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January 2007

Czar George W. Bush Flails Around and Gets Some New Cossacks

Watertiger observes that Bush's "clean sweep" of his Iraq team should start at the top. Impeach George W. Bush. Impeach him now:

Dependable Renegade: You call it a "clean sweep.": I call it flailing around for a deus ex machina answer.

I'm certainly no military expert, but it seems to me that firing the guys who carried out your poorly designed plan and then, when the plan didn't work, told you it was because your plan was poorly designed doesn't exactly qualify as "leadership." Smacks of scapegoating to me....

Admiral William J. Fallon to replace General John Abizaid at Central Command.... [T]he replacement as MNF-I commander in Iraq (replacing Gen. George Casey) will be LTG David Petraeus. Though Casey was originally staying in position till June, he is expected to leave earlier than expected probably in the next few months. "The president wants a clean sweep" an official told ABC News.

Fallon, who is in the Navy, is currently head of Pacific Command; he will be overseeing two ground wars, so the appointment is highly unusual.

"Unusual" may be putting it mildly. Pat Lang writes:

Sic Semper Tyrannis 2006: Casting for the Play: An intelligence analyst makes judgments based on available data and interprets that data through a mental "filter" made up of experience, contextual knowledge, probabilities and sheer, unmerited, intuitive talent. Among the most valuable indicators of intentions are the appointments of senior people to fill leadership positions.

In that regard it must be said that the appointment of Admiral William Fallon the the post of Commander, US Central Command is surely indicative of intentions. This distinguished officer's career lay altogether within the field of naval aviation and latterly of joint staff and command functions. His official biography is posted below.

It makes very little sense that a person with this background should be appointed to be theater commander in a a theater in which two essentially "ground" wars are being fought unless it is intended to conduct yet another war which will be different in character. pl

If Pat Lang is right in reading the meaning of Admiral Fallon's appointment, "another war" would be a naval-based aviation and missile war against Iran.

More on the Torture of Padilla

Brian Tamanaha:

Balkinization: We Torture: The horror of this widely reported story is almost lost in accounts that contain an overflow of words. A report by NPR (thanks to Michael Perry on Mirror of Justice) puts it concisely:

According to court papers filed by Padilla's lawyers, for the first two years of his confinement, Padilla was held in total isolation. He heard no voice except his interrogator's. His 9-by-7 foot cell had nothing in it: no window even to the corridor, no clock or watch to orient him in time. Padilla's meals were delivered through a slot in the door. He was either in bright light for days on end or in total darkness. He had no mattress or pillow on his steel pallet; loud noises interrupted his attempts to sleep. Sometimes it was very cold, sometimes hot. He had nothing to read or to look at. Even a mirror was taken away. When he was transported, he was blindfolded and his ears were covered with headphones to screen out all sound. In short, Padilla experienced total sensory deprivation.

During lengthy interrogations, his lawyers allege, Padilla was forced to sit or stand for long periods in stress positions. They say he was hooded and threatened with death. The isolation was so extreme that, according to court papers, even military personnel at the prison expressed great concern about Padilla's mental status....


Even former Justice Department spokesman Corallo concedes that in hindsight, Padilla [an American citizen] was a bit player.

Padilla is now mentally disturbed. Although the government does not deny the specific claims above, it does deny that he was "mistreated."Our government--including the great Justice Department--has lost its moral compass, to the disgrace of our country.

Impeach George W. Bush. Impeach him now.

Matthew Yglesias Throws the Yellow Flag on Jacob Weisberg

I'm not sure what the penalty is. Fifteen yards and loss of down?

Me? I take this as more evidence that liberal hawks are cognitively dysfunctional:

Matthew Yglesias / proudly eponymous since 2002: Weisberg argues:

As Iraq descended into mayhem, a disengaged president continued to put forth the absurdist goal of establishing liberal democracy in a catastrophically damaged country where it had no root.

This is no fair. Establishing a liberal democracy in Iraq was absurd but it was the mission. You can't argue that the mission wasn't doomed to failure and only failed because of incompetence, and then cite as an example of incompetence the national leadership's pursuit of the mission objectives. Yes, yes, a smarter, wiser president could have invaded Iraq and made things turn out less bad. The question on the table, however, is whether "competent" execution of the invade-occupy-democratize plan could have achieved the goals of the plan.

We really do deserve a much better press corps than this one we have got.

The View from Elsinore

Hoisted from Comments: Jacob Chrstensen on the March of the Danes:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: The Scandinavian Model: Just some short comments: The 1933 Kanslergade Agreement (Shameless self-promotion: I've written about it) may have a mythical place in Danish history (because the agreement was made on the very same night a certain Mr. Hitler became Chancellor of Germany) but on the labour market there is a longer story of capital-labour cooperation starting with the 1899 September agreement. It hasn't been all roses but in general Danish employers have found Danish Trade Unions a reliable partner.

Anyway, the unemployment situation only eased during the latter half of the 1930s (I don't have access to statistics right now)

The 1993 turn-around is interesting because governments in the 1970s reacted to the economic crisis in good Keynesian fashion by extending the period unemployed could receive unemployment benefit from 1 year to - eh - 4 years. Starting in the mid-80s (under a Conservative government!) more active employment policies were introduced, but initially counteracted by a restrictive fiscal policy. But once the radicalism of the 1970s had worn off, trade unions were favourable to these kinds of employment policies.

Pensions: The Danish pension system is probably unique globally as it combines a general flat-rate tax financed system with collective or individual savings systems - so the flat-rate is tax financed, everything else directly linked to savings and funds. There cannot be unfinanced claims to future payments in the system - unlike the German or the former Swedish systems.

Health care: Yes - but the Danish advantage was that the system was established in 1892 and effectively made a near-comprehensive system in 1933 (formally, this only happened in 1973). But there was no place for insurance companies. What we are seeing, though, is a tendency to establish private insurances in order to by-pass waiting lists in the public system.

Finally, Danes discuss the system's ability to accomodate immigrants. Maybe, so the argument goes, this only works in a homogenoeus and relatively stable culture. Immigrants on the other hand find the high entrance wages a handicap when they seek work. (This would merit a post in itself).

