Previous month:
May 2007
Next month:
July 2007

June 2007

Poverty Traps: The High Price of Investment Goods in Poor Countries

Tyler Cowen notes the "relative prices and relative prosperities" literature. It is an updating of Prebisch-Singer: that poor countries have really lousy terms of trade that grow worse over time, and this greatly hinders their development by making it extremely expensive for them to import the high-quality technology-carrying capital goods that they need.

See Caselli and Feyrer (2007), Klenow and Hsieh (2006), DeLong (1997), Jones (1994), DeLong and Summers (1991), and problems 4, 5, and 6 from Problem Set 3 of the DeLong-Rosenberg fall 2006 version of Economics 101b.

Tyler quotes from Caselli and Feyrer:

Marginal Revolution: The marginal product of capital, and policy irrelevance: The May 2007 Quarterly Journal of Economics offers up a fun piece on the marginal product of capital, earlier version here.  The bottom line is startling, though it requires only a simple model:

Francesco Caselli and James Feyrer (2007), "The Marginal Product of Capital" Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows.  Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions.  The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products.  We find that the MPK is much higher on average in poor countries.  However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions.  Instead, the main culprit is the relatively high cost of investment goods in developing countries.  One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries’ incomes.

Tyler concludes

The rough equality of financial rates of return means that [financial] capital [does] flow to where it is most productive.  That means if a country receives some aid, and converts that aid into useful capital goods, less capital flows into your country.  A version of neutrality holds.  Of course there is no reason to focus on aid in this argument.  Most one-off improvements (or destructions) wash out in the longer run, due to subsequent adjustments in the capital stock.  The one-off improvements matter only if liquidity and credit imperfections hinder the international mobility of capital; such imperfections would mean that transfers could bring about a permanently higher level of capital...

This claim that policies to boost capital investment in poor countrise will not help (much) is, of course, true only if the rich who save and invest have time preferences corresponding to those of society as a whole, and only if the private profits earned by investors are in line with the social benefits produced by investment.

Here is how Larry Summers and I formulated it back in the early 1990s, and I believe that we were correct:

Begin with the large divergence between purchasing power parity and current exchange rate measures of relative GDP per capita levels. The spread between the highest and lowest GDP per capita levels today, using current exchange rate-based measures, is a factor of 400; the spread between the highest and lowest GDP per capita levels today using purchasing power parity-based measures is a factor of 50. If the purchasing power parity-based measures are correct, real exchange rates vary by a factor of eight between relatively rich and relatively poor economies. And the log GDP per capita level accounts for 80 percent of the cross-country variation in this measure of the real exchange rate, with each one percent rise in GDP per capita associated with an 0.34 percent rise in the real exchange rate.

Why? Because real exchange rates are such as to make the prices of traded manufactured goods roughly the same in the different nation-states of the world, putting to one side over- or undervaluations produced by macroeconomic conditions, tariffs and other trade barriers, and desired international investment flows. Thus the eight-fold difference in real exchange rates between relatively rich and relatively poor economies is a reflection of an approximately eight-fold difference in the price of easily-traded manufactured goods: relative to the average basket of goods and prices on which the "international dollar" measure is based, the real price of traded manufactures in relatively rich countries is only one-eighth the real price in relatively poor countries.

This should come as no surprise. The world's most industrialized and prosperous economies are the most industrialized and prosperous because they have attained very high levels of manufacturing productivity: their productivity advantage in unskilled service industries is much lower than in capital- and technology-intensive manufactured goods.

And a low relative price of technologically-sophisticated manufactured goods has important consequences for nation-states' relative investment rates. In the United States today machinery and equipment account for half of all investment spending; in developing economies--where machinery and equipment, especially imported machinery and equipment is much more expensive--it typically accounts for a much greater share of total investment spending (see Jones, 1994; DeLong and Summers, 1991).

Consider the implications of a higher relative price of capital goods for a developing economy attempting to invest in a balanced mix of machinery and structures. There is no consistent trend in the relative price of structures across economies: rich economies can use bulldozers to dig foundations, but poor economies can use large numbers of low-paid unskilled workers to dig foundations. But the higher relative price of machinery capital in developing countries makes it more and more expensive to maintain a balanced mix: the poorer a country, the lower is the real investment share of GDP that corresponds to any given fixed nominal savings share of GDP.

The gap between nominal savings and real investment shares of GDP that follows from the high relative price of machinery and equipment in poor countries that wish to maintain a balanced mix of investment in structures and equipment is immense. For a country at the level of the world's poorest today--with a real exchange rate-based GDP per capita level of some $95 a year--saving 20% of national product produces a real investment share (measured using the "international dollar" measure) of only some 5% of national product.

In actual fact poor economies do not maintain balanced mixes of structures and equipment capital: they cannot afford to do so, and so economize substantially on machinery and equipment. Thus here are three additional channels by which relative poverty is a cause slow growth:

First, the fact that investment in general--taking equipment and structures together--is expensive relative to consumption goods and services in poor countries provides them with an incentive to diminish their nominal savings effort: to reduce the share of nominal incomes saved.

Second, the fact that relative poverty is the source of a high real price of capital means that poor countries will have a low rate of real investment corresponding to any given nominal savings effort, and thus a low steady-state aggregate capital-output ratio corresponding to any given nominal savings effort.

Third, to the extent that machinery and equipment are investments with social products that significantly exceed the profits earned by investors (see DeLong and Summers, 1991), the price structures in relatively poor developing economies lead them to economize on exactly the wrong kinds of capital investment...


"The Singer-Prebisch Thesis," Wikipedia (accessed June 25, 2007).

J. Bradford DeLong (1997), "Cross-Country Variations in National Economic Growth Rates: The Role of 'Technology'", in Jeffrey Fuhrer and Jane Sneddon Little, eds., Technology and Growth (Boston: Federal Reserve Bank of Boston) (accessed June 25, 2007).

J. Bradford DeLong and Lawrence H. Summers (1991), "Equipment Investment and Economic Growth," Quarterly Journal of Economics 106: 2 (May), pp. 445-502 (accessed June 25, 2007).

J. Bradford DeLong and Joseph Rosenberg (2006), "Problem Set 3: Economic Growth: Further Explorations," U.C. Berkeley Economics 101b, Fall 2006 Version (accessed June 25, 2007).

Francesco Caselli and James Feyrer (2007), "The Marginal Product of Capital" (accessed June 25, 2007).

Chang-Tai Hsieh and Pete Klenow (2006), "Relative Prices and Relative Prosperity" (accessed June 25, 2007).

Charles Jones (1994), "Economic Growth and the Relative Price of Capital," Journal of Monetary Economics 34, pp. 359-82 (accessed June 25, 2007).

links for 2007-06-25

Richard Thaler: Slippery Slope Arguments Should Be Avoided Unless There Is Proof that the Slope Is Greased

Via Pinky and the Brain: Richard Thaler:

Pinky and the Brain: Richard Thaler: Libertarian Paternalism: Let's recapitulate. People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London, pedestrians from abroad are reminded by signs on the pavement to "look right" because their instincts from back home are to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks.

Another example comes from Sweden, which launched a partial privatization of their social security system in 2000. The plan was open to any fund, which meant that participants faced 456 options. There was also a very well-designed default fund -- using private managers selected by the government -- that offered global diversification at very low fees (16 basis points). By any standard, both ex ante and ex post, the participants who selected their own portfolio of funds did worse than those who took the default plan. The main mistake the government made in designing this plan was to discourage participants from choosing the default fund, perhaps thinking, as Mario does, that choosing for oneself is always the best approach.

Mario thinks we are naïve about government. We think he is naïve about firms. Does he think that the companies that offered stock options to student loan officers to induce them to feature their loans had the "actual preferences" of the students at heart? Maximizing profits does not always mean maximizing the welfare of the customers.

Finally Mario seems to have a phobia about slippery slopes. I guess he thinks that if governments start with signs that say "look right," the next thing you know we will have Prohibition coming back. By the same logic, we should worry that if libertarians succeed in eliminating rent control that we will be soon down the slippery slope toward anarchy. Slippery slope arguments should be avoided unless there is proof that the slope is greased. In our case, by insisting, as we do, on only libertarian paternalism, the slope runs into a brick wall before it even gets started. And besides, what is the alternative? Inept neglect?

Annals of Horticulture

Kieran Healy of Tucson, AZ is alarmed:

The Triffid: Because I have no talent for or interest in it, I have been putting off dealing with my garden—-or yard, as we say in America. Although the landscaping is now on the domestic agenda, it may have been a serious error to wait so long. Because, over the past few months, this... thing... has grown up with astonishing rapidity by the side of my house, next to the A/C unit. It has become known as The Triffid. It is now about ten feet tall. Here’s a set of pictures showing its leaves and little tubular yellow flowers in more detail. It has recently acquired a little brother a few feet away.

For those of you who don’t know, I live in Tucson. Given how little water we have falling out of the sky around here, it disturbs me that anything so ugly could grow quite so big, quite so fast. (I feel the same way about Phoenix.) My question to the more horticulturally informed amongst you is, What the hell is it? And when the answer is, inevitably, “Giganticus Weedus Noxiensis,” tell me what combination of axe, chemicals and Wagner will be required to get rid of it.

Air conditioners leak incredible amounts of moisture, even in arid climates like Tucson. This plant has found the one moist spot for acres around, and is responding appropriately.

Wonders of the California Republican Party

From the San Francisco Chronicle:

Aussie hired by state GOP embroiled in immigration lawsuit: Carla Marinucci and Lance Williams: Michael Kamburowski, the Australian immigrant hired as a top official in the California Republican Party, was ordered deported in 2001, jailed three years later for visa violations -- and has filed a $5 million wrongful arrest lawsuit against the U.S. Department of Homeland Security, according to U.S. District Court documents.

Kamburowski was named in March to be the chief operating officer of the California GOP. He is responsible for the state party's multimillion-dollar budget and oversees campaign funds and financing for the nation's largest state GOP organization. As the state GOP's new operating officer, the 35-year-old Kamburowski was handpicked for the post by state Republican Party Chairman Ron Nehring, who became party chief in February.

Kamburowski is a former registered lobbyist for Americans for Tax Reform and a top operative for the Ronald Reagan Legacy Project, both founded by conservative activist Grover Norquist. Nehring -- also a former senior adviser and consultant to Norquist's Washington, D.C., operation -- worked with Kamburowski at Americans for Tax Reform in the 1990s.

