effect on aggregate demand via expenditure switching. This view is buttressed by the empirical work of Croke et al. (2005) as well as Freund and Warnock (2005).

He is a little less optimistic about avoiding a slump if the current strength of the dollar is due to investor myopia, and housing prices exceed those consistent with rationality and the transversality condition (for instance, if there is a bubble). A downward revision in both the relative market-to-book price (i.e., "q") of housing as well as the value of the dollar might induce a slump if the lags in adjustment to the exchange rate are longer than those to housing prices. My own view is that is likely to be the case.

Indeed, the lags to exchange rate changes are more likely to be longer, the harder it is to move capital and labor to the export sector. After the battering taken by the tradable sector over the past decade, I worry.

And Michele Cavallo worries as well about the carry trade and the failure of uncovered interest parity:

Interest Rates, Carry Trades, and Exchange Rate Movements (2006-31, 11/17/2006): The U.S. dollar has seen some remarkable swings.... Many observers have related these swings to what is known as the carry trade... investors in international financial markets... exploiting the existence of interest rate differentials across countries.

The use of this strategy by investors is puzzling, as the theory of interest parity conditions implies that it should not generate predictable profits.... [A]n investor borrows a given amount in a low-interest-rate currency (the "funding" currency), converts the funds into a high-interest-rate currency (the "target" currency) and lends the resulting amount in the target currency at the higher interest rate....

According to economic theory, an investment strategy based on exploiting differences in interest rates across countries should yield no predictable profits.... [T]he difference in interest rates between the two countries [should] simply reflects the rate at which investors expect the high-interest-rate currency to depreciate.... In practice, however, investors in international financial markets do seem able to make profits through such strategies. In fact, market participants and commentators have often cited the carry trade as the source of several recent exchange rate swings....

If the carry trade is a risky strategy, why are investors reported to use it extensively? The answer lies in the "forward premium puzzle."... Currencies that ... have a low interest rate... tend, on average, to depreciate, not appreciate.... [C]urrencies that... have a high interest rate, tend, on average, to appreciate, not depreciate....

Burnside et al. find that, for the period from 1977 to 2005, the realized cumulative return to their [carry trade] strategy is very similar to that of investing in the S&P500 index... [with a] the lower volatility of its returns...

The message appears to be that the dollar's value is out-of-whack--too high--because nobody expects it to decline by a lot in the near future, and that expectation means that demand for dollar-denominated securities is high because U.S. interest rates are higher than interest rates in Japan and Europe. One again, it looks like there may well be lots of money left on the table.

A conversation in London:

Trader: We have to take off this short-dollar position. We have no edge in predicting exchange rate movements, and it is costing us 1/2 a percent of the leg every quarter. We need to show good short-term results to keep our investors, and this isn't helping.

At which point the fund's principal says one of two things:

Principal: You are right. Liquidate...

Or:

Principal: A, grasshopper. The fact that people like you are coming to people like me telling me that we must take off this short-dollar position is the reason that we must keep the position on...

## The Dollar Moves Downward

FT.com / MARKETS / Currencies - Markets rocked by sharp slide in dollar: By Neil Dennis and Chris Giles in London and Ralph Atkins in Frankfurt Published: November 24 2006 20:08 | Last updated: November 24 2006 20:08: A sharpening slide in the US dollar unnerved global markets on Friday as investors sought to protect themselves from the possibility of sustained dollar weakness.

As US markets were closing on Friday , the euro stood at a 19-month high of $1.309, up 1.2 per cent, while sterling gained 0.9 per cent to a 1½-year peak of$1.9333. The yen climbed 0.5 per cent to ¥115.66....

The euro’s strength could put the European Central Bank under fresh political pressure not to raise interest rates again after the expected quarter percentage point rise to 3.5 per cent on December 7.

The dollar has now fallen this year by more than 10 per cent against the euro and 12 per cent against sterling. Some economists suggest the greenback has further to slide given a weak economic outlook in the US, and the prospect of interest rate cuts there next year....

The gaping US trade deficit, the near certainty of a December rise in eurozone interest rates, rising expectations of a cut in US rates in the spring and wariness about borrowing in yen to finance investments in the US all continued to weigh on the dollar, analysts said.

