Previous month:
November 2006
Next month:
January 2007

December 2006

The Terraforming Begins...

On a small scale, but it is a start:

BBC NEWS | Europe | Italy village gets 'sun mirror': Viganella marked its "day of the light" on Sunday: A sun-deprived village in the Italian Alps has come up with a novel solution to fix the problem - by installing a giant mirror. The mirror - an eight-by-five metre (26x16ft) sheet of steel - was placed on a nearby peak to reflect sunlight onto Viganella's main square below. The computer-operated mirror will now be constantly following the sun's path.

Viganella sits at the bottom of a steep valley, and surrounding mountains cut off direct sunlight during the winter.

"It wasn't easy," Village Mayor Pierfranco Midali told Italy's Ansa news agency.

"We had to find the proper material, learn about the technology and especially find the money," he said.

The project cost some 100,000 euros (£67,110) and was financed by the regional authorities and a bank. Viganella's problem is that it was built at the bottom of a very steep-sided Alpine valley, right up against the Swiss border. The southern side of the valley is so sheer that on 11 November the sun disappears and does not reappear until 2 February.

Not a single ray of sunlight falls on Viganella in the weeks in between.

"It's like Siberia," one of the village's nearly 200 residents has said...

How Low Can They Go? (Rudolph Giuliani Spin Edition)

The things people will do to burnish their reputation for the Republican Presidential primaries. Here Rudolph W. Giuliani, in his campaign biography, denies all knowledge of his two so-called "children" and of his two so-called "ex wives": Rudolph W. Giuliani was born in 1944 to a working class family in Brooklyn.... Italian immigrants... strong work ethic... equal opportunity.... Bishop Loughlin Memorial High School, Manhattan College... New York University Law School.... United States Attorney for the Southern District of New York... Chief of the Narcotics Unit at age 29. In 1975, Rudy was recruited to work in Washington, D.C., and was appointed Associate Deputy Attorney General and chief of staff to the Deputy Attorney General. In 1977, Rudy returned to New York to the private practice of law.

The Crime Fighter: After the inauguration of Ronald Reagan in 1981, Rudy was named Associate Attorney General.... United States Attorney for the Southern District of New York.... Mayor of the City of New York... overall crime was cut by 57%.... September 11th, 2001.... Giuliani Partners in January, 2002, quickly establishing the consulting firm as a leader in the fields of emergency preparedness, public safety, crisis management, energy and health care... “boutique investment banking”... Giuliani Capital Advisors... Bracewell & Giuliani....

In May of 2003, Rudy married Judith S. Nathan. Mrs. Giuliani is a registered nurse with an extensive medical and scientific background. She currently serves as Managing Director of Changing Our World, Inc., a national fundraising and philanthropic services company headquartered in New York. In the aftermath of the September 11, 2001 terrorist attacks, Mrs. Giuliani coordinated the efforts at the Family Assistance Center on Pier 94. She was also a founding member of the Board of Trustees of the Twin Towers Fund, which raised and distributed $216 million to over 600 families and individuals.

In 2006, Mrs. Giuliani was awarded New York University College of Nursing’s “Humanitarian Award” in recognition of using her nursing identity for humanitarian work and charitable endeavors as well as for being a powerful voice that enhances the visibility of nursing and elevates the profession. Also in 2006, Mrs. Giuliani received the “St. Francis Xavier Cabrini Service Award” from Mother Cabrini High School, an award honoring her commitment to young women and their education.

What Should We Be Doing About Global Climate Change?

There are lots of fake disputes over global climate change. Does carbon dioxide in the atmosphere act like a giant blanket warming the earth? (Yes.) Does uncertainty about global warming mean that we should delay action? (No.) Should we be spending a much bigger fortune than we are on research: research into carbon-neutral power technologies, research into carbon-sequestration technologies, research into albedo-increasing technologies? (Yes.) Should India, China, and company have to bear a substantial part of the medium-term burden? (No: the rich countries got to take an easy carbon emissions-intensive path to industrialization and riches; theirs is the medium-term responsibility for dealing with the problem.) Should we be building or blocking the formation of the international institutions that will manage our reactions to global climate change over the next several centuries? (The first.)

There is, however, one real dispute: what else, besides research, should we be doing over the next decade or two? We economists like to think of things in terms of prices. And when we economists see something going wrong in the sense of having destructive side-effects, we like to tax it. Taxing it makes the individuals who are undertaking actions feel in their wallets the destruction they are causing elsewhere. Maybe the action is still worth doing, and maybe not. Imposing a tax--imposing the right tax--on those who are, say, driving low-mileage SUVs is a way of harnessing the collective intelligence of humanity to deciding in which case the bad side-effects are a reason to stop. But it needs to be the right tax.

An SUV going ten miles in the city and burning a gallon of gasoline pumps about 3 kilograms--6.5 pounds--of carbon in the form of carbon dioxide into the atmosphere. Should the extra tax on this--and on all carbon emissions--appropriate for global warming be on the order of five cents a gallon, fifty cents a gallon, or a dollar fifty a gallon? Our views will change as we learn more, but at the moment whether the tax should be five or fifty cents a gallon hinges on a question of moral philosophy: how much do we believe that we owe our distant descendents?

Australian economist John Quiggin has a very illuminating discussion on his website The Stern Review on Global Climate Change (on the internet at which comes down more on the side of fifty cents a gallon, immediately, does so because they project that spending today to reduce carbon emissions is a very good investment for the future. If the world grows in per capita income at about 2% per year, a marginal expenditure of roughly $70 today in cutting carbon emissions would be worth it if it were to enrich the world of 2100 by about an extra $500 of year-2006 purchasing power, once all the damages to the world economy and environment from global warming, costs of adjustment, and so on are taken into account. This looks like a very good deal to Nick Stern and his team.

On the other hand, critics point out that the world today is poor: average GDP per capita at purchasing power parity today is roughly $7000. We expect improvements in and the spread of technology to make the world of 2100, at a 2% per year growth rate much richer than the world of today: $50,000 per capita of year-2006 purchasing power. We today can use the marginal $70 per capita, critics say, much more than the richer people of 2100 will need the $500 or so they would gain from not having to suffer from the effects of global climate change.

What critics don't often say is that the same logic applies to the world today. The U.S., Japan, and Western Europe today have average incomes of roughly $40,000 per capita. The poorer half of the world's population today have incomes of less than $6,000 per capita. The same logic that says that we today need our $70 more than the people of 2100 need an extra $500 also tells us that we ought to tax the world's rich in the OECD more and more to fund world development as long as each extra $500 in first-world taxes generates even as little as $70 in extra poor-periphery incomes. If we in the world's rich now are stingy toward the (likely to be much richer) future and want to leave them our environmental mess to deal with, we should be lavish toward our poorer brothers and sisters today. If we today are stingy toward our poorer brothers and sisters now, we should be lavish toward our descendents.

At least, that is what we should do if we want to fulfill our part of Edmund Burke's great worldwide social contract between the dead, the living, and the unborn. If we

Unclear on the Concept of a "Free Market"

John Derbyshire encounters the free market in health care, and recoils in horror. Via Kevin Drum:

The Washington Monthly: BEST IN THE WORLD, BABY, BEST IN THE WORLD.... From John Derbyshire over at The Corner:

CHRISTMAS PRESENT [John Derbyshire] My health insurer has just notified me, in a brief form letter, that my monthly premiums are to rise from $472.33 to $857.00 on January 1st. That's an increase of 81 percent. EIGHTY-ONE* PERCENT Can they do that? I called them. They sound pretty confident they can. Ye gods!

A conservative reader emailed this item to me with the following comment: "I've heard people say a conservative is just a liberal who's been mugged. Then maybe a liberal is just a conservative who suddenly got this in the mail."

You see, John, there is this thing called the "market." People who want to buy health insurance--that's you, John--look for people who want to sell health insurance, and when you find one and agree on a price you make a "transaction." This is a voluntary exchange. Both sides to do it. The health insurer has just told a customer that they want to charge you not $5,668 for next year but rather $10,284. If the customer doesn't like that price, the customer should look for another health insurer.

Now we liberals have lots of reasons and arguments for why we would not expect free markets in health insurance to work very well, and Derbyshire has just encountered one of them: it looks as if his particular health plan is entering an adverse-selection death spiral.

Why Oh Why Can't We Have a Better Press Corps? (Washington Post Trifecta Edition)

Yes, this morning we have a Washington Post trifecta of journamalism. E.J. Dionne, Anne Applebaum, and now this:

Peter Baker and Robin Wright talk about the thuds and screams inside the Topkapi Palace without ever telling us (a) which people inside the White House who know anything about military affairs are in favor of boosting troops in Iraq by 30,000 for an additional six months, or (b) what the advocates say those soldiers are supposed to do while they are there. Military planners are opposed, they say. "White House officials" are "aggressively promoting the concept." Ummm... Which "White House officials" please? Steven Hadley? Karl Rove? Josh Bolten? And why are they doing so?

If it is indeed true that nobody in the Roosevelt Room meetings who has commanded a company is in favor of this, then Baker and Wright should say so. If it is indeed the case that this has been stovepiped in from the AEI via Cheney's office and that the entire government is appalled (save for Condi Rice who is lying low because she doesn't want to disagree with wherever Bush comes out), then say so.

And if you won't clue us in to what is really going on, get out of the way and turn your column inches over to people who will:

White House, Joint Chiefs At Odds on Adding Troops - The Bush administration is split over the idea of a surge in troops to Iraq, with White House officials aggressively promoting the concept over the unanimous disagreement of the Joint Chiefs of Staff, according to U.S. officials familiar with the intense debate.

Sending 15,000 to 30,000 more troops for a mission of possibly six to eight months is one of the central proposals on the table of the White House policy review to reverse the steady deterioration in Iraq. The option is being discussed as an element in a range of bigger packages, the officials said.

But the Joint Chiefs think the White House, after a month of talks, still does not have a defined mission and is latching on to the surge idea in part because of limited alternatives, despite warnings about the potential disadvantages for the military, said the officials, who spoke on the condition of anonymity because the White House review is not public.

The chiefs have taken a firm stand, the sources say, because they believe the strategy review will be the most important decision on Iraq to be made since the March 2003 invasion. At regular interagency meetings and in briefing President Bush last week, the Pentagon has warned that any short-term mission may only set up the United States for bigger problems when it ends...

Why Oh Why Can't We Have a Better Press Corps? (E.J. Dionne/Washington Post Edition)

Shorter and smarter E.J. Dionne:

Every two years there is a crucial election that totally transforms the future of America!

Yes, that is smarter than what E.J. Dionne actually wrote. Ten years, Post, unless you repent:

E. J. Dionne Jr. - 'The Real America,' Redefined - When a nation alters its philosophical direction and changes its assumptions, there is no press release to announce the shift, no news conference where The People declare that they have decided to move down a different path.

Yet 2006 is looking more and more like one of history's hinge years, a moment when old ideas are cast aside, new leaders emerge and old leaders decide to speak in new ways. The changes in politics and culture are visible in the many sudden and outright reversals of the conventional wisdom....

It wasn't all that long ago that Democrats and liberals were said to be out of touch with "the real America," which was defined as encompassing the states that voted for President Bush in 2004, including the entire South. Democrats seemed to accept this definition of reality, and they struggled -- often looking ridiculous in the process -- to become fluent in NASCAR talk and to discuss religion with the inflections of a white Southern evangelicalism foreign to so many of them.

Now the conventional wisdom sees Republicans in danger of becoming merely a Southern regional party. Isn't it amazing how quickly the supposedly "real America" was transformed into a besieged conservative enclave out of touch with the rest of the country? Now religious moderates and liberals are speaking in their own tongues, and the free-thinking, down-to-earth citizens in the Rocky Mountain states are, in large numbers, fed up with right-wing ideology.

Only a few months ago, it was widely thought that accusing opponents of wanting to "cut and run" in Iraq would be enough to cast political enemies into an unpatriotic netherworld of wimps and "defeatocrats."

Now the burden of proof is on those who claim that fighting in Iraq was a good idea and that the situation can be turned around....

How durable are these changes? In both politics and culture, the side that thinks it's losing usually accommodates itself to the ascendant order. My hunch is that we will be seeing many new claims to moderation and social concern on the right and many fewer fake NASCAR fans on the left.

Why Oh Why Can't We Have a Better Press Corps? (Anne Applebaum/Washington Post Edition)

Shorter and smarter Anne Applebaum:

It's all Europe's fault that they don't have a magic wand to wave to get us out of the catastrophe in Iraq that they warned us against.

Believe it or not, that sentence is smarter than what she actually wrote. As I said, I give the Post ten years.

And what does Duncan Black do? He ignores me!

Eschaton: Aneurism: I couldn't deal with Anne Applebaum yesterday because exposure to her column was going to cause several aneurisms to form and burst. But, let's have a Carnival of the Inanities. Henley. Scott.IOZ. Brendan (warning: somewhat rude)...

Thailand Experiments with Capital Controls

The first day doesn't go that well:

Thailand Lifts Investment Controls: Financial News - Yahoo! Finance: Thai government is lifting controls on foreign investment in stocks after the market plunged nearly 15 percent on Tuesday, rattling regional bourses amid worries about a repeat of the 1997 Asian financial crisis.

Finance Minister Pridiyathorn Devakula said that the controls -- announced just a day earlier -- would remain on foreign investments in bonds and commercial paper as part of central bank's measures to stem the surge of speculative investment in the Thai baht, which had risen to a nine-year high versus the dollar on Monday.