Mark Thoma Does Some Intellectual Garbage Pickup

He reads Donald Luskin at National Review:

Economist's View: Bush's Fiscal Irresponsibility: Don Luskin has an article in the NRO discussing Paul Krugman's column "Democrats and the Deficit." The article is critical of Krugman's position that Democrats should be careful not to hand budget surpluses to Republicans because they are likely to give them away as tax cuts rather than use them responsibly as down payments on future government liabilities. As part of his argument, Luskin tries to rebut "Bush’s irresponsibility" by arguing Bush has done as well as Clinton on federal budget issues. For example, he says:

The debt [under Clinton] was 49.3 percent of GDP, higher than in any year of the George W. Bush administration

Well, okay, but let's look a little closer.... While it's true that the debt to GDP ratio is lower today than the 1994 value of 49.3%, it's risen steadily under Bush. At the end of fiscal year 2000 the debt to GDP ratio had fallen to 35.1%, and it fell to 33.0% at the end of fiscal year 2001. But since 2001 it has risen steadily. So the important part of the story is not that the debt to GDP ratio is lower now than it was in 1994, instead, it's that the ratio has risen steadily under the Bush administration....

Oh, and by the way, the rest of Luskin's piece, "Speaking Truth to Power," is no better at speaking the truth...

Real American Heroes

Prometheus 6 directs us to: "Clyburn Leads Southern Blacks' Ascent To Top Posts in Congress," By DAVID ROGERS: Rep. James Clyburn, a minister's son from South Carolina, takes his place tomorrow as the House Majority Whip -- the No. 3 Democratic post and highest ever held by an African-American from a Southern district. The 66-year-old Mr. Clyburn, who was 25 before the Voting Rights Act was enacted, symbolizes the rise of a set of Southern black lawmakers, shaped by the region and with a distinctive approach to politics separate from that of black leaders representing urban Northern districts.... Rep. Bennie Thompson, once a Mississippi alderman, becomes chairman of the Homeland Security Committee....

"We have come from a part of the country where it was legal for people to treat people differently because of their color," Mr. Thompson says. "In many instances you find a passion for making sure that our systems are fair and equitable. On the other hand you find a greater interest in community." Their often rural roots and the black educational and religious institutions that sustained them through segregation still influence their politics. "It's like the turtle on the fence post: he didn't get there by himself," says Rep. Sanford Bishop (D., Ga.) "I come from a district that believes in God, country, work, family and guns, and not necessarily in that order. For rural blacks, a shotgun was just another tool on the farm and a way to protect you from the Klan."...

Segregation's mark is clear in his protective reserve.... "I wasn't born this way," Mr. Clyburn says. "I taught myself to be as reserved as I am in order to survive." As a boy, Mr. Clyburn dreamed of being in politics, despite warnings from older blacks to keep his ambitions in check. The civil-rights movement thrust him forward in college, when he was arrested several times for demonstrations. In an early case, the late Rev. I. DeQuincey Newman, a mentor and South Carolina civil-rights activist, picked him to take the stand at the trial after Mr. Clyburn and other black students were arrested during an Orangeburg, S.C., demonstration.

It was common then for Southern newspapers to print the names of black student protesters on the front page, inviting retaliation against their families. Rev. Newman argued that in a white society the Clyburn family was safe from economic retribution: "Your daddy is a minister and he ain't preaching to no white people. Your mother is a beautician and she's fixing no white folks' hair. You're independent of the system. Nobody gets fired. So you're it." Mr. Clyburn says, "It was my parents. It was because of them I was picked out of the crowd. Wherever it is you are, you don't get there on your own."...

"Don't tell me things don't change," Mr. Lewis says. "Walk in my shoes; walk in Jim Clyburn's."

I know that as long as the Democratic Party has people like James Clyburn and John Lewis in it while the Republican Party has people like Newt Gringrich and Tom DeLay in it, I will be a Democrat.

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

Dean Baker is annoyed this morning at Washington Post reporter Steve Mufson, who seems genuinely over his head and going down for the third time in trying to cover the budget:

Beat the Press: One Year, Ten Years, What's the Difference? The Washington Post goes the extra mile in meaningless budget reporting this morning. It reports on the Democrats' efforts to increase the royalties assessed on energy companies for drilling on public land and also taking back some of the tax breaks given them by the Republican Congress. The article tells readers that repealing the tax cuts would save $5 billion, while increasing royalty payments would raise $9 billion to $11 billion.

Of course all the people reading the article knew that these projections refer to a 10-year time frame so there was no reason to include this information in the article. For the full story, the Post would have told readers that the $5 billion in tax breaks would be equal to 0.017 percent of projected federal spending over this period and the $9-$11 billion in royalties is equal to 0.03 percent to 0.04 percent of federal spending.

Readers should have this information. These tax breaks and royalty free contracts were an outrage, but taking them back is not going to have a big effect on the budget and no one should be led to believe otherwise.

Daniel Gross Has Had Enough of George Will

George Will is truly remarkable:

Daniel Gross: December 31, 2006 - January 06, 2007 Archives: ECONOMIC ROYALISM WATCH: George Will's sneering attack on the minimum wage is typically awful. The first paragraph contains so much blinkered willful misreading of history that it deserves a prize. Here it is:

A federal minimum wage is an idea whose time came in 1938, when public confidence in markets was at a nadir and the federal government's confidence in itself was at an apogee. This, in spite of the fact that with 19 percent unemployment and the economy contracting by 6.2 percent in 1938, the New Deal's frenetic attempts had failed to end, and perhaps had prolonged, the Depression.

Lets review a bit. Will seems to think that "public confidence in markets was at a nadir" in 1938. Um, no. Public confidence in markets reached a nadir in 1933, when half the banks in the country had closed, when Wall Street was essentially out of business, when the Dow stood at its appalling lows, when employment was about 25 percent. In 1933 -- before the New Deal -- there was no securities industry, no banking industry, no mortgage industry, no capital formation or lending of any kind. That year, an estimated 40 percent of home mortgages were in default.

It was only with the passage of New Deal efforts--the SEC, the FDIC, the FSLIC--that the mechanisms of private capital began to kick back into gear. Don't take it from me. Take it from Federal Reserve Chairman Ben Bernanke, who wrote the following in Essays on the Great Depression: "Only with the New Deal's rehabilitation of the financial system in 1933-35 did the economy begin its slow emergence from the Great Depression."...

The argument that the New Deal's efforts "perhaps had prolonged, the Depression," is likewise a canard. One would be very hard-pressed to find a serious professional historian--I mean a serious historian, not a think-tank wanker, not an economist, not a journalist--who believes that the New Deal prolonged the Depression.... My confidence in George Will is at a nadir.

A normal person would not argue that the New Deal prolonged the Great Depression. A normal person would require a case that he or she could point to of a country that (a) relied on market forces alone to generate recovery, and (b) recovered fully from its Great Depression. But George Will is not a normal person.