## Anatole France

Ah. The full quote:

Pandagon: "For the poor citizenship consists of supporting and sustaining the power and idleness of the rich. They must work for those goals before the majestic equality of the laws, which forbids rich and poor alike to sleep under bridges, to beg in the streets and to steal bread." --Anatole France

## The Obviously Correct Grand Strategy of the United States of America

Blake Hounshell on the obviously correct grand strategy of the United States:

American Prospect Online - The Old New World Order: A revival of pragmatic liberal internationalism is what the world, and America, need now. By Blake Hounshell: Shadi Hamid and Spencer Ackerman debated what should serve as the lodestar of a progressive foreign policy vision. Hamid argued that the United States should make the promotion of democracy the centerpiece of its foreign policy, while Ackerman advocated that human rights take that role.... But neither Hamid nor Ackerman offered the correct answer. As the small example of Vietnam helps to illustrate, the United States ought to be redirecting its energies toward renewing its strength and expanding the postwar liberal world order. Do that, and the rest -- democracy, human rights, liberal reforms -- will eventually follow.

Ronald Beisner's new biography of Dean Acheson, this philosophy's most able practitioner, tells the familiar story of this world's creation from the perspective of its key founder. Although Secretary of State Acheson was a lawyer, not an economist, and his president Harry Truman a haberdasher rather than an international trade expert, their instincts were sound. Together with visionary European statesmen such as Jean Monnet and Robert Schuman, they led the creation of a postwar order that has brought the world to unparalleled levels of peace and prosperity. Acheson's main concern was to create a liberal system on what he later called the "half a world" that the United States had come to dominate, facing off against the Soviet bloc. Economic openness, and ever-closer economic integration in Europe, were the primary drivers of this new system....

Acheson was first and foremost a pragmatist, constantly evaluating policy in light of the evidence. When the facts changed, so did his views. The best example, which Beisner elucidates in meticulous detail, is how Acheson rapidly transformed from a cautious advocate of sharing nuclear technology with the Soviets to a stalwart Cold Warrior who sought to use "situations of strength" to compel better behavior from them....

The key to any viable doctrine is that it offer comprehensive guidance on the whole range of foreign policy problems. The Bush Doctrine has failed spectacularly (though this may not yet be clear to all just yet). Hamid and Ackerman's alternatives fall short: how does promoting democracy and/or human rights help us deal with the diverse challenges listed above? Acheson's approach to the world offers a way forward: a pragmatic liberal internationalism underpinned by renewed American strength.

In practice, this means extricating ourselves as honorably as possible from Iraq, creating new security structures in the Middle East and Asia to deal with the threats of the Iraqi civil war, Iran, and North Korea, and incorporating the counterinsurgency lesson so painfully learned in Iraq into military doctrine and practice in Afghanistan. Equally importantly, it means reinvigorating American leadership on global economic issues such as the Doha Round, and working with Europe to devise a more realistic, multilateral approach to Middle East reform. These and other vital priorities are hardly likely to be addressed properly under the Bush presidency, so they will be up to the Democrats in Congress and in a future administration to tackle.

And who knows? Some day, we may see Iraq join the WTO.

## Texas Hold-em?!?!

Hmmm. I actually thought Daniel Craig made a better Bond than Sean Connery. Heresy, I know, but there it is:

Armchair Generalist: A New Bond Isn't A Bad Thing: 1 I wanted to quickly tell you two things about this new Bond movie "Casino Royale." First, Daniel Craig makes an interesting Bond. The movie's trying to show you how Bond became the smooth, hardened killer/lover that Sean Connery played - why does Bond like martinees, Aston Martins, and good clothes - it's all here. Craig plays it well - he's muscled and quick, a much different character from "Layer Cake" - and while he's no Sean Connery, he's going to be better in the next Bond movie.

The movie is about a half hour too long - the director really wanted to make a point about how Bond lost his innocence and became the tough professional, and they really didn't need to drag the movie out so long (2 1/2 hours). The Sony product placement is hardly subtle - the Sony laptops, digital cameras, and personal organizers are all embossed clearly for the audience. But the movie is worth seeing - a Bond who sweats and bleeds and gets messy in fights, and who uses no fancy gadgets or gimmicks. This is not a Roger Moore/Pierce Brosnan Bond model...

But Texas Hold-em? No.

## Milton Friedman, Friedrich Hayek, Augusto Pinochet, and Hu Jintao: Authoritarian Liberalism vs. Liberal Authoritarianism

Jamie K. at Blood and Treasure writes:

Blood & Treasure: Hayekian dictatorship: Greg Grandin in Counterpunch sings of Friedman, Hayek, Pinochet, and someone closer to home:

Friedrich von Hayek, the Austrian émigré and University of Chicago professor whose 1944 Road to Serfdom dared to suggest that state planning would produce not "freedom and prosperity" but "bondage and misery," visited Pinochet's Chile a number of times. He was so impressed that he held a meeting of his famed Société Mont Pélérin there. He even recommended Chile to Thatcher as a model to complete her free-market revolution. The Prime Minister, at the nadir of Chile's 1982 financial collapse, agreed that Chile represented a "remarkable success" but believed that Britain's "democratic institutions and the need for a high degree of consent" make "some of the measures" taken by Pinochet "quite unacceptable."

