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September 2007

We Can Help Karen Tumulty!

Karen Tumulty asks a question:

The Greenspan Book - Swampland - TIME: However, it is worth remembering the central role that Greenspan played in enabling the Bush economic program to happen. In the first days after the 2001 inauguration, Greenspan warned of a danger that the budget surplus (remember the surplus?) could actually become too big and drag down the economy. And thus, Greenspan gave the green light to Bush's tax cuts.

In his book, the NY Times says, Greenspan acknowledges that he was cautioned not to make such an endorsement, by none other than Robert Rubin, the head of that Clinton economic team that he regarded so highly:

Though Mr. Greenspan does not admit he made a mistake, he shows remorse about how Republicans jumped on his endorsement of the 2001 tax cuts to push through unconditional cuts without any safeguards against surprises. He recounts how Mr. Rubin and Senator Kent Conrad, Democrat of North Dakota, begged him to hold off on an endorsement because of how it would be perceived.

“It turned out that Conrad and Rubin were right,” he acknowledges glumly. He says Republican leaders in Congress made a grievous error in spending whatever it took to ensure a permanent Republican majority.

But Greenspan presided over the Fed for another five years. So it seems fair to ask: Why did he wait until he had an $8.5-million book deal to tell us this?

One way that Karen Tumulty could have learned earlier that Greenspan did not intend to give the "green light" to Bush's tax cuts was by listening to or reading Greenspan's testimony:

http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent...

In English rather than Greenspanese, that last sentence means: If there is any chance that the tax cuts will send the budget into deficit, then the tax cuts need triggers that would then turn them off.

And Greenspan explicitly says there is a chance that the tax cuts will send the budget into deficit:

What if... the forces driving the surge in tax revenues in recent years begin to dissipate or reverse...? Indeed, we still do not have a full understanding of the exceptional strength in individual income tax receipts during the latter 1990s... we are making little more than informed guesses of certain key relationships.... [T]he risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible.

In fact, Greenspan's testimony is filled with such phrases:

...the highly desirable goal of paying off the federal debt... an extraordinarily rapid and highly undesirable short-term dissipation of unified surpluses... what type of private assets [the government should] acquire and to which federal accounts they should be directed must be [decided] well before the policy is actually implemented... it would be preferable in my judgment to allocate the required private assets to the social security trust funds... a declining level of federal debt is desirable... a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt... we should make sure that social security surpluses are large enough to meet our long-term needs... explicit mechanisms that will help ensure that outcome... care must be taken not to conclude that wraps on fiscal discipline are no longer necessary.... provisions that... would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied... caution... the tentativeness of our projections... forces driving the surge in tax revenues in recent years [might] begin to dissipate or reverse... we are making little more than informed guesses of certain key relationships... the risk of adverse movements in receipts is still real... the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible... crucial that we develop budgetary strategies that deal with any disappointments... a cautionary note... we need to resist those policies that could readily resurrect the deficits of the past...

A second way she could have learned earlier that Greenspan had not intended to give a green light to unconditional tax cuts would have been from listening to or reading about the exchange between Sarbanes and Greenspan on April 21, 2005. As reported by Nell Henderson:

http://www.washingtonpost.com/ac2/wp-dyn/A6620-2005Apr21?language=printer Federal Reserve Chairman Alan Greenspan said today that his support for tax cuts in early 2001 unintentionally encouraged policies that helped swing the federal budget from surplus to record deficits. In addition, he said for the first time explicitly that he expected tax increases to be part of any bipartisan agreement on deficit reduction.

But Greenspan, responding to questions during a Senate Budget Committee hearing today, said it was unfair for critics to ignore the warnings in his January 2001 congressional testimony that the surplus forecasts might be wrong, and his recommendation of some "trigger" mechanism that would limit tax cuts if certain budget targets were not met.

"I think its frankly unfair" for critics to blame him for the fact that Congress chose to "read half my testimony and discard the rest," Greenspan said, venting his frustration on the issue publicly for the first time, in response to a question from Sen. Paul Sarbanes (D-Md.)