Jagdish Bhagwati Blames Technology for Wage Stagnation

Mark Thoma makes the catch:

Economist's View: Globalization, Wages, and Jumping J-Curves: Jagdish Bhagwati of Columbia University defends globalization in this commentary from the Financial Times:

We have recently witnessed a flurry of comment in the US on the long-running stagnation of wages. Many believe that the future livelihood of the “middle class” is also at risk.... Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they ... want to lean on the door – even to close it – on trade with poor countries and occasionally on unskilled immigration from them. Proponents of globalisation ... find themselves in a politically implausible position: they typically ... accept this “distributional” critique of globalisation – yet nonetheless propose that those adversely affected should accept globalisation but be aided...

As it happens, globalisation’s supporters are on firmer ground than they fear. Examine the common arguments linking globalisation to the distributional distress and little survives. First, all empirical studies, including those done by some of today’s top trade economists (such as Paul Krugman ... and Robert Feenstra ...), show that the adverse effect of trade on wages is not substantial....

Second, the same goes for ... studies by the best labour economists regarding the ... influx of unskilled illegal immigrants into the US. The latest study by George Borjas and Larry Katz ... also shows a virtually negligible impact on workers’ wages, once necessary adjustments are made.

Can it be that globalisation has reduced the bargaining ability of workers and thus put a downward pressure on wages? I strongly doubt this. First, the argument is not relevant when employers and workers are in a competitive market and workers must be paid the going wage. As it happens, fewer than 10 per cent of workers in the private sector in the US are now unionised.

Second, if it is claimed that acceleration in globalisation has decimated union membership, that is dubious. The decline in unionisation has been going on for longer than the past two decades of globalisation ...

Has the outflow of direct foreign investment ... contributed to a decline in wages? As I look at the data, the US has received about as much equity investment as it has lost over the past two decades. One cannot just look at one side of the ledger. The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. ...

Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced.

But we know from past experience that we usually get a J-curve where, as increased productivity takes hold, it will ... lead to higher wages. So why has there been no such significant effect in the statistics on wages for almost two decades?

I suspect that the answer lies in the intensity of displacement of unskilled labour by information technology-based change and in the fact that this process is continuous now – unlike discrete changes caused by past inventions such as the steam engine...

Retro Science Fiction

The Singularity in historical perspective:

The Brad DeLong Early Holocene Sci-Fi Contest:

Robert G. Seeberger .......Well........I'm declaring a contest myself The Idea is to write a few paragraphs that exhibit what Sci-Fi would be for an early hunter/gatherer:

"As you know, Throgette," said Throg son of Throg son of Throg, "these new flint deposits allow us to make 147% more hand-axes from each flint core. That will be a great help in butchering the mastadon carcasses and preparing for the winter. If only we could build fires on a large enough scale to make the cold of the winter less deep."

"Build enough fires to warm the whole world? There will never be enough people to build enough fires to warm the world by even 1/212 of the difference between the coldness of ice and the hotness of the cloud that comes when you forget and leave the water-pot on the fire too long!"


"But we can dream dreams. Someday, in the far future, there will be not hundreds of people but hundreds of hundreds of hundreds of hundreds!"


"And they will acknowledge the leadership of one man--a man from the hot country of the Permian Basin."

"That's just not credible. There's so little water there. Anyone who voluntarily lived there would automatically disqualify himself from leadership by virtue of obvious stupidiy."

"And he will believe that changes in the kinds of plants and animals come about not because of mutation, resulting variation, and natural selection but because they are impelled to do so by the guidance of a Great Spirit!"

"Now you've gone too far--over into complete fantasy."

PAT MATHEWS: My own entry:

"Chief, I have foreseen a time when everybody can have all the meat, fat, and sweet stuff they can eat, and they all get fat."

"Shaman, you have had a vision of the Happy Hunting Grounds."

"And, Chief, it is considered a great and horrible problem! People go out of their way to eat leaves and grass and grains, and work very hard to look lean and brown."

"Shaman, you've been eating too many of those strange mushrooms, and are seeing everything backward."

The Maddened William Rehnquist Fleeing a CIA Plot to Assassinate Him Makes It to the Hospital Lobby in His Pajamas Before Psychiatrists Wrestle Him to the Ground

Wow: William Rehnquist hopped up on 1500 mg a day of jelly-bellies, inducing hallucinations and paranoia, with his pusher--Capitol physician Freeman Cary--giving Rehnquist a three-month perscription every month: Also detailed in the declassified [FBI] file was Rehnquist's 1981 hospital stay for treatment of back pain and his dependence on powerful prescription pain-relief medication.... Placidyl, which Rehnquist had taken for at least 10 years, according to a summary of a 1970 medical examination. When Rehnquist checked into a hospital in 1981 for a weeklong stay, doctors stopped administering the drug, causing what a hospital spokesman at the time said was a "disturbance in mental clarity."

The FBI file, citing one of his physicians, said Rehnquist experienced withdrawal symptoms that included going to the hospital lobby in his pajamas in a bid to escape. He imagined that there was a Central Intelligence Agency plot against him, and he also seemed to discern changes in the patterns on the hospital curtains.,Rehnquist thought he heard voices outside his room discussing various plots against him.

The doctor said Placidyl is a highly toxic drug and that she could not understand why anyone would prescribe it, especially for long periods. Prior to his hospitalization, Rehnquist occasionally slurred his speech in his questions to lawyers at Supreme Court arguments. Those problems ceased when he changed medications, the doctor said.

Charns said that some of the censored documents provide intriguing hints of what else Rehnquist's file might contain. In one previously secret memo from 1971, an FBI official wrote, "No persons interviewed during our current or 1969 investigation furnished information bearing adversely on Rehnquist's morals or professional integrity; however ..." The next third of the page is blacked out, under the disclosure law's exception for matters of national security. "It would be nice to know what is still classified, three decades later," Charns said.

This is the AP article which hit the wires at 5 PM Pacific time. The story by Tony Mauro hit the net at noon Pacific time Wednesday. There appears to be nothing in either the Thursday Washington Post or the Thursday New York Times.

Budget Journamalism from the Washington Post (Brendan Nyhan Gets Baited-and-Switched)

Brendan Nyhan is amazed to find a real journalist--William Branigin--covering the budget for the Washington Post. But it's a flash in the pan that soon disappears:

Brendan Nyhan: Post commits journalism on Bush tax/budget plans: Democrats have long derided Bush's deficit-cutting boasts, saying he routinely ignores the huge debt that the federal government has accumulated since he was inaugurated in January 2001. From a record surplus of $237 billion in fiscal 2000 under President Bill Clinton, the budget began slipping into deficit under Bush, in part because of a sluggish economy, falling tax revenue, the impact of the Sept. 11, 2001, terrorist attacks and the war in Iraq.