Investors dumped stocks in Hong Kong, India, Indonesia, Malaysia, South Korea and the Philippines amid contagion concerns that the plunge might to spread through the region and trigger the kind of slump that enveloped Asia nearly ten years ago.The Stock Exchange of Thailand's benchmark SET Index closed down 14.8 percent at 622.14, after plunging as much as 19.5 percent earlier.

It was the market's biggest one-day drop ever, and brought the benchmark index to its lowest since October 2004. The hardest hit sectors were banking, energy and telecommunications.The plunge came after the Bank of Thailand late Monday announced its toughest measures yet to clamp down on speculative inflows that have lifted the Thai currency, the baht, to a nine-year high of 35.09 to the dollar.

The measures said that starting Tuesday, all banks were required to hold in reserve for one year 30 percent of capital inflows that aren't trade- or services-related, or repatriation of Thai residents' investments abroad. Also, foreign investors must pay a 10 percent penalty unless they keep funds in the country for a year.

Effectively, the central bank's rules meant that if a foreign investor allocated the equivalent of 100 million baht to the Thai bond market, the investor could only buy 70 million baht of bonds, while the remainder would be withheld by the central bank, earning no interest.

If the investor wanted to withdraw the money in less than a year, only two-thirds of the amount withheld would be returned, an effective 10 percent tax on the initial investment amount.The moves spooked international investors, who viewed the measures as drastic and dimming the allure of Thai stocks.

David Cohen, chief of Asian economic forecasting for Action Economics in Singapore, said the worries may be unfounded because the situation in Thailand now is fundamentally different from the events surrounding the 1997-98 Asian financial crisis. The big problem ten years ago was currency weakness; now, it's currency strength...

Madbodger Buys a TiVo


madbodger: I bought a HD TiVo and wanted to hook it: Side rant on automated attendants. If I key in my phone number, I'm annoyed when I have to key it in again, and then say it to whoever answers. Worse, some attendants won't LET me key in information. I have to SAY it. Since they're only available during business hours, I have to call from at work. Since I work at the customer's site, I have no privacy. And these automated attendants get more and more creative about the stuff they want you to say out loud in a crowded room.

I imagine some nut like baronmind works for them, coming up with progressively more bizarre things you have to say out loud to get anything. Reading a credit card number is bad enough. Saying things like "YES ...... YES ...... CUSTOMER SERVICE ....... CUSTOMER SERVICE!..... FIVE SEVEN BAKER THREE ALPHA OMEGA ZERO ZERO ....... YES ...... NO ....... CABLE ....... NEW SERVICE ...... YES........ SEVEN FOUR ZERO DESTRUCT ZERO ..... PAPA INDIA MLENDY GRACKLE BORGWARD ONE ...." tends to garner some interesting stares. What's next?

The Civil War in Iraq Corcyra

For some reason, both the New Republic and the Weekly Standard rejected this forecast of civil war in Iraq account of the civil war in Corcyra when it was submitted to them back in 2003:

Thucydides 3.82-83, U. of Saskatchewan: So savage was the factional strife that broke out -- and it seemed all the worse in that it was the first to occur. Later on, indeed, all of Hellas (so to speak) was thrown into turmoil, there being discord everywhere, with the representatives of the demos wanting to bring in the Athenians to support their cause, while the oligarchic factions looked to the Spartans. In peacetime they would have had no excuse nor would they have been prepared to summon them for help, but in the midst of a war, the summoning of outside aid readily offered those on both sides who desired a change in the status quo alliances that promised harm for their opponents and, at the same time, benefit for themselves.

Many harsh events befell the various cities due to the ensuing factional strife -- things which always occur in such times and always will occur, so long as human nature remains the same, although with varying degrees of violence, perhaps, and differing in form, according as variations in circumstances should arise. For in peacetime, and amid prosperous circumstances, both cities and individuals possess more noble dispositions, because they have not fallen into the overpowering constraints imposed by harsher times. But war, which destroys the easy routines of people's daily lives, is a violent schoolmaster, and assimilates the dispositions of most people to the prevailing circumstances.

So then, affairs in the cities were being torn apart by faction, and those struggles that occurred in the latter stages of the war -- through news, I suppose, of what had occurred earlier in other cities -- pushed to greater lengths the extravagance with which new plots were devised, both in the inventiveness of the various attempts at revolt and in the unheard-of nature of the subsequent acts of retaliation.

And people altered, at their pleasure, the customary significance of words to suit their deeds: irrational daring came to be considered the "manly courage of one loyal to his party"; prudent delay was thought a fair-seeming cowardice; a moderate attitude was deemed a mere shield for lack of virility, and a reasoned understanding with regard to all sides of an issue meant that one was indolent and of no use for anything. Rash enthusiasm for one's cause was deemed the part of a true man; to attempt to employ reason in plotting a safe course of action, a specious excuse for desertion.

One who displayed violent anger was "eternally faithful," whereas any who spoke against such a person was viewed with suspicion. One who laid a scheme and was successful was "wise," while anyone who suspected and ferreted out such a plot beforehand was considered still cleverer. Any who planned beforehand in order that no such measures should be necessary was a "subverter of the party" and was accused of being intimidated by the opposition. In general, the one who beat another at performing some act of villainy beforehand was praised, as was one who urged another on to such a deed which the latter, originally, had no intention of performing.

Indeed, even kinship came to represent a less intimate bond than that of party faction, since the latter implied a greater willingness to engage in violent acts of daring without demur. For such unions were formed, not with a view to profiting from the established laws, but with a view toward political advantage contrary to such laws. And their mutual oaths they cemented, not by means of religious sanction, but by sharing in some common crime.

Fair proposals offered by the opposing faction were accepted by the party enjoying the superior position in a guarded fashion, not in a truly generous spirit. More concern was placed on exacting vengeance from someone else than on not suffering a wrong yourself in the first place. And if ever oaths of reconciliation did come about, having been exchanged in the face of some temporary difficulty, they remained in force only so long as the parties possessed no resources from any other source. The one who was quicker to seize the opportunity for some daring outrage, if ever he saw his opponent off his guard, took more pleasure in taking vengeance in this way than if he had done so openly, considering this method to be safer and thinking that, by getting the upper hand through deceit, he had won in addition the prize for cleverness. And indeed, most people accept more readily being called clever, when they are knaves, than being called fools when they are honest: the latter they take shame in, whereas they preen themselves on the former.

The cause of all of these things was the pursuit of political power, motivated by greed and ambition. And out of these factors arose the fanatical enthusiasm of individuals now fully disposed to pursue political vendettas. For the leading men on both sides in each city, employing fine-sounding phrases and advocating either equality before the law for the masses (in the case of the democrats) or the moderate rule of the best men (in the case of the oligarchs) made a show of serving the common good but in fact engaged in competition for personal advancement. Competing in every possible fashion to get the better of their opponents, they went to the farthest extremes of daring and executed even greater acts of vengeance, not limiting themselves by the demands of justice or the interests of the city, but only by their whims at any particular moment. In their efforts to gain power either through the use of trumped up lawsuits or by force, they were always ready to pursue the political vendetta of the moment. The result was that neither side was wont to pay any regard to personal integrity: those who succeeded in accomplishing some act of malice under cover of some fine phrase were the ones to gain general approval. By contrast, those citizens who chose the middle course of moderation perished at the hands of both factions, either for their failure to join in the struggle or due to envy at the fact that they were surviving amid the general chaos.

Thus moral degeneration took hold throughout Hellas due to such factional strife, and that simplicity of character common in former times -- of which a concern for honor had formed the greatest part -- became an object of mockery and disappeared. People were ranged against one another in opposite ideological camps, with the result that distrust and suspicion became rampant.

For there was no means that could hope to bring an end to the strife -- no speech that could be trusted as reliable, no oath that evoked any dread should it be broken. Everyone, when they had the upper hand, reckoned that there was no hope of any security by means of promises or oaths, and so concentrated on taking precautions not to suffer any injury rather than daring to trust anyone.

And, for the most part, those of more limited intelligence were the ones to survive: in their fear regarding their own deficiencies and their opponents' cleverness, lest they might be defeated in debate (e.g. in a political trial) or be forestalled in laying some plot by their opponents' cunning, they turned to action right away with a boldness born of desperation.

Their opponents, overconfident in their assurance that they could anticipate the plots of their less intelligent antagonists, and feeling that they could attain their ends by cunning rather than by force, tended to be caught off guard and so perished.

John Porter, translator

Jared Bernstein Writes in on Alan Reynolds

Hoisted from comments:

Grasping Reality with Every Limb: Brad DeLong's Semi-Daily Journal: Intellectual Garbage Collection: The Unreliability of Alan Reynolds: The problem with Reynold's critique is that he latches on to a few correct points about the limitations of the IRS SOI data, then he:

  • ignores the work others have done to correct these problems;
  • way overstates the bias from these problems;
  • ignores other data that do not suffer from these problems; *having ignored all the inconvenient evidence to the contrary, misleadingly concludes there's no inequality problem.

He's not nuts. Some changes in inequality as measured by the IRS SOI data (the main source for Pik&Saez) are induced by income shifting due to tax changes. But while that can explain a spike in one year to the next, it doesn't explain longer trends in income concentration found in that and every other data set we have.

Also, analysts at IRS have worked hard to try to deal with some of these shortcomings. Take a look at this paper--the figures and tables clearly show an increase in inequality since 1988 income measures that correct for some of the inconsistencies.

I won't belabor the CBO points others have made, other than to say that these data go the furthest towards addresses all the concerns raised by Reynolds. Sorry if these tables don't align correctly--I just pasted them in from excel.

They show real household income changes, since 1988. 2000 was an economic peak and the year before the bursting financial bubble took a big bite out of high incomes (large capital losses), so you see more inequality if you stop there. But I've include the latest CBO year too--02-03--to show that the old pattern is returning.

Pretax        1988-2000  1988-2003  2002-2003
Bottom fifth     15.6%      9.6%      -1.3%
Mid fifth        11.2%      7.5%      -0.4%
Top fifth        35.3%     19.0%       2.3%
Top 1%           68.4%     25.1%       5.9%

Posttax       1988-2000  1988-2003  2002-2003
Bottom fifth     17.7%     13.7%      -1.4%
Mid fifth        12.9%     13.1%       0.7%
Top fifth        30.9%     20.0%       3.9%
Top 1%           60.4%     22.1%       8.2%

Source: CBO

You simply can't write about this stuff in good faith and leave all this information out, unless you're trying to push an agenda that's dependent on misleading.

Gordon's Notes Rents a Car

The struggle over price discrimination continues:

Gordon's Notes: Car rental: enter gold number, price jumps $200: The 'arms race' of modern pricing continues apace. I priced a personal 5 day van rental twice on Travelocity - once with no loyalty number added and again with the loyalty number.The price of loyalty, was a $200 increase. Yes, I would pay Avis for the joy of being a loyal customer.

To their credit Travelocity listed Avis twice after I entered my registration number, once at the disloyal price and again at the inflated loyal price.These days it is increasingly foolish to do any price negotiation directly with a travel related vendor.

Why Is TV so Low-Quality?

Back when there were only three networks and TV was entirely advertising-supported, this made a lot of sense:

Marginal Revolution: Why is TV so often stupid: Why is TV so often stupid:

TV is not vulgar and prurient and dumb because the people who compose the audience are vulgar and dumb. Television is the way it is simply because people tend to be extremely similar in their vulgar and prurient and dumb interests and wildly different in their refined and aesthetic and noble interests.

That is from David Foster Wallace. Here is the link, from Ben Casnocha.

You see, network TV made money not by providing the maximum value to watchers, but by providing advertisers with the maximum number of eyeballs. The two are not the same.

Now, however, we have cable, and hundreds of channels. So things should be changing. But I see no signs that they are.

Liars, Charlatans, and Republican Legislators

Yes, Mark Thoma gets shriller and more firmly based in reality with each passing day:

Economist's View: A Gathering of Liars and Charlatans:I will be glad when this nonsense ends. Government hearings should not be "a gathering of liars and charlatans, sponsored by those industries who want to protect their profits." This is Daniel P. Schrag, professor of earth and planetary sciences at Harvard and director of the Harvard University Center for the Environment recounting his recent experience testifying before the Senate Committee on Environment and Public Works:

On a swift boat to a warmer world, by Daniel P. Schrag, Commentary, Boston Globe: I am a climate scientist and an optimist. This may seem like a contradiction, with all the talk of scorching heat waves and bigger, deadlier hurricanes. But it's not. Let's be clear: I am not a skeptic on climate change. In my earth science courses, I teach that burning fossil fuel is raising atmospheric carbon dioxide to levels not seen on Earth for more than 30 million years. In public lectures, I show pictures of what would happen ... if half the Greenland Ice Sheet melted, asking people to imagine abandoning New Orleans and Miami. I tell people that, unless we take action to reduce emissions, the question is not whether this is going to occur, but when.

Yet I am an optimist because I believe we can fix the climate change problem. We can deploy the technologies to meet our energy needs while slashing carbon emissions: plug-in hybrids, windmills, carbon sequestration for coal plants, and even nuclear power....

Unfortunately, I am a little less optimistic today than I was a couple of weeks ago, before testifying at the Senate Committee on Environment and Public Works. It was Senator James Inhofe's last hearing as chair of the committee, and the focus was on media coverage of global warming. I was invited by the Democratic staff to counter arguments that global warming is a hoax perpetrated on the American people by scientists like me....

