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February 2007

DeLong Smackdown Watch: Brad Setser

Brad Setser agrees with Jeff Faux that China's exports to the United States must be cut--but for very different reasons:

Brad Setser: DeLong’s position – that the US needs to position itself as a friend of China’s economic development -- is an appealing one. But it is also one that I suspect glosses over some big issues. Both the US and Europe... have done their part to support China’s development over the past few years. US imports from China have increased from $100 b in 2001 to $280b in 2006.... Eurozone imports from China have gone from 62b euros in 2002 to something like 130b euros, maybe a bit more, in 2006.... Both the US and Europe have supplied a lot of demand for Chinese goods over the past few years. The risk of a protectionist backlash is no doubt rising. But so far, the US hasn’t taken any policy actions that have really crimped the expansion of China’s exports – which is what I think worries DeLong.

Nor for that matter has the US government done much – if anything -- to help in the US whose living standards have been adversely affected by China’s export success. DeLong and Jeff Faux would both agree that tax cuts for the have-mores whose assets are worth even-more thanks to large financial inflows from China doesn’t count....

Since 2001, China’s exports have basically quadrupled, Chinese productivity has shot up, the set of products that China produces has expanded dramatically and the external purchasing power of the RMB has fallen. If China’s government stopped intervening and allowed the RMB to rise, the ratio between China’s market GDP and its PPP GDP to rise to a level more typical of other emerging economies with comparable levels of development. China’s government has had a policy of, in effect, subsidizing the use of Chinese labor for the production of goods for export.... China subsidizes – through its exchange rate intervention – the global consumption of Chinese goods, which leaves producers in other poor countries whose governments don’t offer a comparable subsidy at something of a disadvantage.

Chinese exports have increased from about around $265b in 2001 to about $1,000b in 2006 – and are poised to rise to $1,250b in 2007. Now you can argue that this policy of holding down the external purchasing power of China’s workers has worked. Real living standards in China are growing strongly.... China is a far richer place today than it was a few years ago....

But China’s policy of buying dollars (and to a smaller degree euros) also means that China is sinking a growing share of its national wealth into a set of assets that are almost certain to depreciate over time.... The sums involved are not trivial. China is now running a current account surplus of around 10% of its GDP. That implies that about 20% of China’s annual savings... is being invested in assets that are likely to depreciate.... China’s government effectively now has a policy of both holding China’s current living standards down and sinking a fairly large share of China’s savings into assets that are sure to lose value.... The capital losses could destroy the PBoC’s formal capital: borrowing in RMB, even at an artificially low rate, to buy depreciating dollars isn’t a winning financial strategy....

When the time comes for China to realize the losses that are now accumulating quietly on the PBoC’s balance sheet (and soon on the balance sheet of the state foreign investment company), I doubt China’s leaders will say, “you know, these losses were really incurred years ago, when we decided to sink a lot of Chinese savings into depreciating dollars in order to encourage our export sector and make it attractive for foreign firms to locate investment in China. We shouldn’t blame the US for the fact that China’s investments in the US haven’t done well. We were the ones who over-paid for US assets.”

I suspect China’s leaders will be somewhat less magnanimous. They will argue that the losses... [stem] from the failure of the US to adopt the policies needed to maintain the value of Chinese investment in the US....

I worry that at some point, China will conclude that investing so much of its savings in the non-tradable part of the US economy isn’t the best way of building Chinese wealth, and the flow of funds will stop. If that process is gradual, it will be for the best--but it if it is sudden, well ... a lot of US workers now employed in the non-tradables sector will need to shift into tradables production, pronto. DeLong:

In this alternative scenario, the U.S. has to move about ten million workers out of currently-favored sectors--construction, home-equity-credit financed consumer expenditures, and so on--into export and import-competing manufactures. How much structural unemployment does such a sectoral shift require, and how long does the structural unemployment last? Other countries have to shift up to forty million workers out of export manufactures into other industries, and to generate demand for the products of those industries...

If that process isn’t smooth, I rather suspect the US won’t say, “You know, we got an awful good deal from China for all these years. Rather than complaint about the costs of the transition that followed the end of Chinese financing, we should thank China for selling us so many goods at such generous prices, lending us so much on such generous terms, and for helping keep the profits of US firms up for so long by underpricing its labor.”...

DeLong has in the past argued that the US should aim to try to replicate its post-war success at creating a liberal international economic order. The new liberal international economic order though would extend beyond the US, Europe and a few islands in East Asia. It would in effect, draw in the big population centers of the Asian land mass as well. That is a very appealing vision--one that I think is very widely shared. By the party of Davos. But not just by the party of Davos.

I worry, though, that the conditions that allowed the US to construct a liberal international order after World War 2 no longer exist.... In a sense right now, rather than having a Marshall plan, where the US--at the time the US public sector--financed the reconstruction of Europe on very generous terms while opening its markets to European goods (creating the conditions that allowed Europe to repay the US loan), we have something that looks like a Marshall plan in reverse. Or maybe half the Marshall plan--China doesn't seem to have given much thought to how the US will pay it back.

China’s public sector is, as a matter of policy, providing subsidized financing to the US. The reverse comes because China, still a very poor country, is financing the still very rich US. Bretton Woods 2 is very, very different from Bretton Woods 1.

I am convinced the post-war analogy doesn’t quite fit. But I also don’t have a better one to suggest.

Bookmarked at for 2007-03-01

The Domestic Macroeconomic Outlook: February 28, 2007

It looks like I'm not going to get to give my short talk on the domestic macroeconomic outlook up at Lake Tahoe this weekend:

That's too bad, because such talks quickly grow stale.

One of the major points of my schtick is that the macroeconomic outlook rarely changes suddenly, so that 90% of the time it is perfectly OK to say, "things are like they were, only three months ago." Nevertheless such talks have a very short half life: people like to know how the most recent news affects things, even if the usual answer is "not much"--except, of course, for those turning points where things do change a great deal, and which we usually see clearly only in retrospect.

I was going to hit three points:

The Great Moderation:

  • The business cycle is smaller than it used to be
  • Fewer recessions in industrial production
    • Largely good luck
    • But are there structural causes--better financial intermediation, et cetera?
    • We don't really know
  • Shallower recessions in industrial production
    • The Federal Reserve is doing a much better job of responding to recessions in real time
    • In large part the Federal Reserve has not let itself get wedged into a situation where it feels it can't respond to recession because inflation is still uncomfortably high
    • Major but still low-probability risk: a steep fall in the dollar accompanied by substantial import price passthrough wedges the Federal Reserve
  • Industrial production matters less for the economy as a whole
    • It used to be that fluctuations in the harvest were a really big deal for the macroeconomy
    • Someday, somebody will write: "it used to be that fluctuations in industrial production were a really big deal for the macroeconomy"--but not today, not quite yet

Productivity and Its Contents

  • The alarmingly large productivity gains of the early 2000s appear to have been one-off benefits from restructuring
  • However, the Silicon Valley-driven productivity speedup of the 1990s is still with us, as strong as ever
    • In the late 1990s the gains went to established high-tech companies and to dot-commers and their VCs
    • Since 2000 the gains have gone to companies that use computers and communications, and as competition sets in to their customers
    • The productivity future looks like the recent past--and you don't have to say "biotech, nanotech" in order to reach that conclusion

Factor Shares and the Strength of the Labor Market:

  • Rising profit shares because the labor market has been weak
  • The unemployment rate has been giving bad signals of labor market relative strength
    • Lots of people not in the labor force nevertheless appear to be pretty easy to hire
    • Unless the Federal Reserve allows the unemployment rate to fall further, wage picture looks grim--which means profit picture looks very bright
    • Political implications of still further increases in income inequality
  • Any connection between globalization and labor market weakness?
    • Hard to build a sensible model in which there is
    • But that may reflect economists' limited imagination--lots of people out there in the world think they see it happening

Pictures from playing with Economagic:

The Interesting Thing Is That the Drop Was Not "Instantaneous"...

Today in journamalism:

Today's Markets - Global stock markets remained weak on Wednesday, but the selling pressure that swamped Wall Street late yesterday eased.... U.S. stock markets suffered their worst one-day plunge on Tuesday since Sept. 17, 2001, the first day of stock trading after the Sept. 11 terror attacks. The broad selloff was encouraged by weakness on the Shanghai market, disappointing economic data, weakness in the subprime lending market and rising uncertainty about Iran and Afghanistan. The Dow industrials -- briefly down as much as 546.20 points after a nearly instantaneous drop of about 200 points -- ended the day down 416.02....

But the Dow Industrials did *not* instantaneously drop 200 points. The ticker ran behind because of volume, and they had to switch over to a backup system, and this created the appearance of a sudden 200-point drop--not the reality of such a drop.

The news is not that the DJIA instantaneously dropped 200 points. The news is that Dow Jones, Inc., has not invested enough in infrastructure to be able to produce a reliable real-time index. Plus it's a really lousy index, as indexes go.