But after reaching a record $413 billion in 2004, the budget deficit dropped to $248 billion in the 2006 fiscal year that ended Sept. 30, thanks largely to higher tax receipts from corporations and individuals.

The claim that the federal budget deficit has been cut in half stems from the administration's original projection of a $512 billion deficit for 2004, a number that critics have said was inflated, especially since the Congressional Budget Office (CBO) was forecasting $477 billion at the time.

Some economists also have charged that Bush has claimed unwarranted credit for his tax cuts, which they say have cost the Treasury more in lost revenue than has been gained from their economic stimulus effect.

According to Alan D. Viard, a former Bush White House economist who joined the American Enterprise Institute, "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."

Viard said in October there was "no evidence" that Bush's tax cuts come anywhere close to paying for themselves, a conclusion shared by economists at the Treasury Department and the nonpartisan CBO, Washington Post staff writer Lori Montgomery reported.

The Congressional Research Service has estimated that economic growth fueled by the tax cuts is likely to generate revenue worth about 7 percent of their total cost, which amounts to about $1.1 trillion since 2001...

But, alas, the act of journamalism was only temporary. If you click on Brendan's link or search the Post's website, you find that the story is gone. It has been replaced: journalism to journamalism. Somebody decided the Post's readers needed to be protected from learning about the estimates of CBO, about the consensus of economists, and about the fact that the Bushies highballed their forecast to make it easier to cut it in half.

Now we see a different story--with no quotes from real economists, with no quotes from budget analysts outside the Heritage Foundation, with un-fact-checked quotes from Bush's budget director, and with no challenge to Bush's claim that the tax cuts have raised revenue--by the obsequious Peter Baker

I have a hard time understanding why anyone pays for the Post today. I find it difficult to conceive how it can last a decade.

Barack Obama: It's Going to Get Mean. And It's Going to Get Ugly

Oliver Willis looks at the Lois Romano article in the Washington Post, and draws the appropriate conclusions:

The Swiftboating Of Barack Obama Begins? [Oliver Willis: Like Kryptonite To Stupid]: It's got to be the first time that a youthful mistake revealed long ago by the candidate himself is all of a sudden fodder for the front page of and The Washington Post.

For some reason, the standards have changed. Luckily, people are actually smarter than the opposition media and their political pals on issues like this. Still, worth noting for what the mainstream press has in store in the next two years versus Democrats, continuing their old pattern since the Clinton administration.

It's going to get really mean. And it's going to get really ugly. And the Washington Post, Microsoft, and NBC are going to be leading the charge to keep Barack Obama out of the White House.

Andrew Samwick Has a New Year's Plea

Andrew Samwick has not a New Year's resolution but a New Year's plea. Listen to him. He's begging:

Vox Baby: A New Year's Plea: To anyone in the Administration who may read this blog, I have one small wish for the new year. Please stop your boss from writing or saying the following:It is also a fact that our tax cuts have fueled robust economic growth and record revenues.

You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues.

We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.

If I'm wrong, show me the evidence... and tell me why the tax cuts were so small given their effects on revenues.

Malcolm Gladwell Semi-Defends Enron's Jeff Skilling

UPDATE: Malcolm Gladwell digs himself in deeper in his "semi-defense" of Jeff Skilling and the other fraudsters of ENROn. In response to a commenter on his website who points to the ENRON off-balance-sheet-entity accounting fraud, Gladwell says that the fraud wouldn't have been fraud if it hadn't had the fraudulent elements, Gladwell writes:

My understanding is that a) its not entirely clear how those outside partnerships ran afoul of SEC rules, except in the matter of [their failing to have] the 3 percent outside equity interest]...

To the contrary. It is entirely clear how those outside partnerships ran afoul of the SEC. And of course it isn't criminal fraud if you remove the fraudulent elements that had previously been criminalized!

Gladwell seems more than a bit thick here. He also misstates the requirements for an SPE to be taken off the balance sheet--he omits the requirement that third-party investments be genuinely at risk:

As the SEC wrote in its ENRON enforcement actions:

Complaint: SEC v. Michael J. Kopper : 11) Enron engaged in myriad SPE and other transactions that were structured to achieve off-balance-sheet treatment. Under applicable accounting rules, an SPE could receive off-balance-sheet treatment only if independent third-party investors contributed at least three percent of the SPE's capital, and the third party investment were genuinely at risk, among other things. If the third party were not truly independent, or its investment were not truly at risk, consolidation of the SPE onto Enron's balance sheet would be required.

12) Starting in at least early 1997, Kopper and others devised a scheme to defraud Enron's security holders by enriching themselves through the use of certain Enron SPEs. Some of these SPEs were not eligible for off-balance-sheet treatment because the supposedly independent third party investors were controlled by the CFO, Kopper, and others and because the third party "investment" was not at risk, since Enron, the CFO, Kopper, or others provided the funds to be invested or guaranteed the investment against risk of loss. Thus, these SPEs should have been consolidated onto Enron's balance sheet.

13) Enron nevertheless engaged in various transactions with these SPEs that were designed to improve its apparent financial results. Meanwhile, Kopper and others used their simultaneous influence over Enron's business operations and the SPEs as a means to secretly and unlawfully generate millions of dollars for themselves and others...

Gladwell goes on:

The point is that even that simple phrase is arguable and complex and not nearly as straightforward as it sounds...

But the point--Gladwell's clam that ENRON's SPEs weren't fraudulent--is only "arguable" because Gladwell misstates the case.

A simple answer to a not-innocent question by Malcolm Gladwell--the question, you see, is part of what Gladwell calls a "semi-defense" of Enron's Jeff Skilling:

Jeff Skilling and his co-conspirators breached their fiduciary duties and falsified the accounts of ENRON for 1998, 1999, 2000, and 2001 in order to persuade investors that Enron was a well-run, profitable company, and so boost its stock price.

What is Malcolm Gladwell's question? It is: Enron: I also have a minor challenge for aficionados of the Enron case. Years ago, when I was at the Washington Post, one of my colleagues on the science desk—-Bill Booth—-called up a dozen or so Nobel Laureates in physics and asked them to explain, in plain language, the nature and significance of the Higgs Boson atomic particle. None of them could....

Can anyone explain—-in plain language—-what it is Jeff Skilling and Co. did wrong?

I’m not asking for an explanation for what they did wrong as businessmen. That’s plain. They did a mountain of stupid and arrogant things. Nor is this about what Skilling and company did that was unethical or in bad faith. There’s a mountain of evidence on that too. The question is strictly a legal one: according to the way the accounting rules were written at the time, what specific transgressions were Skilling guilty of that merited twenty-four years in prison? For the sake of argument, let’s stipulate that summaries must be three sentences or less.