Well, the left in Britain fought and lost in the 1980’s. But just think what might have happened if it hadn’t fought at all. Anyway:

Like Friedman, Hayek glimpsed in Pinochet the avatar of true freedom, who would rule as a dictator only for a "transitional period," only as long as needed to reverse decades of state regulation. "My personal preference," he told a Chilean interviewer, "leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism." In a letter to the London Times he defended the junta, reporting that he had "not been able to find a single person even in much maligned Chile who did not agree that personal freedom was much greater under Pinochet than it had been under Allende." Of course, the thousands executed and tens of thousands tortured by Pinochet's regime weren't talking.

Hayek's University of Chicago colleague Milton Friedman got the grief, but it was Hayek who served as the true inspiration for Chile's capitalist crusaders. It was Hayek who depicted Allende's regime as a way station between Chile's postwar welfare state and a hypothetical totalitarian future. Accordingly, the Junta justified its terror as needed not only to prevent Chile from turning into a Stalinist gulag but to sweep away fifty years of tariffs, subsidies, capital controls, labor legislation, and social welfare provisions -- a "half century of errors," according to finance minister Sergio De Castro, that was leading Chile down its own road to serfdom.

I think that there is an important difference between Friedman and Hayek. Hayek is an economic (classical) liberal but a social conservative: a believer in respect for throne and altar. Social conservative Hayek can see Pinochet as a good thing: far better to have an authoritarian state that maintains the conservative moral order, if it can be persuaded to adopt laissez-faire economics, than it is to have a democracy that regulates the economy. Friedman, by contrast, hates and fears a government that prohibits use of recreational drugs in your home almost as much as he hates and fears a government that won't let you undersell your politically-powerful competitors. For Friedman, Pinochet is a bad--an aggressive, powerful military dictator--whose evil the Chicago Boys can curb by persuading him to adopt laissez-faire policies. (And, Friedman would say, Pinochet is vastly better than that communist Allende--consider, Friedman would say, that Castro's regime in Cuba is the zenith of what Communist rule can accomplish.)

Jamie K. goes on:

Now, the position of many mainstream intellectuals and economists in China, especially during the mid to late 1990’s was summed up at the time as “liberty before participation”, ie “capitalism now, democracy sometime, maybe.” And there’s still a powerful school of thought in China to the effect that the advantage of CPC rule is that it enables China to establish a full market economy without the kind of “historic mistakes” like the welfare state or the New Deal that you get when the public is allowed to vote itself the keys to the bank. People who call themselves libertarians in China are likely to be strong supporters of the Communist Party, at least on instrumental grounds.

I’ve argued before that many of China’s anti subversion laws – like those against “causing turmoil” or “disturbing social order” - have a Hayekian feel to them. They’re essentially designed as measures to stop people exercising the conceit of reason. If Hayek’s preference was for a liberal dictatorship, China is still the country that best meets that description, despite the recent leftish turn in official policy.

## SONY Drives for PS3 Market Share at Launch

SONY spends a fortune to launch the PS3:

Paul Kedrosky's Infectious Greed: Tearing Down the PS3: Losing Money on Every Sale, etc.: iSuppli has out its teardown of the PS3, and it contains some fascinating factoids:

• Sony is losing an astounding $306.85 to$241.35 in manufacturing and component costs per PS3, depending on the configuration
• Cell processor costs are a rock-bottom $85 • In the entire history of iSuppli's teardowns it has only seen three semiconductors with 1,200 or more pins; the PS3 alone has three such chips The size of the loss per unit is, my recollection, the largest in the history of the gaming industry. It is a fairly remarkable demonstration of how the industry has changed, especially when you consider that the PS3 is delivering supercomputer levels of performance. ## Jackie Calmes Exhbits a Tinge of Optimistic Naivete The highly-intelligent but, it appears, slightly naive Jackie Calmes has hopes for bipartisan action in the next two years. George W. Bush, she believes, has every incentive to act like a rational human being in the circumstances in which he finds himself--and that means striking deals with the Democrats that are in the national interest. The flaw in Jackie's reasoning is obvious: when has Bush every acted like a rational human being? Campaign Journal - WSJ.com: Pledges of Bipartisan Action In Congress Look Shaky: WASHINGTON -- In the days since the midterm election, the signs haven't been encouraging for the bipartisan cooperation that both President Bush and Congress's incoming Democratic leaders initially promised for the coming two years. A couple of factors do keep alive some expectations for joint action. President Bush wants to burnish a legacy that otherwise seems destined to be defined by the misadventures in Iraq. And congressional Democrats want to rack up some achievements, both to deliver on their few and mostly unambitious campaign promises, and to show voters they can govern ahead of the 2008 election. Among the possibilities: a federal minimum-wage increase, renewed budget limits, a rewrite of immigration policy, and lobbying reforms. But even that much will be a big challenge, judging by the post-election maneuvering.... First, the president. Folks in both parties have been looking for signals of whether Mr. Bush will continue to seek his way or no way -- or whether he'll accept voters' rebuke and dust off the more conciliatory governing style of his days as Texas governor. So far, both sides see the old Bush at work. With Republicans still in charge for a lame duck Congress -- Democrats officially take over in January -- Mr. Bush has pushed several issues that Democrats are interpreting as an outstretched hand alright, but "a clear slap in the face," as Democratic Sen. Chuck Schumer of New York put it in one instance. The president is again asking the Senate to confirm John Bolton as United Nations ambassador and five controversial conservatives as federal judges, all of whom saw their initial nominations blocked. He is demanding passage of the bill authorizing warrantless electronic surveillance. He renominated the chairman of the agency for U.S. overseas broadcasting, despite a government report alleging misuse of public funds. And he has chosen as a federal overseer of family-planning grants a man hostile to distribution of contraceptives. Mr. Bush says he will try again to overhaul Social Security, though even with his party in control of Congress, he couldn't get to first base. For any hope of success with Democrats, he would first have to set aside his idea of carving private accounts from Social Security. Then he could call the Democrats' bluff, challenging them to make good on their stated willingness to restore the existing program's long-term solvency. If the two sides then could agree on cost-saving tweaks to Social Security's benefits and tax formulas that both sides know must be made eventually, that would be a huge achievement. It would be one that the George Bush who governed Texas would gladly take for his legacy -- but probably not the George Bush who as president for six years has played to the social and economic conservatives of his party's base. As for the Democrats, Speaker-apparent Nancy Pelosi's... intervening -- aggressively and ultimately unsuccessfully -- to get House Democrats to elect her ally Pennsylvania Rep. John Murtha as the second-ranking Majority Leader.... Mrs. Pelosi mainly acted out of personal loyalty to Mr. Murtha.... But another motivation... was... her desire to elevate Congress' harshest critic of the president and his Iraq policies as House Democratic leader. Then there are the congressional Republicans. Already they are telegraphing that, once officially in Congress' minority, they will feel little responsibility to help Democrats succeed -- or the president, should he reach some bipartisan deals with the other party. Interviews with House Republicans in town for the lame-duck session elicited nothing short of fury with Mr. Bush for waiting until after the election to fire Defense Secretary Donald Rumsfeld, the lightning rod for many voters' dismay with the Iraq war. And the president and his strategist Karl Rove only stoked these Republicans' anger by their suggestions that, more than Iraq, it was corruption in the Republicans' own ranks that cost them their congressional majorities. Even Republicans who accept the corruption rap are angry at this perceived buck-passing by the men in the White House. Such pique wasn't the cause but certainly was a factor when a significant number of House Republicans helped block approval of a trade pact with Vietnam -- even as Mr. Bush was winging his way to that country in hopes of celebrating the agreement. In the Senate, meanwhile, Republicans narrowly resurrected as their No. 2 leader Mississippi Sen. Trent Lott, who openly blames the president and Mr. Rove for engineering his ouster as majority leader two years ago in favor of the hapless and now-retiring Sen. Bill Frist of Tennessee. In House Republicans' elections for their leaders in the coming Congress, a common theme was struck by Texas Rep. Kay Granger after her election last week to a lower-level post. Her "one goal," she told colleagues, is "getting our majority back"... ## Richard Posner Debates Milton Friedman A thing that, as George Shultz likes to remark, everybody likes to do when he is not there to answer--and, alas, he will never answer again. Judge Posner writes: The Becker-Posner Blog: Milton Friedman--Posner's Comment: Perhaps his most important general contribution to economic policy was the simple, but when he first propounded it largely ignored or rejected, point that people have a better sense of their interests than third parties, including government officials, do. Friedman argued this point with reference to a host of issues, including the choice between a volunteer and a conscript army. With conscription, government officials determine the most productive use of an individual: should he be a soldier, or a worker in an essential industry, or a student, and if a soldier should he be an infantryman, a medic, etc.? In a volunteer army, in contrast, the determination is made by the individual--he chooses whether to be a soldier or not, and (within limits) if he decides to be a soldier what branch, specialty, etc., to work in. A volunteer army should provide a better matching of person to job than conscription, and