GDP Revised Down to 2.2% Growth In 4th Quarter on Lower Inventories

Jeff Bater on the day's news:

GDP Revised Down to 2.2% Growth In 4th Quarter on Lower Inventories - The U.S. economy didn't surge at the end of 2006 as originally thought, according to new government data showing a sharp downward adjustment to fourth-quarter growth partly because of lower business inventory investment.... Gross domestic product increased at a 2.2% annual rate October through December, the Commerce Department said Wednesday in its first revision to GDP growth during the last three months of 2006.... The chain-weighted GDP price index rose 1.7%, above the previously estimated 1.5% rise but below the third quarter's 1.9% climb. The government initially estimated GDP grew by 3.5% in the fourth quarter. The new estimate of a 2.2% seasonally adjusted gain meant the economy was just a little stronger than in the third quarter, when GDP rose 2.0%.

New-home sales plunged in January, falling to the lowest level in nearly four years after back-to-back increases.... Sales of single-family homes decreased 17% to a seasonally adjusted annual rate of 937,000, the Commerce Department said Wednesday. It was the weakest sales rate since 936,000 in February 2003.... The median estimate of 21 economists surveyed by Dow Jones Newswires and CNBC was for sales to fall by 3.6% to a 1.080 million annual rate in January. Commerce's report Wednesday showed new-home sales fell 19% in the Northeast, 8.1% in the Midwest, 9.7% in the South and 37.4% in the West.... The median price was $239,800, higher than the $239,400 in December. There were an estimated 536,000 homes for sale at the end of January, representing a 6.8 months' supply at the current sales rate...

We're now two quarters into a growth recession, and an investment recession, and an industrial recession. But I don't think we're in a real recession yet--still lots of demand for the service sectors.

The Crisis of the "Mixed Economy"

Econ 210a: Introduction to Economic History: February 28 Class: The Crisis of the Mixed Economy

In the mid-1960s economists thought that they had it right. Bretton Woods. Keynesian domestic demand management. Progressive tax and transfer systems. And perhaps a bit of public ownership of the "commanding heights" and of "indicative planning." The problems of economic management seemed--to some at least, in the first world at least--to be broadly solved. And people were looking forward to future eras in which the "economic problem" would not be allocating scarce resources among various productive uses but allocating abundant products in the interest of human well-being. What is the economic problem in an era in which we have enough food not to be hungry, enough clothing not to be cold, enough shelter not to be wet, and certainly enough diversions not to be bored?

But as a result of the 1970s and 1980s, consideration of these problems was pushed into the far future, because it became clear that economists did not have it right:


The embarrassing question is: "What is this class doing in an economic history course?" I say: "Some ask 'why?' I say 'why not!'!"

Barry Eichengreen says that when he was on the job market, Zvi Griliches asked him: "You say you're an economic historian, and you study the 1920s and 1930s. How can that be? I lived through the 1920s and 1930s."

And after today (except for special fill-in and guest lectures, except for dissertation and thesis supervising, except for talking to students about their class papers and then grading them, except for seminars--but I don't have organizational responsibility for any this semester) I am off the teaching line...

Bookmarked at for 2007-02-28

Andrew Northrup Is a National Treasure...

He reminds us of Tom Friedman past:

The Poor Man: [A]t long last, someone in a respectable publication has pointed out that Glenn Reynolds is completely insane.... [Reynolds's] comment...--that the government should be murdering Iranian scientists and religious leaders, because we have been continuously at war with them for thirty years--was a bit blunt, but wasn't really unrepresentative of his views.

Why should this be getting attention all of a sudden? Fans of his oeuvre could probably think of a handful of crazier comments right off the top of their head--in fact, I immediately thought of that time in 2003 when Prof. Christmas opined that, seeing as we were already at war with France and all, we should probably start some nice proxy wars [against France] in Africa....

[Reynolds] was riffing on Thomas L. F------ Friedman, September 2003, NY Times:

It's time we Americans came to terms with something: France is not just our annoying ally. It is not just our jealous rival. France is becoming our enemy. If you add up how France behaved in the run-up to the Iraq war (making it impossible for the Security Council to put a real ultimatum to Saddam Hussein that might have avoided a war), and if you look at how France behaved during the war (when its foreign minister, Dominique de Villepin, refused to answer the question of whether he wanted Saddam or America to win in Iraq), and if you watch how France is behaving today (demanding some kind of loopy symbolic transfer of Iraqi sovereignty to some kind of hastily thrown together Iraqi provisional government, with the rest of Iraq's transition to democracy to be overseen more by a divided U.N. than by America), then there is only one conclusion one can draw: France wants America to fail in Iraq. France wants America to sink in a quagmire there in the crazy hope that a weakened U.S. will pave the way for France to assume its "rightful" place as America's equal, if not superior, in shaping world affairs....

Tom Friedman... was telling us at the time that we needed to invade Iraq because we just had to kill some Arabs. We just had to, OK? Something about a bubble or something, too--you had to be there, man, it all made perfect sense. I know it seems weird now, man, but it was this magical time... The Summer of War!--when we all just knew we were going to change the world. All that stuff our parents told us about Vietnam and all that s---? We were just going to blow that away, man, just tear down their world and build it all up new, like better than ever, like nothing you'd ever seen before!...

DeLong Smackdown Watch! (Nathan Newman Edition)

Nathan Newman comes to Jeff Faux's support, and inflicts heavy damage on DeLong:

Why Mexico is Not Enough | TPMCafe: It's the oddest thing that progressives demand higher wages for workers in the developing world and we get accused of wanting to keep them impoverished-- a neat trick by folks like Brad, admittedly. But here's the deal we should all want. Chinese workers should be able to demand higher wages to the point THEY WANT; if those WORKERS decide that trading off lowering wages for higher employment in the global economy is what they want, so be it. But right now, they are settling for low wages based on the decisions of Chinese and allied US CORPORATIONS and GOVERNMENT decisions.

So here's the global deal we should demand. Full trading rights for countries that honor the basic free speech rights of their workers to collectively organize. No trade rights for countries that don't. This isn't an argument for shutting down trade with China; it's a demand that they give free speech rights to their own employees as a condition of trade....

The question is not do We WANT Chinese workers to be poor and barefoot; the question is whether we are willing to fight seriously and consistently for them to have a voice to say what THEY WANT?

In Which I Carry Yet More Water for the Commissars-Turned-Capitalists of Shanghai

Over at TPM Cafe, I respond to the eloquent and dangerous Jeff Faux yet again:

Sailing into Harm's Way versus the Dangerously Eloquent Jeff Faux | TPMCafe:

I had written:

Is there a way to interpret Jeff other than as a call to keep China a society of poor subsistence rice farmers as long as possible--keep them poor, barefoot, uneducated, and by no means allow them to work at any of the high-value manufacturing occupations we want to keep in the United States?

Jeff Faux writes back:

Feb | TPMCafe: Brad missed the point. There are rich people in poor countries and poor people in rich countries. China is not just a society of poor, barefoot, uneducated peasants. At the top, China is a place of immense wealth.... Why is it that it is the responsibility of $40,000 year American working families to sacrifice their future in order to raise up the living standards of poor Chinese, when commissars turned capitalists ride around Shanghai in a different Rolls every day?...

I think it's time to put myself seriously in harm's way here...

I reply:

There aren't many commissars-turned-capitalists.

Scratching on the back of my envelope, I find that at current exchange rates, China's GDP per worker--and there are 800 million workers--is $3,000 per year. (In 1990 it was $1,100 of today's dollars per year.) According to Piketty and Qian's guesses, the top 0.1% of China's workers get an average of $30,000 per year at current exchange rates. This elite of some 800,000 do live considerably better in their homes in Shanghai than Americans with $30,000 do--unskilled labor and the services it provides are really cheap in Shanghai because China is still really poor (perhaps at a level equivalent to $100,000 per year if you like being waited on and having a household staff; much less if you don't). Redistribute all the income of the 800,000 commissars-turned-capitalists back to the masses, and you boost median standards of living in China by 1% above current levels.

In 1877, it was the United States that was the rising superpower across the ocean to the west of the world's industrial and military leader. Today it is China. In 1917 and again in 1941 it was greatly to Britain's benefit that America regarded it as a friend and an ally rather than as a competitor and an enemy. And since 1945 it has been greatly to Britain's benefit that America has regarded it as a trading partner rather than an industrial competitor.

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China. There is nothing more dangerous for America's future national security and nothing more destructive to America's future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible.

Speaking as a Water-Carrying Policy Intellectual...

Over at the coffeehouse that is TPM Cafe, I feel compelled to sail into harm's way vis-a-vis the eloquent and dangerous Jeff Faux:

A Question for Jeff Faux... | TPMCafe:

Jeff Faux is... confused, to put it politely. He opens:

Confronting Davos: The Class Politics of Global Governance | TPMCafe: it’s no surprise that a cross-border class politics has developed in the wake of the globalizing economy... a one-party system. Call it the Party of Davos, after the annual elite bash in the Swiss Alps that resembles the big-donor receptions at a political convention--corporate CEOs and world class investors, the people who carry their bags, and the politicians, pundits and policy intellectuals who carry their water...

Well, as one of the policy intellectuals who carries the water for the "corporate CEOS and world-class investors... people who carry their bags, and the politicians" I guess I should respond.