When I was reporting the piece, I tried to get someone to answer this question. But everything ended up very Higgs Bosonian.

There is an easy answer to Gladwell's Higgs-boson question too:

The standard model of subatomic physics builds up everything out of a few basic elementary particles: the electron, the muon, and the tau; the electron-neutrino, the muon-neutrino, and the tau-neutrino; the up and down quarks; the charm and strange quarks; the top and bottom quarks; all the antiparticles of these; the gluon bosons; the weak-electromagnetic bosons W, Z, and the photon; and the Higgs boson.

So far we have found, in our particle accelerators, direct evidence of the existence of everything but the Higgs boson. If we are going to extend the standard model, we need to see if the Higgs boson is in fact what we think it is and does in fact behave as we think it does.

If we remove the Higgs boson from the standard model, it looks then as if nothing has any mass and everything travels at the speed of light always: the Higgs boson is kinda important in making our universe look like it does.

The impression I get is that neither Bill Booth nor Malcolm Gladwell tried very hard to get their respective questions answered in a way they would judge satisfactory.

Why Oh Why Can't We Have a Better Press Corps? (Washington Post's Thomas Ricks Courageously Waits Four Years To Tell Us What He Thought About Iraq's WMD

Jonathan Schwarz is disgusted by Thomas Ricks of the Washington Post:

A Tiny Revolution: Washington Post's Thomas Ricks Courageously Waits Four Years To Tell Us What He Thought About Iraq's WMD: Here's Thomas Ricks, telling us in a recent Time Magazine roundtable that he never believed Iraq had WMD:

TIME: On the eve of the war, which of you believed that we would go in and find no WMD?...Why did you feel that way, Tom?

RICKS: I thought that at most they would find some old mustard gas buried out in the '91 war that somebody had forgotten about. I remember asking the Chairman of the Joint Chiefs about a week before the invasion, "You don't know where the stuff is, do you?"

Here's Thomas Ricks before the war--not telling us what he believed, but instead writing down exactly what the U.S. government said. Note that Myers was the Chairman of the Joint Chiefs to whom Ricks addressed his "You don't know where the stuff is, do you?" question:

Myers Depicts War on Two Fronts By Thomas E. Ricks Wednesday, March 5, 2003: ...One major early mission of U.S. forces would be to locate and secure Iraq's suspected arsenal of chemical and biological weapons, [General Richard] Myers said. The U.S. government expects to learn far more about those weapons programs once its forces invade Iraq. At that point, he said, the "giant shell game" played by the Iraqi government to conceal its weapons "would come to a halt," and instead "people would come forward and say, 'Here's where this is, here's where that is.' "


Audacious Mission, Awesome Risks By Rick Atkinson and Thomas E. Ricks Sunday, March 16, 2003: ...Overhanging the entire operation is the prospect that Iraq could use chemical or biological weapons.... A major risk is that Iraqi units might try to lie low as the ground attack thrusts northward and then try to attack the vulnerable supply columns that follow.... A major mission of Special Operations will be leading the hunt for chemical and biological weapons...


U.S. Airstrikes Open War on Iraq By Rajiv Chandrasekaran and Thomas E. Ricks Thursday, March 20, 2003: One Army commander put the odds of Iraq possessing chemical weapons at "80 to 90 percent," but there still is no consensus on whether those weapons are likely to be used, much less used effectively...

International Financial Capitalism, Twenty-First Century Style

I am not sure that this argument hangs together. But it might be on the right path:

Brad Setser:

RGE - Is Stephen Pearlstein right?: Stephen Pearlstein... argues that [the] surge in demand for US financial assets from emerging economies -- and overwhelmingly from the governments of emerging economies, not private investors -- be they Asian central banks or oil investment funds -- has had a profound impact on the distribution of wealth in the US. I agree. Greenwich CT is partying (Goldman too) this weekend. Detroit, Michigan is not. At least not in the same way.

Pearstein writes:

These countries know that if they were to try to exchange all those dollars for their own currencies, it would drive down the value of the dollar -- and with it, demand by American consumers for all the things they sell. Rather than accept slower growth and higher unemployment, they have decided to keep their currencies loosely pegged to the dollar by investing those trade-surplus dollars in U.S. assets.

One obvious effect of this decision is to drive up demand for U.S. stocks, bonds and real estate... the tech and telecom bubbles of the 1990s, the current bubble in corporate takeovers and commercial real estate, and the just-ended bubble in residential real estate. Indirectly, it also helps explain why stock prices are at or near all-time records.... So what does this have to do with income inequality? Quite a bit, actually. We've known for a long time that increased trade with low-wage countries depresses wages of workers who produce goods and services now imported. A trade deficit equal to 7 percent of economic output obviously magnifies that effect.

But as the trade deficit is depressing wages at the bottom, it is now boosting incomes at the top by significantly inflating the value of stocks, bonds and real estate -- assets whose ownership is concentrated heavily in the hands of high-income people. By buying and selling these assets, and borrowing against them, these people have been transforming their paper wealth into spendable (and measurable) income at a record pace.

Finally, let's remember that all this buying, selling and monetizing of assets has created lots of fat fees for handling these transactions or serving as financial intermediaries. Those fees, in turn, translate into eye-popping bonuses for Wall Street investment bankers, hedge fund managers and partners in private-equity firms...

I have a nagging feeling that a large fraction of the current disruption reflects not just China’s integration into the global economy, but the integration China’s integration into the global economy at what increasingly looks like an signicantly undervalued exchange rate.... China will export about $1 trillion worth of goods in 2006. Its exports are heading into 2007 with 30% pace of growth. Think about that. If that pace of growth is sustained, the increase in China’s exports in 2007 will top China’s total exports in 2001. Which brings me back to Pearlstein’s column....

[W]e do have good data for the year from June 2004 to June 2005. During that period China bought about $185b of US debt, and roughly $50b in US goods. I doubt the basic pattern changed significantly in the last 18 months.

It isn’t hard to figure out why the past few years have been for those who manufacture debt than those who manufacture goods. Over time, the US economy has become increasingly specializes in the production and sale of financial assets to the PBoC -- and a few other big accounts.

The data on China is better than the data on the major oil exporters. But the same basic point holds. The big oil exporters don’t buy many US goods. Boeings, sure. But not much else. But they must buy a lot of US debt, albeit in ways that don’t register cleanly in the US data.