in addition should create a more efficient balance between labor and capital inputs into military activity by pricing labor at its civilian opportunity costs. But this is in general rather than in every case. The smaller the armed forces and the less risk of death or serious injury in military service, the more efficient a volunteer army is relative to a conscript one. These conditions are not satisfied in a general war in which a significant fraction of the young adult population is needed for the proper conduct of the war and the risk of death or serious injury is substantial--the situation in World War II. For then the government's heavy demand for military labor, coupled with the high cost of military service to soldiers at significant risk, would drive the market wage rate for such service through the roof. Very heavy taxes would be required to defray the expense of a volunteer army in these circumstances and those taxes would have misallocative effects that might well exceed the misallocative effects of conscription. I mention this example because I find slightly off-putting what I sensed to be a dogmatic streak in Milton Friedman. I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis. I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly. I also think that Friedman, again more as a matter of faith than of science, exaggerated the correlation between economic and political freedom. A country can be highly productive though it has an authoritarian political system, as in China, or democratic and impoverished, as was true for the first half century or so of India's democracy and remains true to a considerable extent, since India remains extremely poor though it has a large and thriving middle class--an expanding island in the sea of misery. What is true is that commercial values are in tension with aristocratic and militaristic values that support authoritarian government, and also that as people become economically independent they are less subservient, and so less willing to submit to control by politicians; and also that they become more concerned with the protection of property rights, which authoritarian government threatens. But Friedman seemed to share Friedrich Hayek's extreme and inaccurate view that socialism of the sort that Britain embraced under the old Labour Party was incompatible with democracy, and I don't think that there is a good theoretical or empirical basis for that view. The Road to Serfdom flunks the test of accuracy of prediction! I imagine that without the element of faith that I have been stressing, Friedman might have lacked the moral courage to propound his libertarian views in the chilly intellectual and political climate in which he first advanced them. So it should probably be reckoned on balance a good thing, though not to my personal taste. His advocacy of school vouchers, the volunteer army (in the era in which he advocated it--which we are still in), and the negative income tax demonstrates the fruitfulness of his master micreconomic insight that, in general, people know better than government how to manage their lives. But perhaps not always... Let me channel Uncle Milton on one point: replacing a volunteer army with conscription does not get around the "very heavy taxes" with their enormous "misallocative effects" needed to man a wartime army. It simply loads those taxes onto a small group: young adult men (and these days women). It leaves the rest of us scot-free. But it is a redistribution away from the draftees--not an improvement in efficiency. As to Posner's other points--Friedman's faith in markets, Sweden as a personal affront to Friedman, Friedman's excessive confidence that economic freedom would bring political freedom with it, and the falsification by reality of the main argument of The Road to Surfdom--I think they are very good ones. ## A Signal Dropout... If somebody could please tell me what happens on pages 537-538 of Vernor Vinge's A Deepness in the Sky, I would greatly appreciate it. My hardcover copy has shed those two pages. So there is a gap between: For a moment the color of pain was all there was, squeezing out consciousness, fear, even startlement... And: ...finally pounced. Thract looked out across the caldera at the pattern of smoking destruction... If it weren't for the fact that I remember no gaps in page numbering, I would think it a clever act of meta-literature: the characters are, at that point in the narrative, experiencing massive acts of communications deception, spoofing, and dropouts themselves. So why not visit the same upon readers?... Never play a game of lurk-and-pounce against a sentient race of spiders. ## This week in Journamalism Some tasty morsels from this week in Journamalism. We open with a warning to the usually reliable Financial Times: Financial Times! Kristol and Kagan sent, and you published: FT.com / Comment & analysis / Comment - Bush must call for reinforcements in Iraq: By Robert Kagan and William Kristol: President George W. Bush has just over two years left in office. The central question facing him is: what kind of Iraq will he bequeath to his successor? Will it be a metastasising mess dumped on the doorstep of the next president, or an Iraq on the path to stability and success? The answer will determine how this president should be remembered by future generations. There are, of course, other grave issues that will consume the Bush administration over the next two years: the continuing need to defend Americans from terrorist threats; Iran's efforts to acquire nuclear weapons; containment and weakening of a nuclear-armed North Korea; an increasingly belligerent Russia; and manifold challenges presented by a rising China. But the fact remains that Mr Bush (correctly, in our view) took the nation to war to remove Saddam Hussein, and the success or failure of that war will be central to his legacy. The trajectory is downward towards failure. Indeed, this has been the case for more than three years, ever since Pentagon officials decided to put far too few troops in Iraq... At that point, Financial Times, you should have pressed the "delete" key. You do your readers no good service by printing the writings of people who pretend to think that it was "Pentagon officials" who decided to put far too few troops in Iraq. It was Bush, Cheney, and Rumsfeld who decided to do so. Your advantage, Financial Times, is that you rarely publish outright lies. Guard that advantage carefully. We continue with Matthew Yglesias vainly begging Amy Goldstein and Lyndsey Layton to please do some accurate reporting: Matthew Yglesias / proudly eponymous since 2002: Washington Post takes a look at the Democratic agenda. The necessity of some GOP votes, combined with the austere fiscal climate, has influenced how Democrats plan to proceed in their first weeks. Rep. Nancy Pelosi (D-Calif.), the next speaker of the House, has said that one of the first domestic issues she will bring up will be an increase in the minimum wage by$2.10 per hour, to \$7.25. The cost of that would largely be borne by private employers, not the government. President Bush has supported similar proposals, said Dana Perino, a White House spokeswoman.