I still hoped I could help educate our lawmakers -- maybe not Inhofe, but perhaps some of the others.... [G]lobal warming is not a partisan issue. America should lead the world and capitalize on an extraordinary business opportunity as we invest in new energy technologies, I said. Then I watched in horror as Inhofe's witnesses spouted outrageous claims intended to deceive and distort. Two were scientists associated with industry-funded think tanks. They described global warming as a "mass delusion" among the scientific community, sowing confusion by misrepresenting the ... data... They even recommended burning as much fossil fuel as possible to prevent another ice age....

Some senators defended the integrity of the scientific community, including Barbara Boxer.... But... no one stood up and called this hearing what it was: a gathering of liars and charlatans, sponsored by those industries who want to protect their profits. Later that day, Inhofe... [claimed] that I "agreed" with him that the Kyoto Protocol "would have almost no impact on the climate even if all the nations fully complied." In fact, I had interrupted him during the hearing to object to this claim....

Taking the first step without government isn't feasible - if it was, why haven't we taken it already? Voters sent a message in the last election -- we'll see if Congress and the rest of government hears it.... The assault on the science underlying global warming is ongoing. For example, this is from Friday's American Spectator:

The Gore Who Stole Christmas, by Rob Bradley, American Spectator: The... science behind rapid, disruptive global warming scenarios is murky at best.... [P]eer-reviewed studies dispute virtually all the tenets behind climate alarmism.... [T]hese scares du jour may go the way of yesterday's alarms over global cooling, the population bomb, and mineral-resource exhaustion. Nonetheless, one part of these scare stories is genuinely frightening: the heavy-handed government intervention that advocates always look to as the source of salvation. Yesterday's foes of the free market were socialists, communists, and Keynesians. Today's are greens who want government engineering to "stabilize" the climate and ensure "sustainability."...

Keynesians... those awful people who brought us things like Social Security, Unemployment Compensation, and macroeconomic stabilization policy. And all those government regulations about polluting the air and rivers those commies put into place are such an inconvenience for business. It was so much better when they didn't have to care.

I am not anti-market. When there is market failure and markets are broken, they need to be fixed. I want markets to work efficiently and that requires some mechanism to force economic agents to internalize the costs they impose on the environment.

People who deny this basic point, or refuse to acknowledge the science that would justify such actions, should not promote themselves as advocates for well-functioning, efficient markets.

Why Oh Why Can't We Have a Better Press Corps? (Yes, It's Another Fred Hiatt of the Washington Post Edition)

Fred Hiatt--the man who has done more than anybody else to destroy the credibility and the honor of the Washington Post with his mendacious and obsequious toadying to George W. Bush--appears to finally realize that George W. Bush and his dwindling band of flatterers don't have all the answers:

Fred Hiatt - A New Mideast, or Wishful Thinking? - [T]hings get a bit more complicated than Rice in her fluency makes them sound, because the forces of moderation -- the "mainstream actors," as she calls them -- are hardly all democratic, and the fruits of democracy are hardly all moderate. The good guys, in her view, include dictatorships (not her word) such as Egypt and Saudi Arabia, while democratic victors include extremist actors such as Hamas in the Palestinian territory and Moqtada al-Sadr in Iraq.

It grows even more complicated when Rice attempts to fit the neat strategic frame of moderation vs. extremism over the mess her administration has helped create in Iraq. Rice says the United States must encourage Shiite, Sunni and Kurdish leaders of the "more moderate center" to work together and to isolate and move against their respective militias. But what if those parties see each other as the enemy, and each value their own militia or terrorists as means of pressuring the other?

Rice is determined to see "real advantages for the United States" in the mess of today's Mideast -- a "new and much more favorable strategic context in the Middle East."... But is she seeing something that Baker and Hamilton missed -- or something that isn't there? The administration's credibility for such visions is near zero, and justifiably so, given its record of wishful thinking. Rice... [said that Bush had] understood even [before the invasion of Iraq] that the democracy-building alternative would be difficult.

But then why did they not share that with the public? And why did they fail so abjectly and repeatedly to prepare for the difficulties? Why, even now, does the president seem to be re-creating the conditions for the infighting that plagued his first term, hiring a defense secretary who seems much closer to Baker than to Rice in his view of the world?

You can't help but be impressed as you listen to Rice discourse on how the region has changed and why the old approaches won't work. You feel less certain, when she's finished, that she or her boss have come up with any alternatives that will.

He hasn't yet shed all of his obsequious toadying tics. I know a great many people who can help but be impressed, and are not, by listening to Condi Rice discourse. And almost all of his questions should be statements.

But the signs are there. After seven years of total denial of reality, Fred Hiatt is showing the first signs of becoming shrill. Only the first signs, but it is a step.

My January Starts to Fill Up

Thursday, January 11, from 4-5:30 in Evans 608-7:

Department of Economics, University of Michigan: Yuriy Gorodnichenko: "Endogenous information, menu costs and inflation persistence"; "Reduced rank identification of structural shocks in VARs"; "Using firm optimization to evaluate and estimate returns to scale"; "Monetary Policy When Potential Output Is Uncertain: Understanding the Growth Gamble of the 1990s."

Do Unto Others...

John Quiggin and Hal Varian are discussing the Stern Review on Global Climate Change and the pure rate of time discount in my email inbox:

Hal Varian: Stern is advocating levying a $70 tax on today's generation to transfer $940 to a future, much wealthier, generation. This is exactly the opposite of the experiment you suggestion. Given the absence of time travel, the relevant transfers are all of from the present to the future.

John Quiggin: At the margin, it's the same question. If you oppose paying $70 now to transfer $940 to wealthy people in the future, you should support taxing wealthy people $940 now to pay $70 to poor people, unless you specifically discount the utility of future generations simply because they are in the future. I'm not saying that this is an implausible preference, just that it indicates the kinds of trade-offs that are involved.

Hal Varian: Here is my problem with 0 social rate of time discount. Suppose I believe that it is ethically neutral to transfer $1 from Brad DeLong to John Quiggin. Furthermore, John and Brad are indifferent between $1 now and $1.10 next year. Should it not be the case that it is ethically neutral to take $1 from Brad DeLong now to give John Quiggin $1.10 in the future? In general, if I discount my own future consumption and I should "treat others as myself" doesn't that mean that I should discount other people's future consumption (just as I do my own)?

My view--which I admit may well be wrong--of this knotty problem is that we are impatient in the sense of valuing the present and near-future much more than we value the distant future, but that we shouldn't do so. Our habits of mind of preferring a bird in the hand to two in the bush come from a time when life was nastier, more brutish, and definitely shorter, and that if you went into the bush to try to get the two birds you might well not come out.

The fact that we want to apply a pure rate of time discount much greater than the risk of extinction to problems of planning for the far future is, I think, a flaw in our reasoning.

So I come down with John rather than with Hal on this one.

Scent Trails

But you would need a much longer neck to follow scent trails at speed:

3quarksdaily: A team of neuroscientists and engineers, led by Noam Sobel of the University of California, Berkeley, and the Weizmann Institute of Science in Rehovot, Israel, decided to test this conventional wisdom.

The team first laid down a 10-metre-long trail of chocolate essential oil in a grass field (the scent was detectable but not strong or overpowering). Then they enlisted 32 Berkeley undergraduates, blindfolded them, blocked their ears and set them loose in the field to try to track the scent. Each student got three chances to track the scent in ten minutes; two-thirds of the subjects finished the task. And when four students practiced the task over three days, they got better at it.

Next, the team tested how the students were following the trails. They counted how many whiffs of air each student took while tracking the scent trail, and tested the effect of blocking one nostril at a time. The scientists found that humans act much like dogs do while tracking a scent, sniffing repeatedly to trace the smell's source. They didn't do so well with one blocked nostril, suggesting that the stereo effect of two nostrils helps people to locate odours in space...

Intellectual Garbage Collection: The Unreliability of Alan Reynolds

A correspondent asks why she should presume that Alan Reynolds is wrong when he claims that statistics showing rising inequality are cynically and fraudulently manipulated--that, as Reynolds writes in the extremely bad and low-quality intellectual neighborhood that is the Wall Street Journal editorial page:

Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false.... The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic. The architects of these estimates, Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley...

The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim... fill[s] a psychological rather than logical need. Some economists [i.e., Thomas Piketty and Emmanuel Saez] seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems...

The first reason is that Alan Reynolds is playing intellectual three-card monte. He opens his op-ed by attacking Senator-elect Webb's belief that income inequality has risen steeply since 1980, but in the body of the op-ed--as he writes to economist Mark Thoma's Economist's View--"[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87..." That is sufficient reason right there.

However, there are more reasons. We have experience with Alan Reynolds. The last time I noticed Alan Reynolds on inequality was last March, when he wrote:

The Top 10 Percent, Again: [T]he eternal ambition of Robin Hood economics is to steal money from those who earned it and "redistribute" it to those with more political clout. When in pursuit of such a worthy cause, it appears quite respectable to torture innocent statistics. Those deploying statistics in this campaign take special care to select their favorites. Washington Post columnist Steven Pearlstein.... "in 1979, the top 10 percent of households earned 33 percent of all pretax income. By 2003, their share had climbed to 44 percent. The shares of everyone else declined." Where did [Pearlstein's] numbers come from? They certainly didn't come from the Census Bureau.... Pearlstein's statistics obviously didn't come from the CBO... [which] estimates that in 1979 the top 10 percent of households earned 39.3 percent of all pretax income. By 2003, their share had dropped to 38.3 percent (or 33.7 percent after taxes).... It is easy to see why the CBO is not Pearlstein's favorite source of income statistics...

At the time Reynolds's claim that CBO showed no rise in household income inequality since 1979 surprised me, because I had read a report by the careful Isaac Shapiro and Joel Friedman of CBPP on the CBO study which said something very different:

New CBO Data Indicate Growth in Long-Term Income Inequality Continues, 1/29/06: CBO issues the most comprehensive data available on changes in incomes and taxes for different income groups.... The new CBO report highlights the degree to which income gains have become increasingly concentrated at the top of the income scale over the past two and a half decades.... The top one percent of the population received 12.2 percent of national after-tax income in 2003, up from its already-large 7.5 percent share in 1979...

Sure enough, Reynolds is wrong. CBO estimated that for all households the income of the top tenth in 2003 was 37.2%, compared to 30.5% in 1979. Reynolds's 39.3% and 38.3% came not from "Table 1: All Households", but instead from Table 3, "Elderly Households".

As Paul Krugman wrote at the time, defending Pearlstein:

: [F]or [Pearlstein's] pains, he was smeared by someone at the Cato Institute who needs help -- technical help. Hint to Alan Reynolds: check which table you're looking at before claiming that Congressional Budget Office data refute a statement you don't like...

Emmanuel Saez's office is seven doors north of mine on the west corridor of Evans Hall. He is an extremely thoughtful, intelligent, careful, and fair-minded economist, trying his very best to tell it straight. He deserves much better than to be smeared by people who are not careful--who get their tables mixed up--and are not fair-minded--i.e., "I very carefully did not say there was no such evidence about 1981-87."

UPDATE: More "Unreliability":

Back in 1992, in an article, "The Rich, the Right, and the Facts" for the American Prospect, Paul Krugman tangled with Alan Reynolds's earlier incarnation--the one in which he said that claims that the top 1% share of wealth and income had risen over 1983-1989 "can't really be taken seriously." Quite a difference from today, when Reynolds writes:

[I said that] there is no clear evidence of a sustained and significant increase in inequality since 1988.... I very carefully did not say there was no such evidence about 1981-87...

Here is Paul:

The Unofficial Paul Krugman Web Page: Wealth is typically much more concentrated than income.... [B]ecause wealth is so concentrated, it is difficult to measure accurately from sample surveys: a random survey of a few hundred or even a few thousand people will contain only a handful of really wealthy people.

Nonetheless, researchers at the Federal Reserve Board have tried to use sophisticated sampling procedures to deal with this problem.... In March, 1992 they released a working paper that showed a sharp increase in the concentration of wealth even since 1983, with the share of the top 1 percent of families rising from 31 to 37 percent....

When the Federal Reserve wealth study came out, it was immediately attacked by Alan Reynolds in the Wall Street Journal.... Reynolds's main argument was that the study, based on a survey of 3,000 families, could not be reliable about the top 1 percent, since thirty families is too small a sample. This was an interesting reaction, since the Fed study carefully explains that they used a two-stage procedure... [with] over 400 families in the top 1 percent. In fact, the study is written in the form of a working paper on statistical methodology, and the issue of sample size is raised immediately. One can only conclude that Reynolds did not bother to read the study before attacking it....

The wealth dispute was a minor part of the distribution controversy, but it was revealing about the desperation, unscrupulousness, and sheer lack of competence of today's conservatives...

And Paul is right. Here is Reynolds:

"Who Gained in the 1980s? Everybody" By Alan Reynolds. 1,344 words. 7 May 1992. The Wall Street Journal. PAGE A14. English (Copyright (c) 1992, Dow Jones & Co., Inc.): Jerry Brown was incensed that "the top 1% have more wealth than the bottom 90%."... The source of Gov. Brown's remark was a New York Times story, loosely based on a Federal Reserve survey. This front-page story claimed the wealthiest 1% had 37% of all net worth in 1989, up from 31% in 1983.... Estimates of the share of wealth owned by the top 1% can't really be taken seriously. After all, 1% means just 31 families among the 3,143 sampled. Some years ago, the late Warren Brookes uncovered that a similar Fed survey had been grossly distorted by an error involving a single individual. This time, perhaps the survey stumbled upon Donald Trump, Leona Helmsley or Mike Milken (in which case a newer survey might already look a bit different)...