Sarbanes chided the Fed chief that he is well aware of how Congress works, and he should have known lawmakers might not heed all his cautions.

Sarbanes said he believed it was "fair" for lawmakers to see Greenspan's 2001 remarks "as a green light to the tax cuts," which were enacted without any triggers.

"I plead guilty to that," Greenspan said. "I did not intend it that way."

A third way that she could have learned of this before September 15, 2007 would have been to read Ron Suskind's The Price of Loyalty back when it was published in 2003, where Suskind writes:

May 22 [2001]... Greenspan arrived at the Treasury for breakfast with O'Neill.... Greenspan said that wasn't enough. "Without the triggers, that tax cut is irresponsible fiscal policy," he said in his deepest funereal tone. "Eventually, I think that will be the consensus view."


Now it is, of course possible that Greenspan was playing a subtle reputation-enhancing game, anxious to give testimony that the administration and its press lapdogs would spin as a green-light endorsement, but in which economists like me and financiers like Robert Rubin would be unable to find any sentence that was truly objectionable.

But let's give the mike to Alan Greenspan, p. 220 ff.:

Bob Rubin phoned.... With a big tax cut, said Bob, "the risk is, you lose the fiscal discipline."...

"Bob, where in my testimony do you disagree?"

There was silence. Finally he replied, "The issue isn't so much what you're saying. It's how it's going to be perceived."

"I cant be in charge of people's perceptions," I responded wearily. "I don't function that way. I can't function that way."

It turned out that Conrad and Rubin were right....

As the hearing ended, I was optimistic that the ideas I had set forth--the risks of excessive surpluses, the glide-path proposal [to a zero national debt], the notion of a trigger [to prevent the reemergence of deficits by shutting off the tax cut if necessary]--would in the long run get attention as the legislative process proceeded. But for the moment, I resigned myself to the idea that my testimony would be politically framed. I later told my wife, "I am shocked, shocked, that there is politics on Capitol Hill....

I'd misjudged the emotions of the moment. we had just gone through a constitutional crisis... which... is not the best time to try to put across a nuanced position based on economic analysis. Yet I'd have given the same testimony if Al Gore had been president...


Matthew Benjamin of Bloomberg on Greenspan's Memoirs

Matthew Benjamin writes:

Bloomberg.com: Worldwide: Soon after Bush took office, Greenspan wrote in a new book, it became evident that the Treasury secretary and White House economists would play secondary roles in decisions on taxes and other issues. In addition, officials with whom he had worked in the administration of President Gerald Ford changed after Bush brought them back to Washington, he said he found. "The Bush administration turned out to be very different from the reincarnation of the Ford administration that I had imagined. Now, the political operation was far more dominant," Greenspan, 81, wrote in "The Age of Turbulence: Adventures in a New World."... [Greenspan] recounts his relationships with the six presidents he served. Richard Nixon and Bill Clinton were the most intelligent, he wrote, while he found Ford the most normal and likeable. Ronald Reagan was the most devoted to free markets, though his grasp of economics "wasn't very deep or sophisticated." George H.W. Bush, the current president's father, was very cordial, though Greenspan's relationship with him was complicated by differing views on monetary policy, he wrote. Bush blamed high interest rates, in part, for his 1992 election loss to Clinton.

Greenspan saved his harshest analysis for the current president. Soon after Bush took office in 2001, the president set about implementing a campaign promise to cut taxes, a policy Greenspan said he believed at the time wasn't well conceived. "Little value was placed on rigorous economic policy debate or the weighing of long-term consequences," he wrote. In 2001 testimony before Congress, Greenspan was widely interpreted to have endorsed Bush's proposed tax cuts. In the book, he characterized his testimony as politically careless and said his words were misinterpreted. Greenspan also expressed disappointment in Bush's reluctance to antagonize then-House Speaker Dennis Hastert and other congressional Republicans by vetoing spending bills. "There is a remedy for legislative excess," wrote Greenspan, "it's called a presidential veto."