No doubt Dana Perino did say that, but it's not, you know, true. The "similar" proposals Bush has supported are "compromises" that involve combining small increases in the minimum wage with giant tax cuts for rich people.

We find Kevin Drum doing some intellectual garbage cleanup as the Washington Post messes itself once again:

The Washington Monthly: RELIGIOUS VOTERS.... Why do I keep writing about the exit polls? Because of stories like this from the Washington Post's Alan Cooperman:

Religious liberals contended that a concerted effort by Democrats since 2004 to appeal to people of faith had worked minor wonders, if not electoral miracles, in races across the country.

....Democrats recaptured the Catholic vote they had lost two years ago. They sliced the GOP's advantage among weekly churchgoers to 12 percentage points, down from 18 points in 2004.

....In House races in 2004, 74 percent of white evangelicals voted for Republicans and 25 percent for Democrats, a 49-point spread, according to exit polls. This year, Republicans received 70 percent of the white evangelical vote and Democrats got 28 percent, a 42-point spread.

Once more with feeling: in the the overall national vote, Democrats picked up 5 percentage points compared to 2004. Among Catholics they picked up 6 points. Among weekly churchgoers they picked up 3 points. Among white evangelicals they picked up 3 points....

Nationally, turnout among religious voters was as high as it was in 2004, and their shift toward Democrats was either the same or a bit less than the overall national shift. I'd love to be able to say that Democrats made some disproportionate inroads in this group, since it's such an important part of the GOP base, but they didn't. People need to quit saying it.

And a notable act of past journamalism from last March causes Glenn Greenwald to get mediaeval--nay, to get neolithic--on the New Republic:

Unclaimed Territory - by Glenn Greenwald: Why the Beltway class can't comprehend the Russ Feingolds of the world: UPDATE: One of the best/worst examples of this emptiness comes, unsurprisingly, from The New Republic, courtesy of Ryan Lizza, who chortled at the political stupidity of Feingold's censure resolution but -- of course -- knew exactly why Feingold was doing it (h/t Michael):

Feingold is mystified by the reaction. Democrats, he said this week, are "cowering with this president's numbers so low." The liberal blogosphere, aghast at how wimpy Democrats are being, has risen up in a chorus of outrage....

The nature of the split is obvious. Feingold is thinking about 2008. Harry Reid, Charles Schumer, and other Democrats are thinking about 2006. Feingold cares about wooing the anti-Bush donor base on the web and putting some of his '08 rivals--Hillary Clinton, Joe Biden, and Evan Bayh--in uncomfortable positions. Reid and Schumer care about winning the six seats it will take for Democrats to win control of the Senate . . . .

So the partisans on the left cheering Feingold appear to have both the policy and the politics wrong. Censure is meaningless. Changing the FISA law is the way to address Bush's overreach. And the only way for Democrats to change FISA is for them to take back the Senate. This week, Feingold's censure petition has made that goal just a little bit more difficult to achieve. What an ass.