Another Very Good Personnel Choice...

Jackie Calmes writes:

"Hamiltonian Democrats" Get New Leader: Former Clinton administration economist Jason Furman will become the new director of The Hamilton Project, a year-old effort of the Brookings Institution to promote a centrist economic strategy. Named for Alexander Hamilton, the nation's first Treasury secretary, the project is better known for its association with his modern successor, Clinton Treasury Secretary Robert Rubin, a founder and funder.

Peter Orszag, the project's founding director a year ago, is leaving to become the director of the Congressional Budget Office when Democrats take control of Congress in January. Both Orszag and Furman are veterans of the Clinton administration economic team and proteges of Rubin, now a director of Citigroup Inc. Both have been leading Democratic voices lately in the policy debates over taxes, Social Security, health programs and other fiscal issues.

With protectionist pressures growing amid manufacturing job losses, the Hamilton Project has emerged as an intellectual counterweight to organized labor and liberal groups that want to restrict trade, and a source of policy fodder for potential Democratic presidential candidates, including Illinois Sen. Barack Obama.

Despite the "Hamiltonians'" differences over trade with more liberal Democrats, its policy prescriptions for adjusting to the pain of globalization have much for liberals to agree with. Early next year, for example, new papers on health and education will propose ways to strengthen the social safety net for workers and their families.

In the Clinton White House, Furman was a top staffer for budget and tax issues. He also was an economist at the World Bank and in 2004 was director of economic policy for Sen. John Kerry's presidential campaign. He received his doctorate in economics from Harvard University, under the supervision of N. Gregory Mankiw, who went on to be a top economic adviser to President Bush.

It's Opposite Day!

It is now clear what James Baker should have done with his Iraq Study Group: he should have recommended that Bush do the opposite of what Baker really wanted him to do. But Baker didn't. Baker didn't realize that it was opposite day--that if he wanted Bush to negotiate with Iran and Syria, he should have recommended that Bush not negotiate with Iran and Syria; that if he wanted Bush to set a timetable for reducing forces, he should have recommended that Bush set no timetable and in fact increase forces.

Opposite Day.

Impeach teh *&#@%^&! Impeach him now!

Let's turn the microphone over to Thomas Barnett:

The freeze out of the Iraq Study Group seems complete: (Thomas P.M. Barnett :: Weblog):

  1. Bush rejects the [study group's] timetable
  2. Rice is trotted out to reject [the study group's call for negotiations with] Iran and Syria
  3. the military is poised to push the "go big" option and Bush is poised to "submit" to the generals (oh yeah!).

The only bright spot is one everyone had agreed upon earlier and which was in the works for months: more trainers.

But it is stunning when you think of the elections and what Americans said through them: Bush is basically blowing it all off...

On the "go big," I'm not pissed. I get the logic and it beats the "go small" and hope for better, but it can't be sustained and the training shift (or what I call "Vietnam backwards") won't constitute the tipping point the generals are hoping rather wishfully for. The failure of this track will be linked back to two things: 1) the failure to engage the neighbors and 2) the failure to generate the preconditions of a true exit strategy--aka, jobs (Chiarelli's swan song).

Primitive Accumulation

Max Sawicky relays a question in applied utilitarianism:

MaxSpeak, You Listen!: THE DAGWOOD CONJECTURE: A professor of the dismal science submits the following for your consideration and amusement:

In economic theory, individual actors maximize utility subject to a budget constraint -- hence constrained optimization. As an example, consider two people: Mr. Sated and Mr. Hungry. In the morning, Mr. Sated eats breakfast and leaves the house with $20 in his pocket. Mr. Hungry has not eaten in the last 24 hours and finds his only $5 while waiting for the bus. Both leave work at 1 pm and head for the sandwich shop. Upon arriving at the shop they find only one sandwich which the proprietor agrees to auction to the highest bidder. Mr. Sated purchases the sandwich for $8; Mr. Hungry was willing to pay $9 but couldn't. With no time left to shop, Mr. Hungry returns to work.

  1. Is the outcome allocatively efficient?
  2. Is there a market failure? If so, what is it?
  3. If Mr. Sated or the proprietor knew of Mr. Hungry's plight would the outcome have been different? If so, would it have been allocatively efficient?

The answers are:

  1. Yes.

  2. No. There may be an endowment allocation failure, but there is no market failure.

  3. The outcome might have been different, and might not: it is, after all, not from the benevolence of the sandwich-shop proprietor that we expect our lunch, but from his or her interest. Would a different outcome have been allocatively efficient? Once again possibly, and possibly not. In the absence of knowledge of what Mr. Sated's willingness to pay is, we cannot tell.

But the interesting questions here are not about allocative efficiency. The interesting questions revolve around the justice of the process of primitive accumulation that gives Mr. Sated breakfast and $20, Mr. Hungry $5, and the proprietor only one sandwich to sell. The devil is in the narrative that describes and thus produces the framing of the endowment distribution.

Do You Have to Go to War with the Generals You Have?

Army chief of staff General Peter Schoomaker is blunt and candid, says his spokesman, Lieutenant Colonel Gary Kolb.

Over the past year General Peter Schoomaker has thought that the army is breaking. When asked about the state of the army, however, General Peter Schoomaker has said that the army isn't broken. When Schoomaker says that the army isn't broken, says Lieutenant General Gary Kolb, he was not addressing whether the army was breaking, but he was being blunt and candid.

Now that's blunt candor!

When George C. Marshall became chief of staff on the eve of World War II, he decapitated the army. I don't think any prewar general served in a combat command position during World War II.

Why do generals like Peter Schoomaker and Gary Kolb make me wonder whether it might be time to do another Marshall on the army brass?

Here's the videotape, from Spencer Ackerman weekly:

TAPPED: SCHOOMAKER: I AM NOT A SHILL! I caused a bit of a kerfuffle on my blog today when I suspected General Peter Schoomaker, the Army's chief of staff, of shifting his views on whether or not the Army is breaking under the strain of current deployment to suit the tenure -- and now departure -- of Donald Rumsfeld. After I wrote the post, I spoke with Lieutenant Colonel Gary Kolb, Schoomaker's spokesman, who "absolutely" denied that pleasing Rumsfeld played any role in his shifting stance on the health of the Army. "I'll personally vouch that General Schoomaker will tell you what's on his mind, and he'll be blunt and candid," Kolb told me.

Kolb emphasized that what Schoomaker is worried about is the Defense Department's policy regarding how long after a deployment a National Guard or Army Reserve unit can be certified as fit to redeploy, without what's called "cross-leveling" -- that is, taking soldiers from other units to get the full unit back up to deployment readiness. And in Schoomaker's testimony on the Hill yesterday, he certainly emphasized that the policy is too restrictive. According to Kolb, the head of the Army National Guard, Lieutenant General Clyde Vaughn, favors a more-restrictive policy on Guard-unit redeployment -- understandably, from Vaughn's persective -- but Schoomaker hasn't come to a decision on what the new policy should be.

OK, but it's not as if Schoomaker suddenly figured out that the deployment schedule is onerous. Kolb wouldn't answer my questions as to when exactly Schoomaker grew so alarmed as to speak out in public, or what the "magic number" is for when a Guard or Reserve unit is "ready" to redeploy back to a combat zone. He did, however, emphasize that when Schoomaker over the past year said that the Army isn't "broken," he was not addressing whether the Army was "breaking." So I hope that's clear to everyone.

Don't Believe It, Matt! Income Inequality Did Rise! A Lot!

Matthew Yglesias falls into a trap. He makes the mistake of crediting an empirical claim--in this case Alan Reynolds's claim--on the editorial page of the Wall Street Journal. The claim is that there is: no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on [Piketty and Saez's] seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other. The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

Matthew writes:

Matthew Yglesias / proudly eponymous since 2002: Alan Reynolds' argument that we've been mis-measuring inequality by using flawed tax return data.... [T]his seems like an important project and I'll be eager to read the lengthier, non-op-ed form of his argument along with, one hopes, commentary on it from people better-equipped than I to evaluate the work...

Matthew thus forgets the two rules of reading the editorial page of the Wall Street Journal:

  1. When you feel tempted to credit a surprising empirical claim found on the editorial page of the Wall Street Journal, your first step should be to lie down until that feeling goes away.
  2. When you are tempted to believe that something on the editorial page of the Wall Street Journal brings new information to the party and sheds new light on the facts, don't.

One thing you can't learn from Reynolds's op-ed is that, back in their original paper that they wrote six years ago and published in 2003, Thomas Piketty and Emmanuel Saez thoughtfully considered many of the claims made by Alan Reynolds. Here is some of what they wrote back then:

[W]e build new homogeneous series on top shares of pretax income and wages in the United States... based primarily on tax returns data published annually by the Internal Revenue Service... as well as on the large micro-files of tax returns released by the IRS since 1960.... We argue that both the downturn and the upturn of top wage shares seem too sudden to be accounted for by technical change alone. Our series suggest that other factors, such as changes in labor market institutions, fiscal policy, or more generally social norms regarding pay inequality may have played important roles in the determination of the wage structure. Although our proposed interpretation for the observed trends seems plausible to us, we stress that we cannot prove that progressive taxation and social norms have indeed played the role we attribute to them. In our view, the primary contribution of this paper is to provide new series on income and wage inequality.

One additional motivation for constructing long series is to be able to separate the trends in inequality that are the consequence of real economic change from those that are due to fiscal manipulation. The issue of fiscal manipulation has recently received much attention. Studies analyzing the effects of the Tax Reform Act of 1986 (TRA86) have emphasized that a large part of the response observable in tax returns was due to income shifting between the corporate sector and the individual sector [Slemrod 1996; Gordon and Slemrod 2000]. We do not deny that fiscal manipulation can have substantial short-run effects, but we argue that most long-run inequality trends are the consequence of real economic change, and that a short-run perspective might lead to attribute improperly some of these trends to fiscal manipulation....


[T]he evidence suggests that the twentieth century decline in inequality took place in a very specific and brief time interval. Such an abrupt decline cannot easily be reconciled with a Kuznets-type process. The smooth increase in inequality in the last three decades is more consistent with slow underlying changes in the demand and supply of factors, even though it should be noted that a significant part of the gain is concentrated in 1987 and 1988 just after the Tax Reform Act of 1986 which sharply cut the top marginal income tax rates (we will return to this issue)....


Our long-term series place the TRA86 episode in a longer term perspective. Feenberg and Poterba [1993, 2000], looking at the top 0.5 percent income shares series ending in 1992 (respectively, 1995), argued that the surge after TRA86 appeared permanent. However, completing the series up to 1998 shows that the significant increase in the top marginal tax rate, from 31 to 39.6 percent, enacted in 1993 on did not prevent top shares from increasing sharply. From that perspective, looking at Figures II and III, the average increase in top shares from 1985 to 1994 is not significantly higher than the increase from 1994 to 1998 or from 1978 to 1984. As a result, it is possible to argue that TRA86 produced no permanent surge in top income shares, but only a transitory blip. The analysis of top wage shares in Section IV will reinforce this interpretation. In any case, the pattern of top income shares cannot be explained fully by the pattern of top income tax rates....


From 1970 to 1984 the top 1 percent share increased steadily from 5 percent to 7.5 percent (Figure IX). From 1986 to 1988 the top shares of wage earners increased sharply, especially at the very top (for example, the top 1 percent share jumps from 7.5 percent to 9.5 percent). This sharp increase was documented by Feenberg and Poterba [1993] and is certainly attributable at least in part to fiscal manipulation following the large top marginal tax rate cuts of the Tax Reform Act of 1986 (see the discussion in Section III above). However, from 1988 to 1994, top wage shares stay on average constant, but increase very sharply from 1994 to 1998 (the top 1 percent wage share increases from 9 percent to 11 percent). While everybody acknowledges that tax reforms can have large short-term effects on reported incomes due to retiming, there is a controversial debate on whether changing tax rates can have permanent effects on the level of reported incomes. Looking at long-time series up to 1998 casts doubts on the supplyside interpretation that tax cuts can have lasting effects on reported wages.

Part of the recent increase in top wages is due to the development of stock options that are reported as wages and salaries on tax returns when they are exercised. Stock options are compensation for labor services, but the fact that they are exercised in a lumpy way may introduce some upward bias in our annual shares at the very top (top 0.1 percent and above). To cast additional light on this issue and on the timing of the top wage surge, we look at CEO compensation from 1970 to 1999 using the annual surveys published by Forbes magazine since 1971. These dataprovide the levels and composition of compensation for CEOs in the 800 largest publicly traded U. S. corporations.... Consistent with the evolution of top wage shares, average CEO compensation has increased much faster than average wage since the early 1970s. Therefore, the increase in pay gap between top executives and the average worker cannot be attributed solely to the tax episodes of the 1980s....