Greenspan's frustration extended to Congress, which let spending get out of control, he wrote. "'Deficits don't matter,' to my chagrin, became part of the Republicans' rhetoric.... The Republicans in Congress lost their way. They swapped principle for power. They ended up with neither. They deserved to lose."...

When Bush brought one-time Ford aides Cheney -- whom Greenspan describes as having a "sphinxlike calm" -- and Donald Rumsfeld, back to Washington, the Fed chairman saw a "golden opportunity to advance the ideals of effective, fiscally conservative government and free markets." It wasn't to be. "I was soon to see my old friends veer off in unexpected directions," wrote Greenspan, who had been encouraged by the budget surpluses of the Clinton administration. "Then with George Bush came the tax cuts, unmatched by decreased spending, and, in the wake of September 11, still more open- handed spending." Greenspan said he never became part of Bush's inner circle, in which dissent from staff like former Treasury Secretary Paul O'Neill wasn't encouraged. "Paul's outspokenness put him at odds with the administration, which emphasized loyalty and staying on message." The White House just wanted a spokesman for its economic policies, he said...


Alan Greenspan on the Presidents

Greg Ip and Emily Steel:

Greenspan Book Criticizes Bush And Republicans - WSJ.com: Mr. Greenspan writes that when President Bush chose Dick Cheney as vice president and Paul O'Neill as treasury secretary -- both colleagues from the Gerald Ford administration, during which Mr. Greenspan was chairman of the Council of Economic Advisers -- he "indulged in a bit of fantasy" that this would be the government that would have resulted if Mr. Ford hadn't lost to Jimmy Carter in 1976. But Mr. Greenspan discovered that in the Bush White House, the "political operation was far more dominant" than in Mr. Ford's. "Little value was placed on rigorous economic policy debate or the weighing of long-term consequences," he writes.

From serving under so many presidents, Mr. Greenspan concludes that there's something abnormal about anyone willing to do what it takes to get the job. Mr. Ford, he writes, "was as close to normal as you get in a president, but he was never elected." The Watergate tapes, he says, show Richard Nixon as "an extremely smart man who is sadly paranoid, misanthropic and cynical." He recalls telling someone who had accused Nixon of anti-Semitism that he "wasn't exclusively anti-Semitic. He was anti-Semitic, anti-Italian, anti-Greek, anti-Slovak. I don't know anybody he was pro."

Ronald Reagan's ability to instantly tap one-liners and anecdotes in support of a particular policy represented an "odd form of intelligence." He describes Bill Clinton as "a fellow information hound" with "a consistent, disciplined focus on long-term economic growth" whose relationship with Monica Lewinsky "made me feel disappointed and sad."

Mr. Greenspan makes no mention of his successor as Fed chairman, Mr. Bernanke, other than in a caption accompanying a picture: "I was very comfortable leaving the post in the hands of such an experienced successor," it reads...


Gothic Print Hunnenschlacht Blogging

Thanks to Ian Maitland, who points out the wikicommons scanned version of Weber's Freiberg inaugural lecture, "Der Nationalstaat und die Volkswirtschaftspolitik" http://upload.wikimedia.org/wikipedia/commons/3/39/Max_Weber_-_Der_Nationalstaat_und_die_Volkswirtschaftspolitik_Seite_20.jpg, and thanks to the seventeen year old, who returns with a copy of I.F. Stone's The Trial of Socrates just in time to be of assistance, we decide that the right translation of Max Weber's reference to Aetius v. Attila:

...und die Hunnenschlacht auf den Catalaunischen Feldern in einen Nebensass gedraengt.

is:

...and stick in a minor clause the Hun-battle on the Catalaunian field.

Weber doesn't say it is a victory of the Huns. He just says that it is a Hun-battle. And so we presume that the translator is ignorant of the history of the 5th-century Western Roman Empire.