Jeff goes on:

[T]he economic challenge to Americans is not from China, per se, but from a business partnership between Chinese commissars who provide the cheap labor and American and other transnationals who provide the technology and financing--and whose lobbyists in Washington provided access to the US market.... [T]his reality is rarely if ever part of the mainstream discussion of globalization. It discomforts advertisers and campaign contributors. Better to define the issues with the abstract homilies of economics 101--“free-trade vs. protectionism.”...


Don’t think of your job, they tell anxious workers, think of the benefits of cheap prices.... [W]hatever numbers you want to believe, neither economic theory nor statistical calculation can determine whether the benefits of cheaper sneakers are worth the costs of lost jobs, disrupted lives and increased economic security. It is essentially a values question. In the context of the domestic economy, Progressives rightly reject the argument, even where true, that lower prices and greater employment generated by cheaper labor would justify the elimination of social protections and safety nets. Yet intimidated by the prospect of being labeled a “protectionist,” many support international trade regimes that are based on the same argument...

Let me respond with a question: Is there a way to interpret Jeff other than as a call to keep China a society of poor subsistence rice farmers as long as possible--keep them poor, barefoot, uneducated, and by no means allow them to work at any of the high-value manufacturing occupations we want to keep in the United States?

Pictures from Playing with Economagic...

Pictures from playing with Economagic:

The last one is my favorite: it shows, in one picture, the seasonal cycle, the business cycle, and the long-term trend in American labor force participation coming from demography and feminism.

Comparing that figure with the one immediately above it shows the extraordinary year-to-year regularity of the seasonal cycle: you could set your watch by it. And the one above that shows the gradual deceleration of productivity growth from 1960-1995 and the acceleration since then. And the one above that provides an interesting look at the Great Moderation of the American business cycle since 1984: recessions come less frequently, and when they do come they involve a smaller increase in economic slack than 1974-75 or 1979-82.

Durable Goods Orders Down

Not a good macroeconomic sign. If we still had the manufacturing-based economy of the 1960s, we would now be in a recession. As it is...

Today's Markets - Early Tuesday, the Commerce Department said January durable-goods orders fell 7.8% to a seasonally adjusted $203.90 billion. The decline in orders surprised economists, who expected a 3.2% drop. Timothy Rogers, chief economist at, pointed to a decrease in capital-goods orders, "the bread and butter of the manufacturing side," as an area of particular concern. "I think it's just a mid-cycle stall," he added. "The fundamentals are still strong."

If I were the Federal Reserve, I'd be a-cuttin interest rates next meeting...

Ezra Klein on the Employee Free Choice Act

Ezra Klein on labor unions:

Ezra Klein: A System of Checks and Balances (Working People Only): Steven Greenhouse has a very peculiarly written story (why isn't the bill named or described till halfway through?) on the coming clash over the Employee Free Choice Act.... Democrats can't break a Senate filibuster or overturn the promised presidential veto. Remarkable how our legislature found it so easy to heighten the obstacles for declaring bankruptcy but seems totally stymied when aiding workers who want to join a union....

Towards the end of the article we get back into the debate over whether card check -- wherein workers simply sign cards to join the union -- is a legitimate process, or if, by denying the employer a distinct NLRB vote it can intimidate and sabotage, it exposes workers to union intimidation. Happily, there's actually data.... [T]he Eagleton Research Center and Rutgers University surveyed workers to see how they compared.

22% of workers surveyed said management "coerced them a great deal" during union elections. 6% said unions did the same. During the NLRB election, 46% of workers complained of management pressure. During card check elections, 14% complained of union pressure. Workers in NLRB elections were twice as likely as workers in card check elections to report that management coerced them to oppose -- and even in card-check elections, 23% of workers complained of management coercion, more than complained of union coercion! Workers in NLRB elections were more than 53% as likely to report that management threatened to eliminate their jobs.

Even more interesting, fewer workers in card check campaigns said coworkers pressured them to join the union (17% to 22%). Workers in card check elections were more than twice as likely to report the employer took a neutral stance and let the workers decide. But, rather hilariously, anti-union Labor Secretary Elaine Chao concludes that, "a worker's right to a secret ballot election is an intrinsic right in our democracy that should not be legislated away at the behest of special interest groups." A worker's right to organize, conversely, can be swiftly sacrificed atop the altar of business interests.

Bookmarked at for 2007-02-27

Rui Pedro Esteves: Economic History Seminar: February 26, 2007

Rui Pedro Esteves (2007), "Between Imperialism and Capitalism: European Capital Exports Before 1914"

Abstract: An original database of German capital exports comparable to Stone's (1993) data for British was compiled for 1883-1913. Three classes of variables were tested as determinants of capital flows: political conditions in recipient countries, long-term growth prospects, and institutional characteristics. German capital flows responded to long-term growth prospects as much as British flows. This conclusion is robust after controlling for political affiliation. It suggests that the sharp distinction in the literature between "developmental" and "revenue" finance is probably a figment of the previous absence of detailed data on non-British capital exports.

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

Yes, because of David Broder, Glenn Greenwald is shrill:

Glenn Greenwald - Salon: Following up on the posts here about David Broder's most recent column -- in which he proclaimed that "President Bush is poised for a political comeback" and heaped all sorts of praise on the President -- the Post's Dan Froomkin highlights why Broder's columns are so significant and, more importantly, how they are used by an appreciative White House (see "Broder Speaks" section): Say what you will about Washington Post reporter and columnist David S. Broder, but he is the dean of the Washington press corps and his columns are often an accurate reflection of the temperament of Washington's top political reporters....

The White House press office was so delighted with Broder's column that it sent it out to the entire White House press corps this morning at 6:44 a.m., under the heading: "In Case You Missed It. Compare that fact to Broder's denial, during last week's " online chat," that he has helped to "prop up" the Bush presidency. Broder boasted: "You will find no one in the White House or on the Republican side of the House or Senate who thinks I have been propping up the Bush presidency." How about the White House official excitedly disseminating Broder's column?

There are invariably commenters and e-mailers who insist that these Beltway pundits can be ignored because they have no real following and nobody listens to them. It may be true that there are relatively few members of the public who listen directly to David Broder, but the shallow tripe he churns out is read -- and respected -- by most Beltway media elites, whose views are shaped by people like Broder and whose media coverage and mindset is as well.

Where Is the Budget Reporting?

Stan Collender writes: Like many Washington-based analysts, I generally believe that every word I utter not only is quotable but should be quoted. That's why this time of year is usually so ego fulfilling: the submission of the president's budget to Congress generally means I get calls from lots of people who want to hear what I have to say. That didn't happen this year.... At first I thought it was me.... I assumed that... I was over the hill....

But two days after the president's budget had been sent to Congress, at an informal monthly breakfast of budget analysts I've been attending for more than two decades, I found out that virtually everyone else who is usually quoted heavily this time of year also wasn't getting called. Because of this, the breakfast partly turned into a support group.... It was therapeutic....

It turns out that the reason for this change is actually quite simple: most major media outlets have decided that the budget is not much of a story this year and are not covering it....

On one hand, this is hard to understand. How is it possible that the federal budget -- with spending and revenues that are both nearly equal to one-fifth of the U.S. economy -- is not a significant story that deserves daily in-depth coverage?....

On the other hand, the lack of interest in the Bush FY08 budget and the overall federal budget debate is completely understandable.... Few people believe that there is anything Congress will be able to do to get George Bush to negotiate on budget issues....

Then, of course, there's the elephant that's always in the room in Washington these days: Iraq. The only thing that has been able to push that off the front pages is Anna Nicole Smith and Britney Spears and, no matter how much we might like it to be otherwise, the federal budget will never able to compete with that type of story.... Finally, the news coverage is far different than it used to be. Not only have the pages and minutes devoted to reporting and analysis generally decreased, but the audience has greatly changed as well.

I called several media friends.... The Washington bureau chief of a major financial outlet told me that he's not covering the budget... because he doesn't think much will happen. A senior Washington correspondent for a major daily newspaper told me she can't get anyone in the White House to talk in a meaningful way.... A producer of a Sunday talk show said that they were planning to cover Iraq and the 2008 election all the time from now on.

At least it's not me.

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

Inflation Expectations Are Now Nearly Static

From Greg Ip's February 26 article. Changes in actual inflation no longer fed through to changes in expected inflation--at least not yet. This makes the Federal Reserve's life much easier. And there is no sign that static inflation expectations have been disrupted by the replacement of Alan Greenspan by Ben Bernanke

Adverse Selection! What Does "Unlimited" Mean?

Bandwagon of estimated that the average iTunes user had some 30 to 60GB of stuff:

What does unlimited mean? - bandwagongroupie | Google Groups: Terence Pua: Based on survey data (months before launch), our research showed that most iTunes users have about 30 to 60GB...

Bandwagon of thought that if their average customer had some 39 to 60GB of stuff to back up, they could make money selling dynamic backup services for $99 a year.

But if you have 5GB of stuff, will you pay $100 a year to back it up when $100 will buy you two Western Digital 80GB hard drives? No.