Similarly, the huge increase in top wage shares since the 1970s cannot be the sole consequence of technical change. First, the increase is very large and concentrated among the highest income earners. The fractiles P90–95 and P95–99 experienced a much smaller increase than the very top shares since the 1970s. Second, such a large change in top wage shares has not taken place in most European countries which experienced the same technical change as the United States. For example, Piketty [2001a, 2001b] documents no change in top wage shares in the last decades in France. DiNardo, Fortin, and Lemieux [1996] argue that changes in institutions such as the minimum wage and unionization account for a large part of the increase in U. S.... Changing social norms regarding inequality and the acceptability of very high wages might partly explain the rise in U. S. top wage shares observed since the 1970s...

KQED Forum: 9 AM December 13, 2006: Interest Rate Update

On the Radio: mp3 files:

KQED | Programs A-Z: Forum: Home: Wed, Dec 13, 2006 -- 9:00 AM:

Interest Rate Update -- Forum discusses the impact of the Federal Reserve's decision to leave interest rates unchanged.

Guests include:

  • Brad De Long, professor of economics at UC Berkeley and research assistant at the National Bureau of Economic Research;
  • John Karevoll, analyst at Data Quick Information Systems, a nationwide real estate information service;
  • Adam Posen, senior fellow at the Peterson Institute for International Economics, member of the Council on Foreign Relations, and former economist at the Federal Reserve Bank of New York.

Host: with Michael Krasny

Peter Orszag to Head the Congressional Budget Office: Wonderful News

Peter Orszag to head the Congressional Budget Office. Excellent news:

CONRAD TO RECOMMEND ORSZAG AS NEW CBO DIRECTOR: Brookings Economist Receives Bipartisan Praise

Incoming Senate Budget Committee Chairman Kent Conrad (D-ND) will recommend the appointment of Peter R. Orszag as the new director of the Congressional Budget Office (CBO). “I am enthusiastically recommending Dr. Orszag to be the next CBO Director,” Conrad said. “He is exceptional. Not only is he an outstanding economist, widely recognized as one of the most able economists in the country, but he also has written widely on the many challenges facing the Budget Committee, the Congress, and the country. Dr. Orszag understands CBO’s non-partisan role and is highly regarded by Democrats and Republicans alike. He is the right person to take the helm of CBO at this critical time.”

Conrad is making his recommendation after consulting with incoming House Budget Committee Chairman John Spratt (D-SC), current Senate Budget Committee Chairman Judd Gregg (R-NH), and the incoming House Budget Committee Ranking Member Paul Ryan (R-WI). Dr. Orszag was among three finalists interviewed Monday by Conrad, Spratt, Ryan, and a representative from Gregg’s office. “We had an abundance of great candidates for this position, but even among this group, Peter Orszag stood out,” Spratt said. “He is highly regarded for his keen intellect and broad command of policy. He is committed to advancing CBO’s mission, which is to supply Congress with information and analysis that is objective, non-partisan, and of the highest quality. Congress has had the benefit of some excellent economists as directors of CBO. I believe that Peter Orszag will follow in that tradition.”

“Peter Orszag is an excellent choice for the new Director of CBO,” said Senate Budget Committee Chairman Judd Gregg. “He has a distinguished background in economics and the federal budget, and he shares my deep concerns about the fiscal challenges posed by entitlement spending. In choosing Mr. Orszag, Senator Conrad should be commended not only for his selection, but also for a thorough and bipartisan selection process. In addition, Acting Director Donald Marron has done an outstanding job at the helm of CBO over the past year. His superb skills, professionalism, and dedication are greatly appreciated. I look forward to working with Mr. Orszag in his new role.”

“I am pleased the leadership selected Peter, one of the most talented, energetic and prolific policy analysts,” said former CBO Director Douglas Holtz-Eakin. “I look forward to him furthering the CBO’s mission of non-partisan support of Congress. I offer my congratulations to Peter and the entire Congress.”

“Peter has a sophisticated understanding of the economy, the federal budget, and the challenges posed by the nation’s entitlement commitments,” said former CBO Director Robert D. Reischauer. “He has an uncommon ability to explain complex policy issues in understandable ways. He will provide CBO’s excellent staff with balanced, nonpartisan leadership.”

In early January, Conrad will formally notify the incoming Senate President Pro Tempore, Robert C. Byrd (D-WV), of his recommendation. Incoming House Budget Committee Chairman Spratt will make a similar recommendation to the incoming Speaker of the House, Nancy Pelosi (DCA). The Senate President Pro Tempore and the Speaker jointly make the appointment of the new director, after considering recommendations from the two budget committees.

Dr. Orszag is currently serving as the Joseph A. Pechman Senior Fellow and Deputy Director of Economic Studies at the Brookings Institution. Prior to joining the Brookings Institution, he worked for several years in the private sector and as a lecturer at the University of California, Berkeley. During the Clinton administration, he served as the top economic advisor to the Director of the National Economic Council and as the senior economist on the Council of Economic Advisers.

Dr. Orszag is the author of numerous books and economic policy papers and has testified before Congress on many occasions. He graduated summa cum laude in economics from Princeton University and obtained a M.Sc. and a Ph.D. in economics from the London School of Economics, which he attended as a Marshall Scholar.

Eggs Are Broken, but No Omelette Appears

Felix Salmon approves of the Economist:

RGE - The Economist gets it right on Pinochet: The Economist's print edition, unlike its blog, is spot-on when it comes to Pinochet:

If the coup did indeed rescue Chile from an elected government that was Marxist-dominated--and thus anti-democratic--was it justified? The answer is no...

With Chileans cowed, the Chicago Boys could work as if in a laboratory, with no regard for social costs. They made mistakes: a fixed exchange rate and unregulated bank privatisations triggered a massive recession and financial collapse in 1982-83. More pragmatic policies and a renewal of growth followed. But it took the return of democracy in 1990, with its ability to bestow legitimacy, to create an investment-led boom and a large fall in poverty...

Even if history bothers to remember that he privatised the pension system, that should not wipe away the memory of the torture, the "disappeared" and the bodies dumped at sea. His defenders--who include Britain's Lady Thatcher--really should know better.

KQED Forum: 9 AM December 13, 2006: Interest Rate Update

On the Radio:

KQED | Programs A-Z: Forum: Home: Wed, Dec 13, 2006 -- 9:00 AM:

Interest Rate Update -- Forum discusses the impact of the Federal Reserve's decision to leave interest rates unchanged. Guests include: Brad De Long, professor of economics at UC Berkeley and research assistant at the National Bureau of Economic Research; John Karevoll, analyst at Data Quick Information Systems, a nationwide real estate information service; and Adam Posen, senior fellow at the Peterson Institute for International Economics, member of the Council on Foreign Relations, and former economist at the Federal Reserve Bank of New York.

Host: with Michael Krasny

Greenspan's "Irrational Exuberance" Speech and Asset Price Targeting

Mark Thoma sends us to John Berry's puzzlement over the strength of the reaction to Alan Greenspan's "irrational exuberance" speech:

Economist's View: Greenspan's Irrational Exuberance and Asset Price Targeting: John Berry looks at a topic addressed here a few days ago, an evaluation of Fed policy in light of Alan Greenspan's use of the phrase ''irrational exuberance,'' i.e. whether the Fed should target asset price bubbles....

'Irrational Exuberance' Baffles 10 Years Later, by John M. Berry, Bloomberg: Ten years ago this week, Alan Greenspan... slipped the phrase ''irrational exuberance'' into an otherwise unremarkable long speech.... His use of the phrase triggered a debate about the role of asset prices in monetary policy decisions that has never ended. In December 1996, the asset prices in question were those of equities. Many of Greenspan's critics later complained that after having raised the issue of a possible stock price bubble, he and his Fed colleagues didn't do enough to deflate it before its bursting led to the 2001 recession.

The same complaints about Greenspan... and his refusal to deal with asset price bubbles also are being heard now regarding housing prices.... However, even as he described how ''irrational exuberance'' could cause asset prices to climb rapidly, and perhaps add to inflationary pressures, Greenspan never suggested central banks should try to prevent a bubble from developing. Rather, if one did, he said, a central bank should only stand ready to limit the damage that might be done to the broader economy if the bubble burst.

In the December 1996 speech... the Fed chairman's use of the ''irrational exuberance'' phrase was so subtle that it was far from clear that he even had the U.S. stock market in mind.... [T]he Japanese press overnight jumped on the story, drawing the conclusion that the Fed chairman was hinting at rate increases to curb rising stock prices.... In congressional testimony the following February, Greenspan expanded on his ''irrational exuberance'' comments. Analysts' projections of profit growth needed to justify the high level of stock prices would be validated only if productivity growth accelerated and increases in compensation did not, he said. ''Neither, of course, can be ruled out,'' Greenspan said in a context that made it clear he didn't really expect that to happen. Of course, it did.

Princeton University economics professor Burton G. Malkiel, author of the widely read book, ''A Random Walk Down Wall Street,'' said during a seminar at the university in April 2005, that when Greenspan caused a stir by mentioning ''irrational exuberance'' there was no bubble in stock prices. And he and others at the seminar, including several present and former Fed officials, all agreed that the central bank should not try to target the prices of equities, homes or other assets...

Material Nonpublic Information

RGE Economonitor on insider trading:

RGE - Hedge funds go to Washington: Insider trading is illegal mainly because it violates peoples' sense of fair play. People do know, of course, that in fact the prop desks and hedge funds and other institutions which drive the market are always going to have better access and information than Ed Kozin of Kalamazoo. They questioned this at the end of the 1990s, with the rise of the internet and sites like, when there was much talk about the leveling of playing fields. But then the dot-com crash happened, a bunch of day-traders lost their shirts, and now there's much talk about exchange-traded funds. So goes it.... Private markets are only going to become increasingly attractive if public markets make any kind of attempt to get an information edge illegal....

Cue David Vise in Breaking Views today:

For hedge funds, these waters may be treacherous. Secrets flowing to hedge funds from Washington often fall into a gray area that requires legal advice. There's nothing wrong with dispatching your own messengers to count the bodies at Waterloo, but paying someone else to count them for you could spell trouble.

For one thing, what are "secrets"? If I eat a hamburger, decide it's disgusting, and call my broker to sell my McDonald's stock, am I acting on the inside information of how my burger tasted? Not all information can be publicly available. And it's hard to see the logic behind Vise's Waterloo analogy: why is it a bad thing to buy or sell information of value? One imagines that's how both Breaking Views and the Wall Street Journal make their money. The financial markets have long operated on the assumption that the best way to deal with information is to ban its dissemination, unless and until it's disseminated in certain carefully-prescribed ways....

Maybe a better way to deal with information is to be much more laissez-faire about the whole thing. I wouldn't necessarily go as far as the WSJ's Holman Jenkins, who has argued... that insider-dealing laws should be abolished entirely. But worrying about hedge funds having access to Washington gossip just looks silly.

The goal is to encourage research, but to discourage corruption. A market in which it is accepted that corporate insiders are going to leak sales and technology information to their "friends" in return for preferential allocations of stock during the next wave of initial public offerings will not be an efficient market--it will not be a market that is very liquid, or one in which companies will have an easy time raising capital. A market in which nobody does any research because it is illegal for them to trade on what they have figured out is not going to be an efficient market either.

The problem, as I see it, is that the SEC has confused matters to an extent that nobody knows what is and isn't "material nonpublic information." The SEC has done this--perhaps unconsciously--because when they decide that somebody is a bad guy, they want to be able to take him down rather than have him wriggle away on a "technicality," so they want as expansive a definition of "insider trading" as possible when they reach the courtroom. But, they say, this trap will only snap shut on "bad guys." This line by the SEC does not encourage investment firms to do good research.

The solution, I think, is to make sure that the SEC Commissioners are people who come from the industry and understand the tradeoffs, rather than people who come from academia or enforcement or politics who may well not.

Where Oh Where Are the Smart Conservatives?

Let us start with John Stuart Mill's prayer:

Brad DeLong's Semi-Daily Journal: Fair and Balanced Almost Every Day: We Are Live at Salon, with an Obituary for Milton Friedman: "Lord, enlighten thou our enemies," prayed nineteenth-century British economist and moral philosopher John "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength..."

Or, in Michael Berube's version:

Michael Berube: These days, I often think my field is so pervasively liberal/left that smart young conservatives will shun it altogether. I know there are still some conservatives out there who truly love the arts and humanities-—“old school” arts and humanities, usually, more Augustan than modern, or more Chaucerian than Kafkaesque, but I’ll settle for what I can get, and besides, some of those old schools were pretty good. They may be a dying breed, as “conservatism” in America becomes more and more associated with the know-nothing, Tom DeLay wing.... But when they disappear from the earth altogether, along with conservative American economists who believe in honest budgets and honest business practices (an endangered species) and conservative American environmentalists who respect scientific evidence (already extinct), I know that I will miss them terribly. Or, to put this another way, I often wish I had more conservative colleagues in literary study.... I don’t mind in the least having substantial political disagreements with colleagues, just so long as they’re smart colleagues who hit the rhetorical ball back over the net with gusto and topspin. I already have plenty of these on the left.... But when all the substantial intellectual disagreements in a discipline are arguments among leftists and liberals, the premises of argument are inevitably skewed–- especially in those lefter-than-thou circles in which the most “oppositional” position claims for itself the greatest moral authority. And when an entire department or an entire field of inquiry produces a uniform moral mist, it’s no wonder that after a while, it will attract only those aspirants who like breathing the air...

In economics, John Stuart Mill's prayer have been answered. We neoliberal types are, I think, a bare plurality, but the Chicago School is powerful, articulate, brilliant, and energetic. On our left thing are less healthy, but improving: the left has escaped its destructive embrace of Marxism. And there are signs of a fundamental rethinking of economics in embryo as the borderland between economics, sociology, and psychology becomes more active.