Edward Gibbon on the Hunnenschlacht:

Gibbon: The Catalaunian fields spread themselves round Chalons, and extend, according to the vague measurement of Jornandes, to the length of one hundred and fifty and the breadth of one hundred miles, over the whole province, which is entitled to the appellation of a champaign country. This spacious plain was distinguished, however, by some inequalities of ground; and the importance of a height which commanded the camp of Attila was understood and disputed by the two generals. The young and valiant Torismond first occupied the summit; the Goths rushed with irresistible weight on the Huns, who labored to ascend from the opposite side; and the possession of this advantageous post inspired both the troops and their leaders with a fair assurance of victory. The anxiety of Attila prompted him to consult his priests and haruspices. It was reported that, after scrutinizing the entrails of victims and scraping their bones, they revealed, in mysterious language, his own defeat, with the death of his principal adversary; and that the barbarian, by accepting the equivalent, expressed his involuntary esteem for the superior merit of Aetius.

But the unusual despondency, which seemed to prevail among the Huns, engaged Attila to use the expedient, so familiar to the generals of antiquity, of animating his troops by a military oration; and his language was that of a king who had often fought and conquered at their head. He pressed them to consider their past glory, their actual danger, and their future hopes. The same fortune which opened the deserts and morasses of Scythia to their unarmed valor, which had laid so many warlike nations prostrate at their feet, had reserved the joys of this memorable field for the consummation of their victories. The cautious steps of their enemies, their strict alliance, and their advantageous posts he artfully represented as the effects, not of prudence, but of fear. The Visigoths alone were the strength and nerves of the opposite army; and the Huns might securely trample on the degenerate Romans, whose close and compact order betrayed their apprehensions, and who were equally incapable of supporting the dangers or the fatigues of a day of battle. The doctrine of predestination, so favorable to martial virtue, was carefully inculcated by the king of the Huns, who assured his subjects that the warriors, protected by heaven, were safe and invulnerable amid the darts of the enemy, but that the unerring Fates would strike their victims in the bosom of inglorious peace. "I myself," continued Attila, "will throw the first javelin, and the wretch who refuses to imitate the example of his sovereign is devoted to inevitable death."

The spirit of the barbarians was rekindled by the presence, the voice, and the example of their intrepid leader; and Attila, yielding to their impatience, immediately formed his order of battle. At the head of his brave and faithful Huns, he occupied in person the centre of the line. The nations subject to his empire, the Rugians, the Heruli, the Thuringians, the Franks, the Burgundians, were extended on either hand, over the ample space of the Catalaunian fields; the right wing was commanded by Ardaric, king of the Gepidae; and the three valiant brothers who reigned over the Ostrogoths were posted on the left to oppose the kindred tribes of the Visigoths. The disposition of the allies was regulated by a different principle. Sangiban, the faithless King of the Alani, was placed in the centre, where his motions might be strictly watched, and his treachery might be instantly punished. Aetius assumed the command of the left, and Theodoric of the right wing; while Torismond still continued to occupy the heights which appear to have stretched on the flank, and perhaps the rear, of the Scythian army. The nations from the Volga to the Atlantic were assembled on the plain of Chalons; but many of these nations had been divided by faction or conquest or emigration; and the appearance of similar arms and ensigns, which threatened each other, presented the image of a civil war.

The discipline and tactics of the Greeks and Romans form an interesting part of their national manners. The attentive study of the military operations of Xenophon or Caesar or Frederic, when they are described by the same genius which conceived and executed them, may tend to improve--if such improvement can be wished--the art of destroying the human species. But the battle of Chalons can only excite our curiosity by the magnitude of the object; since it was decided by the blind impetuosity of barbarians, and has been related by partial writers, whose civil or ecclesiastical profession secluded them from the knowledge of military affairs. Cassiodorus, however, had familiarly conversed with many Gothic warriors who served in that memorable engagement; "a conflict," as they informed him, "fierce, various, obstinate, and bloody; such as could not be paralleled either in the present or in past ages." The number of the slain amounted to one hundred and sixty-two thousand, or, according to another account, three hundred thousand persons; and these incredible exaggerations suppose a real and effective loss sufficient to justify the historian's remark that whole generations may be swept away, by the madness of kings, in the space of a single hour.