Pearlstein notes surge in demand for financial assets has had a profound impact on the distribution of income and wealth in the US. And these changes haven’t been -- at least to my mind -- simply the product of market forces. The oil exporters haven’t distributed the recent surge in oil revenues to their people and let their people decide how much to spend and how much to save -- or allowed their populations to decide what kind of financial assets to hold. No, they have budgeted for oil at say $30 or $35 (that’s changing) and put the difference between the budget price and the actual price on deposit with the central bank – or given it to the state oil fund. The Saudi fiscal surplus was $70b in 2006.... Norway added $50b to its government pension fund.... Russia’s reserves rose by over $100b.... China is a bit different.... [T]he PBoC ends up managing the chunk of private Chinese savings that is invested abroad.... [M]ost of the banks would prefer to sell their dollars to the PBoC and hold RMB if they had a chance....

Why can private equity funds, whether in the US or Europe, raise funds so easily in the leveraged loan market?... Cheap credit for private equity firms helps support equity market valuations generally. Central banks aren’t big players in the more exotic bits of the corporate credit market.... But by bidding up the price (and bringing the yield down) of more conventional assets, emerging market central banks demand has contributed to a host of innovations -- as other institutions are forced to search for yield....

The key point is simple: China and others emerging market governments haven’t just subsidized the consumers of their goods. They also have subsidized those manufacturing financial assets -- the have-mores of the global economy. Wall Street should have lifted a glass to the PBoC as they toasted the new year. The City should have toasted the Bank of Russia and a host of other oil state central banks

Call it financial capitalism, 21st century style.

The Scandinavian Model

Jonathan Cohn on Denmark:

TNR Online | Great Danes (1 of 2) (print): If you want a lower standard of living," conservative policy experts Grace-Marie Turner and Robert Moffit wrote in an op-ed last week, "the Europeans have the right prescription." The topic of discussion was universal health care, but it just as easily might have been government-sponsored child care or generous unemployment benefits. The failure of the European welfare state is, after all, an article of faith among conservatives, from Robert Samuelson ("Europe is history's has-been") to Jonah Goldberg ("Europe has an asthmatic economy") to David Brooks ("[T]he European model is flat-out unsustainable").

The argument generally goes like this. Nowadays, every nation faces a stark but straightforward choice: It can admit that globalization demands a fluid economy--in which people will lose jobs frequently and incomes are bound to be more volatile--and adapt by slashing taxes, government benefit programs, and trade barriers. Or it can try to hold on to old-fashioned notions of lifetime job security and guaranteed incomes by blocking out trading partners, closely regulating business activity, and maintaining a generous welfare state--a formula sure to produce sluggish growth, chronic unemployment, and crippling government debt....

But... Scandinavia and, especially, to Denmark. Over the last decade, the Danes have turned the conventional wisdom on its head by boasting not only one of the world's most expansive welfare states, but also one of its most robust economies. Given the way average American workers' wages continue to stagnate even as their burden of risk--of losing a job, of losing medical insurance--continues to rise, it looks increasingly as though the conservative triumphalism has been misplaced....

Denmark's welfare state traces its origins to the Great Depression--specifically, to a dank January morning in 1933 when Prime Minister Thorvald Stauning called several of the country's political leaders to his apartment for a private session to discuss the nation's growing economic crisis.... [N]early half the population was out of work and farm foreclosures were widespread.... Stauning and his colleagues were desperate to take actions that would not only alleviate the widespread suffering but also save capitalism itself.... Henceforth, the government would take primary responsibility for making the economy work--and making sure that it worked for everybody--by, among other things, providing a set of social insurance programs that protected against illness and unemployment.

The strategy succeeded. Denmark's political center held, Danes got back to work, and, on the eve of World War II, the economy was back on track. The country continued to thrive... from the 1950s through the 1970s, it generally had steady, strong growth. The more the economy grew, the more money the government collected through taxes--allowing it to provide, in turn, even more generous services....

[In] the '70s... the Danish economic model--like those across Europe and in the United States--was challenged by "stagflation" in the '70s and globalization in the 1980s.... [W]hile most of Europe continued staunchly to resist change, the Scandinavians began to embrace it.... In the early '80s... voters threw their support behind the Danish conservatives... [who] had run on a platform of rescuing the Danish economy, which they vowed to do by privatizing some government services, modestly reducing welfare benefits, and bringing down government deficits....

By the early '90s, the economy had recovered enough--and the public's enthusiasm for the conservatives had waned enough--to swing politics back in the other direction. The Social Democrats took power once again, this time under the leadership of Poul Nyrup Rasmussen... [who] undertook some of the very measures that the conservative coalition had proposed but could not enact on its own.... [P]erhaps most important were the reforms Rasmussen's Social Democrats introduced to the Danish unemployment system.... [T]he government began limiting assistance to four years--and, even then, only on the condition that beneficiaries worked or enrolled in job training.... Relative to Clinton's welfare reform, Rasmussen's invested much more money in worker-counseling and training. The explicit goal was to recognize a social compact: Just as the unemployed were obligated to find new jobs, so the government was obligated to make sure the jobs were there (even if it meant creating them on the public payroll) and that the unemployed received proper training to succeed.

Today... Denmark spends more than 4 percent of its GDP on its labor market programs--the most of any country in the Organization for Economic Cooperation and Development (oecd) and more than 20 times what the United States spends on its worker-training programs.... [W]hat was most significant about Rasmussen's agenda was what it did not include: radical changes to the welfare state.... [T]he country has programs that remain among the most generous in the developed world. There is universal health care and child care....

Denmark has a tax burden to match: Half of the country's annual economic output goes through government in the form of taxes--again, among the highest in the developed world and well above the U.S. rate of just under 30 percent. If you believe the conservative rhetoric on economics, this combination of high taxes, a large public sector, and lavish welfare benefits ought to be killing the Danish economy. But it's not. In fact, Denmark's economy has thrived. And nowhere is that more apparent than in the job market. By the time Rasmussen left office in 2001, the unemployment rate had fallen from a 1994 peak of 9.6 percent to 4.3 percent; in 2002, it fell below the U.S. rate, where it has remained ever since. For the most recent quarter of 2006, Denmark's standardized unemployment rate was 3.6 percent, compared with 4.7 percent in the United States.... [I]n Denmark, a mere 3 percent of its 15- to 19-year-olds are neither in school nor working--the second-best rate in the developed world.... In the United States, by comparison, the figure is about 7 percent....

[W]hat have the Danes figured out that conservative American pundits haven't? "High taxes don't hurt [by themselves]," says Harvard's Richard Freeman, a highly respected labor economist who has studied Europe extensively. "It depends on what you are getting for the money." Medical care is the most obvious example of this. Danes have lower infant-mortality rates than Americans and, statistically speaking, live just as long. You can't pin that completely on the medical system (a lot has to do with poverty, diet, and so on), but it certainly suggests Danish health care is no worse than the U.S. version. Yet we Americans pay far more for our system....