What kind of people will spend $99 a year for dynamic backup services? Terence Pua found out:

However, in a little more than 24 hours after we opened the doors, unlimited means people have as much as 2TB of iTunes stuff! That is an outlier for sure but many people have over 100GB. As you know, we are currently using Amazon S3*, who charges $0.15/GB/month. We charge $99/year for Bandwagon. At that price, people who have over 55GB become a loss to us (and that's not including the bandwidth costs at $0.20/GB).

It's simple arithmetic that if we don't cover costs, we can't stay in business to serve your needs.... We'd like to have a fruitful community-based discussion to help us come up with a more long term pricing/model...

But they are getting some nice publicity out of this.

Bookmarked at for 2007-02-26

Memo to Self: My Best Work

Time to start compiling a list of what I think is my best work...

Academic Papers:

Bookmarked at for 2007-02-24

Econbrowser: Unwitting Investors in Amaranth

Jim Hamilton finds out that he, in his capacity as a San Diego County taxpayer, was an unwilling and unwitting investor in Amaranth:

Econbrowser: San Diego County pension fund: I have been developing concerns about the possibility that hedge fund investment flows have become a destabilizing force in world financial markets. Following the maxim "think globally, act locally," I decided to take a look at how the behavior of our local pension funds may be one small part of that phenomenom. And I have some recommendations to make on behalf of San Diego County residents and the world at large.

There are any number of financial instruments that would allow you to construct an investment portfolio that could show high returns with limited variability for many years in a row, even though the investment strategy could actually involve enormous risk or even negative expected returns.... Such financial instruments could be particularly problematic given a potential conflict between the incentives facing an individual pension fund manager and the best interests of the future retirees whose assets he or she is managing. If the manager can turn in well-above-market returns five years in a row, the manager is likely to be spectacularly rewarded over that period....

When I heard about the disastrously irresponsible investments made by the Amaranth hedge fund, my first reaction was, who would be so stupid to have put up the margin requirements for such a scheme? The answer turned out to be found in my own backyard-- the San Diego County Employees Retirement Association apparently donated over a hundred million dollars to this worthy cause.

I took a look at the 2006 SDCERA Annual Report to try to find out what was really going on. If you only look at the "summary of retirement portfolio by manager/asset type" on page 54, all appears healthy. Two billion dollars, or 27% of their $7.3 billion portfolio, were reported to have been held in the form of domestic equity, split among a dozen different large, diversified equity funds. There's another 25% in international equity, 26% in fixed income, and 10% for real estate and "alternative equity". There are some other categories such as "commodity swaps" and "overlay" that worry me a little, but these don't amount to that much of the total. So where do you squeeze a couple hundred million for Amaranth in there?

The really interesting stuff is to be found on page 55, which is labeled "summary of derivative financial instruments." Here Amaranth is included as one of a dozen entries in a group of "alpha engine managers." The total market value of these alpha engine managers comes to $1.5 billion, which would amount to 20% of SDCERA's net assets....

But as far as I'm aware, there's no place you can go to find an audited statement of the assets and liabilities of these "alpha fund managers", so there's no way to verify exactly what the nature and magnitude of the risk is that's being palmed off on the county. We have only the word of the county fund managers that they're doing something smart. They in turn are likely basing their own confidence primarily on the word of the alpha fund managers. At least in the case of Amaranth, we know how much that word is worth, and it ain't $233,830,268.

And that's just the San Diego County pension fund. The pension fund of the city of San Diego is an even more gruesome story, which perhaps I should take up another time...

Bookmarked at for 2007-02-23

Supply and Demand for Academic Journals

Tyler Cowen reports:

Marginal Revolution: Four new economics journals: The [American Economic] Association will publish four new quarterly refereed journals starting in 2009 that, together, cover the fields of economics...

AEJ: Macroeconomics: macroeconomics; monetary economics; international finance; aggregate aspects of development; economic growth; finance; and comparative economic systems. Editor: Olivier Blanchard.

AEJ: Microeconomics: microeconomic theory; corporate finance; industrial organization; micro theory aspects of economic development; and micro aspects of international economics. Editor: Andrew Postlewaite.

AEJ: Economic Policy: public economics; urban and regional economics; public policy aspects of health, education, and welfare; law and economics; economic regulation; and environmental and natural resource economics. Editor: Esther Duflo.

AEJ: Applied Economics: labor; demography; empirical micro development; and health, education, and welfare economics. Editor: Alan Auerbach.

Then I think Tyler becomes confused:

Overall I consider this bad news. It expands the career-making power of one professional association and the editors it nominates. It further encourages overspecialization, and discourages general interest research. It discourages research in the area of whichever journal becomes the weak sister of the four. It makes it harder for an individual piece to stand out as important.

By the time these journals hit the street, it is unlikely that their paper versions will play much of a role at all in deciding what people read--big screens will be too big with too many pixels and printers too fast. What these journals will do is guarantee that Olivier, Andrew, Esther, or Alan is sitting on top of a refereeing process that finds that these papers are interesting. How valuable this signal is depends on how good the editors are at managing referees and how good the editors' tastes are. Certainly AEJ: Macroeconomics and AEJ: Applied Economics will significantly add to my utility. (I don't know Andrew Poslewaite at all, and so don't know how good his taste is, and I have no idea how good a manager Esther will turn out to be.)

Tyler muses further:

The real issue is why articles should be bundled into journals at all...

It used to be a combination of limited economies of scale in distribution and a filtering-signalling mechanism. Now it's overwhelmingly the filtering-signalling mechanism.

Louis Uchitelle on Life After NAFTA

Louis Uchitelle:

Nafta Should Have Stopped Illegal Immigration, Right? - New York Times: THE North American Free Trade Agreement, enacted by Congress 14 years ago, held out an alluring promise: the agreement would reduce illegal immigration from Mexico. Mexicans, the argument went, would enjoy the prosperity and employment that the trade agreement would undoubtedly generate--and not feel the need to cross the border into the United States. But today the number of illegal migrants has only continued to rise....

When Nafta finally became a reality, on Jan. 1, 1994, American investment flooded into Mexico, mostly to finance factories that manufacture automobiles, appliances, TV sets, apparel and the like. The expectation was that the Mexican government would do its part by investing billions of dollars in roads, schooling, sanitation, housing and other needs to accommodate the new factories as they spread through the country.

It was more than an expectation. Many Mexican officials in the government of President Carlos Salinas de Gortari assured the Clinton administration that the investment would take place, and believed it themselves, said Gary Hufbauer.... But "it just did not happen," he said. Absent that investment, foreign factories congregated in the north, within 300 miles of the American border, where some infrastructure already existed. "Monterrey is quite good," Mr. Hufbauer said, "but in a lot of other cities the infrastructure is terrible, not even enough running water or electricity in poor neighborhoods. People get temporary jobs, but that is all."

Meanwhile, Mexican manufacturers, once protected by tariffs on a host of products, were driven out of business as less expensive, higher quality merchandise flowed into the country. Later, China, with its even-cheaper labor, added to the pressure, luring away manufacturers and jobs.... [T]otal manufacturing employment in Mexico declined to 3.5 million by 2004 from a high of 4.1 million in 2000, according to a calculation of Robert A. Blecker, an American University economist.

As relatively well-paying jobs disappeared, Mexico's average wage for production workers, already low, fell further behind the average hourly pay of production workers in the United States, and Mexicans responded by migrating. "The main thing that would have stemmed the flow of people across the border was a rapid increase in wages in Mexico," said Dani Rodrik, an economist and trade specialist at Harvard's John F. Kennedy School of Government. "And that certainly has not happened."...

A financial crisis also dashed expectations. One expectation was that the Mexican economy, driven by Nafta, would grow rapidly, generating jobs and keeping Mexicans home. The peso crisis of 1994-95, however, provoked a steep recession, and while there was some big growth later, the average annual growth rate over Nafta's lifetime has been less than 3 percent....

"We underestimated Mexico's deficits in physical and human infrastructure," said J. Bradford DeLong, an economist at the University of California, Berkeley, and a Treasury official in the Clinton administration. But, he says, without Nafta the migration would have been even greater. For instance, he says, there would not have been as much investment in the north of the country....

The European Union, in contrast, assumes little about government spending on the part of economically weaker nations joining it. The union itself has hugely subsidized the improved services needed by entering countries like Portugal, Spain, Greece and Poland, rather than leave financing to the relatively meager resources of entering countries. The money is used not only for public investment, Mr. Rodrik noted, but also to subsidize companies setting up operations in the new countries and to support government budgets. "I am not saying Nafta was a bad agreement," Mr. Rodrik said."But more than a trade agreement is required for countries to converge economically. And Nafta has been viewed as a shortcut to convergence without having to do all the other stuff."

Jim Hamilton Worries About Saudi Oil Production Cuts

Jim Hamilton worries about Saudi oil production cuts. He writes:

Econbrowser: Saudi oil production cuts: The Wall Street Journal's assumption that these production cuts represent a deliberate effort by the Saudis to stabilize the price is a reasonable one to make. But one problem with that hypothesis is that the trajectory followed by prices really doesn't jibe with the story....