Outside economics, however, things are much less healthy. John Stuart Mill's prayer has not been answered. Witness Mark Bauerline in the Chronicle of Higher Education, which leads me to beg: Can we please ask the Chronicle of Higher Education to print the works of a smarter class of conservatives? Calls for a diversified intellectual portfolio fall flat when the conservative assets on offer are intellectual shell corporatilns. The benefits of a Millian clash of views to stimulate and deepen our thoughts are nonexistent when one side in the battle of wits is unarmed.

I mean, what can one make of Mark Bauerlein's charge that liberals--like The Baffler's Thomas Frank--are biased against Friedrich Hayek because they talk about what Hayek actually said in his 1956 preface to The Road to Serfdom?

The Chronicle: 12/15/2006: How Academe Shortchanges Conservative Thinking: Public intellectuals are less parochial, and even some of those on the left do acknowledge Hayek's eminence -- but too often with just a dismissive tack.... Thomas Frank, the editor of The Baffler, briefly summarizes Hayek's legacy with a run of high-handed jibes. He mentions Hayek's seminal The Road to Serfdom, but only to disparage it for equating "British-style socialism with the Nazi obscenity."...

But, Mark, Thomas Frank is right. I am a Hayek fan, or at least somebody who thinks it is important to wrestle with Hayek at least once once a month. Nevertheless, here is Hayek, in the 1956 preface to The Road to Serfdom:

Of course, six years of socialist government in England have not produced anything resembling a totalitarian state. But those who argue that this has disproved the thesis of The Road to Serfdom have really missed one of its main points: that "the most important change which extensive government control produces is a psychological change, an alteration in the character of the people." This is necessarily a slow affair... attitude[s] toward authority are as much the effect as the cause of... political institutions under which it lives.... [T]he change undergone... not merely under its Labour government but in the course of the much longer period during which it has been enjoying the blessings of a paternalistic welfare state, can hardly be mistaken.... Certainly [Weimar Germany's] Social Democrats... never approached as closely to totalitarian planning as the British Labour government has done.... The most serious development is the growth of a measure of arbitrary administrative coercion and the progressive destruction of the cherished foundation of British liberty, the Rule of Law... [E]conomic planning under the Labour government [has] carried it to a point which makes it doubtful whether it can be said that the Rule of Law still prevails in Britain...

In other circumstances, I might cavil at Thomas Frank--I would say that Hayek draws a line connecting Britain's Labour Party and Germany's Nazi Party, but that he does not quite equate them: In Hayek's view, the Labour Party has not established Nazi-like serfdom, but only placed Britain on the road to Nazi-like serfdom. However, not hear: the Road to Serfdom that the Labour Party placed Britain on leads, in Hayek's estimation, to serfdom and nowhere else. And I cannot read Bauerlein's complaint as anything other than saying that it is rude and biased for Thomas Frank to, you know, talk about things Hayek actually believed and cite things Hayek actually wrote.

Bauerline is similarly irate at Michael Berube for "bias." What is the bias? It is pointing out that George Will, Michelle Malkin, and David Horowitz self-identify as conservatives. An unbiased writer, Bauerline claims, would pretend that Will, Malkin, and Horowitz do not exist at all. To note their existence is "stigmatizing" and unfair to conservatives:

In What's Liberal... ?, conservatism suffers similarly from stigmatizing references. [Michael] Bérubé focuses on the anti-academic conservatives and fills his descriptions with diagnostic asides. Gay-rights debates "transform otherwise reasonable cultural conservatives into fumbling, conspiracy-mongering fanatics." The columnist George Will is "furious," and the columnist Michelle Malkin writes "shameful" books pressing "'interpretations' that no sane person countenances," while Horowitz exaggerates "hysterically." Such psychic wants explain why, according to Bérubé, "we just don't trust cultural conservatives' track record over the long term, to be honest. We think they're the heirs of the people who spent decades dehumanizing African-Americans and immigrants, arguing chapter and verse that the Bible endorses slavery and the subjection of women"...

Note the lineage: Not a line of reasoning, but a swell of mad wrath. Not Burke, Alexis de Tocqueville, T.S. Eliot, and Leo Strauss, but slaveholders, nativists, and sexists. Nothing from Elizabeth Fox-Genovese, E.D. Hirsch Jr., Harvey C. Mansfield, and the late Philip Rieff, to cite more-recent writers who may be termed "educational conservatives." The scholarly conservative case against higher education is overlooked, while Bérubé devotes too many words to the claims of discrimination by a conservative student on television's Hannity & Colmes, to a worry by a state legislator about "leftist totalitarianism," and so on...

I truly don't get Bauerlein here. First, by what warrant does Bauerline call Alexis de Tocqueville a "conservative"? Why not call John Maynard Keynes, Max Weber, and Oliver Cromwell "conservatives" as well? Burke, too, has conservative moods but is only a conservative thinker in a modern American sense if you take a chainsaw and reduce him to selected passages from Reflections on the Revolution in France. In Reflections Burke does make the argument that we should respect the traditions and institutions we have inherited because they incorporate the Wisdom of the Ancestors, but he only makes that argument because he thinks that in this case the Ancestors--not his personal ancestors, note--were wise. The argument that it was one of the traditions and institutions of Englishmen that they would conquer, torture, and rob wogs cut no ice with Edmund Burke when he was trying to prosecute Warren Hastings. The argument that it was one of the traditions and institutions of England that power flowed to Westminster cut no ice with Burke when he was arguing for conciliation with and a devolution of power to the American colonists. To Burke, conservative arguments based on respect for the Wisdom of the Ancestors are to be deployed in support of traditions, institutions, and practices that he approves of--they are not trumps. Burke is no more a conservative than Adam Smith is a Thatcherite. And anyone who classifies Burke as a conservative has not read much beyond scattered selections from Reflections on the Revolution in France.

Second, does Bauerline really think that Berube's take on Leo "The Text Means What I Say It Means" Strauss or Harvey C. Mansfield--a man who regards the admission of Blacks to Harvard as the cause of the baneful curse of grade inflation--would be significantly different than his take on Will, Malkin, Horowitz? I agree that we should get Michael to write on Mansfield as soon as possible. But I guarantee you that it won't lead to a more favorable view of modern American conservatism.

And I truly don't get what Bauerlein means when he says "the scholarly conservative case against higher education is overlooked." Does he mean that Michael Berube overlooks the scholarly conservative case against higher education? If so, then why not say so: what is Bauerlein's purpose in removing the active subject from his sentence by placing it in the passive voice? And what is "the scholarly conservative case against higher education" anyway? Is it that people shouldn't learn about science because it will undermine their trust in throne and altar? Is it that only a small, narrow elite should go to college because the masses will get bad ideas if they read Voltaire? Bauerline never says.

Lord, enlighten thou our enemies. Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength...

The FOMC Holds Target Rate at 5.25%

The Federal Reserve stays data-dependent:

Economist's View: The FOMC Holds Target Rate at 5.25%: Here's a summary of the differences between today's Press Release and the Press Release from the previous meeting:

  1. The Committee added the word "substantial" to its description of the housing market slowdown.
  2. The new statement recognizes that "recent indicators have been mixed," but still says, as before, that the economy is "likely to expand at a moderate pace" with the added qualification "on balance over coming quarters."
  3. Jeffrey M. Lacker continued his dissent, voting against the proposal to leave rates unchanged. He prefers an increase in the target rate.
  4. The Committee notes, as it did last meeting, that inflation risks remain and further rate moves will depend upon how these risks play out. It does not mention risks to economic growth explicitly as it does with inflation. For example, it talks about "The extent and timing of any additional firming that may be needed," but not about the potential for easing.

By Neddie Jingo!: Pinochet Passes By

Neddie Jingo's encounter with Pinochet:

By Neddie Jingo!: Pinochet Passes By: June, 1975: Santiago de Chile

Your Ned, the son af an American diplomat, is a sophomore at an international school at the farthest edge of town, in the Andean foothills. His anti-authoritarian teenaged years in their fullest pimply bloom, he insists, despite his parents' entreaties (or, who knows, perhaps because of them) on affecting the uniform of the Pissed-Off 1975 Teen: the long, ratty hair, jeans worn through at the knee, the general surliness.

In a fascist dictatorship -- gun emplacements on the public thoroughfare, DINA agents prowling the streets in unmarked cars ready to pounce and "disappear" you to torture chambers on Dawson Island, itchy-trigger-fingered Carabineros on street corners stopping any random passerby who looked vaguely "socialist" -- the Pissed-Off 1975 Teen look is the sort of thing that the Authorities lick their chops at. It's utterly impossible to understand, in a cosmopolitan democracy, the raw, adrenaline-pumping fear that can gnaw at your vitals when you can be hauled off the street at any instant for the way you dress. I'm sorry, punk rockers and Disaffected Victims of the Man: you can't know. There is no comparison.

I came to dread with a sickly nausea those knee-trembling moments when a machine-gun-wielding cop would pick me out of a crowded sidewalk, step in front of me, and accost me for my ID: "A ver, joven..."

And I was safe! I was untouchable! I had Diplomatic Immunity! I had a diplomatic carnet de identidad that rendered me literally untouchable!

Most of my friends were theoretically untouchable, too -- but try explaining that to my pal Joe, son of the Bolivian chargé d' affaires, who got his knee broken in just such an encounter. He'd forgotten his wallet. Boom. Rifle butt to the patella. Don't forget, punk.

The trip to school that year was a bouncy, uncomfortable ride with several other kids in the back of a covered pickup truck. A few families had banded together, hired a driver for the duty. Our outbound trip wound its way through Santiago's fashionable districts, picking up kids, then out to Calle Las Condes for the drive to the beautiful foothills.

One morning, we were going down a one-way street on our usual route. Minding our own business. Obeying the speed limit. Being good citizens. Out of nowhere, coming directly at us, came two motorcyle cops, gesticulating wildly -- get out of the way! Get out of the way!

On a one-way street. Going the wrong way.

Directly into oncoming traffic.

The motorcycles were followed by several police cars, Carabineros leaning out the windows, also waving their arms. One of the cars slowed momentarily, and a particularly vehement cop shouted directly into our drivers' face; apparently the rather deft dive the driver had made onto a spare patch of sidewalk hadn't been fast enough to please him.

Then a Mercedes limousine passed imperiously by, oblivious to the strewn traffic on either side of the quiet city street. A profile in an ornate military peaked cap, distinctive brush moustache clearly visible, adorned the opened back window. Generál Augusto José Ramón Pinochet Ugarte, Presidente de la República de Chile.

It's a good thing those Carabineros were so preoccupied ahead, clearing the way for the Great Man. I'm not sure they would have taken kindly to the Pissed-Off 1975 Teen Neddie's upraised middle finger that extended from the back of the truck.

I hope dying hurt a whole lot, you rat-faced son of a bitch. I hope you suffered the tortures of the damned. I hope no one wiped your brow or comforted you while you suffered and died. I hope you died alone.

Kelly Risk Analysis: Snatch the Pebble From My Hand, Grasshopper

The intelligent and thoughtful Felix Salmon makes a subtle and interesting error--an error that I would make on at least a monthly basis had Robert Waldmann not patiently explained all this to me in the winter of 1986--in discussing Kelly risk analysis:

RGE - Bill Gross on CPDOs: My favorite bit of the piece is a wonderful thing called a Kelly risk analysis, which shows that increased leverage doesn't always increase expected returns. It does to begin with, but eventually you reach a point at which increasing leverage decreases expected returns -- and it's no coincidence that that point of maximum leverage is more or less exactly where CPDO structures (and today's hedge funds) sit...

Pushing leverage beyond the Kelly point does not decrease expected return. Rather, it decreases the likelihood of organizational survival and the chance that you will be wealthy. If you are acting as one of many agents for a well-diversified principal, you will in general want to ignore the Kelly point and leverage yourself up to the gills. If your objective is, instead, to maximize your own chances of remaining in the game with boasting rights, you will position yourself at the Kelly point.

A stark way of seeing this difference is to think of the following situation: Matt Rabin from the office beneath mine comes up the stairs and offers me the following: I start with a stake $1. I can wager none, some, or all of my stake. He flips a fair coin. If it is tails, I lose my wager. If it is heads, I win twice my wager. We do this ten times in a row, with my stake growing or shrinking.

To maximize expected return--this is, after all, a very advantageous game for me--I should be my whole stake, and let it ride time after time. After 10 rounds, there is one chance in 1024 that I have $59,049 and 1023 chances in 1024 that I have zero, for an expected portfolio value of $57.67.

The Kelly point, by contrast, says that I should wager 1/4 of my current stake each round. If Matt flips ten heads, then I have only $57.67 instead of $59,049. And my expected final wealth is only $3.25 instead of $57.67. But my median final wealth is not $0 but is instead $1.80. I make money not 1/1024 of the time but 638/1024 of the time. And if Robert were here he could prove in five lines that as the number of rounds goes to infinity an agent wagering according to the Kelly criterion almost surely ends up wealthier than an agent choosing his wager from his or her stake according to any other rule. The Kelly point makes sense if you are risk averse (and if this portfolio is a major component of your wealth) or if organizational survival and relative organizational prosperity is your major goal.