Just as a well-educated workforce attracts foreign investment, so does strong infrastructure--whether it's in the form of good roads or a speedy information highway. Here, too, Denmark excels. And here, too, government can take considerable credit....

The high rates on personal income, which max out at 63 percent, mask relatively low rates on investment capital and corporate earnings. That relative balance--with investment taxed less than wages--is what many economists prefer....

A bigger issue for those who might want to import the Danish model--particularly for a country like the United States--is that Denmark is a small, ethnically homogenous country with a tradition of marked cooperation. Labor and management enjoy one of the least adversarial relationships in the developed world.... [N]obody is suggesting that other countries could--or even should--import the Danish model whole.... The idea, rather, is to take broad lessons from Denmark's experience. And the broadest lesson would seem to be the most obvious one: that it is entirely possible to have a large welfare state, with generous benefits, without choking the economy....

[E]ven back in the early '90s... then-Secretary of Labor Robert Reich, who proposed that "if we blended our flexible labor markets with [Europe's] investments in human capital and put the safety net somewhere in between ours and theirs, you would have the best system in the world."... [Laura] Tyson... raised the possibility that Denmark might be a model for the United States, noting that "there is nothing in the growth rates to suggest that Denmark is paying a penalty for having a high level [of taxes and government spending]. ... This is not to mention in addition the fact that health care coverage in Denmark is universal, and it is not to mention the fact that, actually, Denmark has one of the lowest poverty rates in Europe and has the lowest poverty rates for children in all of the oecd countries"...

Why Oh Why Can't We Have a Better Press Corps? (Los Angeles Times/Joel Stein Edition)


Joel Stein: Have something to say? I don't care - Los Angeles Times: Not everything should be interactive. A piece of work that stands on its own, without explanation or defense, takes on its own power. If Martin Luther put his 95 Theses on the wall and then all the townsfolk sent him their comments, and he had to write back to all of them and clarify what he meant, some of the theses would have gotten all watered down and there never would have been a Diet of Worms...

But... But... But... But...

Luther did put his 95 theses on the wall. And he asked for everybody interested to send him comments. On October 31, 1517, Martin Luther mailed his theses to Pope Leo X, the Archbishop of Mainz, his friends, and scholars at other universities besides Wittenberg. He probably posted them on the Castle Church door as well--the standard way of advertising a theological event. He asked readers to come to Wittenberg to discuss and debate his theses, and if they could not do so, to debate him by letter.

Here's Martin Luther:

Disputation of Doctor Martin Luther on the Power and Efficacy of Indulgences: Out of love for the truth and the desire to bring it to light, the following propositions will be discussed at Wittenberg, under the presidency of the Reverend Father Martin Luther, Master of Arts and of Sacred Theology, and Lecturer in Ordinary on the same at that place. Wherefore he requests that those who are unable to be present and debate orally with us, may do so by letter.

In the Name our Lord Jesus Christ. Amen. (1) Our Lord and Master Jesus Christ, when He said Poenitentiam agite, willed that the whole life of believers should be repentance...

I don't know what I'm going to say in fifty years when my great-grandchildren ask me, "Great-grandpapa, what were newspapers?" Perhaps: "Well, they were big buildings located in cities, where managers paid people to be ignorant and write about things they did not understand..."

"New Amsterdam," by Elizabeth Bear

Elizabeth Bear, New Amsterdam. This looks like it is going to be great fun:

: Chapter One: The zeppelin Hans Glücker left Calais at 9:15 in the evening on a cold night in March, 1899, bound for New Amsterdam, the jewel of British North America. Don Sebastien de Ulloa, known to the Continent as the great detective, passed his departure on the promenade, watching the city lights recede through blurring isinglass. He amused himself by taking inventory of his fellow passengers while enjoying the aroma of a fairly good cognac.

The Hans Glücker was nearly empty, aside from cargo. So empty, in fact, that Sebastien wondered if she would not have delayed her Atlantic voyage for want of passengers if she were not also a mail dispatch and carrying diplomatic papers. Her capacity was over sixty, but this trip she bore only fourteen.

The longest-term travelers were a couple who had been with the airship since Shanghai, Mr. Cui Jioahua and his wife, Zhang Xiaoming. They had passage as far as the Spanish settlement of San Diego, on the west coast of North America, where they intended to join family--if the intersection of their limited Arabic and German and Sebastien’s equally flawed Cantonese could be trusted...

White House Drive-by Hit on General Casey

David Sanger, Michael Gordon, and John F. Burns help the White House perform a drive-by hit on General Casey. We learn absolutely nothing--absolutely nothing we can trust, that is--save that the White House has decided to perform a drive-by hit on General Casey, and that Sanger, Gordon, and Burns are eager to assist and don't want to ask the White House any questions.

Here it is:

Chaos Overran Iraq Plan in '06, Bush Team Says - New York Times: DAVID E. SANGER, MICHAEL R. GORDON and JOHN F. BURNS: President Bush began 2006 assuring the country that he had a "strategy for victory in Iraq." He ended the year closeted with his war cabinet on his ranch trying to devise a new strategy, because the existing one had collapsed.

The original plan, championed by Gen. George W. Casey Jr., the top commander in Baghdad, and backed by Donald H. Rumsfeld, then the defense secretary, called for turning over responsibility for security to the Iraqis, shrinking the number of American bases and beginning the gradual withdrawal of American troops. But the plan collided with Iraq's ferocious unraveling, which took most of Mr. Bush's war council by surprise.

In interviews in Washington and Baghdad, senior officials said the White House, the Pentagon and the State Department had also failed to take seriously warnings, including some from its own ambassador in Baghdad, that sectarian violence could rip the country apart and turn Mr. Bush's promise to "clear, hold and build" Iraqi neighborhoods and towns into an empty slogan.

This left the president and his advisers constantly lagging a step or two behind events on the ground.

"We could not clear and hold," Stephen J. Hadley, the president's national security adviser, acknowledged in a recent interview, in a frank admission of how American strategy had crumbled. "Iraqi forces were not able to hold neighborhoods, and the effort to build did not show up. The sectarian violence continued to mount, so we did not make the progress on security we had hoped. We did not bring the moderate Sunnis off the fence, as we had hoped. The Shia lost patience, and began to see the militias as their protectors."

Over the past 12 months, as optimism collided with reality, Mr. Bush increasingly found himself uneasy with General Casey's strategy. And now, as the image of Saddam Hussein at the gallows recedes, Mr. Bush seems all but certain not only to reverse the strategy that General Casey championed, but also to accelerate the general's departure from Iraq, according to senior military officials.