[T]he cuts in Saudi production began in October 2005, when oil was selling for $62 a barrel, and those cuts continued as oil rose to a new high over $75 last summer.

For that matter, the Saudi production numbers themselves don't look to me like they're under the precise control of anybody. Up through the first half of 2005, the Saudis hit 9.5 mbd or 9.6 mbd month after month. I interpreted the stability of those numbers as signaling that the Saudis could hit any target they wanted, and they happened to be picking 9.5 or 9.6. By contrast, the erratic path since is much harder to view as the outcome of some careful manipulations.

We do know that concomitant with this decrease in Saudi production has been a huge increase in the effort they're making to find and produce new oil, as evidenced by the number of oil rigs the Saudis are employing....

We also know that the decrease in production has coincided with a deterioration in the quality of oil that the Saudis are trying to sell and develop....

There's some fascinating speculation as to what this all means.... The first possibility is that the Saudis could still pump 10 mbd or more today if they wanted to, but they are cutting back production and exploring like mad because they put an extremely high value on having 2-3 mbd of excess capacity... because it puts them in an incredibly powerful negotiating position... the ability at any time to flood the market could be used at an opportune moment to undercut expensive alternatives such as oil sands that require an oil price over $50.

The second and more natural interpretation is even more disturbing: the mighty Ghawar oil field is already in decline, and the Saudis don't want anyone to know.

Now this would be a simple enough hypothesis for anyone to test, if the Saudis published field-by-field numbers for production and water cut. But instead, those numbers are a closely guarded secret, leaving people like me simply to guess as to what the truth might be.

But, if you'll indulge me in a bit of cloak-and-daggerism, there are others who must know. This data cannot be something that would be that difficult for American or Russian intelligence operatives to collect...

Offshoring Will Be Big: But How, Exactly?

Alan Blinder on "offshoring":

Offshoring and Inequality | TPMCafe: By Ganesh Sitaraman: You probably didn’t notice Princeton economist Alan Blinder’s testimony to the Joint Economic Committee a few weeks ago, but Blinder has peered into the future and identified a crisis that’s just waiting to explode. It’s called offshoring – the movement of jobs or business processes to other countries. So far offshoring has only touched a few areas – manufacturing notable among them--but Blinder thinks that up to 29% of American jobs are offshorable, including many service-industy jobs. Even if only half those jobs go overseas, that’s a crisis of epic proportions....

[T]he dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not does not correspond to traditional distinctions between high-end and low-end work.

The added danger of offshoring is compounded by the rising inequality America has seen since the 1970s. Earnings from work for less-skilled and less-educated workers can't keep up with earnings of the elites in society. These troubles, caused by the market, not by government, have in the last few years been “piled on by enacting tax cuts for the rich while either permitting or causing large holes to emerge in the social safety net.” So when your job is offshored, you’ll be worse off because of the recent erosion of the nation's social and economic safety programs....

Blinder offers two solutions:

First, we need to repair and extend the social safety net for displaced workers. This includes unemployment insurance, trade adjustment assistance, job retraining, the minimum wage, the EITC, universal health insurance, and pension portability--plus other, newer ideas like wage loss insurance.

Second, we must take steps to ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore. Among other things, that may require substantial changes in our educational system—all the way from kindergarten through college.

A Short Dialogue on Santa Clara County v. Southern Pacific Railroad Company

John of Salisbury: I see that Brad DeLong is getting smacked down from the left and from the right.

Thrasymakhos: Something that would make the world a better place if it happened more often, but about what, exactly?

John of Salisbury: Well, DeLong wrote down an off-the-cuff list of ten "constitutional moments" when American judges had changed the law. Fourth on his list is:

  • The post-Civil War empowering of corporations with exorbitant privileges of citizenship and limited liability at the expense of government regulators and creditors.

Justinian: And?

Edward Coke: Nathan Newman accused him of Amnesia on the Death of Reconstruction--when the Grant administration was trying to suppress the anti-Negro terrorist insurgency in the U.S. South in the 1870s, the Supreme Court betrayed it and broke the legal tools it was using. Because the Supreme Court threw its weight onto the scales, Newman argues, the terrorists won.

Thrasymakhos: And what does DeLong say?

John of Salisbury: He wimps out. Something about the Supreme Court being a bit player--the main actors being executive and legislative.

Thrasymakhos: But the Supreme Court was active?

John of Salisbury: Very.

Thrasymakhos: Seems like Nathan has a fair point.

Justinian: And what else?

John of Salisbury: This is interesting. I can't claim to fully understand it. From the right, Stephen Bainbridge cheered on by Glenn Reynolds, takes aim at DeLong's example number 4:

I assume that DeLong's talking about the post-Civil war cases [like Santa Clara County v. Southern Pacific Railroad Company].... Congress substituted the word "person" for the word "citizen" [in the text of the Fourteenth Amendment] precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation.... (Admittedly... the legislative history is not uncontroverted.)...

The... cases establishing the corporation as a legal person with constitutional rights were (a) required by the legislative history of the 14th amendment and (b) made good policy sense. Hence, my conclusion that's you're "wrong" was intended to suggest that # 4 doesn't belong on your list. It was also intended to suggest that your rehetorical claim that the post-Civil War cases provided corporations with "exorbitant" privileges was, frankly, over the top. I should have thought that was apparent...

Justinian: I don't understand. Is Bainbridge defending the ruling of the Supreme Court in Santa Clara County v. Southern Pacific Railroad Company because the Court had a choice as to how to rule and chose the just result--the one that made "good policy sense"--or because the Court had no choice as to how to rule, being contrained by the plain meaning of the text?

Thrasymakhos: Neither.

Justinian: Neither?

Thrasymakhos: Neither. Notice that Bainbridge claims not that the Court was constrained by the meaning of the text, but by the legislative history of the amendment. He can't claim that the text requires his interpretation: it doesn't. And notice that Bainbridge cannot claim that justice alone--the fact that this interpretation would make "good policy sense"--is sufficient to justify his interpretation. That would mean that good judges are "activists" because they can make choices, and Bainbridge is certain that good judges aren't activists.

Edward Coke: No, that's not it at all. What good judges do is that they understand the law at a deeper level than other people. They see more clearly than others what the law always meant--but what their predecessors were too blurry-eyed to see.

Thrasymakhos: But the Fourteenth Amendment was then only sixteen years old.

Edward Coke: But the real Constitution--the Constitution that is true justice--had always included a Fourteenth Amendment. The drafters in 1787 had simply failed to see that it did. The life of the law, after all, is reason. The law that is written down is simply crystalized reason itself, to the extent that we can understand and follow it. So it had to be the case that true justice required and the properly-interpreted Fourteenth Amendment required that corporations be persons with the right to the equal protection of the laws. Anything else would be unreasonable.

John of Salisbury: Are you Edward Coke or G.F.W. Hegel?

Justinian: But this "required"? How can claims made about legislative history that are "not uncontroverted" "require" anything?

Edward Coke: Got me.

Justinian: How does this Fourteenth Amendment read?

Edward Coke: Like this:

Section. 1. All persons born or naturalized in the United States and subject to the jurisdiction thereof, are citizens.... No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Section. 2. Representatives shall be apportioned... counting the whole number of persons in each State....

Justinian: So if you have more corporations in your state, you get more representatives in the legislature?

John of Salisbury: No, no, no! "Persons" in Section 2 refers only to human beings...

Edward Coke: And "persons" at the start of Section 1 refers only to human beings...

John of Salisbury: Only "persons" at the end of Section 1 refers to legal persons, i.e. corporations, as well as human beings...

Justinian: If anybody had tried to place such a strained interpretation on one of my laws...

John of Salisbury: Yes. Justices Hugo Black and William O. Douglas had things to say about Bainbridge's "required":

Wheeling Steel Corporation v. Glander , 337 U.S. 562 (1949): Mr. Justice DOUGLAS, with whom Mr. Justice BLACK concurs, dissenting.

It has been implicit in all of our decisions since 1886 that a corporation is a 'person' within the meaning of the Equal Protection Clause of the Fourteenth Amendment. Santa Clara Co. v. South. Pacific R. Co.... [I]t wrote no opinion on the point.... There was no history, logic, or reason given to support that view.... The Fourteenth Amendment became a part of the Constitution in 1868. In 1871... Mr. Justice Woods (then Circuit Judge) held that 'person' as there used did not include a corporation.... [I]n 1873. Mr. Justice Miller... adverted to events 'almost too recent to be called history' to show that the purpose of the Amendment was to protect human rights--primarily the rights of a race which had just won its freedom....

[W]hat was clear to these earlier judges was apparently plain to the people who voted to make the Fourteenth Amendment a part of our Constitution.... There was no suggestion in [the amendment's] submission that it was designed to put negroes and corporations into one class and so dilute the police power of the States over corporate affairs....

[H]ow strained a construction it is of the Fourteenth Amendment so to hold.... It requires distortion to read 'person' as meaning one thing, then another within the same clause and from clause to clause....

History has gone the other way..... But now that the question is squarely presented I can only conclude that the Santa Clara case was wrong and should be overruled...