News of Kamburowski's troubled immigration past comes on the heels of revelations in The Chronicle earlier this month that the state GOP used a highly sought-after H1B visa to hire another immigrant as a top consultant. Christopher Matthews, a Canadian citizen with no experience in statewide politics, was hired this month after the California Republican party applied for, and received, an H1B visa specifically to fill the role of "political director,'' according to U.S. Department of Labor data.

In a week in which the immigration bill is being revisited by Congress -- and after Republican presidential candidates and party officials nationwide have called for secure borders and tough enforcement of illegal immigration -- the past immigration troubles of a high-ranking California GOP official has the potential to both endanger Republican fundraising in crucial California, the nation's political ATM, while also handing Democratic opponents ammunition for coming campaigns.

Kamburowski sued the U. S. Immigration and Customs Enforcement agency and its agents in U.S. District Court in New York in December 2005, charging that he suffered "significant financial hardship" and "severe emotional stress and embarrassment" when immigration officials ordered him deported, detained and imprisoned for visa violations -- actions he claims were illegal, according to court documents on file...

John Succo on Pricing CDO Mortgages

John Succo:

Minyanville : Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions. I asked a large broker firm to send over its smartest math person on Collateralized Debt Obligations (CDO) structuring.  I wanted to know what I am missing: why is the market so sanguine in the face of deteriorating collateral values in the mortgage market?  One of my firm's theses has been that, as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes.  Why aren’t losses being seen when the market is clearly deteriorating?

The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker I was prepared for some sugar coating. I didn’t get any. The answer is simple and scary: conflict of interest. He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective in fact that in order to make the market work an “impartial” pricing mechanism must exist that the entire market relies upon.

Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This of course raises two issues.

First, it is questionable whether "recent" experienced losses over the last few years really represent the worst of the credit market (conservative). But even more importantly, it raises a huge conflict of interest: the credit agency's customers are the very issuers of the tranches they rate. The credit agencies, therefore, need to compete for business based at least in part on the ratings they are willing to give these tranches. As a result, they will only downgrade when forced to by experienced losses; not rising default rates, not a worsening economy, but only actual, experienced losses. Even more disturbing, they will be most reluctant to downgrade the riskiest tranches (the equity tranches) since those continue to be owned by the issuers even after the deal is sold. So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized simply because the rating agencies have not changed their ratings for all the above reasons.

Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices. For example, below is a chart of the actual BBB minus tranch of the mortgage-backed securities pool from November '06 to present. Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions.

The levels at which investors are carrying the paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment.

I asked them what would force the rating agencies to change their ratings and the response was “it's just a matter of time if the market continues to deteriorate, for the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies are likely to result in a massive repricing of risk.

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

It would be interesting to know whether in fact it is the case that Barton Gellman and Jo Becker had to threaten, and what they had to threaten, before Len Downie would run their piece on Cheney:

War and Piece: : A veteran newspaper editor friend has some sharp observations about the Post Cheney piece:

A careful reading of the story of Cheney's coup against a feeble executive reveals that paragraphs 7 through 10 were written and inserted in haste by a powerful editorial hand. The banging of colliding metaphors in an otherwise carefully written piece is evidence of last-minute interpolations by a bad editor whom no one has the power to rewrite.

("Waxing or waning, [moon metaphor], Cheney holds his purchase [grasping image, a monkey?] on an unrivaled portfolio [business metaphor]...." A monkey with a gibbous face clutching a briefcase stuffed with investments?)

(Worse is this garble: "Cheney, they said. inhabits an operational world [?] in which means are matched with ends [is there any other way?] and some of the most important choices are made." [Where's the rest of the sentence? What does this pseudo-sentence even mean?])

That in turn suggests that this piece has been ready to run for some time. Insertions like the one about the veep's office not being part of the executive branch and seriatim "softenings" show that jamming it into the paper at the end of June, when only cats and the homeless are around the read the paper, was made at the last minute.

Why? My guess is that this series ready to go during the debate over the supplemental funding of the Iraq war and that Downie or someone at the top held it back until Gellman and others started carrying snub-nose .38s to work under their seersuckers.

A key element of the coup is also ignored: the role of the press as revealed in the Libby scandal... : Note in particular paragraph seven the phrase that Cheney's subversive roles "went undetected." The correct verb is "unreported."

This series is a landscape of an internal war. Parts of it are still smoking and some reputations are visibly dying--anonymously, for the moment. The journalistic graves registration people will go in later and tag the corpses.

Stuart Taylor, Jr. Is a Psychotic Creep

Stuart Taylor, Jr., attacks the judges who ruled against the Bush administration in the al-Marri case. If there is time to assemble a SWAT team to make a raid, there is time to get a warrant. Judges have telephones, and they answer them.

Most people who salivate at the thought of torture and construct "ticking bomb" hypotheticals to make it seem reasonable work a little bit harder than Taylor to keep their hypotheticals from being completely and transparently silly. Not Stuart Taylor, Jr.:

OPENING ARGUMENT: A Judicial Overreaction To Bush Abuses? (06/18/2007): [T]heir additional, broader holding... that Ali Saleh Kahlah al-Marri and other suspected Qaeda terrorists arrested in the United States cannot be detained at all, no matter how dangerous, unless the government brings criminal charges against them within a week of arrest or is unable to deport them.... Judge Motz (joined by Judge Roger Gregory).... Motz's suggestion that the criminal-justice system can safely deal with such people is unconvincing... [the] system is ill-equipped to handle any future waves of Qaeda attacks on American soil.... [H]ow will the Motz ruling look in hindsight if and when Americans are mass-murdered by the thousands again, or if -- as seems all too possible -- Islamist terrorists get their hands on a nuclear device or lethal germs?

Suppose, for example, that after a series of bombings in Chicago, Washington, and Los Angeles, an anonymous tipster tells the FBI that five Saudi biology students have assembled a large supply of lethal anthrax in two New York City apartments and are planning a massive attack.... With no time to get a warrant, FBI agents break into the apartment, arrest two Saudis, and find lots of anthrax and Qaeda literature.

Under Judge Motz's logic, both men would have to be released or deported unless criminally charged within a week -- but they could not be criminally charged because the warrantless search would clearly have been illegal. And... [Miranda warnings] would torpedo any hope of using aggressive interrogation... before they launch an anthrax attack....

Dissenting Judge Henry Hudson... countered that al-Marri "is the type of stealth warrior used by Al Qaeda to perpetrate terrorist acts against the United States," and thus was a target of Congress's September 2001 authorization for the president to "use all necessary and appropriate force" against "nations, organizations, and persons" involved in the 9/11 attacks...

I have no idea why the National Journal and other outlets that wish to be thought reputable continue to burn their reputations by printing Stuart Taylor, best known for on February 4, 2002 denouncing our NATO allies:

Opening Argument (02/04/2002): already in an overwrought tizzy about the supposed mistreatment of the 158 detainees at Guantanamo Bay...

Michael Clemens on the Real Immigrant Underclass: "The People Who Wanted To Come, But Could Not"

Michael Clemens of the Center for Global Development, with a good rant, including bonus New Republic bashing:

Global Development: Views from the Center: The Real Immigrant Underclass: The People Who Wanted To Come, But Could Not: The New Republic's lead editorial (free registration required) blasts the now-moribund Immigration Reform Act for including a provision to admit hundreds of thousands of temporary workers each year. It bitterly condemns America's "unsavory tradition" of "importing non-Europeans to do the difficult tasks that our own citizens shun" as part of a "shadowy underclass". To the editors, this is "the tradition of the African slave ship, the Chinese coolie, and the Mexican bracero" and is "one of the worst ... instincts in American democracy".

I take a breath and count to ten. First, and emphatically, we must set the brutal, coercive slave trade completely and irrevocably apart from Chinese and Mexican immigration, which has been almost universally voluntary. Forcing Africans to come to this country and work for nothing was indeed far beyond unsavory and it did reflect, in its time, the worst instincts of this country. A colossal difference lies between this and the braceros' decision to come here and work for pay. Slaves were indeed "imported" as subhuman commodities. Mexicans and Chinese chose to come. And allowing people to voluntarily pursue their dreams is not something for which we should hang our heads in shame.

Now: What is the alternative to admitting Chinese and Mexicans to do "difficult" work here in a "shadowy" underclass? The alternative was not mass admission of unskilled labor with full citizenship, which would have been politically impossible and continues to be. For most of them, the alternative was not to come at all, and the temporary worker provision of the Immigration Act embodies a sophisticated understanding of this fact. If the US had not admitted Chinese and Mexicans in the past, those people would have remained where they were: doing far more difficult work in a sub-sub-underclass in the places they came from --- not just shadowy, but completely invisible to Americans. How do we know it was that bad where they were before? Because despite the enormous hardships of coming here, both groups kept on choosing to come, for many decades. Immigrants, bluntly, are not stupid; they know what makes them better off, and they act on it.

The failure of the Immigration Reform Act means no temporary worker program, so fewer people will have that chance for a better life. The way the editors of the New Republic excoriate that provision of the bill, you'd think the bill's collapse is a victory in the fight against poverty.

Those editors would appear to prefer that the non-Europeans who have been afforded tremendous opportunities to improve their lives here had stayed home and kept their desperation out of sight, out of mind -- as the bill's failure ensures many more will. If the New Republic didn't prefer this, it might point out that admitting Chinese and Mexican laborers is precisely the act of setting them free from the very, very "shadowy underclass" in which they lived prior to coming here, when most did much more "difficult" work for a lesser reward. It might note that giving those enterprising people a chance is one of the best "instincts in American democracy", one that is not emulated by other rich democracies like Japan.

It might also point out that it was the precisely the halting of Chinese immigration, via the unapologetically racist Chinese Exclusion Act of 1882, that indeed reflects our "worst instincts". Was that law any less repugnant because building railroads is "difficult" work?

This doesn't mean that there are no problems with immigration and assimilation here; those need to be solved. But let us not patronize the migrants. "Saving" them from the conditions they face here, if that means sending them home or not admitting them, means "saving" them from something they have told us loudly that they prefer --- by voting with their feet. Full and immediate citizenship for hundreds of thousands of unskilled Mexican laborers a year is politically infeasible, and the temporary worker program was a great shot at an outcome that still would have made a lot of people better off. Now we face the alternative, which is that those people will never have the chance to come, or will try to come through very dangerous and harmful illegal channels. The New Republic might like the sound of that, but I don't.