So knowing and sophisticated. So wise and insightful to the hard-core political realities. Always above the lowly impassioned masses and their misguided, simplistic notions (such as the belief that there should be consequences for presidential lawbreaking -- how excitable and stupid that is). TNR is always so cleverly restrained and calculating.... And all of that is to say nothing about the complete incoherence of Lizza's "argument." How could "changing FISA"... possibly be a solution to the president's lawbreaking when the whole point is that the President claims he has no obligation to comply with FISA...? Censure was the only way (short of impeachment) for Congress to... express its objections to the President's lawbreaking. "Changing FISA" was... a complete non-sequitur.... But to Lizza, that's the more moderate, passionless and less disruptive course. Therefore, by definition, it's the best one...

Eric Boehlert watches the insanity:

Media Matters - The Karl Rove crush: by Eric Boehlert:

"If I were them [Democrats], I'd be scared to death about November's elections." -- Mark Halperin, director of ABC News' political unit, June 22, 2006

My favorite article from the just-completed campaign season appeared in the October 9 issue of Time, in which Mike Allen and James Carney wrote a detailed piece about why Republicans were not worried about the upcoming elections. "The G.O.P.'s Secret Weapon," read the bold headline. "You think the Republicans are sure to lose big in November? They aren't. Here's why things don't look so bad to them," read the subhead.

The article went on and on about how an "eerie, Zen-like calm" had fallen over GOP operatives who, despite a mountain of public polling data, did not fear big election losses. In fact, they coolly insisted their own prospects were "getting better by the day."... Time ended on this chipper note: "As long as they [Republicans] end up keeping control of both houses, they still come out the winner on Election Day."...

[T]he tone of the Time piece -- the working assumption that Republicans would naturally find a way to outsmart Democrats -- was startling.... Bush at the time stood as the most unpopular second-term president in modern history... had spent the previous 18 months careening between a series of political debacles (Social Security, Katrina, immigration, port security, Iraq).... Bush's presidency was in shambles (think Jimmy Carter, circa 1979), yet Time eagerly passed along the transparent spin about how Republican chances were "getting better by the day." Those kinds of simplistic campaign talking points worked wonders with right-wing bloggers and radio talk show hosts who excitedly repeated them as a way to calm their nerves during the campaign homestretch. But Time?

Sure enough, its 1,500-word article did not quote a single Democratic or independent source. It was, in the most literal sense, transparent RNC spin....

[T]he GOP's-sitting-pretty angle became something of an obsession for Time's Allen... October efforts such as "Why The Democratic Wave Could Be A Washout" and "Why Some Top Republicans Think They May Still Have the Last Laugh"... Allen's November 2... "Upset in Michigan?" which hyped the Republican-friendly theory that its candidate there had a chance of knocking off incumbent Democratic Sen. Debbie Stabenow.... no polling data... no quotes from any Democratic or independent observers. The entire Michigan item consisted of quotes from Republicans insisting their guy really, really had a shot....

Rove gave his first, exclusive post-election interview to Time's Allen, who continued to treat his key White House source very gently...

## Never Fire Your Best Polemicist If Your Dork Quotient Is More than 30%

"Never go up against a Sicilian when death is on the line." "Never call your own website 'poor and stupid'." "Never play poker with a man called 'Doc'." "Never eat at a place called 'Mom's'." "Never use vodka to try to remove bloodstains from white linen." "Never get involved in a land war in Asia."

And now we have another one: If the dork quotient of your magazine is more than 30%, never, ever, ever, fire your best polemicist:

Anderson watches the unleashed Spencer Ackerman in action. It is a thing of beauty, in its own way:

Thus Blogged Anderson.: Beware of firing your polemicist: The New Republic's decision to fire Spencer Ackerman cannot possibly have done anything positive for their subscription numbers. Besides which, if you thought Paul O'Neill talked bad about his former boss, you ain't seen nothin' yet:

Among the most annoying of TNR tropes is the flight to meta-analysis as soon as the recognition dawns that the magazine can't win an argument. And here, it pains and saddens me to say, TNR embraces it like a security blanket. First, TNR concedes that nothing it can possibly desire is likely to occur: "The U.S. presence in Iraq will not last long. Perhaps this new political reality will serve as shock therapy, scaring Iraq's warring factions into negotiations that can prevent the worst sectarian warfare. But perhaps not." The "perhaps not" is an intellectual prophylactic: it changes the subject before one can ask what in the world the U.S. could tell the Sunnis and the Shiites that could make them believe that that their interests are better served by peace than by war. If TNR has any idea what it means by this, it has an obligation to say so. But -- and, my friends, I can tell you, because I went to those Thursday editorial meetings for years -- these people have no idea what they mean....