Edward Coke: And things get worse. If you look in Justice John Marshall Harlan's opinion in Santa Clara Co. v. South. Pacific R. Co. you see no holding that a corporation is a "person." The Court does not reach the question:

Santa Clara County v. Southern Pacific Railroad Company: The special grounds of defense by each of the defendants were: (1) That its road... a... franchise... derived from the United States, cannot, without their consent, be subjected to state taxation. (2) That the provisions of the constitution and laws of California... are in violation of the fourteenth amendment... denying to it the equal protection of the laws....

Mr. Justice FIELD overruled the first of the special defenses... but sustained the second.... The propositions embodied in the conclusions reached in the circuit court... belong to a class which this court should not decide unless their determination is essential.... [If not,] there will be no occasion to consider the grave questions of constitutional law....

[T]he court below might have given judgment... upon the ground that the assessment... included property... the state board was without jurisdiction to assess.... As the judgment can be sustained upon this ground, it is not necessary to consider any other questions...

Justinian: So Harlan writes explicitly that the Supreme Court is not deciding this question, and people like Bainbridge assert that the Supreme Court did decide the question?

Edward Coke: Yep.

Justinian: Wow.


Justinian: But Bainbridge talks about the legislative history. He says the legislative history requires his reading of the Fourteenth Amendment.

John of Salisbury: Now we get to the interesting case of Roscoe Conkling. Roscoe Conkling claimed that the drafters of the Fourteenth Amendment had used the word "persons" in the equal protection clause so that subsequent courts could use it to protect corporations from legislatures--and that the drafters had kept this secret throughout the ratification process, and that he was only now in 1882 revealing the true meaning of what the states had ratified.

Justinian: Under what theory of ratification is a Court "required" to adopt a secret meaning of a law--a meaning unknown to those who adopted it?

Edward Coke: Got me.

Justinian: If Roscoe Conkling had written an extra clause on the original of the Amendment text in invisible ink, and the Amendment had then been ratified, would Bainbridge say that the invisible ink text was a valid part of the Constitution?

Edward Coke: Got me.

Justinian: Is Bainbridge serious when he writes that this claim by Conkling "requires" that judges adopt Conkling's reading of the Fourteenth Amendment?

Edward Coke: Apparently.

Thrasymakhos: It gets worse: Conkling appears to have misquoted his own diary, and to have done so deliberately: Howard Jay Graham (1938) "The 'Conspiracy Theory' of the Fourteenth Amendment," Yale Law Journal.

Justinian: Your modern jurisprudents appear to be a scurvy lot.

Edward Coke: I cannot disagree.

John of Salisbury: It's your fault.

Edward Coke: My fault?!

John of Salisbury: Yes. You started this practice of pretending that what judges wanted to do was in fact what precedent demanded that they must do. You with your "Great Charter" business--the rights of Englishmen against arbitrary arrest dating back to 1215. If anybody had shown up before Queen Elizabeth I demanding that someone she held in the Tower be released because of the "Great Charter"--well you, you as her Speaker blocked a proposed reaffirmation of it, didn't you? But you wanted to curb the power of a Scottish-born king, and pretending that Magna Carta had always been good law since 1215, and that it had always applied not just to barons with knights in the field but to all crown subjects was just the tool you needed. Modern lawyers have a nasty habit of making false claims about the past--that such and such a reading is "required" because of the past--in the hope that their claims will be true about the future. And it's your fault.

Justinian: I'm still stuck at this "required by the legislative history" business...

Thrasymakhos: It doesn't make "sense." It's not supposed to make sense. It's simply a way of avoiding admitting that the post-Civil War Supreme Court made choices about how American corporate law was to develop, and those choices could have gone different ways...

Bookmarked at for 2007-02-22

Can the Republican Party Nominate a Non-Wingnut?

Ezra Klein is disappointed:

Ezra Klein: The End of Romney?: While we're on the subject of 2008, I just don't see how Mitt Romney survives this video....

That's not a qualified defense of choice. It's a full-throated, self-righteous defense of his long-standing, totally immutable belief that women should be able to control their reproductive health. And this isn't from 1993, it's 2002 -- post-9/11, still in the Bush-era. Such a total transformation on such a high-profile issue within five or so years just isn't very credible. Either he was lying then, is lying now, or lacks any convictions to lie about at all. But that video, juxtaposed with his current statements on abortion, will create an ad easily able to sink his candidacy...

Econ 210a: February 28: Question: The Inflation of the 1970s

Econ 210a: February 21: Question: The Inflation of the 1970s John Maynard Keynes said, near the end of his life, that the problem of controlling inflation while maintaining full employment was fundamentally a political and not an economic question. Did the 1970s in the developed world prove him right, or prove him wrong?

"Two Months Before the Mast of Post-Modernism" Recycled: Hoisted from the Archives

John Holbo is turning The Valve's discussion of Daphne Patai and Will Corral's Theory's Empire into a book: Framing Theory's Empire (West Lafayette, IN: Parlor Press).

God, my contribution is good!

I do need, however, to make an abject and public apology to a humanist for using him as a straw man. If I were writing it over, I would prefer to change things like:

What work can you do with statements like...

to things like:

Let me try to help Adam and company by putting some personal experiential meat, sinew, and skin on their dry theoretical bones...

Over at The Valve, they are talking about the book Theory's Empire--and thus about the damage done by "Critical Theory" and its spawn on the American humanities over the past generation. But most of it is all too... theoretical.1 What work can you do with statements like:

  • "Derrida is... the greatest and most exciting thinker of the 20th century.... Derrida is in many respects... very conservative... one must start from that conservatism in order to measure the ways in which he is radical... can seem highly radical to thinkers who are attempting to graft Derrida into a tradition... in which many of Derrida’s key reference points have historically been marginal.... How much does that affect the way you read a sentence where someone asks to have a button undone? Probably not much..."
  • "This polarizing, personalizing rhetoric indicates that social constructionism has an institutional basis, not a philosophical, moral, or political one. It tramples on philosophical distinctions and practices an immoral mode of debate. Though it declares a political goal for criticism, it is not a political stance.... Herein lies the secret of constructionism’s success... it is the school of thought most congenial to current professional workplace conditions of scholars in the humanities."
  • "I liked theory, even when I felt I didn't have the faintest idea what was going on, because if nothing else you could sense the energy behind it.."
  • "The older philosophical critics, Jameson suggests, lacked Hegelian seriousness: in place of an aggressive commitment to the consequences of their premises, they were 'content' to 'simply' muse about literature 'in an occasional way'.... His sinecured dilettanti mass-produced 'curiosities of an existential or phenomenological criticism, or a Hegelian or a gestalt or indeed a Freudian criticism.' Burke, Empson et al. avoided indenture in the Curiosity Trade, Jameson argues, by processing literature in accordance with a personal interpretive ethos, one resonant with a nonsystemized theory nonetheless compulsively applied in a rage for symmetry. Jameson’s notion of a virtuoso critic (of the good camp) can be summed up thus: a thinker of original temperament but suitable Hegelian seriousness whose passion for patterns generates interesting reading of literary works. His notion of a virtouso critic (of the bad): calicified mind, learned but unoriginal and philosophically fickle, whose passions for other people’s patterns generates predictable readings of literary works..."
  • "I apologize for Heidegger’s highly convoluted and neologistic prose. (I imagine that some readers are already thinking, 'come back, Derrida, all is forgiven').... In Heidegger’s reading, we could say that the discovery of Neptune in 1846 could plausibly be described, from a strictly human vantage point, as the 'invention' of Neptune.... [B]efore we began to look for it, the planet 'Neptune' simply did not exist in any human consciousness.... And yet once humans had invented... Neptune, they understood [it]... as [a thing]... not susceptible to mere human invention..."
  • "[It] takes the already deeply problematic arguments and style of the dominant superstars like Spivak, Prakash and Bhabha and operationalizes it as yeoman-level banality"


There is a certain bloodlessness here: the dry bones hop about and clatter, but there is no flesh on them: much too little is said about how High Critical Theory changed--for good and for ill--how "we" "read" "our" "texts".2

So let me get down and dirty: in the boiler room, at the contact point, before the mast. Let me recount the two months--November and December 1981--that I spent enthralled by the High Critical Theory of Michel Foucault.

By day I would rise late, eat a strange late breakfast of scrambled eggs mixed with cottage cheese (a kind of breakfast which I ate only from November 1981 through January 1982, never before, and never since), and then walk across the Charles River footbridge to the Kress Collection of the History of Economic Thought in Baker Library. I would read. I would hasten out into the lobby where I was allowed pens and take notes. I would go back in and read some more. I would hasten out into the lobby. After dinner I would sit in my room, either staring at the wall wondering what my thesis was going to be about or reading secondary works on the history of economic thought, hoping to spot a hole that I could fill with something sorta original.