Whatever you think of how America has handled the people it did let in, the fact is that it did let them in, and many other countries simply have not and do not allow as many people to better their lives in this fashion as we do. That is a distinction of which we can be proud. It is light years away from the slave trade. The death of the Immigration Bill and its temporary worker program means more people will be "saved" from the chance to pursue their dreams and see their hard work better rewarded. Now there's something to be ashamed of.

Jim Hamilton and Mark Zandi on Interest Rates

In the Wall Street Journal:

Econbrowser: Econoblog on interest rates: I was pleased to participate in the latest Wall Street Journal Econoblog with Mark Zandi, Chief Economist and co-founder of Moody's Here's a brief preview of what you can find over at the WSJ. Our topic was the following question:

Treasury-bond yields, a benchmark for market interest rates, scared investors earlier this month with a sharp rise, and pull back. What was behind the uptick? And what does it mean?

And here is part of what we said.

Hamilton: Long-term bond yields are generally procyclical, falling with the decreased spending and borrowing that accompanies an economic slowdown. Indeed, a lot of us look at the spread between long-term and short-term yields as a predictor of what is going to happen to economic growth. When the 10-year yield fell below the overnight fed funds rate from 2006:Q2 to 2007:Q1, that was followed by slower than average real GDP growth. But if investors are now expecting stronger growth, that could explain why nominal rates, TIPS yields, the dollar, and stocks have all risen together...

Zandi: Behind the higher rates is slowly evaporating global liquidity. This is most evident in tighter monetary policies across much of the globe. Central banks ranging from the European Central Bank to the Chinese Central Bank are in the midst of a series of tightening moves. Indeed, the Federal Reserve is the only major central bank not expected to tighten policy again before the year is over....

Given that 80% of mortgage loans are fixed rate loans, this will be another significant hurdle for the housing market to overcome. The spring selling season was already a bust prior to the run-up in long-term rates. Home sales are being hit hard by the tightening in lending standards in response to the stunning erosion in mortgage credit quality. It will be very difficult to make any progress in reducing the bulging inventories of new and existing homes without further substantial cuts in housing construction and house prices.

Hamilton: Unfortunately, Mark is exactly right about housing. I had been among those who incorrectly predicted that lower mortgage rates would arrest the housing downturn last fall. I think we did see some evidence of a rebound, but then the sector was hit badly by the tightening lending standards Mark mentioned. Now with mortgage rates back up and, as Mark also noted, the inventory of unsold homes, it's hard to find any reason for optimism in this sector. But the housing bust has been subtracting 1% from annual GDP growth for a year now. What we've clearly seen is that, unless some other part of the economy follows it down, a recession in housing need not mean falling overall GDP.

There's much more over at the WSJ...

links for 2007-06-23

Why Oh Why Can't We Have a Better Press Corps? (The Hill Edition)

Matthew Yglesias:

Matthew Yglesias: Carping: The Hill's Elana Shor on Barack Obama's earmarks:

Obama’s earmark requests range from the general, such as $65 million for service improvements to his state’s Metra commuter rail, to the quirky, such as $8.5 million for an Army Corps of Engineers barrier intended to keep Asian carp fish from entering the Great Lakes."

Quirky! But wait, I thought, why does Obama want to keep these carp out?

Well, it turns out that Asian carp populations have been growing extremely rapidly of late in the Mississippi River basin. As indicated by the name, these carp are indigenous to Asia rather than to North America and are exhibited one of these "invasive species"-type growth patters where they're so well-adapted to an ecological niche that isn't adapted to them, that the population booms and there's risk of substantial problems for the rest of the local ecosystem. In a November 2000 report the USGS concluded that "On the basis of past experiences (e.g., with common carp), a failure to address the exotic species problem will likely result in more introductions and potential harmful effects to native biota."

The EPA reports that "researchers expect that Asian carp would disrupt the food chain that supports the native fish of the Great Lakes" and "could pose a significant risk to the Great Lakes Ecosystem." So, yes, appropriating funds for the Army Corps of Engineers to keep carp out of the Great Lakes sounds a little silly, but a preliminary effort to research the issue seems to indicate that it's a perfectly reasonable thing to be doing.

Add Elana Shor to the blacklist...

The Evolution of Household Income Volatility

Karen Dynan, Doug Elmendorf, and Dan Sichel report on changes in household income volatility. They find increases, but somewhat smaller increases than Moffitt and Gottschalk (and Gosselin) and much smaller increases than Hacker:

The Evolution of Household Income Volatility: Karen E. Dynan, Chief of Household and Real Estate Finance Section, Division of Research and Statistics, Federal Reserve Board; Douglas W. Elmendorf, Senior Fellow, Economic Studies; Daniel E. Sichel, Assistant Director, Division of Research and Statistics, Federal Reserve Board: Using data from the PSID, we find that household income has become noticeably more volatile during the past thirty years. We estimate that the standard deviation of percent changes in household income rose one-fourth between the early 1970s and early 2000s. This widening in the distribution of percent changes is concentrated in the tails of the distribution, and especially in the lower tail: Changes between the 25th and 75th percentiles are almost the same size now as thirty years ago, but changes at the 10th percentile look substantially more negative. The boost in volatility occurred throughout the 1970s, 1980s, and 1990s, albeit not at a steady pace. Households' labor earnings and transfer payments have both become more volatile over time.

"Orthodox" and "Heterodox" Economics Once Again

I'm going to duck and let Barkley Rosser duke it out with Thomas Palley.

Barkley says that leading American Keynesian or neo-Keynesian or new Keynesian Ben Bernanke--former co-editor of the flagship American Economic Review, former chair of the Princeton Economics Department, former chair of the President's Council of Economic Advisers, current chair of the Board of Governors of the Federal Reserve and of the Federal Open Market Committee, one of America's leading economists in institutional, research, and policy arenas--has "heterodox ideas." He is, according to Barkley, a "non-orthodox mainstream" economist who has spent his career "reviving a non-orthodox idea, financial fragility" and successfully "brought the idea out of the shadows of non-respectability where the rat[ional ]ex[pectations] 'revolution' had put it."

Palley says that orthodox economics "exclude[s] ideas that don’t fit... create[s] barriers to entry and expression.... [To] counter Diane Coyle’s claim that heterodox economists have nothing to complain about.... The last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics. That is a matter of taste. There is simply no scientific basis for rejecting the Keynesian description of how the economy works.... [T]he orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment.... [I]t is increasingly hard to have conversations with mainstream economists.... [H]eterodox economists know the orthodoxy.... [O]rthodox economists increasingly have no knowledge of heterodoxy and are proud of that ignorance..."

Hoisted from Comments: Barkley Rosser:

Ben Bernanke, Mortgages, the Financial Accelerator, and the Macroeconomic Consequences of "Financial Fragility": Well, conversation here has stopped, but I feel the need to add a bit more in light of my being wrong and brad's request about how all this relates to heterodoxy.... In 2004, David Colander and Ric Holt and I published an article ("The Changing Face of Mainstream Economics") in the Review of Political Economy.... [W]e distinguished between the concepts of "orthodox, mainstream, and heterodox" in the following way: orthodox is a set of ideas, presumably equaling "neoclassical economics" with its trinity of greed, rationality, and equilibrium; mainstream is a sociological category, consisting of the economists in charge of the leading departments, journals, and funding sources; and heterodox is both, anti-orthodox intellectually and also alienated from the mainstream sociologically, on the fringes professionally, with or without due cause.

The controversial aspect of this is that it allows for the category of "non-orthodox mainstream"... [like] George Akerlof, whose AEA presidential address had some people upset in the Chris Hayes Nation article on neoclassical mafias. There was this terribly respectable, mainstream economist, Nobel Prize winner and AEA president, uttering these clearly non-orthodox ideas about macroeconomics, egad!...

[W]e argued that the real intellectual action is on the boundary between the mainstream and the heterodox, with the orthodox in effect being... fossilized and ossified.... [T]he people who were more likely to be engaging in outright repression of ideas were less likely to be the elite at the very top of the mainstream, who tend to be pretty open-minded, but more second-tier players, stupidly enforcing dead (or dying) orthodoxies. Hence, at Notre Dame the villains were a bunch of third rate deans and nobodies, far less well known than some of the people they were criticizing and repressing, a pathetic joke really.

So, bringing this back to Bernanke, clearly he is an example of somebody who fits this non-orthodox mainstream category. He made his fame by reviving a non-orthodox idea, financial fragility.... I will give him credit that apparently he did cite Minsky and Kindleberger, as well as Fisher... brought the idea out of the shadows of non-respectability where the ratex "revolution" had put it... [and] to the attention of policymakers... although as I previously noted, many such policymakers never stopped taking it seriously.

Thomas Palley:

Are Heterodox Economists Just Unhappy Whiners?: Economists also use private languages to exclude the public, to exclude ideas that don’t fit those languages, and to create barriers to entry and expression.... I would like to... counter Diane Coyle’s claim that heterodox economists have nothing to complain about.... The last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics. That is a matter of taste. There is simply no scientific basis for rejecting the Keynesian description of how the economy works.

That leads to the practice of economics in the real world.... [T]he orthodox cup is filled with hard-core orthodox theory, [but] the lip of orthodox policy practice quickly and easily slips into Keynesian thinking. This suggests Keynesians may be more right than the orthodox.... [Consider] the scare with deflation during the last recession. Suddenly, the orthodoxy started arguing at the policy level that inflation could be damaging and the economy might get trapped with sustained unemployment... exactly what Keynes claimed, yet the orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment....

[I]t is increasingly hard to have conversations with mainstream economists.... [H]eterodox economists know the orthodoxy.... [O]rthodox economists increasingly have no knowledge of heterodoxy and are proud of that ignorance.... For instance, “old” Keynesian economics is often accused of lacking so-called “optimizing foundations”, which is complete nonsense. Keynesian economics has long emphasized rational consumers and profit maximizing firms – and has been criticized for it by other heterodox economists...