After the mutual and repeated discharge of missile weapons, in which the archers of Scythia might signalize their superior dexterity, the cavalry and infantry of the two armies were furiously mingled in closer combat. The Huns, who fought under the eyes of their King, pierced through the feeble and doubtful centre of the allies, separated their wings from each other, and wheeling, with a rapid effort, to the left, directed their whole force against the Visigoths. As Theodoric rode along the ranks to animate his troops, he received a mortal stroke from the javelin of Andages, a noble Ostrogoth, and immediately fell from his horse. The wounded King was oppressed in the general disorder and trampled under the feet of his own cavalry; and this important death served to explain the ambiguous prophecy of the haruspices.

Attila already exulted in the confidence of victory, when the valiant Torismund descended from the hills and verified the remainder of the prediction. The Visigoths, who had been thrown into confusion by the flight or defection of the Alani, gradually restored their order of battle; and the Huns were undoubtedly vanquished, since Attila was compelled to retreat. He had exposed his person with the rashness of a private soldier; but the intrepid troops of the centre had pushed forward beyond the rest of the line; their attack was faintly supported; their flanks were unguarded; and the conquerors of Scythia and Germany were saved by the approach of the night from a total defeat. They retired within the circle of wagons that fortified their camp; and the dismounted squadrons prepared, themselves for a defence, to which neither their arms nor their temper was adapted. The event was doubtful: but Attila had secured a last and honorable resource. The saddles and rich furniture of the cavalry were collected, by his order, into a funeral pile; and the magnanimous barbarian had resolved, if his intrenchments should be forced, to rush headlong into the flames, and to deprive his enemies of the glory which they might have acquired by the death or captivity of Attila.

But his enemies had passed the night in equal disorder and anxiety. The inconsiderate courage of Torismund was tempted to urge the pursuit, till he unexpectedly found himself, with a few followers, in the midst of the Scythian wagons. In the confusion of a nocturnal combat he was thrown from his horse; and the Gothic prince must have perished like his father, if his youthful strength, and the intrepid zeal of his companions, had not rescued him from this dangerous situation. In the same manner, but on the left of the line, Aetius himself, separated from his allies, ignorant of their victory and anxious for their fate, encountered and escaped the hostile troops that were scattered over the plains of Chalons, and at length reached the camp of the Goths, which he could only fortify with a slight rampart of shields till the dawn of day. The imperial general was soon satisfied of the defeat of Attila, who still remained inactive within his intrenchments; and when he contemplated the bloody scene, he observed, with secret satisfaction, that the loss had principally fallen on the barbarians. The body of Theodoric, pierced with honorable wounds, was discovered under a heap of the slain; his subjects bewailed the death of their king and father; but their tears were mingled with songs and acclamations, and his funeral rites were performed in the face of a vanquished enemy.

The Goths, clashing their arms, elevated on a buckler his eldest son Torismund, to whom they justly ascribed the glory of their success; and the new King accepted the obligation of revenge as a sacred portion of his paternal inheritance. Yet the Goths themselves were astonished by the fierce and undaunted aspect of their formidable antagonist; and their historian has compared Attila to a lion encompassed in his den and threatening his hunters with redoubled fury. The kings and nations who might have deserted his standard in the hour of distress were made sensible that the displeasure of their monarch was the most imminent and inevitable danger. All his instruments of martial music incessantly sounded a loud and animating strain of defiance; and the foremost troops who advanced to the assault were checked or destroyed by showers of arrows from every side of the intrenchments. It was determined, in a general council of war, to besiege the King of the Huns in his camp, to intercept his provisions, and to reduce him to the alternative of a disgraceful treaty or an unequal combat. But the impatience of the barbarians soon disdained these cautious and dilatory measures; and the mature policy of Aetius was apprehensive that, after the extirpation of the Huns, the republic would be oppressed by the pride and power of the Gothic nation.

The patrician exerted the superior ascendants of authority and reason to calm the passions, which the son of Theodoric considered as a duty; represented, with seeming affection and real truth, the dangers of absence and delay; and persuaded Torismond to disappoint, by his speedy return, the ambitious designs of his brothers, who might occupy the throne and treasures of Toulouse...