It was Associate Professor of Social Studies Michael Donnelly's fault. He knew I was trying to write an undergradute thesis about the British Classical Economists and how they understood the economy of their time. He gave me a book by Keith Tribe, Land, Labour, and Economic Discourse. And Tribe had read and been hypnotized by Foucault--specifically The Order of Things and _The Archaeology of Knowledge. I began to read Keith Tribe. He said very strange things. He said that the Wealth of Nations that economists read was not the Wealth of Nations that Adam Smith wrote. The Wealth of Nations that economists read was made up of two books: Book I on markets and Book II on capital. The Wealth of Nations that Adam Smith wrote was made up of five books: Book I on the "system of natural liberty," Book II on accumulation and the profits of stock, Book III on the economic history of Europe and why the empirical history of its economic development had diverged from its natural history, Book IV on the mercantile and physiocratic systems of political economy, and Book V on the proper management of the affairs of the public household by the statesman.

The Wealth of Nations, Tribe said, could not be a book of economics because a book of economics had to be about the economy. And there was no such thing as the economy in 1776 for a book of economics to be about. What was there? There was the undifferentiated stuff of the mixed social-cultural-political-trading system that governed production and distribution: material life. There was the study of the management of public finances. This was conceived in a manner analogous to the domestic-economic management of household finances. Just as--to Robert Filmer and others--the King was the father of the people, so the King's household--which became the state--had to be properly and prudently managed.

In the words of James Steuart, who wrote his Principles of Political Oeconomy nine years before the Wealth of Nations, in 1767: "Oeconomy, in general, is the art of providing for all the wants of a family, with prudence and frugality. What oeconomy is in a family, political oeconomy is in a state." It is managing affairs to make the people prosperous and the tax collections ample by governing "in such a manner as naturally to create the reciprocal relations and dependencies between [inhabitants], so as to make their several interests lead them to supply one another with their reciprocal wants."

There wasn't, Tribe argued, an economy that an economist could write a book of economics about until the 1820s or so.

Strip Tribe's (and Foucault's) arguments of their rhetoric of apparent contradiction and you can understand that within the mystical shell there is a rational kernel. It is--or, at least, I read them as--an injunction to analyze a school of thought in more-or-less the following way:

  1. Read not just one or two important books, but a whole bunch of books that talk to our past each other and use the same or similar vocabulary in order to identify the school you will look at.
  2. Strip your mind of what they must be talking about, and look with fresh eyes on what they are talking about.
  3. Examine what rhetorical, conceptual, and intellectual moves are common within the examples you have of this "discursive formation."
  4. Think hard about what rhetorical, conceptual, and intellectual moves you would think you would find in these books--but don't.
  5. Think hard about what rhetorical, conceptual, and intellectual moves you do not expect to find prominently in these books--but that you nevertheless do find.
  6. Present to the world, in as clear and straightforward a way as you can, what this particular form of discourse was--what it thought the world was like, what it saw as important, what its particular blindnesses were, what its particular sharp points of insight were.
  7. Do not, ever, grade a discursive formation of the past by how much it falls away from the ideas of the bien-pensant of today. The past is another country.

And I became convinced that Tribe and Foucault were right. It was, indeed, only with Ricardo that the operation of what we now say is the economy--the production, exchange, and distribution of goods and services all mediated through market exchange--was seen as something that was important enough, or separate enough, or coherent enough to be something that it made sense to write books about, and, indeed, something that it made sense to be an expert in. David Ricardo was a political economist. Adam Smith was a moral philosopher. To try--as somebody like Joseph Schumpeter was--to grade Adam Smith as if he were engaged in the same intellectual project as Schumpeter was somewhat absurd.

Tribe applied this methodology to Adam Smith, his predecessors, contemporaries, and successors. What they were doing, before Ricardo, was Political Oeconomy--writing manuals of tactics and policy as advice to statesmen, although manuals restricted to what Adam Smith would have called (did call) a subclass of police: how to keep public order and create public prosperity. Hence for Adam Smith Book V of Wealth of Nations is the payoff: it tells British statesmen what they ought to do in order to make the nation prosperous, their tax coffers full, and thus the state well-funded. Book IV is a necessary prequel to Book V: it tells the statesmen in the audience why the advice that they are being given by others in other books of Political Oeconomy--by Mercantilists and Physiocrats. Book III is another necessary prequel: it teaches statesmen about the economic history of Europe and how political oeconomy of various kinds has been practiced in the past.

But Tribe's (and Foucault's) methodology collapses when we work back to Books II and I of the Wealth of Nations. For Adam Smith is not the prisoner of the discursive formation of Political Oeconomy. He is not the simple bearer of currents of thought and ideas that he recombines as other authors do in more-or-less standard and repeated ways. Adam Smith is a genius. He is the prophet and the master of a new discipline. He is the founder of economics.

Adam Smith is the founder of economics because he has a great and extraordinary insight: that the competitive market system is a remarkably powerful social calculating and organizing mechanism, and that the sophisticated division of labor to which a competitive market system backed up by secure and honest enforcement of property rights give rise is the key to the wealth of nations. Some others before had had this insight in part: Richard Cantillon writing of how once you have specified demands the market does by itself all the heavy lifting that a central planner would need to do; Bernard de Mandeville that dextrous management by a statesman can use the power of private greed to produce the benefit of public utility. But it is Smith who sees what the power of the "system of natural liberty" that is the market could be--and who follows the argument through to the conclusion that it forever upsets and overturns the previous intellectual moves made in and conclusions reached by the discursive formation of Political Oeconomy.

And once I had worked my way through to this conclusion, I could start to write my own thesis. I had broken the thralldom. Foucault's ideas of "discourse" and "archaeology" were not my masters, but my tools. And as I wrote it became very clear to me that between David Ricardo and even the later John Stuart Mill the discursive formation that was Classical Economics did not produce anybody like Adam Smith. There was nobody who made the intellectual leap--produced the epistemological break--that Smith had done that shattered Political Oeconomy and enabled the birth of Classical Economics. I could write my thesis about how the British Classical Economists never understood the Industrial Revolution that they were living through.

--J. Bradford DeLong, B.A. in Social Studies summa cum laude, June 1982.

Nine Years?

Ah. Robert Swaine, The Cravath Firm and Its Predecessors, 3 volumes plus supplement, has been checked out of the Boalt Hall Law Library since... 1998...

If they would tell me who has it, I could go and negotiate for access...

Guess I'll have to wait a while to learn more about Frederick H. Wood, lead litigation partner for Cravath in the New Deal years and former general counsel for The Octopus...

Scott Horton on George Washington, for His Birthday

Scott Horton on George Washington, for his birthday:

Balkinization: A Tale of Two Georges: "Should any American soldier be so base and infamous as to injure any [prisoner]. . . I do most earnestly enjoin you to bring him to such severe and exemplary punishment as the enormity of the crime may require. Should it extend to death itself, it will not be disproportional to its guilt at such a time and in such a cause... for by such conduct they bring shame, disgrace and ruin to themselves and their country."- George Washington, charge to the Northern Expeditionary Force, Sept. 14, 1775.

On February 22, HBO premieres Rory Kennedy's documentary The Ghosts of Abu Ghraib. The date is George Washington's birthday. There could be no more appropriate date to launch this documentary, because the experience of Abu Ghraib presents a direct challenge to the legacy of the greatest of America's Founding Fathers.

Before America had a Constitution, a Bill of Rights or a Congress - before the institution of the Presidency - it had its first surviving institution, which was the Army. And its first commander-in-chief - the only one to bear that title without simultaneously being president - was the great militia veteran of the French and Indian War, a man whose experience in warfare towered over others, George Washington.

From the outset of their confrontation with the British monarchy, the Americans were labeled as traitors and insurgents. They were denied the status of honorable soldiers in arms and were treated shamefully. Even as Washington issued the order quoted at the outset, he knew that all 31 of the prisoners taken by the British at Bunker Hill had died in captivity, many under unsettling circumstances. Of the 2,607 Americans taken prisoner at the capitulation of Ft Washington, all but 800 had died in captivity by 1778. The continental press was filled with accounts of the brutal and inhuman treatment of Americans taken by the British throughout this period.

Against a loud public outcry of "eye for an eye," George Washington stood fast. He made it a point of fundamental honor (and that was his word) that the Americans would not only hold dearly to the laws of war, they would define a new law of war that reflected the humanitarian principles for which the new Republic had risen. These principles required respect for the dignity and worth of every human being engaged in the conduct of the war, whether in the American cause or that of the nation's oppressor. They also required respect for the religion and cultural values of foreign peoples. He wrote, "While we are contending for our own liberty, we should be very cautious of violating the rights of conscience in others, ever considering that God alone is the judge of the hearts of men, and to Him only in this case are they answerable."

Following the Battle of Trenton in 1776, Washington set firm rules for the treatment of prisoners in American custody. "Treat them with humanity, and let them have no reason to complain of our copying the brutal example of the British Army in their treatment of our unfortunate brethren who have fallen into their hands," he wrote. In all respects the prisoners were to be treated no worse than American soldiers; and in some respects, better. Through this approach, Washington sought to shame his British adversaries, and to demonstrate the moral superiority of the American cause. He also anticipated that the prisoners, treated with such attention and care, would reconsider their loyalties by the end of the war and embrace the American cause (his expectation was fulfilled - nearly all of the surviving prisoners of Trenton, for instance, settled in America and attained citizenship, many after US military service). But Washington makes clear that he took this approach in the end because of his experience in the wilderness, and the lesson he learned there: soldiers who mistreated prisoners, who took up cruel practices, were bad and unruly soldiers - the discipline and morale of the entire fighting force was undermined by such conduct. For Washington, the issues were clear on both a moral and practical level, and his guidance was given with firm conviction.