The kindest thing one can say about Thomas Palley is that he suffers from a bad Groucho Marx problem: "heterodox" ideas that appear in orthodox flagship journals in articles written by prominent mainstream economists cannot really be "heterodox" at all because everyone knows that economic orthodoxy is hegemonic and exclusive.

Say the secret word and win $100!

But let's give the microphone back to Palley:

Heterodox Alternatives: “[N]ew Keynesianism” – a form of intellectual cuckoo that took over the Keynesian nest and pushed out the real Keynesian ideas (PS. Brad, you’re not chopped liver, but you are scrambled eggs. PPS. Nice post about the tool kit)...

Ottoviano-Peri and the CEA vs. George Borjas on the Distributional Consequences of Immigration

George Borjas appears to get the economic theory not quite right:

The Borjas Blog: An Inconvenient Truth That Somehow Didn't Make The CEA Report: As I mentioned in a previous post, the CEA seems to have concluded that if one allows for complementarities between immigrants and natives [i.e., that unskilled native-born workers can serve as translators and team bosses for their coworkers who don't speak Englidh]... the long-run gains from immigration are somewhere between $30 to $80 billion per year. A careful reading, however, indicates that the CEA doesn't quite say that....

As I suspected, the $80 billion number does not mean what most people would probably take it to mean. Economic theory predicts that the long-run gains from immigration to the pre-existing population must be zero—-even when there are complementarities between immigrants and natives and even if those complementarities are incredibly strong. In the long run, capital adjusts fully until firms wither away all the excess profits from the initial wage depression...

Now that's simply wrong: "capital adjusts fully" means that more future investments are made in high-productivity areas to which migrants move and fewer in low-productivity areas from which migrants came. Returns on savings are thus higher--and because the pre-existing population are savers, they benefit. So do the migrants. The long-run model in which Borjas is implicitly working is one in which real wages for non-movers are constant by assumption: so there are no losers, only gainers.

Borjas then shifts to the Ottaviano-Peri model:

The CEA used the Ottaviano-Peri result that the complementarities helped natives and calculated how much natives gained as a result. This is what they say: "Multiplying the average percentage gains by the total wages of US natives suggests that annual wage gains from immigration are between $30 billion and $80 billion." But they completely ignored the fact that the same complementarities that supposedly help natives also hurt [previous] immigrants, and by quite a bit. In other words, the CEA uses a strange definition of who “we” are: including only native-born workers and ignoring the millions of immigrants already here, who are affected by yet more immigrants.... Had the CEA taken the immigrant losses into account, the Bush administration would have had to report that the net gains from immigration for the pre-existing population are equal to... ZERO!

This is true only if you believe that previous immigrants are exactly like brand-new immigrants--that they don't become more like native-born over time as they gain social knowledge and English proficiency.

And there's actually more embarrassing news, for a theorem is a powerful thing.... [T]he average [long-run] wage change [note: not the real income change] in the [pre-existing] population must be zero.... If there were 15 million [previous] immigrant workers, each immigrant worker must lose $3,333 annually--and the $50 billion gain accruing to natives must be entirely offset by the $50 billion loss accruing to immigrants.... Imagine the headlines had the CEA reported that immigration during the 1990s led to a $3,333 drop in the average earnings of pre-existing immigrants! This is not the spin the White House was looking for, but it is a direct implication of the spin they did put out. What an inconvenient truth! I wonder if the compassionate conservatives will shed a tear about the huge wage losses suffered by pre-existing immigrants.

If I had Giovanni Peri here at hand, I think that he would say that increased immigration is very good for new migrants, good for savers worldwide, good for native-born workers, good for previous immigrants who have substantially assimilated--social knowledge, English proficiency, et cetera--and probably bad for previous immigrants who have no assimilated. And he would also say that the model goes haywire and is untrustworthy when the number of non-assimilated immigrants is small, and that that going haywire is where the very large income losses for previous migrants is coming from.

And, of course, the thing to object to in the turn this entire debate has taken has been the failure to focus evenly on the consequences for all stakeholders in global migration--look at what happens to everyone, not just one particular group that is convenient for your current political position.

But I will ask him.

E.P. Lazear et al. (2007), "Immigration's Economic Impact"

G. Ottaviano and G. Peri, "Rethinking the Effects of Immigration on Wages," NBER Working Paper 12497 (2006)

links for 2007-06-22

The Blind Squirrel Strikes!

Duncan Black listens to George F. Will:

Eschaton: Epitaph: George Will found a nut on Sunday's This Week:

When, against the urgings of the Israelis, we pressed for the elections that overthrew Fatah, who we were backing and put in Hamas, Condoleezza Rice said nobody saw it coming. Those four words are the epitaph of this administration.

The Bear Stearns Reporting Contest

Tanta at Calculated Risk:

Calculated Risk: The Bear Stearns Reporting Contest: It was a dark and stormy night; the rain fell in torrents--

The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds. All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable...

except at occasional intervals, when it was checked by a violent gust of wind which swept up the streets

June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street. . . . "More than a Bear Stearns issue, it's an industry issue," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. "How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?"...

(for it is in London that our scene lies),

One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be "junk in investment-grade clothing"...

rattling along the housetops, and fiercely agitating the scanty flame of the lamps that struggled against the darkness.

The bottom line is that big losses in subprime investments are likely to make investors more reluctant to risk their money on these instruments in the future. That will make it harder for mortgage originators like banks to sell these types of loans in bundles to the bond markets, which will, in turn, reduce the availability of funds for subprime loans and make it much harder for subprime borrowers to obtain financing.

Nobody ever apologizes to Edward George Bulwer-Lytton. So I'm a contrarian. Herewith: apologies to Bulwer-Lytton.

UPDATE: Thank you, Outsider, for the perfect denoument to our overwrought little narrative:

"We're looking at somewhat immature markets that are going through a growth phase," Ralph Cioffi, senior managing director of Bear Stearns Asset Management, said at a bond conference in New York in February, Reuters reports. "There is a catharsis and a cleaning-out process."

Investors: If you can't tell who is having the catharsis, you're the catharsis.

FURTHER UPDATE: Every caprice needs a rondo. But Hugh Moore, partner of Guerite Advisors and a former executive at a subprime mortgage lending company, described the situation as a "slow train wreck."

"I wouldn't be at all surprised if we hear about more [hedge funds] blowing up in the coming months, as the subprime market meltdown continues," he said. "You've got $250 billion of subprime [adjustable-rate mortgages] that are going to reset this year. I don't think it's going to be systematic . . . but for those people who invested in those hedge funds, its certainly not going to be fun."

So what's it going to be for those subprime borrowers? Just another day at the circus?

Self-Pwnage Department

Ron Rosenbaum sneers, in Slate, about Esquire:

The worst celebrity profile ever written?: The main thing is that the magazine wants... an unclothed Angelina Jolie clutching a wispy sheet over her nakedness. But the magazine wants you to understand that it's not running some Maxim-type lowbrow lingerie spread featuring an actress who used to be on the WB. No.... There are serious issues raised, there are profound questions about The Way We Live Now to be discussed. The result is a meretricious prose whose pretense at arch sophistication has become a schlock art form, the written equivalent of a Leroy Neiman nude...

The problem is that if you look to the left of Ron Rosenbaum's words, what do you see but "an unclothed Angelina Jolie clutching a wispy sheet over her nakedness"--a silver sheet, in fact, and between her thighs, in fact.

[No. This is an Angelina Jolie image-free zone.]

Add to this the fact that the article misspells the name of a woman to whom Ron Rosenbaum once proposed marriage, and it seems to me that Ron Rosenbaum is completely and thoroughly pwned. By himself? Deliberately? Accidently? By Slate's editors? Deliberately? Accidently?

There are Serious Issues raised. There are Profound Questions about The Way We Live Now to be discussed.

Possibilities for Really Cheap Entertainment

From "As You Know, Bob":

As You Know, Bob: "Ahhh! My hand!": Earlier today (well, last evening, now), the eldest kid and I made a nerd road trip up to the new digital-tv transmitter shack up in the hills. All afternoon, I had been brooding about standing at the foot of the broadcast tower while it was radiating a few megawatts of radio energy into space. So, come sunset, I went down to the basement and dug out a couple of 48" fluorescent bulbs, and threw them and the family into the car. We drove over to the nearest high-voltage power line, and we watched the fireflies while we waited for full dark, and then we played light sabers in the gloaming...

Tyler Cowen Advances China Skepticism

He summarizes:

Marginal Revolution: China skepticism: How long will it take before China cracks up?

To most Western observers, China’s economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing’s brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption, and widening inequality. Dreams that the country’s economic liberalization will someday lead to political reform remain distant. Indeed, if current trends continue, China’s political system is more likely to experience decay than democracy. It’s true that China’s recent economic achievements have given the party a new vibrancy. Yet the very policies that the party adopted to generate high economic growth are compounding the political and social ills that threaten its long-term survival...

The Chinese state remains deeply entrenched in the economy. According to official data for 2003, the state directly accounted for 38 percent of the country’s GDP and employed 85 million people (about one third of the urban workforce). For its part, the formal private sector in urban areas employed only 67 million people. A research report by the financial firm UBS argues that the private sector in China accounts for no more than 30 percent of the economy. These figures are startling even for Asia, where there is a tradition of heavy state involvement in the economy. State-owned enterprises in most Asian countries contribute about 5 percent of GDP. In India, traditionally considered a socialist economy, state-owned firms generate less than 7 percent of GDP.Here is much more, and I will go on record in agreement.  More specifically, how about a bone-crunching, bubble-bursting, no soft landing, Chinese auto crash-style depression within the next seven years?  This is also my biggest worry for the U.S. economy, I might add.

If you are not convinced, raise your right hand and repeat after me: "China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn't even brush his teeth, and now they will go from rags to riches without even a business cycle burp."  I don't think you can do it with a straight face.

Had I mentioned that Yana and I are going to Shanghai in April?  I'll ask you all for tips when the time comes.  I hear MarginalRevolution is banned there...

Rick Perlstein: Bloggers vs. Heathers

Rick Perlstein watches a panel in which Richard Wolffe and David Schuster further undermine their shattered reputations as reporters--and don't seem to realize it:

Bloggers and Heathers go 15 Rounds | Campaign for America's Future: Richard Wolffe of Newsweek... insists [that Newsweek] really is fair and balanced: it tells the truth, and speaks that truth to power.... Wolffe and David Schuster of MSNBC both defended Chris Matthews, criticized... for trivializing political coverage by, for example, his attention to Fred Thompson's musky, manly smell.