If Matt showed up at my office and announced that we were going to play this game on each of the next 1024 days, I would have no trouble choosing to follow the bet-the-limit strategy rather than the Kelly strategy on each day. 1024 x $3.25 is only $3328, which is a lot less than 1024 x $57.67 = $59049. But what if Matt says that this is my one and only one day? The right way to think about it is that my marginal utility of wealth is surely pretty flat over the range of $50,000 or so, and so I ought to be risk-neutral in this particular situation. The right way to think about it is that I "buy" lots of lottery tickets of various types during my life, and that the right strategy is to maximize the expected value of each lottery ticket--not to apply the Kelly criterion to each situation individually. (Of course, the generalized Kelly criterion--maximizing the expected value of the log of your portfolio--for 1024 rounds is not to apply the Kelly criterion to each round independently.)

But I would find it hard. I would have a hard time giving the 1/1024 chance of winning $59049 its proper weight in the face of the 1023/1024 chance of suffering the humiliation of bankruptcy.

In the end, however, I would be the limit. The humiliation for an economist like me of violating the axioms of expected utility is much worse than the humiliation of losing my entire stake.

Kelly Criterion finger exercises at:

Impeach George W. Bush. Impeach Him Now.

Scott Horton is a Winter Patriot:

Balkinization: A Question for December 7: Scott Horton: On this day - "a day that will live in infamy" - the Empire of Japan attacked the United States armed forces gathered at Pearl Harbor. And on the other side of the world, December 7 was also a momentous day. The German drive on Moscow stalled - it happened at a place not far from the airport at Sheremetyevo that I drive past a couple of times each year, marked by a memorial composed of over-sized tank barriers. And in Berlin, faced with concern about the stalling effort and the approaching, life threatening Russian winter, Field Marshal Keitel issued the "Night and Fog Decree," one of the bloodiest and most disgusting documents of a war that challenged the conscience of the world. All of this occurred on a single day sixty-five years ago: December 7, 1941.

For a generation of Americans, their lives changed, suddenly and dramatically. National security had been a lingering worry. Suddenly it became a matter that dominated and redirected their lives. Americans handled this challenge with a nobility and clarity of purpose that are worth thinking about today. I propose to do just that, for a simple reason: America needs to remember its history, its values and its legacy. In a world of 24/7 cable pseudo news channels, they have gone missing. And that loss cheapens the lives of every one of us.

In his first inaugural, Franklin Delano Roosevelt told us that "the only thing we have to fear is fear itself." The Roosevelt presidency, and especially the conduct of the Second World War is the first proof of this statement. And in the last five years, Americans have lived through a second proof of it - if they only will open their eyes and see it. Those words sound simple to us today, and we need to remember the context in which they were uttered....

[S]omewhere along the line, this fundamental truth was forgotten in America.In one of his earliest works, Edmund Burke tells us that fear is the hallmark of a despotic society. Fear is used to make a population stupid and subservient; it is used to chill the natural demand for the most basic of freedoms and liberties. A ruler who uses fear in this way deserves contempt, Burke wrote. One of the essential tools of fear is torture. Historical studies of the use of torture inevitably find that torture exists not as a device to gather intelligence, but as a tool to instill fear - to petrify, to silence....

By treating our adversaries as human beings, by showing them dignity and respect, our grandfathers' generation created a new world in the rubble of the Second World War. The nations which were our bitterest adversaries - Germany, Italy and Japan - emerged in the briefest time as our committed friends and allies. A world was born in which America was the dynamic center. And the foundation was laid to win the Cold War as well, after which America would emerge as the world's sole superpower, its direction-giving force. Now I'd like you to use your imagination for a second. Let's assume the unthinkable: that America had embraced Mr. Bush's "Program" in the Second World War; that German, Italian and Japanese fighters had been waterboarded, subjected to the cold cell and techniques like "long time standing." Do any of you think for even a second that these nations would have been our allies and friends in the following generations? Think of how much darker, colder and more hate-filled our world would be than it is today.

I ask this question because this issue - the use of "coercive intelligence gathering techniques" - should be a matter of grave concern to everyone of us. But it has taken time for the question to be asked and discussed. And for that, I have a bone to pick with our media. By mid-2002, evidence began to collect that highly coercive techniques were being used in Guantanamo and in Afghanistan. A few brave souls reported on this - Dana Priest and a couple of her colleagues at the Washington Post were among the first, and there were stories in a handful of other newspapers. I have spent some time talking with print media reporters and editors about this process. What I learned was not encouraging. There was strong pushback from the beginning. Editors did not want to run these stories. Many stories were spiked. And when they ran, they were cut back and appeared buried deep inside the paper. Why? Journalists were under immense pressure at this point, from the Pentagon, the Administration and from the rightwing chorus that dominates much of the cable news world. Threats were raised: papers that report such matters are slandering our troops, it was said. They are undermining our combat morale. They are weakening our war effort....

When we talk about torture today, Abu Ghraib seems a synonym. But this is deceptive. In fact all those wretched photos show is humiliation tactics. They are grim and disturbing. They make a mockery of standards laid down by George Washington and Abraham Lincoln. But they're hardly the worst of the tactics employed. Ninety-eight deaths occurred in detention in circumstances suggesting foul play....

The media had a role in this process - it was to keep us informed about what is being done in our name. For two years, the media failed us miserably. More recently it has started to make up for its failings. But the process by which the media was silenced is troubling, and it, too, is something we should think about.

The key tool used to silence the media was simple: the patriotism of journalists who wrote critical articles was systematically challenged. There is an irony about this that I find remarkably unsubtle. There is nothing unpatriotic about criticizing the use of highly coercive techniques. They have put Americans in uniform in grave risk - and they will continue to do so for a generation at least. They have done incalculable damage to our nation's honor and reputation. They have dramatically undermined our ability to be a moral leader in the world, to forge and sustain alliances - alliances which could save the lives of thousands of Americans in future conflicts. Our Founding Fathers understood these principles perfectly, which is why the notion of humane warfare were an essential part of the beacon they fashioned.

So I ask you: who demonstrates patriotism today - the critics who stand fast by our foundational values? Or those who would ignore our traditions by reaching quickly for the base and the brutal? No real patriot today, no citizen who is concerned about the fate of our fellow citizens in uniform, can be silent on this issue.

A short time ago, in Germany, I spoke with one of the senior advisors of Chancellor Angela Merkel. I noted that a criminal complaint had been filed against Donald Rumsfeld and a number of others invoking universal jurisdiction for war crimes offenses. How would the chancellor see this, I asked? There was a long pause, and I fully expected to get a brush-off response. But what came was very surprising. "You must remember," said the advisor, "that my chancellor was born and raised in a totalitarian state. She cannot be indifferent to questions of this sort. In fact, she views them as matters of the utmost gravity and they will be treated that way.

"The Nuremberg process happened in my country. It was painful for us. But we absorbed it. It became a part of our legacy. An important part of our legacy. We will not forget it. But I have to ask you: why has your country forgotten?"

That is a question to reflect upon on this day, on December 7. The time has come to remember.

Double-Barreled Stupidity from CNN: Fire Jeff Greenfield. Fire Jeff Greenfield Now

First, CNN says that Bush's new Iraq policy has been "largely decided"--and then says that it isn't:

White House: Bush's new Iraq policy largely decided - President Bush on Tuesday put off until early next month announcing a new approach to the Iraq war, and Secretary of State Condoleezza Rice said Bush should take whatever time necessary to decide his next steps. The White House initially indicated that Bush might deliver the speech before Christmas. While administration officials said Bush had largely decided on where he wants to go in terms of a new policy, he gave no public hint of his plan at a meeting with the country's Sunni vice president.

"Our objective is to help the Iraqi government deal with the extremists and the killers, and support the vast majority of Iraqis who are reasonable, who want peace," Bush said after an Oval Office meeting Tuesday with Tariq al-Hashemi....

Taking questions after a State Department meeting with Australia's foreign minister, Rice said there were several factors behind the delay -- including a desire to allow incoming Defense Secretary Robert Gates to settle in and help in developing the new policy. Gates starts the job on December 18.

Either it is largely decided and Gates's input is not important, or it isn't "largely decided" at all. Shame on CNN.

But that's not the only outburst of stupidity. There's Jeff Greenfield: the fact that CNN continues to employ him is reason enough to pull the plug on the entire network. I confess that I had expected the press to help the Republican Slime Machine try to dispose of Barack Obama. I hadn't expected it to come so soon, for the press to be so enthusiastic as Jeff Greenfield is, or for him to prostitute himself so cheaply:

Talking Points Memo: by Joshua Micah Marshall December 11, 2006 08:32 PM: JEFF GREENFIELD: The senator was in New Hampshire over the weekend, sporting what's getting to be the classic Obama look. Call it business casual, a jacket, a collared shirt, but no tie.

It is a look the senator seems to favor....

But, in the case of Obama, he may be walking around with a sartorial time bomb. Ask yourself, is there any other major public figure who dresses the way he does? Why, yes. It is Iranian President Mahmoud Ahmadinejad, who, unlike most of his predecessors, seems to have skipped through enough copies of "GQ" to find the jacket-and-no-tie look agreeable.

And maybe that's not the comparison a possible presidential contender really wants to evoke...


GREENFIELD: Now, it is one thing to have a last name that sounds like Osama and a middle name, Hussein, that is probably less than helpful. But an outfit that reminds people of a charter member of the axis of evil, why, this could leave his presidential hopes hanging by a thread. Or is that threads? -- Wolf.

Fire Jeff Greenfield. Fire Jeff Greenfield now.

Believe in a Loving God, or Die! Department

Yeshua ben Yosef would not be filled with joy by this video game, which seems to miss the point in a particularly pathetic way:

Blood & Treasure: convert or die: The war over Christmas, it seems.

Liberal and progressive Christian groups say a new computer game in which players must either convert or kill non-Christians is the wrong gift to give this holiday season and that Wal-Mart, a major video game retailer, should yank it off its shelves.... Left Behind: Eternal Forces, a PC game inspired by a series of Christian novels that are hugely popular, especially with teens...

...Plugged In, a publication of the conservative Christian group Focus on the Family, gave the game a "thumbs-up." The reviewer called it "the kind of game that Mom and Dad can actually play with Junior -- and use to raise some interesting questions along the way."

'Convert or die' game divides Christians / Some ask Wal-Mart to drop Left Behind: A Wal-Mart spokeswoman said the retailer has no plans to pull Left Behind: Eternal Forces from any of the 200 of Wal-Mart's 3,800 stores that offer the game, including just seven in California. The nearest are in Chico and Redding. "We look at the community to see where it will sell," said Tara Raddohl. "We have customers who are buying it and really haven't received a lot of complaints about it from our customers at this time."... In Left Behind, set in perfectly apocalyptic New York City, the Antichrist is personified by fictional Romanian Nicolae Carpathia, secretary-general of the United Nations and a People magazine "Sexiest Man Alive."

Players can choose to join the Antichrist's team, but of course they can never win on Carpathia's side. The enemy team includes fictional rock stars and folks with Muslim-sounding names, while the righteous include gospel singers, missionaries, healers and medics. Every character comes with a life story. When asked about the Arab and Muslim-sounding names, Frichner said the game does not endorse prejudice. But "Muslims are not believers in Jesus Christ" -- and thus can't be on Christ's side in the game. "That is so obvious," he said.... Frichner said that... his company's ultimate goal in offering the game: to bring parents and kids together to talk about the Bible. He said most teens are playing video games, so it was natural to turn the books into one...

Communicate by Blinking Department

Meanwhile, over at the Weblog Awards:

The 2006 Weblog Awards: Best Centrist Blog: The Weblog Awards are the world's largest blog competition, with over 1 million votes cast in the last three years for nearly 1,000 blogs.

The Moderate Voice is ahead of Ann Althouse--even though The Moderate Voice has asked people not to vote for it, and says it prefers to be crushed by Ann Althouse in a landslide.


Let's all remember Ann Althouse's greatest hit, from her Criminal Procedure 102 class:

It's terrible that the poor man [Jean Charles de Menezes] was shot to death yesterday by the London police.... But... everyone -- at least in London -- now knows not to run from the police, especially not onto a train and while wearing bulky clothing. Is it not true that yesterday's sad mistake has already solved the problem it represents? In fact, a further good has been created: as ordinary persons change their behavior and drop the bulky clothing and unnecessary running, the real terrorists will stand out more. Indeed, if anyone ever behaves like Jean Charles de Menezes again, the presumption that he is a terrorist will be so overwhelmingly strong that the police really must kill him....

A Cultural Shift in Progress

Mark and Period, "The Vineyard," 4314 Redwood Highway #200, San Rafael, CA invites us to their:

Christmas Special New Shipment Warehouse Sale

Huge selection of: antique and contemporary jewelry, silver, coral, glass, jade beads, Buddha and GuanYin statues, paintings, furniture, feng shui, crystals, cashmere, Italian garments...