John Cassidy Makes His Play for the Stupidest Man Alive Crown

He is definitely a contender: he writes apropos of Alan Greenspan:

Alan Greenspan Age of Turbulence - Portfolio.com: As the speculative fever raged, some old-timers and sticks-in-the-mud, myself included, urged Greenspan to raise interest rates and tighten margin requirements. He refused, on the grounds that bubbles are impossible to identify definitively. Pricking them is by no means easy, and even if you succeed, the consequences are far from certain. The best course of action, Greenspan argued, was to let a bubble deflate of its own accord. Then, and only then, you take remedial action by cutting interest rates. That was what he did. Following the stock market slump and the events of September 11, 2001, he cut the federal funds rate to 1.75 percent, a level that had not been seen since the early 1960s. Then, in June 2003, he reduced the rate even further, to 1 percent.... By the middle of 2002, however, it was clear that for whatever reason—-low interest rates, the Bush tax cuts, increased military spending—the economy was staging an amazingly robust recovery. At that point, history and economic orthodoxy suggested that the Fed should have been tightening policy rather than loosening it. Again, Greenspan went his own way...

Actually, it was not clear at all by the middle of 2002 that the economy was staging an "amazingly robust recovery." The recovery did not become anything anybody could call "robust" in any sense until 2004. Want evidence that it was not clear in mid-2002 that the recovery was "robust"? Here is what Paul Krugman was writing at the time:

July 23, 2002: Living With Bears: The bull market is now well and truly over. In fact, if you adjust for inflation the S.&P.... is now below its level in late 1996, when Alan Greenspan gave his famous "irrational exuberance" speech. So what should the responsible officials -- Mr. Greenspan, George W. Bush and whatshisname, the Treasury secretary -- be doing?

A good first step would be to stop trying to talk up the market by extolling the economy's fundamental strength... the fundamentals aren't actually all that great.... [E]ven before the sudden plunge in the markets, the data were pointing not to a boom but to a ''jobless recovery,'' in which the economy grows too slowly to make much if any dent in the unemployment rate. Indeed, the report prepared in support of Mr. Greenspan's recent testimony projected no significant decline in unemployment this year, and not much decline next year. And in the face of plunging markets we have to worry whether even that forecast is overly optimistic.

Given the definitely iffy economic outlook, shouldn't Mr. Greenspan be thinking seriously about another interest rate cut? True, rates are already very low. But if there's one thing we've learned from Japan's experience, it is that when you face the risk of a deflationary trap -- still not the most likely scenario, but not as unlikely as it seemed a few months ago -- it makes no sense to "save your ammunition," holding interest rate cuts in reserve. The time to fight deflation is before it has time to get built into the nation's psychology. True, the Fed has been concerned that another cut would panic the markets. But now that the markets have panicked on their own, there's nothing to lose...

August 16, 2002: Mind the Gap: [T]he [late 1990s] bubble years left us with too much capacity, too much debt and a backlog of business scandal. We shouldn't have expected a quick and easy recovery, and we're not getting one.... A loud chorus is already shouting "We're not Japan!" Half the time... I'm part of that chorus. But... [if] we do have a housing bubble, and it bursts, we'll be looking a lot too Japanese for comfort. A recent Federal Reserve analysis of Japan's experience declares that the key mistake Japan made in the early 1990's was... "that they did not take out sufficient insurance against downside risks through a precautionary further loosening of monetary policy." That's Fedspeak for "if you think deflation is even a possibility, throw money at the economy now and don't worry about overdoing it." And yet the Fed chose not to cut rates on Tuesday. Why?...

John Cassidy shouldn't tell lies: he shouldn't claim things were clear when they were not clear at all. His nose will grow.