[Matthews] "cares more about politics--about real nitty-gritty politics--than anyone in Washington," Schuster said. He's "the reason" there was a debate in Washington on torture - a scary idea, if you think about it. It's not exactly something on which reporters should have to play follow the leader....

Someone asked the Washington reporters on the panel whether the sense in their newsrooms was that, as the International Atomic Energy Agency maintains, that Iran is nowhere close to having nuclear weapons, and may in fact not even be attempting to get nuclear waeapons. Or did their newsrooms trust the administration, which makes the opposite claim? Schuster affirmed that there was a "great deal of skepticism among reporters" on the administration's Iran claims. He puffed up a little with pride, and said that's why you don't see many reports on Iran these days: because they've evaluated the administration's claims and found them wanting - undeserving of attention.

[Dan] Froomkin got the last word He said: that's precisely the point. You don't respond to administration lies about Iran by not running Iran stories. You respond to it by doing stories - about adminstration lies about Iran...

Hoisted From Comments: Your #1 Source for DC News Ought to Be: McClatchy Washington Bureau

Hoisted from comments: Corvid writes:

Your #1 Source for DC News Ought to Be: McClatchy Washington Bureau: McClatchy also led the way on the U.S. Attorney scandal. Here's the deal with McClatchy, formerly Knight-Ridder: They're not a big-name MSM news organization, therefore they avoid the huge handicap of having Washington insiders leak to them. The problem with leakers is that: 1) 9 times out of 10 they're self-serving and therefore the supposed info they give out is either counter-informative, a smokescreen or a distraction; 2) leakers expect their leaks to be published or else they'll abandon the leakee reporter, so even a good-hearted bigshot journo captured by them feels obligated to go with the leak even if he thinks the info doesn't smell quite right; and, 3) most bigshot reporters are not good-hearted but rather lazy, lazy, lazy and very much enjoy their symbiotic relationships with the self-serving leakers in their Rolodexes.

McClatchy is lacking in this respect and is therefore free to do some independent thinking and reporting. They're not great, but can be a useful reality check. I, for one, will visit their new Washington Web site (also recommended highly by Josh Marshall) daily.

David Wessel Appears to Be in South Africa

Capital - South Africa long will be regarded as a triumph of leadership. But it is also an economic experiment: Can a free-market, developing-country democracy -- blessed with gold, platinum, English speakers and an inspirational story, but plagued by AIDS, violent crime, poverty and an inconvenient location -- deliver a better life for the bulk of its people in an era of globalization?... South Africa is playing by the rules of the new global economy. If it fails to improve living standards for most of its citizens, the lesson would be ominous.

Early returns are promising. The economy has been growing at 5% annually for three years -- not Asian-style growth, but far faster than in the past. Private economists think the economy can sustain close to a 5% growth rate.... With a population growing at 1% a year, that's enough to deliver a better life for the typical South African -- if prosperity is widely shared.

The government is meeting its goal of 500,000 new jobs a year and is hopeful it can halve poverty from today's 26% by 2014. South Africa has First World shopping malls, but 30% of South Africans don't even have pit latrines; they use buckets.

Is globalization -- the integration of South Africa into an increasingly integrated world economy -- a help or hindrance to the country's aspirations? The answer is: Yes.... The growing mobility of people is drawing skilled workers, even luring back some expats (plus). But it also draws unskilled African immigrants to add to the existing surfeit of low-wage labor (minus) and creates a brain drain of disgruntled South African nurses, teachers and engineers to Europe and Australia (minus.)

Lowering barriers to trade brings the usual pluses -- imports for consumers, export markets for producers, a spur to the efficiency of flabby businesses. But here, too, globalization brings challenges. At first glance, the BMW plant outside Johannesburg is a paean to globalization. The robots are as modern as in BMW's German plants. Assembly-line workers, nearly all black, are unionized and well-paid by South African standards. Computer printouts clipped to each of the Series-3 sedans tells where the car is headed: Japan, Australia, the U.S. Last year, South Africa exported 14,000 BMWs to the U.S. In all, 80% of cars coming off this assembly line are exported.

But the plant produces one car every four minutes; BMW's bigger German plants produce one a minute. Labor costs are only 30% of the cost of the car so the savings from wages one-fifth German levels go only so far. A chart on the shop wall reveals that only half the South African-made BMWs come off the line without flaws that need to be fixed; in the best German factory making the same car it's 80%.

Employment at the plant is falling as robots replace workers (good for workers getting trained to keep ahead of the machines; bad for those who will never get hired.) And the enterprise is viable only because of a government subsidy: a complex formula allows BMW to avoid tariffs on importing other models in exchange for every car it exports. The government sees this as temporary expedient until productivity climbs to world levels; the plant's German technical director sees it as vital for the foreseeable future.

Here's the rub. South Africa occupies a middle ground in the global economy. The haves are doing well -- both whites and the new black working class and upper crust. But the same global economic forces that make them winners pose a challenge to widening the winner's circle.

South Africa can't create enough low-skilled jobs to employ its population. Its wages are too high to compete with China or India as a magnet for low-wage, low-skilled manufacturing, but South African workers see how well their best-off countrymen are doing and are pushing for higher wages.

The country's world-class companies can compete -- in finance, engineering, construction, synthetic fuels -- but they demand an increasingly educated and skilled work force. Yet, the country's education system is dysfunctional, and changing too slowly for the swift currents of the global economy.

And, as Mr. Netshitenzhe cautions: "The 13% [who are still poor] in 2014 will be angrier than today's 26%. They will be more impatient."

Joshua Micah Marshall thinks Rudy Giuliani Is Toast

Givrn the number of people who know him who believe that Rudy Giuliani is seriously unbalanced, I have been amazed at his ability to sign up Republicans to donate to and work for him. But Joshua Micah Marshall thinks this looks so bad that it may well be the end of his presidential run:

Talking Points Memo: by Joshua Micah Marshall: June 17, 2007 - June 23, 2007 Archives: How did we not learn about this sooner?: From Newsday...

Rudolph Giuliani's membership on an elite Iraq study panel came to an abrupt end last spring after he failed to show up for a single official meeting of the group, causing the panel's top Republican to give him a stark choice: either attend the meetings or quit, several sources said.

Giuliani left the Iraq Study Group last May after just two months, walking away from a chance to make up for his lack of foreign policy credentials on the top issue in the 2008 race, the Iraq war.

He cited "previous time commitments" in a letter explaining his decision to quit, and a look at his schedule suggests why -- the sessions at times conflicted with Giuliani's lucrative speaking tour that garnered him $11.4 million in 14 months.

That's the kind of story that ends a campaign, especially one like Rudy's based on standing up to terrorism and hanging tough in Iraq. And that's probably why the campaign put out this statement, which Jonah Goldberg posted at The Corner...

As someone considered a potential presidential candidate, the Mayor didn’t want the group’s work to become a political football. That, coupled with time restraints led to his decision.

But wait. If being a presidential candidate was the issue, why'd Rudy accept the appointment in the first place? And did the possibility of running for president make him blow off all the meetings? Was he informally recusing himself? C'mon. In any case, the statement concedes that 'time restraints' (does he mean 'constraints'?) were an issue. So he's not even really denying the claim.

So Rudy's running on terrorism and Iraq. But he got booted off a congressionally-mandated blue ribbon panel because he couldn't be bothered to show up for the meetings. It conflicted with his for-a-price speaking gigs. Like I said, it's the kind of story that ends campaigns.

Guest Lecture on John Maynard Keynes

A few short Keynes quotes:

John Maynard Keynes: The proposals are simply another move in the game, by which the players at any rate are no longer taken in. Mr. Lloyd George feels that he is making progress (perhaps he is) when he succeeds in persuading M. Briand to agree with him that 2 plus 2 does not make 12 but only 8; M. Briand hopes that, being eloquent, he may after all be able in the French Chamber to make a good enough song about 8 to defeat M. Poincare as to how much better it would be for France if 2 plus 2 made 12...

Our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future.... The possession of actual money lulls our disquietude; and the premium which we require to part with money is the measure of the degree of our disquietude...

In our present confusion of aims is there enough clear-sighted public spirit left to preserve the balanced and complicated organization by which we live? Communism is discredited by events; socialism, in its old-fashioned interpretation, no longer interests the world; capitalism has lost its self-confidence. Unless men are united by a common aim or moved by objective principles, each one’s hand will be against the rest and the unregulated pursuit of individual advantage may soon destroy the whole. There has been no common purpose lately between nations or between classes, except for war...

There is a respectable and influential body of opinion which… fulminates alike against devaluations and levies, on the ground that they infringe the untouchable sacredness of contract.... Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are great. If the accreations of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half.... The absolutists of contract... are the real parents of revolution...

The more I spend my thoughts on these matters, the more alarmed I become at seeing you and others in authority attacking the problems of the changed post-war world with... unmodified pre-war views and ideas. To close the mind to the idea of revolutionary improvements in the control of money and credit is to sow the seeds of the downfall of individualistic capitalism. Do not be the Louis XVI of the monetary revolution.... I am told by a good many friends that I have become a sort of disreputable figure in some quarters because I do not agree with the maxims of City pundits. But you know I ought not to be considered so really! I seek to improve the machinery of society not overturn it...

For me, brought up in a free air undarkened by the horrors of religion, and with nothing to be afraid of, Red Russia holds too much which is detestable. Comfort and habits let us be ready to forgo, but I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and individual life. How can I admire a policy which finds a characteristic expression in spending millions to suborn spies in every family and group at home, and to stir up trouble abroad?... How can I accept a doctrine which sets up as its bible, above and beyond criticism, an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of human advancement? Even if we need a religion, how can we find it in the turbid rubbish of Red bookshops? It is hard for an intelligent, decent, educated son of western Europe to find his ideals here, unless he has first undergone some strange and horrid process of conversion which has changed all his values...

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation.... In one way only can we influence these hidden currents–by setting in motion those forces of instruction and imagination which change opinion. The assertion of truth, the unveiling of illusion, the dissipation of hate, the enlargement and instruction of men’s hearts and minds, must be the means...