Let us all now meditate upon Avelokiteshvara, The One Who Hears the Cries of the World, in her form standing in her reindeer-drawn chariot, and chant chapter 25 of the Lotus Sutra--The one that begins: "Ho! Ho! Ho!" and

Max Sawicky Lays Down the Populist Party Line

He writes:


  1. Trade is most prominent, but it may be the least important of my top five. Measures to protect better-paying jobs in the U.S. are feasible but only promise results to a limited extent.
  2. Deficit dementia. The dirty secret in economic policy is that most economists, radical, liberal, moderate, and conservative, understand that the Federal budget need never be balanced, that moderate deficits can be sustained indefinitely. The implications of tolerating deficits of two percent of GDP -- over $200 billion in today's terms -- rather than a deficit of zero are huge.
  3. Social Security. Forget "there is no crisis," the clarion call of anti-Bush campaigners. The new slogan should be, there is no problem. No benefit cuts are necessary for the foreseeable future. If anything, there is a projected shortfall of income tax revenue required to repay debts to the Trust Fund, as per current law, as well as for maintaining other Federal programs.
  4. Health care. There is no crisis. There is, rather, huge projected growth in demand for an ever-expanding menu of treatments, and the burden of managing efficient, ample, and fair public sector finance of this care.
  5. The Imperial Fed. Our true economic overlords, the Federal Reserve Bank's Board of Governors, have arrogated to themselves the right to ignore their mandate for full employment, elevating slow-growth anti-inflation policy over the unparalleled benefits of tight labor markets.

Trade is important, but in the grand scheme of economic security, it is also a pigeon-hole.

I think that (5) misreads the Federal Reserve--both what it can do and what it is doing. And I do not believe that (3) and (2) can peacefully coexist for long. But otherwise it seems a fine starting point for discussions and for frank and productive exchanges of views.

A Question of English Usage...

Here is a passage presented to us:

I thought we had finished with the subject of your wanting to become a writer when you passed through New York last April. You asked for what you called "an uncle's meddling advice," and we spent an afternoon talking about your chances of commercial or critical success (nil and next to none), about the number of readers that constitutes the American audience for literature (not enough to fill the seats at Yankee Stadium), and about the Q ratings awarded to authors by the celebrity market (equivalent to those assigned to trick dogs and retired generals). You didn't disagree with the drift of the conversation, and I thought it was understood that you would apply to business school.

The graders of the PSAT/NMSQT say that the tone of the parenthetical comments is best characterized as "wry." We in this house agree--unanimously--that "surly" is a better characterization. They are not dryly humorous with a touch of irony. They are, rather, sullenly ill-humored.

Or so we think. Do we speak the same language spoken by others, or rather our own private dialect?

Kahn and Rich: Tracking Productivity in Real-Time

Mark Thoma watches Jim Kahn and Bob Rich try to track changes in trend productivity growth in "real time":

Economist's View: NY Fed: Tracking Productivity in Real-Time: The good news is that, according to these estimates, "the underlying trend remains strong despite recent weak productivity data":

Because volatile short-term movements in productivity growth obscure the underlying trend, shifts in this trend may go unrecognized for years--a lag that can lead to policy mistakes and hence economic instability. This study develops a model for tracking productivity that brings in additional variables to help reveal the trend. The model's success is evident in its ability to detect changes in trend productivity within a year or two of their occurrence....

The difficulty in assessing the trend in productivity growth stems primarily from the extreme volatility of quarterly growth rates. In any one quarter, annualized growth rates in excess of 5 percent or below zero are common (Chart 1).[3] Moreover, the volatility is not confined to short-term movements in this series; productivity growth also fluctuates with the business cycle, typically declining during a recession and rising sharply at the onset of a recovery. Thus, economists cannot easily distinguish changes in trend productivity from quarterly or cyclical swings, and years may pass before a trend shift can be ascertained.

Not surprisingly, the misidentification of trend changes can have significant consequences for the economy. It is widely believed, for example, that the inability to recognize the slowdown in trend productivity growth in the early 1970s led policymakers to overestimate potential GDP growth and set interest rates too low--actions that contributed to double-digit inflation over the next several years....

[W]e construct a statistical model that includes, in addition to productivity, two variables that economic theory predicts will move together with productivity over the long term: real (inflation-adjusted) consumption expenditure and real labor compensation. By looking at all three of these economic series at once, the model can more easily uncover the trend that underlies them all. In this respect, our approach resembles the way policymakers gauge the current state of the economy by extracting a signal, with the help of an analytical framework, from a wide array of noisy indicators....

Trend Shifts in the Postwar Period: With the advantage of hindsight, economists have been able to chart the trend in productivity growth in the postwar period. Close to 3 percent from 1948 to 1973, the average growth rate of nonfarm output per hour fell to 1.5 percent between 1973 and 1995, then returned to approximately 3 percent from 1996 to the present. At the time these shifts in trend occurred, however, they were difficult to detect. The trend shift in 1973 went unrecognized for many years.[6] During the late 1990s, the notion that the trend growth rate had picked up found favor with those who believed in the advent of a "new economy," but many economists continued to dispute the notion that the productivity gains of the post-1996 period represented a return to permanently higher growth....

The regime-switching model, introduced in Hamilton's (1988) study of nominal interest rates, has been applied to a number of economic and financial time series.... We consider four time series over the period from first-quarter 1947 to third-quarter 2005: (1) output per hour of work, (2) real labor compensation per hour of work, (3) real consumption expenditure divided by hours of work, and (4) hours of work. The standard one- sector neoclassical growth model of economic theory implies that the first three variables should have a common trend related to technical progress, while any trend in the fourth variable, hours of work, is unrelated to technical progress....

We find that the model would have picked up the change in trend within two years of when it is now known to have occurred....

What does our regime-switching model suggest about the possibility of a trend shift in the current environment? Interestingly, for a period of roughly a year beginning in mid-2005, an apparent slowdown in real compensation growth caused the model to give warning signs of a return to lower trend productivity growth. Subsequent data releases from the Bureau of Labor Statistics, however, revised compensation growth upward, with the result that the model is again indicating strong productivity growth going forward. The shifts in our model estimates are evident in Chart 6, which depicts the probability of being in the low-growth regime (trend growth of 1.3 percent as opposed to 2.9 percent in the high-growth regime), tracked over recent data vintages, including quarterly updates since the third quarter of 2005. We see noticeable increases in this probability beginning in third-quarter 2005, reflecting the sluggish growth in real labor compensation. The latest estimate plotted in the chart, however, assigns a probability of less than 0.05 to productivity's being in the low-growth state. Thus, the model once again places high probability on a trend path that is roughly 2.9 percent, close to the trend over the past ten years and to that in the interval between World War II and 1973....

One variable conspicuous by its absence in our analysis is the stock market. One might think that stock market values would act as a natural leading indicator of a change in trend productivity, since asset prices in general can respond much faster than measures of real activity. We find, however, that the stock market is simply too volatile to be of practical use in detecting a change in trend productivity....

In fact, it may be more useful to consider the interplay between the stock market and trend productivity in the reverse direction. In other words, tracking the trend in productivity growth may illuminate trends in asset values. Chart 8 shows how long-term fluctuations in stock market values (as measured by the S&P 500, adjusted for inflation, and normalized by hours of work) appear to move in line with the level of trend productivity estimated from our original four-variable model. As we have seen, the model identifies changes in the growth regimes of productivity relatively quickly and therefore could be informative about future movements in stock prices...

More on the Fall of Amaranth News

Katherine Burton and Jenny Strasburg of Bloomberg recount the fall of the Amaranth Hedge Fund, answering some questions and raising others. Some highlights:

Katherine Burton and Jenny Strasburg: Amaranth's $6.6 Billion Slide Began With Trader's Bid to Quit: "`It looked to us like the Amaranth multistrategy fund was a pure energy bet," says Edward Vasser, chief investment officer of Wolf Asset Management International LLC, a Santa Fe, New Mexico-based fund of funds. "Almost all of their profits came from their energy portfolio." He decided against investing in Amaranth.... [T]he energy bet was working for Amaranth, which had about 30 percent of its assets in the sector. The flagship fund ended the year [2005] up about 15 percent, compared with Citadel's 7 percent. In January 2006, Maounis allocated $1 billion to Hunter, who then made $300 million during the next four weeks....

The wager had been essentially the same since Hunter joined Amaranth. He was betting that the difference in prices of natural gas between winter months and summer months would widen. Winter months were represented by March delivery contracts and summer months by April contracts. He placed these trades going out until 2012, say market participants with knowledge of his positions. The spread widened to more than $2 early this year from about 40 cents when Hunter started at Amaranth in 2004.

Hunter also bet that natural-gas prices would increase while fuel and heating oils either would stay the same or fall. Arora, Hunter's former boss and the trader with the most knowledge of energy markets at Amaranth, quit in March to start his own fund. In April, Amaranth's fund climbed 13 percent, almost entirely because of energy trades.... In the first four months of the year.... Amaranth's returns approached 30 percent, they say.

Some investors were troubled by the fund's concentrated wagers. Executives of Blackstone Alternative Asset Management, the fund of hedge funds unit of New York-based Blackstone Group, went to Calgary in May to visit Hunter and afterward pulled their entire investment....

Former employees... say they were concerned... questioned Maounis and Jones... were told that the wagers weren't particularly risky because it was an arbitrage--profiting from price disparities--rather than a directional bet on natural gas.

In May, Hunter's fortunes changed. Spreads between October and January contracts, another way to wager on price differences between warmer and colder months, narrowed to $3.27 from a high of $3.64. Spreads between March and April contracts also narrowed. Hunter lost $1 billion.... Amaranth's paper profits in natural gas were significant, yet it couldn't realize all of the gains selling. Traders and hedge funds knew Amaranth was desperate to get out of its trades, so they wouldn't pay current prices....

Hunter controlled 56 percent of Amaranth's assets and accounted for 78 percent of its performance as of June 30.... Starting in May, Hunter and his team spent most of the summer flying between Calgary and Greenwich.... They conferred almost daily at 4 p.m. Eastern time, either in person or by phone or videoconference.

From June to August, the energy and commodities positions earned $1.35 billion, Maounis told clients on a Sept. 22 conference call, according to a transcript provided to Bloomberg News. Much of those gains were generated in August...

As I have said before, great kudos to Blackstone: many people will bail out after unexpectedly large losses, but few people are smart enough to bail out after unexpectedly large gains. I have to confess to some puzzlement over the statement that Amaranth "was desperate to get out of its trades" but couldn't because its counterparties "wouldn't pay current prices." The current price--the price at which you should mark to market--is the price at which you can sell, not a price at which you cannot sell.

This Bloomberg article deepens the mystery. To bet that spreads between March and April gas prices will be higher in the future than they have been in the past is not "arbitrage": arbitrage is betting that things that should converge in price will in fact do so. The disparity between March and April prices will widen only if (a) relative winter demand for natural gas continues to surge more than supply, (b) nobody finds a way to effectively and cheaply store gas produced in April until the next winter, and (c) the market recognizes (or fears) (a) and (b). That's a bet about gas demand and about gas storage technology--something that I think would be the province of energy industry engineers, rather than of a team of eight off in Calgary.

Even more disturbing: Maounis's very high opinion of a trader who had lost his previous employer $50 million in a week due to an "unprecedented and unforeseeable run-up in gas prices" and who was suing that employer for a bigger bonus.

Paul Krugman: Shrillest of the Shrillest of the Shrillest of the Shrill

Mark Thoma reads Paul Krugman, the shrillest of the shrillest of the shrillest of those who have been driven into shrill unholy madness by the disconnection from reality, incompetence, mendacity, and malevolence of George W. Bush and his administration:

Economist's View: Paul Krugman: They Told You So: Paul Krugman reviews "The Cassandra Chronicles":

...Shortly after U.S. forces marched into Baghdad in 2003, The Weekly Standard published a jeering article titled, "The Cassandra Chronicles: The stupidity of the antiwar doomsayers." Among those the article mocked was a "war novelist" named James Webb, who is now the senator-elect from Virginia. The article's title was more revealing than its authors knew. People forget the nature of Cassandra's curse: although nobody would believe her, all her prophecies came true. And so it was with those who warned against invading Iraq. At best, they were ignored....

I'd like to offer some praise to those who got it right. Here's a partial honor roll:

Former President George H. W. Bush and Brent Scowcroft.... "Had we gone the invasion route, the United States could conceivably still be an occupying power in a bitterly hostile land."...

Al Gore.... "I am deeply concerned that the course of action ... with respect to Iraq has the potential to seriously damage our ability to win the war against terrorism and to weaken our ability to lead the world in this new century."

Barack Obama.... "I don't oppose all wars. What I am opposed to is a dumb war. What I am opposed to is a rash war. What I am opposed to is the cynical attempt by Richard Perle and Paul Wolfowitz and other armchair, weekend warriors in this administration to shove their own ideological agendas down our throats, irrespective of the costs in lives lost and in hardships borne."

Representative John Spratt.... "The outcome after the conflict is actually going to be the hardest part, and it is far less certain."

Representative Nancy Pelosi.... "When we go in, the occupation, which is now being called the liberation, could be interminable and the amount of money it costs could be unlimited."

Senator Russ Feingold.... "I am increasingly troubled by the seemingly shifting justifications for an invasion... When the administration moves back and forth from one argument to another, I think it undercuts the credibility of the case and the belief in its urgency. I believe that this practice of shifting justifications has much to do with the troubling phenomenon of many Americans questioning the administration's motives."

Howard Dean.... "I firmly believe that the president is focusing our diplomats, our military, our intelligence agencies, and even our people on the wrong war, at the wrong time.... Iraq is a divided country, with Sunni, Shia and Kurdish factions that share both bitter rivalries and access to large quantities of arms."

We should honor these people for their wisdom and courage. We should also ask why anyone who... acted as a cheerleader for this march of folly... should be taken seriously when he or she talks about matters of national security.

He reminds us of why, today, nearly everybody even semi-sentient joins in the chant: "