Then, finally, comes the coup de grace. Now that TNR has dispensed with its empty attempt to discuss what ought to be done about Iraq, it comes to the real question:

[A]s we pore over the lessons of this misadventure, we do not conclude that our past misjudgments warrant a rush into the cold arms of "realism." Realism, yes; but not "realism." American power may not be capable of transforming ancient cultures or deep hatreds, but that fact does not absolve us of the duty to conduct a foreign policy that takes its moral obligations seriously. As we attempt to undo the damage from a war that we never should have started, our moral obligations will not vanish, and neither will our strategic needs.

Please believe me when I say that this makes me want to cry.... This is the emptiest of evasions -- a fetishization of "seriousness" without ever actually being serious. In one of my last pieces for them, I wrote that "Faced with a disastrous war, the most important consideration is not 'Were we wrong?' but 'Why were we wrong?' and 'How can we avoid being so wrong in the future?'" I begged TNR during my time there to address these last questions. But now it's dawned on me that my former friends never will.

Ouch.

Anderson does not see Spencer Ackerman's reaction to Frank Foer's turning TNR into a clipping service for the Weekly Standard

toohotfortnr: Hey, Frank, great editing, buddy. You really are a credit to the magazine, and I'm a total dick. Here's what you let Bob Kagan write for you this week:

Some claim that we don't have 50,000 troops to send to Iraq. In fact, the troops are available. Sending additional forces to Iraq means lengthening troop rotations, as the United States has done in previous major conflicts. Sustaining such an increased deployment, however, will require a substantial increase in the overall size of the Army and Marines. This increase, which does not require a draft but does require money, is necessary regardless of what we do in Iraq. It is stunning that this administration has attempted to fight two wars and has envisioned other possible interventions with a force clearly inadequate for these global commitments.

And here's what he wrote with Bill Kristol this very week:

Those who claim that it is impossible to send 50,000 more troops to Iraq, because the troops don't exist, are wrong. The troops do exist. But it is also true that the Army and Marines are stretched, and that this new deployment needs to be accompanied by rapid steps to increase the overall size of American ground forces. For six years, Secretary of Defense Donald Rumsfeld refused to acknowledge that his vision of the American military of the future did not match the present reality of American military engagements in Iraq and Afghanistan and around the world. We trust the new secretary of defense will understand the necessity of dealing urgently with the manpower crisis in our military.

Hey, I didn't know you wanted to turn TNR into a Weekly Standard clip service. You're totally up there with Kinsley and Hertzberg!

Ouch.

Anderson does not see Spencer Ackerman's reaction to Marty Peretz:

Even the bare rudiments of civilization will not soon come back to the banks of the Tigris and the Euphrates.

That's exactly right. The Iraqi civil war will be fought with rocks and sticks. Imagine the danger if they realized how to harness fire! Lucky for us that the savages have not learned how to use the wheel...

Ouch.

Or to Leon Wieseltier:

toohotfortnr: bow down, bow down -- God will infest you with maggots, my son: Oh, Leon! Why? You studied under Sir Isaiah! How could you ever, ever, write this line:

For three-and-a-half years, the Iraqis have been a free people.

You knew him and I didn't. But I daresay Isaiah Berlin would have upbraided you for saying this. No, my friend, chaos is not freedom, the Iraqis were never free, and as Becker and Fagan put it, only a fool would say that.

Ouch.

## More Nominees for the Stupidest Men Alive Contest

More Stupidest Men Alive contest nominees:

Duncan Black nominates Ken Pollack of the Brookings Institution:

Eschaton: The People We Listened To: Kevin Drum pulls up a Ken Pollack flashback:

Just to be clear about this: in 1990, Iraq built a workable nuclear weapon. All it lacked was the fissile material.

Anyone with a wee bit of sense reading those two sentences would know that the person who wrote them is either a shameless propagandist or quite possibly the stupidest f------ person on the face of the planet.

In the early 1990s I built a workable time machine. All it lacked was the flux capacitor and 1.21 gigawatts of electricity.

And Juan Cole nominates Condi Rice:

Informed Comment: Rice Urges Iraq to be more like Vietnam (???!!): AP says that Secretary of State Condi Rice asserted Saturday that Iraqis only have a future if they stay within a single state. She pointed to Vietnam's success in reforming its economy and making up with the United States and held it out as a model to Iraq.

Whaaat?

Rice surely knows that the way in which Vietnam achieved national unity was... for the radical forces to drive out the Americans, overthrow pro-American elements, and conquer the whole country. They only went in for this capitalism thing fairly recently. Rice, a Ph.D. and former Provost of Stanford University, shouldn't be saying silly things like that Iraq should emulate Vietnam. I guess if you hang around with W. long enough, you catch whatever it is that he has.