Last night I had to give the Princess [Elizabeth Bibesco, Prime Minister Asquith’s daughter] her long promised dinner, theatre, and tete-a-tete. She groped me in the stalls without the least concealment from the company and when the lights went up it turned out that her neighbor on the other side was my friend Mr. Cockerell of the Fitzwilliam Museum--which ought to be very good for my reputation...

While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history.... Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities [over 1924-1929] could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]seem to me, looking back, to have been in as good a balance as one could have expected them to be. A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied.... It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again. I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...

We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits he expected to accrue to himself in terms of money. Those who are not in favor of drastic changes in the existing organization of society believe that these arrangements, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer--all proceed, in large measure, from the instability of the standard of value...

What is the charm to awaken the sleeping beauty, to scale the mountain of glass without sliding back? If every Treasury were to discover in its vaults a large cache of gold proportioned in size to the scale of its economic life, would that not work the charm? Why should not that cache be devised? We have long printed gold nationally. Why should we not print it internationally? No reason at all, unless our hands are palsied and our wits dull...

Progress is a soiled creed black with coal dust and gunpowder; but we have not discarded it. We believe and disbelieve, and mingle faith with doubt…. We today are the most creedless of men. Every one of our religious and political constructions is moth-eaten. Our official religions have about as much practical influence on us as the monarchy or the Lord Mayor’s coach. But we no longer substitute for them the militant scepticism of Voltaire and Hume, or the humanitarian optimism of Bentham and Comte and Mill, or the far-fetched abstractions of Hegel. Our newest Spinoza [Wittgenstein] gives us frozen comfort: 'We feel that even if all possible questions of knowledge be answered, our problems of life are still not touched at all. But in that event there is obviously no question left; and just this is the answer...'

Some readings:

International Income Comparisons Once Again

John Quiggin muses about international income comparisons across the Atlantic:

John Quiggin: The euro and the dollar: The appreciation of the euro against the dollar has taken the currency close to its highest value ever around $1.35. By contrast, the rate estimated as Purchasing Power Parity by the Penn World Tables International Comparisons Project (ICP) is around $1.00 for most eurozone countries (It’s 1.10 for Italy, 1.05 for France and Germany, 0.96 for the Netherlands. The price differential between eurozone countries is interesting in itself, but that’s another post).

A gap of this magnitude between market exchange rates and estimated PPP values raises all sorts of problems. For example, using the Penn numbers, income per person in the Netherlands is about 75 per cent of that in the US, and this number is often quoted on the assumption that purchasing-power parity means exactly what it says. But using exchange rates, as would have been standard a couple of decades ago, income per person is a little higher in the Netherlands than in the US. Which of these comparisons, if either, is valid?

To some extent, the divergence may be explained by the fact that the eurozone has high consumption taxes, which drive a wedge between prices paid by consumers and international market prices. But it seems clear that a large part of the gap arises from an assessment by the ICP that compared to traded goods, non-traded services are much cheaper in the US than are eurozone services of equivalent quality. Comparisons of this kind are exceptionally tricky. I’ve discussed this before in relation to Walmart.

In any case, comparisons between countries with similar income levels and radically different relative prices only make sense on the assumption of common tastes, and this becomes exceptionally problematic. If Americans like driving long distances to Walmart, with all the implications that has for urban layout, and Europeans prefer shorter trips to smaller and more expensive stores, there’s no obvious way of saying that one set of individual and collective preferences is better than the other.

And there are many different ways of deriving PPP indexes from any given data set. The ICP method is notable for making poor countries look relatively good compared to the base set of European countries. It’s unclear whether there is any similar effect for the US, or which direction it might go in.

One standard test is to look at migration flows, which seem to be small in both directions. For example, the US Handbook of Immigration Statistics show that about 4000 people born in France gained US permanent residency in 2006, and I don’t suppose the flow in the other direction is much different.

All this is good news for the blogosphere. It guarantees that US vs EU comparisons can be carried on indefinitely with no risk of a conclusive resolution.

There are also some interesting problems in relation to trade. On the simple version of the Purchasing Power Parity hypothesis (and even on some more sophisticated versions that take account of the effects of differences in levels), the euro ought to be headed for a big fall.

On the other hand, given that the euro has been well above PPP for several years, the same model would predict that the US ought to show a surplus in bilateral trade with Europe, when in fact there is a substantial bilateral deficit (third countries complicate the analysis, but don’t change the answer). The appreciation of the euro has had some effect, most obviously seen in the shifting fortunes of Boeing and Airbus, but not enough to get back to balance. So, if anything, the long-run equilibrium value of the euro looks to be higher than its current value.

A few comments:

(1) International trade should equalize the prices of tradeable good across the globe--it shouldn't set PPP equal to the average exchange rate. The U.S. has a lot more land per capita than Holland and a much greater degree of competition and freedom to take advantage of economies of scale in the service sector. These should produce a world in which traded goods prices are about the same in the U.S. and in Holland, but in which goods and services that are land-intensive and unskilled labor-intensive are a lot cheaper.

(2) I'm inclined to take the migration data as confirming the PPP numbers: worldwide, the United States is a much bigger immigration target in proportion to its population than Holland or France or Belgium or Germany are--but culture and bureaucracy play a powerful role in that process, in addition to opportunities and living standards.

(3) Differences in taste seem to me to be largely a red herring. Europeans are as happy (or as carsick) cruising up Highway 1 along the California coast in a white convertible as are Americans. The big differences seem to me to be driven much more by differences in cost and regulatory structures than by genuine differences in tastes and preferences. Market economies exist to offer choice: whatever our preferences are, there is money to be made by satisfying them efficiently.

(4) Perhaps the right comparison to make is not the binary Holland-U.S. comparison, but the trinary Holland-parts of the U.S. that feel most like Holland-rest of U.S. comparison. The largest such region in the United States is, of course, New Amsterdam, but the inner urban cores of Boston,San Francisco, Chicago, and Philadelphia are also a much closer approximation to Holland than the rest of the U.S. is. What would a comparison of real exchange rates and real income levels across those two show? And what does a comparison of real exchange rates and income levels comparing New Amsterdam and the rest of the United States show?

links for 2007-06-20

Sheryl Sandberg Interviews Michael Bloomberg

Google has a "public policy" weblog:

Google Public Policy Blog: Bloomberg by Bloomberg, at Google: In an hour-long discussion, the CEO Mayor of the Big Apple discussed a broad range of topics with Google's Sheryl Sandberg. Among other things, the mayor touched on privacy in the Internet age, the challenges of running America's largest city in the wake of 9/11, the status of the U.S. in the world, and the state of the presidential campaign.

Weblog Organization

My problem is--well, one of my problems is: I have many problems--that this weblog is arranged for my convenience rather than yours, Since there is only one of me but a whole lot of you (5,000 on a slow day for this weblog and all the rest of my website), this seems inverted.

I have made a couple of concessions. Jason Furman demanded an economics-only version, and there is an economics-only version. Students asked for a one-stop version where they could see teaching and only teaching-related files, and there is a teaching-files version.

But otherwise, things are set up for my personal convenience: This main weblog is me throwing things up on the web to see what things will stick, what things google will help the community self-assemble an index to, and so that I can--hopefully--find stray thoughts later on. Shrillblog is a psychological coping mechanism--although whether it saves or hastens the ruin of my feeble remaining shreds of sanity is an open question. Egregious moderation is my attempt to create my personal Platonic ideal of a "politics" magazine--people writing and things written about politics that I want to remember. Morning coffee is for when I figure out what the proper place of video is. And is supposed to be the main home page, the organizational hub and central traffic cop--but not even I find it useful.

I am about to lock down the templates for this website for... I don't know, perhaps a year? I want to add some tweaks that you cannot do in typepad without moving to advanced templates, and once in advanced templates further tweaking becomes a real pain.

But before I do that, I want some feedback. How many of you 5,000 who come by at least every other day find what parts of this whole Rube Goldberg contraption useful? How many of the 50,000 who seem to come by at least once every two months find what parts of this assemblage useful? Praise, criticisms, and--especially--suggestions for improvement with respect to the organization of this website are greatly welcomed for the next week or sol, before I turn the key and lock the templates down.

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal
Brad DeLong's Home Page
Brad DeLong's Morning Coffee Videocasts
Brad DeLong's Teaching: Handouts and Other Related Files
Brad DeLong's "Economics Only" Weblog
Egregious Moderation

Mark Thoma Is Irate This Morning: Modelling the Social Value of Microsoft

Mark Thoma's ire is roused by Robert Barro, in the Wall Street Journal. Mark sends us to an article in which Barro attributes the entire consumer plus producer surplus of the personal computer industry to Bill Gates:

Economist's View: Robert Barro: Bill Gates' Charitable Vistas: Mr. Gates delivered a commencement address that focused... on his own personal philanthropy. His implicit theme was that so far what he has accomplished may have been good for him and Microsoft shareholders, but it has been no great contribution to society. He suggested that with a personal fortune of about $90 billion... it is time for him to give something back.

I find this perspective hard to understand.... Microsoft has been a boon for society and the value of its software greatly exceeds the likely value of Mr. Gates's philanthropic efforts. Here is a sketch of a simple model of Microsoft's social value....

In 2006, its revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value.... [T]he social value... comes from the increase in productivity created when businesses and households use [Microsoft] software. The social benefit equals the value of the extra product, less the total paid for the software..... A conservative estimate... is that the social benefit of Microsoft's software is at least the $44 billion Microsoft pulls in each year... capitalized... a valuation of $970 billion.... Mr. Gates is creating a benefit to the rest of society of about one trillion dollars -- or more than 10 times his planned donations. And this counts only the likely future benefits, giving no weight to the past....

Mr. Gates's plan is ... to use the Bill and Melinda Gates Foundation to reduce world poverty, with an emphasis on advances in health. This is a noble goal. But it will likely just supplement the much larger existing programs... that have been carried out for many years by international organizations and governments... a checkered record. Although Mr. Gates is probably smarter and more motivated than the typical World Bank bureaucrat, he likely won't do much better....

[T]he key question for poverty alleviation is how to get Africa to grow like China and India... opening up to markets and capitalism.... [F]oreign aid had nothing to do with the successes [at reducing poverty] and did not prevent the African tragedy.... Perhaps the Gates Foundation will run more efficient aid programs than we've seen in the past, but I wonder.... [Gates] is kidding himself if he believes that the efforts of the Gates Foundation are likely to provide society anything like the past and future accomplishments of Microsoft...