Washington's rules on the treatment of prisoners were doctrine of the United States Army for 227 years....

[E]arly in 2002, a later George W, one who knew no military service, decided he knew better than the Founding Father. The Ghosts of Abu Ghraib makes clear that what transpired in that notorious Iraqi prison was not the misdoings of a few "rotten apples," but rather the foreseeable consequence of policies shaped at the highest levels of the Bush Administration. We should keep in mind that Abu Ghraib itself contained abuse that was mild compared with incidents that occurred elsewhere, including more than one hundred deaths in detention - a significant portion of which are linked to torture.

Venting at the constraints of international law, which they deemed quaint and outmoded, and seemingly ignorant of the proud American tradition behind that law, policymakers like Donald Rumsfeld and Alberto Gonzales were determined to dabble in what Vice President Cheney called the "dark side." The consequences of this gravely mistaken departure from America's foundational values have been exactly what Washington foresaw in his charge of September 1775: shame, disgrace and ruin.

We should celebrate George Washington's birthday this Thursday by remembering the man and the values for which he stood. And we should redouble our efforts to restore that message of fundamental decency with which our nation came into being. While Congress took an important step forward with the Detainee Treatment Act of 2005, it was caught by White House trickery the following year in the Military Commissions Act, which has stripped away the writ of habeas corpus, and thus left the Administration unaccountable for the mistreatment of prisoners. If we are to purge this nation of the shame of Abu Ghraib, habeas corpus must be restored, and offenders must be held to account. George Washington would expect no less. He said as much.

Impeach George W. Bush. Impeach him now.

Dawn Patrol with America's Silliest Dog Gets Risky...

If we head out at dawn, go up the driveway, turn right on the fire road, and cross Burton Ridge, we enter... the woods of Rossmoore: | 02/17/2007 | Residents cry fowl, bring in hired gun: A Walnut Creek retirement community is using a new tactic in the escalating suburban struggle to rein in wild turkeys that damage landscaping and cover sidewalks and decks with bird poop. A hunter is shooting the birds with a silencer-equipped rifle.... Rossmoor in Walnut Creek is believed to be the first Bay Area community to call in a hired gun with a license to kill, state and federal wildlife managers say....

"The turkey population has exploded here, like everywhere else," Donner said, "and in some areas, they left so much defecation that people couldn't get by on the walkways." The federal hunter uses a .22-caliber rifle equipped with a silencer to avoid noise that might disturb Rossmoor residents or scare away the turkeys after the first one in a flock gets whacked.... "It's very unobtrusive and efficient in a neighborhood," said Larry Hawkins, an agriculture department spokesman....

"They're very prolific, and they don't have a lot of predators, especially in these areas around housing developments," said Lt. Sheree Christiansen of the state Department of Fish and Game. She supervises wardens in Contra Costa and Alameda counties....

One wildlife expert at the nonprofit Lindsay Wildlife Museum in Walnut Creek questioned the effectiveness of the turkey shooting. For every turkey shot, the survival odds of others improve because of the diminished competition for food and shelter, said Susan Heckly, Lindsay's wildlife rehabilitation manager...

What a way to go: mistaken for a turkey in the pre-dawn gloaming. Fortunately a 22 is not a very big slug.

This morning at least one large, gobbling flock of turkeys had crossed Burton Ridge going the other way, seeking sanctuary on our property.

Journamalism: A Symposium on Presidents' Day on National Review

It would be inconceivable for any of them to name... Abraham Lincoln, wouldn't it?

An NRO Symposium on Presidents' Day on National Review Online: NRO asked a group of historians and commentators for their favorite presidents:

Richard Brookhiser... George Washington
H. W. Crocker III... Ronald Reagan
John Derbyshire... Calvin Coolidge
Bruce Frohnen... William Henry Harrison
Paul Kengor... Ronald Reagan
John J. Miller... Calvin Coolidge


Bookmarked at for 2007-02-20

All Ten of the Constitutions-in-Exile Order Their Respective Mojitos

I count ten times in the past 225 years when judges--without any lead from legislators--have changed the law:

  • John Marshall's original judicial review power grab.
  • The privileging of entrepreneurial over other property interests in the early republic, as chronicled by Morty Horwitz's Transformation of American Law.
  • Roger B. Taney's attempt to entrench slavery in the territories, in Dred Scott.
  • The post-Civil War empowering of corporations with exorbitant privileges of citizenship and limited liability at the expense of government regulators and creditors.
  • The post-1890 empowering of managers of bankrupt enterprises, at the expense of shareholders and bondholders, to keep their enterprises running.
  • The early twentieth century claim that the Constitution enacts Spencer's Social Statics--that the Constitution's Commerce Clause does not say what it says.
  • The post-1937 rollback: the claim that the federal government does in fact have the power to regulate interstate commerce and thus economic activity as it wishes.
  • The Warren Court's declaration that the Constitution obliges it to do whatever it can to make this a free and equal country.
  • The Bork-Posner-led transformation and rollback of antitrust doctrine.
  • The Rehnquist trump: no matter what the law says, when an election is tied the right wing wins.

Is that rather a lot of constitutional moments, or rather a little?

Why Oh Why Can't We Have a Better Press Corps?

Rich Lowry (and John Patrick Diggins) make their play for the Stupidest Men Alive prize. You have to admit they make a pretty good team:

Ronald Reagan: Fate, Freedom, and the Making of History By John Patrick Diggins - Books - Review - New York Times: Ronald Reagan's reputation has been rising for so long, it is no longer shocking to read a respected historian hail him as, after Abraham Lincoln, "one of the two or three truly great presidents in American history." That's how John Patrick Diggins describes Reagan in a book that is a bid to save him from the dismissiveness of liberal historiography on the one hand and from his conservative worshipers on the other...

In the company of Washington, Jefferson, Jackson, Lincoln, the progressive Roosevelt, the liberal Roosevelt, Truman?

Bookmarked at for 2007-02-19

Bookmarked at on 2007-02-18

Note to Self: Justice McReynolds...

Time Magazine from the 1930s once again:

Alone -- Monday, Dec. 04, 1939: As usual, a soft buzzer sounded, the little page-boys scampered aside, the great red curtains parted, and the Justices of the U. S. Supreme Court stepped between them to their black-leather chairs behind the long mahogany bar. But this time there was a difference. At Chief Justice Charles Evans Hughes' left, a chair was draped in black; on his right sat one of the loneliest men in the world. No spectator on last week's decision-day could look at gaunt, craggy-faced James Clark McReynolds without a stir of sympathy.

On a hot August day in 1914, Woodrow Wilson appointed to the Court his Attorney General, hotheaded, hard-headed Mr. McReynolds of Tennessee. Legend has it that Woodrow Wilson regretted no appointment more than that one. And legend also gave Mr. Justice McReynolds a bad name: a man intolerably rude, antiSemitic, savagely sarcastic, incredibly reactionary, Puritanical, prejudiced.

Legend had little to say about his tenderness to his narrow circle of friends, his unfailing generosity, his clear legal perception, his unerring eye and ear for the false, the unessential. Least-recognized was his long-time alertness for the preservation of civil liberties.

Long before the New Deal, old Bachelor McReynolds had come an ogre to liberals. Invariably he voted with the conservative majority. On Feb. 18, 1935 he burst out in uncontrollable wrath at the Gold Clause decision, roared in dismayed rage: "The Constitution is gone!" One by one his colleagues retired or died. Still undenied by McReynolds was the remark attributed many times to him: "I'll never resign as long as that crippled _ _ is in the White House!"

For many years he had refused to speak at all to Justice Louis Dembitz Brandeis. Reportedly he fought the appointment of saintly Benjamin Cardozo to the court; urged Hoover not "to afflict the Court with another Jew."

A fortnight ago his one remaining mainstay, solid old Pierce Butler, died. In silence last week he heard Justice Owen Roberts read the majority decision reaffirming the civil liberties of the U.S. citizen, proclaim the right to pamphleteer without a police license. The decision presented no new point of Constitutional doctrine, but to many a thoughtful U. S. citizen came as a solemn reminder, in anxious days, that beneath the stated rights of citizenship lies a rock-founded base guaranteeing their preservation.

In his familiar attitude of somnolence old James McReynolds heard Justice Roberts announce the Court's decision, seven-to-one for freedom of the press. Scribbling swiftly, newsmen shoved into the pressroom tubes the line: "Justice McReynolds dissents," turned back to stare at the lonely old man nodding in his huge black chair.

Only one thing I don't get: a "long-time alertness for the preservation of civil liberties" combined with a willingness to say that you can't hand out pamphlets without getting a license from the police? Something doesn't compute. Either somebody was writing much too fast, or somebody is telling us that the positive-spin paragraph four is b---s---.