General Casey repeatedly argued that his plan offered the best prospect for reducing the perception that the United States remained an occupier -- and it was a path he thought matched Mr. Bush's wishes. Earlier in the year, it had.

But as Baghdad spun further out of control, some of the president's advisers now say, Mr. Bush grew concerned that General Casey, among others, had become more fixated on withdrawal than victory.

Now, having ousted Mr. Rumsfeld, Mr. Bush sees a chance to bring in a new commander as he announces a new strategy, senior military officials say. General Casey was scheduled to shift out of Iraq in the summer. But now it appears that it may happen in February or March...

What Sanger, Gordon, and Burns do not do is to provide us with any information about whether what they report--that over the entire past year Bush has been "uneasy with General Casey's strategy" is true or not. Under what restrictions and within what parameters was Casey trying to do his job? Sanger, Gordon, and Burns do not say. Why didn't the White House call for a rethink earlier, if it was uneasy? This is not a question that Sanger, Gordon, and Burns ask anybody.

In the end, all we know for sure is that Bush and company have decided that today is Blame-Casey day--and that Sanger, Gordon, and Burns are unwilling to do anything other than assist them: there's no attempt to tell the whole story, or indeed any part of the story other than the current White-House-approved version.

We've seen journamalism like this from John F. Burns before:

On July 24, 2005, for example, John F. Burns tells us this that in the early summer of 2004 his successors called Iraq Proconsul L. Paul Bremer III and his staff by "a withering term... 'the illusionists'":

[T]he new American team that arrived [in the early summer of 2004]... headed by Ambassador John D. Negroponte, had a withering term for the optimistic approach of their predecessors, led by L. Paul Bremer III. The new team called the departing Americans ''the illusionists,'' for their conviction that America could create a Jeffersonian democracy on the ruins of Saddam Hussein's medieval brutalism. One American military commander began his first encounter with American reporters by asking, ''Well, gentlemen, tell me: Do you think that events here afford us the luxury of hope?'' It seemed clear then that the administration, for all its public optimism, had begun substituting more modest goals for the idealists' conception of Iraq...

But that's not what John F. Burns... [wrote back] in the summer of 2004:

TRANSITION IN IRAQ: THE DEPARTING ADMINISTRATOR; Looking Beyond His Critics, Bremer Sees Reason for Both Hope and Caution: For the 414 days that he was America's proconsul in Iraq, L. Paul Bremer III was forever reacting to surprises.... On Monday, there was a surprise of a different kind... the 48-hour advance of Iraq's return to formal sovereignty... forestalling insurgent attacks to disrupt the transition... was successful.... Mr. Bremer, Brooks Brothers smart as always... allowed himself a smile of satisfaction.... ''It's a great pleasure to be here this day to formally hand over sovereignty on behalf of the coalition,'' he said.... [H]e boarded a Black Hawk helicopter to begin his journey out of Iraq, and eventually to his house in Vermont, teaching the gourmet cooking classes that are his favorite pastime.... ''I think we'll win the war, and we'll win it as we get more and more Iraqis standing up and fighting, and as we proceed on the second pillar, which is getting an Iraqi government,'' Mr. Bremer said.... If the plan holds up, the new Iraq of which Mr. Bremer was a principal architect could go down in history as an extraordinary achievement...

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

Risk, Uncertainty and Irreversibility, Decision Theory, and Global Warming

Alex Tabarrok protests that you should not do expensive and irreversible things before you know what is going on. I think that there is an important distinction to be drawn in decision theory between (a) risk on the one hand, and (b) the interaction of uncertainty and irreversibility on the other.

In general, briefly: As a baseline, you should start out thinking that you should do what it would be best to do if your central-case forecast were to come true. And then:

  1. Relative to that baseline, you should do more of things that reduce risks: a prudent portfolio should have some gold or silver in it (not much!) to guard against the potential inflationary collapse of fiat money systems and other political risks.
  2. Relative to that baseline, you should do less of things that increase risk: invest less in risky enterprises, and dump less carbon dioxide and methane into the atmosphere.
  3. You should delay doing expensive and irreversible things until you are confident that they are needed.
  4. You should prevent processes that could cause irreversible or incredibly-expensive-to-repair damage until you are confident that their effects will be harmless.

The first two principles are the appropriate ones for dealing with risk. The last two principles are appropriate for dealing with the interaction of uncertainty and irreversibility.

Thus if congress were on the verge of banning open-carbon-cycle power generation and vehicle operation in 2010, I would think that that was a bad idea because of principle 3. But congress isn't. The uttermost limit of political feasibility over the next decade is a fifty-cents-a-gallon-equivalent tax on carbon emissions. And that seems well-covered by principle 2.

Here's Alex:

Marginal Revolution: Uncertainty is the Friend of Delay: Regarding global warming and what to do about it, Brad DeLong approvingly paraphrases Tyler, "uncertainty is not the friend of doing nothing." Bearing in mind the obvious dangers of contradicting both Brad and Tyler let me counter with "uncertainty is the friend of delay."... Suppose... that we are uncertain... there is a strong argument for delay. The argument comes from option pricing theory applied to real options. A potential decision is like an option, making the decision is like exercising the option. Uncertainty raises the value of any option which means that the more uncertainty the more we should hold on to the option, i.e. not exercise or delay our decision....

Applying the theory to global warming isn't easy because our decisions involve many options and exit costs; but if we think that our knowledge of the extent, cost, cause and solutions to global warming are increasing at a faster rate than the danger of global warming then delay of any major decision is a rational policy at the present time.

And Tyler Cowen rebuts:

I see the difference between us as such: you write: "making the decision is like exercising the option...". But many costly decisions increase option value. Such decisions include more R&D, more savings, a compensation fund, investment in greater economic flexibility and response capabilities, and so on. Anything we do counts as a "decision," so we cannot postpone decisions per se. We can and should postpone relatively irrevocable decisions, and under that heading "consumption" is a prime candidate. The correct implication of your argument is that when uncertainty increases, we should (under some specific conditions outlined in my post) consume less, which is close to my point of view...

Victor argues:

I agree on the difficulty in applying option theory to global warming policy. There’s a myriad options with varying cost/lead-time trade-offs. The uncertainties are considerable, have many dimensions, and the flow of information to resolve them is stochastic. But option theory doesn’t always argue for delay. If your doctor said there was a chance you had a flesh-eating bacterial infection that would take several days for the tests to resolve, would you delay or accept treatment? It’s a no-brainer if the treatment was just taking a bottle of antibiotics, but if your arm is turning red immediate hospitalization for intravenous antibiotics might be the optimum strategy. Acting now can preserve options going forward. At a simple level for communication, an insurance framing of the problem works better for me.