The problem, of course, is that although Barro's model is a simple model, it is the wrong model.

In the absence of Microsoft, people would not sit in front of dark screens and do all calculations and sorts by hand. In the absence of Microsoft, its programmers would work for other computer companies--IBM, Sun, ATT, Digital Research, Apple, Go, et cetera. In the absence of Microsoft, its customers would buy operating systems and office suites from other computer companies as well. In the absence of Microsoft, production would in all likelihood be somewhat less efficient--in the absence of a single dominant software near-monopolist like Microsoft, more programmers would spend more time essentially duplicating one another's work as competitors went head-to-head with directly competing products. In the absence of Microsoft, margins would be lower because of lower market power--and so distribution would be somewhat more efficient. In the absence of Microsoft, invention and innovation in software might be faster (because a dominant, innovative monopolist can break the lockin effect created by obsolete standards) and might be slower (because a dominant, non-innovative monopolist that has a reputation for predatory pricing like Microsoft can create a "death zone" around it in which no profit-seeking firm dares innovate).

Whether the net social value of Bill Gates is positive or negative depends on his impact in creating and shaping Microsoft: relative to its competitors and to its alternative paths of development, did he make it more of a lockin-breaking innovator or a death zone-creating predator? Did he do more to make Microsoft a company that takes advantage o economies of scale or more to make Microsoft a company that raises profit margins? I'm on the side that thinks that Microsoft has been a considerable net plus. But others I respect see it is a net minus. And my judgment that the net social value of Bill Gates is large and positive is not because I attribute the total producer plus consumer surplus in the industry to him and him alone: I am not that naive, and not that slow-witted.

Greg Ip Writes About Ben Bernanke, Mortgages, the Financial Accelerator, and the Macroeconomic Consequences of "Financial Fragility"

Greg Ip writes at the Wall Street Journal's new Real-Time Economics weblog:

Economics Blog: Why Bernanke's Great Depression Research Matters Today: As an academic in the early 1980s, Mr. Bernanke pioneered the idea that the financial markets, rather than a neutral player in business cycles, could significantly amplify booms and busts. Widespread failures by banks could aggravate a downturn, as could a decline in creditworthiness by consumers or businesses, rendering them unable to borrow. Mr. Bernanke employed this “financial accelerator” theory to explain the extraordinary depth and duration of the Great Depression. (Much of that work was done with New York University’s Mark Gertler, now a visiting scholar at the New York Fed.)

A lot has changed since the 1930s, but the financial accelerator is still relevant. Although Mr. Bernanke doesn’t say so specifically, the record level of consumer leverage today means a change in asset prices (such as homes or stocks) can produce a much larger change in consumers’ net worth, and as a result their ability to borrow and spend. “If the financial accelerator hypothesis is correct, changes in home values may affect household borrowing and spending by somewhat more than suggested by the conventional wealth effect,” that is, the tendency of a changes in asset prices to make consumers feel more or less wealthy, and thus spend differently. That is because “changes in homeowners’ net worth also affect their … costs of credit.”

This tendency of changes in net worth to have knock-on effects on credit availability and spending could “intensify” the effects of Fed actions, Mr. Bernanke said.

Even though bank weakness is less likely to hurt the economy today given banks’ reduced importance as lenders, the financial accelerator is still relevant. That is because “nonbanks” — lenders, such as standalone mortgage companies, that don’t accept deposits — also “have to raise funds in order to lend, and the cost at which they raise those funds will depend on their financial condition — their net worth, their leverage, and their liquidity.”

Mr. Bernanke doesn’t say it, but the current crisis in the subprime mortgage market may be a perfect illustration of the financial accelerator at work today. Many subprime borrowers are facing bankruptcy because their net worth has collapsed and they can’t get new credit. Similarly, numerous subprime lenders have gone bankrupt because they could not get financing to continue operations from newly skeptical Wall Street lenders. As yet, there has been little spillover from these developments into consumer spending or the economy overall. But given his historical interest in the subject, Mr. Bernanke will certainly be on the alert.

Kevin Hassett Is a Psychotic Creep (Yes, It's More American Enterprise Institute-Quality Analysis)

I never understood why Bloomberg hired Kevin "Dow 36000 by 2004" Hassett out of all the world's conservative macroeconomists to be a columnist. And I don't understand why the Bloomberg honchos allow him to use his space to kowtow to his AEI masters by launching a neoconservative hit piece against the Federal Reserve. The Federal Reserve's crime? It assisted George W. Bush in carrying out his policy towarsd North Korea: Opinion: Why Did the Fed Help North Korea Launder Money?: Kevin Hassett: June 18 (Bloomberg) -- Last week the New York Federal Reserve made what may go down as the most misguided move in the history of the Federal Reserve system. They laundered money for North Korea.

A painful flurry of hearings may soon be on the horizon. Last week a group of influential Republicans, including the ranking member of the House Committee on Foreign Affairs, Ileana Ros-Lehtinen, asked the Government Accountability Office to investigate whether anti-laundering and counterfeit laws were broken. They may well have been.

Here is the back story.

Last February, North Korea approved a new version of the Clinton administration's framework for shutting its renegade nuclear reactor program. As part of the deal, the U.S. agreed to unfreeze $25 million at Banco Delta Asia, a Macao bank that has been a primary conduit to the outside world for North Korea.

This bank was formally determined by the U.S. Treasury to be a ``primary money laundering concern.'' The Macao bank denies any wrongdoing. The U.S. doesn't allow such banks to do business in the U.S. Accordingly, reputable banks from Singapore to Russia won't do business with Banco Delta Asia. Even China refuses to do deal with the bank.

This U.S. action significantly impeded the ability of North Korea to wash illicit funds through the world financial system. If it sells a missile to Iran, it must take the payment in cash. If it deposits counterfeit money in its account, there is no easy way to get the money into the world economy.

The U.S. committed to unfreeze the funds last February, but didn't agree to let this pariah state resume its allegedly criminal banking activities. In other words, if North Korea wanted to, it could go to the bank, and withdraw the money physically and fly it back to North Korea.

North Korea didn't want to do that, however.

The country then reneged (as it always seems to), and said that it needed the money to be wired home, something the U.S. never agreed to.

North Korea clearly added this new condition because it hoped to reenter the world financial system. No bank would transfer money from Banco Delta Asia without express approval from the U.S. Treasury. If that permission was given, the prohibition was broken, signaling to other banks around the world that they could resume business with the rogue state.

So the U.S. State Department, ever the naive optimist with regard to North Korea, got the clever idea that it could ask the New York Fed Bank to be the conduit for the North Korean funds, since it might not be covered by the U.S. law prohibiting commercial entities from doing business with money launderers.

Historically, the Fed has tried to avoid such complicated political entanglements, but incredibly, it agreed to help in this case.

On June 14th, in a web of intrigue worthy of a James Bond movie, the New York Fed wired the North Korean money to the Russian central bank, which then transferred it to a dormant North Korean account in a Russian bank.

Many in the foreign policy community are incensed that the State Department engineered this concession to the North Koreans. Since the New York Fed has done business with Kim Jong Il's regime, directly, or indirectly, one can expect other banks around the world to line up to do so again as well. After all, the Fed has given the North Koreans the financial equivalent of the Good Housekeeping Seal of Approval.

It may or may not have been sound foreign policy to make this concession to the North Koreans. The problem for the Fed is that there are enough people in Washington who think it was a catastrophic error. There will almost certainly be a lengthy investigation into the matter. If that investigation turns up legal technicalities that go against the Fed, then hearings will happen, and heads may roll.

The worst outcome is this: If somebody in Congress disagrees with the Fed's monetary policy, they now have a weapon they can use against the central bank. That can't be good for monetary policy.

Back in 1993, Alan Greenspan, Fed chairman at the time, was widely criticized for attending President Bill Clinton's first State of the Union address, allowing himself to be photographed sitting next to Hillary Clinton. He was rapped because Americans rightly expect the Fed to focus on monetary policy, and stay out of the political fray.

By allowing the New York Fed to be a pawn of the State Department and the North Koreans, Chairman Ben S. Bernanke has introduced the Fed into a complicated diplomatic game that has nothing to do with its legal responsibilities.

He isn't sitting next to Hillary Clinton; he is sitting next to Kim Jong Il. It is hard to imagine why anyone at the Fed would think that is a good idea.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was chief economic adviser to Republican Senator John McCain of Arizona during the 2000 primaries. The opinions expressed are his own.)

Everybody with an AEI affiliation needs to think very carefully what they are doing, whose reputation they are bolstering with their work, and whose water they are carrying for what purpose.

Perhaps the most extraordinary thing is the absence of the word "Bush" from the column: one would think that Clinton was still president, and that Ben Bernanke worked for Clinton, the State Department, and the North Korean government.

links for 2007-06-19

I Wish I’d Written That

I wish I had written that too:

I Wish I’d Written That § Unqualified Offerings By BruceB: WhiskeyFire, on the rightness of ignoring liberal hawks’ general theories and principles in favor of focusing on the actual results of their enthusiasm for the war and occupation:

A discussion of “underlying beliefs or theories” in this context is absurd, given the horror of the Iraq debacle. If your “underlying beliefs or theories” made you stick your d--- in the blender, even “reluctantly,” and you haven’t thoroughly reassessed these concepts, I frankly don’t want to hear your advice about what to do with the weed whacker.

A tip of the hat to Avedon Carol (who also often writes things I wish I had).

Authority in the Age of the Internet


Unfogged: the typical way I look for a fact online is Googling a couple of keywords, and then clicking on a selection of the top ten results for a site that looks 'credible'. Sometimes I won't find a credible looking source, and then I rephrase the search or give up, rather than take what I get from something that looks less reliable.

I'm having trouble quantifying 'looks credible' for her, though. I mean, I think whatever rules of thumb I use are pretty solid -- I don't find myself relying on some website and then embarrassingly discovering that it was written by some idiot inventing the whole thing. But I rely on things like graphic design and layout, which I can't make myself pass on to Sally with a straight face ("You can believe anything you read on the Internet if the background is white or offwhite, accent colors are unsaturated blues or warm earth tones, and nothing on the page flickers.") And of course there are things like institutional affiliations and so forth. But it's all hard to describe in seven-year-old terms.

So, anyone have some good rules of thumb for how to identify a credible website?

Perhaps the scariest thing is that I experience no cognitive dissonance as I regard somebody who calls herself "Lizardbreath" as a credible, authoritative source...

John Berry: Should the Federal Reserve Set an Explicit Inflation Target?

Perhaps the biggest sign that the Washington Post simply doesn't care about getting the economic policy coverage right is that they never replaced John M. Berry at the Federal Reserve beat.

Here he reviews the state of the internal debate about whether the Fed should communicate with the outside world by announcing its price level and inflation targets. The principal argument against Ben Bernanke's and Rick Mishkin's arguments that it should is that the Fed is headed by people like Ben Bernanke and Rick Mishkin, that we trust them, and that we don't want to tie their hands in the event of some unforseen crisis.

Berry believes that the Fed won't because members of congress would want to see output and employment atrgts alongside the inflation target, and the Fed doesn't believe it knows enough about the structure of the economy to announce those.

John Berry writes for Bloomberg:

June 18 (Bloomberg) -- Federal Reserve officials are still far from agreement on how to improve communications with the public, including whether to adopt a numerical inflation target.

They will spend part of the June 27-28 meeting of the Federal Open Market Committee once again on their long-running effort to resolve their differences, though it seems unlikely they will succeed.

Fed officials hope that better communication of what the central bank is doing and why may make monetary policy more effective.

In a series of speeches this spring, Fed Governor Frederic S. Mishkin laid out a case for setting an inflation target and why doing that might help the central bank meet its legal mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

No one at the Fed is challenging that mandate.

According to minutes of the March 20-21 FOMC meeting -- the last at which officials had a full discussion of the issue -- participants "emphasized" that setting an inflation target "would need to be consistent with the committee's statutory objectives for promoting maximum employment as well as price stability."

Mishkin argued in an April 10 speech that "a commitment to price stability leads to appropriate policy actions to stabilize employment and output fluctuations." An anchor for prices, such as an inflation target, can help stabilize inflation expectations, which in turn gives a central bank more freedom to respond to the ups and downs of employment and production, he said.

However, the same can't be said for having "a similar sort of anchor for the maximum level of employment," he said.

"Although the Federal Reserve can determine and achieve the long-run average rate of inflation in keeping with its mandate of price stability, the level of maximum sustainable employment is not something that can be chosen by the Federal Reserve because no central bank can control the level of real economic activity or employment over the longer run," Mishkin said.

That argument isn't an easy sell to members of Congress because, even if they may accept it intellectually, they don't want to make themselves vulnerable to criticism that they care more about inflation than they do about their constituents' jobs.

A Father's Day Tribute to an Akhilleus of the Theropods

On this Father's Day, let us pay tribute to one of our local fathers: the Tom Turkey in the blackberry patch 100 yards north. He is a successful father: five hens and forty hatched chicks this year. But the chicks are now down to twenty: snakes, hawks, raccoons, coyotes, cats, dogs, cougars, Acura RSs, Cadillac Escalades.

He is doing his best. He has his feathers fully fluffed out and his tail fanned 24/7, as he stands guard, trying to convince all the snakes, hawks, raccoons, coyotes, cats, dogs, cougars, Acura RSs, Cadillac Escalades that come by that he is a ferocious 40-pound beaked-and-taloned killing machine rather than a 10-pound bird with hollow bones. He bluffs manfully... fowlfully... whatever. But he cannot be everywhere. And when the wind comes whipping up the canyon the fact that most of his apparent volume is fluffed-up feathers means that he behaves less like a well-muscled carnivore and more like a parasail: to watch him display and threaten and then get blown helplessly across the road by a gust is very funny, in a sick way.

Nevertheless, he tries to bluff every snake, hawk, raccoon, coyote, cat, dog, cougar, Acura RS, Cadillac Escalade that comes by in order to keep them away from the chicks. Sooner or later, however, his bluff will fail, and he will become the dinee. This will give extra time for the chicks to escape.

He is a veritable Akhilleus of the theropods.

Marginal Revolution: Hedge Funds

Tyler Cowen writes:

Marginal Revolution: Hedge funds: I've found at least one good piece on them, by Rene Stulz, in the Spring 2007 Journal of Economic Perspectives.  I learned or reaffirmed the following:

  1. Hedge funds have existed since at least 1949.
  2. Hedge funds exist because mutual funds do not deliver "complex investment strategies."  In part this is because mutual funds are regulated.
  3. The largest mutual fund is about six times larger than the largest hedge fund.  Marketing constraints also encourage very large funds to adopt simpler and easier-to-explain strategies.
  4. Investment advisors with fewer than 15 clients do not have to register with the SEC.
  5. Regulations restrict the compensation of mutual fund advisors in various ways, typically requiring symmetric treatment of gains and losses (if a dollar of profit leads to a bonus, a dollar of loss must lead to a penalty).  That is why mutual fund managers are compensated in proportion to the size of their funds, not their performance.  This is not obviously efficient, and of course hedge funds pay for performance.
  6. Hedge funds don't have to disclose information to investors, other than by contractual agreement.
  7. Diversification and redemption requirements make it harder for mutual funds to exploit some profit opportunities, or to hedge in particular manners.
  8. The number of mutual funds that try to replicate hedge fund strategies is growing rapidly.
  9. Available data on hedge fund returns are nearly worthless.

Overall I was struck by how much hedge fund activity is an artifact of regulations, and not necessarily beneficial regulations.  Deregulating some aspects of mutual funds may be an alternative to regulation of hedge funds...

links for 2007-06-17

Impeach George W. Bush

The ITT list watches White House press secretary Tony Snow:

Tony Snow vs Tony Snow -- The ITT List: On The Daily Show, Jon Stewart played video of a reporter asking Tony Snow about the obvious falseness of previous White House claims - including what Snow himself had said “on camera” - regarding the alleged “performance” reasons for the firing of the federal prosecutors. Snow denied he had ever said that politics was not involved, or that the firings were “based on performance.” Stewart then played video from some months ago, wherein Snow says, “It’s pretty clear that these things are based on performance, and not on sort of attempts to do political retaliation, if you will.”

Kevin Drum: Why Oh Why Can't We Have Better Right-Wing Think Tanks?

It's David Boaz of Cato who goes into the tank this time:

The Washington Monthly: CATO....You know, I keep hearing that unlike, say, the Heritage Foundation, the folks at Cato are relatively honest. They've got their ideology just like the rest of us, but they aren't dishonest shills willing to torture the facts any old way that's convenient. The Social Security debate made me pretty skeptical of this notion (remember the Cato Calculator?), and stuff like this pretty much nails the coffin shut:

Politicians are circling around hedge funds like vultures. They want to raise taxes on hedge funds, maybe by treating their capital gains as normal income. Why? Because hedge funds are mysterious — do you know what they really do? — and they have a lot of money. Make billion-dollar profits, get headlines, attract taxers — it's as certain as ants at a picnic.

That's flatly untrue. Nobody wants to treat the capital gains of hedge funds as normal income. What a lot of us would like to do is treat the normal income of hedge fund managers as normal income.

If you invest your own money and earn a return, that's capital gains. If you manage other people's money and take a cut of the profits, that's management. Only in a looking glass world would these management fees have ever been treated as capital gains in the first place, and it's hardly mysterious that Democrats want to close this absurd loophole. After all, we believe in treating the normal income of the rich the same as the normal income of the rest of us. If Cato believes otherwise, I'd like to hear why.

Hilzoy and Hassam al-Madhoun: The Darkness Has Fallen

Hilzoy tells us to go listen to Hassam al-Madhoun talk about the latest disaster inflicted on the Palestinian people by their so-called leaders:

Obsidian Wings: The Darkness Has Fallen: The darkness has fallen and invaded all of the Gaza Strip. We tried to protest against the war today, but gunmen shot at us when we tried to cross the street. This was a peaceful demonstration to try to get these gunmen to stop killing our future, to stop killing our hope. The darkness has fallen. There are no other words. Gaza is not a place for human beings anymore.

Hamas and Fatah have defeated the Palestinian people. Both factions have triumphed against the hope for the future, for a state of our own. These factions are killing the future for my daughter. She is six years old and has to live through this senseless civil war. Yes, it's a civil war to me — you can call it what you like.

This has to stop; these young killers in the street are just boys. They're 17, 19, and 21 years old. They've become killers and they don't realize that they're just being used — by both factions. They're being used by the political leaders who are shouting every day on the satellite TV news shows. These so-called leaders in suits are the real killers, turning our boys into murderers.

It will take generations to recover from all this. It will take so long to change this violent culture we've become. If we start today, it will take years. It's become so easy for any young boy to hold a gun and shoot. We now have a generation of damaged youth....

Many people here — including myself — think that the West is doing everything it can to weaken the Palestinian Authority. And Israel is, as well. All of their acts are aimed at Hamas, but they have also weakened Fatah, the more moderate faction here in Gaza. This is hypocrisy by the West and Israel as they steal the hope by tightening this economic embargo against the Palestinian people. Desperate people don't think rationally. Desperate people turn radical. And that is just what is happening in Gaza...

Hilzoy comments:

There are nearly one and a half million people in the Gaza strip, crammed into a territory 25 miles long and around six miles wide, give or take. People were living on under two dollars a day before the elections and the subsequent withholding of revenues and suspension of aid. It relies on Israel for all its water, electricity, and lots of other things. Israel has sealed the borders to Gaza, and it is entirely unclear what's going to happen to its Egyptian border crossings. It was run by Europeans, but they have left. In any case, they had to come via Israel, and it's not clear that that will still be possible; in any case, Egypt might seal the border. Moreover, it's not clear how Hamas would go about arranging anything with Israel -- e.g., water, electricity, borders -- since Israel will not talk to Hamas.

I don't suppose that most Gazans wanted this civil war. It takes a lot less than a majority of people to start one. A majority did vote for Hamas, but by all accounts that was less a vote for Hamas' militancy than a vote against Fatah's sclerotic corruption.

A lot of people who just want to live normal lives are about to become even more desperate than they were before. Meanwhile, the chances for peace between Israel and the Palestinians, which haven't been all that great recently, just plummeted to a point indistinguishable from zero, where I think it will stay for the foreseeable future.

And remember: things can always get worse.