But wait! There is more. Cassidy writes:

In February, [Greenspan] said a recession was possible before the end of 2007—a comment that contributed to a 416-point fall in the Dow. In May, he put the chances of a recession at one in three.... Greenspan may have been acting strategically. His appearances in the headlines haven’t harmed the commercial prospects of his book, and they may have attracted some clients to Greenspan Associates, the consulting firm that he founded upon leaving the Fed. It was noticeable that shortly after he started using the R-word, Pacific Investment Management, which oversees the world’s largest bond fund, hired him as a consultant. Pimco’s chief investment officer, Bill Gross, is well-known for his bearish views on the economy and the stock market...

It never occurs to Cassidy that Greenspan said there was a chance of recession because... there is a chance of recession. No, that would be too simple! Instead, Greenspan is "acting strategically." Menzie Chinn notes that current betting odds on recession are between 2-1 and 50-50.


links for 2007-09-15


On Tom Keene's Show at Bloomberg Radio

On the Radio:

Bloomberg Radio: Tom Keene BLOOMBERG On the Economy: 9/14/2007 02:07 PM ET U of California, Berkeley DeLong, Brad Professor / Academic

DeLong Wants Fed's Focus on Financial System Regulation: Sep. 14 (Bloomberg) -- Bradford DeLong, an economics professor at the University of California at Berkeley, talks with Bloomberg's Tom Keene about the Federal Reserve's role in the regulation of the U.S. financial system, investing in stocks versus bonds, and DeLong's assessment of former Fed Chairman Alan Greenspan. (Source: Bloomberg)

http://www.j-bradford-delong.net/2007_audio/Bloomberg_Keene_9_14_07.mp3


The Shrillblog: Early September

Wherefore "Shrillblog" and the Ancient, Hermetic and Occult Order of the Shrill?: We still remember the early days, when the Ancient, Hermetic, and Occult Order of the Shrill was so small that its Grand Conventions consisted of Paul Krugman talking to himself while warming a can of baked beans over a can of sterno while he huddled from the rain beneath a New Jersey Turnpike overpass...

Early September in the Shrillblog::

Jay Rosen: The Master Narrative that Went Missing During the Bush Years Turns Up in Charlie Savage's Book
George W. Bush Drives Editor and Publisher Shrill!
Howard Kurtz Drives Media Matters Shrill
George W. Bush Drives Karen Tumulty Shrill!
Justice Souter Is Shrill!
Kevin Drum and Dan Drezner Are Shriller than Ever
The Shrillness of M.J. Rosenberg Passeth Understanding
The Health Care System Freaks Out Marc Cooper
Norm Ornstein Drives Matthew Yglesias further into Shrill Unholy Madness
Hilzoy Ventures into a Really Bad Internet Neighborhood
Condi Rice Drives Steve Benen Even Shriller!
George W. Bush's Amnesia Drives Steve Benen into Shrill Unholy Madness!


Egregious Moderation: Early September 2007

Egregious Moderation: A rotisserie-league journal of politics and reality: an egregiously-moderate forum for people who want an online source for punchy liberal analysis and evisceration; especially evisceration. In the age of the internet anyone can speak in the public sphere, and anyone can be a rotisserie-league magazine editor as well...

From Egregious Moderation, September 1-14, 2007:

David Sirota: The Lesson Of The DMV
Gideon Rachman: America’s self-inflicted war wounds
Marc Lynch: Sunni World
David Cutler: Use a Scalpel, Not a Meat Cleaver
Paul Krugman: A Surge, and Then a Stab
Nick Hornby and David Simon
Ezra Klein: Supply Side Bait and Switch
Andrew Tilghman: The Myth of Al Qaeda in Iraq
Tony Karon: Mearsheimer, Walt and the Erudite Hysteria of David Remnick
Matthew Yglesias: Guilty By Associates
Marc Cooper: Sicko Sticko Shock
M.J. Rosenberg: "There is nothing pro-Israel about supporting policies that promise only that Israeli mothers will continue to dread their sons' 18th birthdays for another generation"
David Petraeus, September 26, 2004: Battling for Iraq
Kevin Drum on George W. Bush
Examiner: Yeas and Nays
Harold Meyerson: Shoring Up the Middle
Spencer Ackerman: U.S.-Backed Sunnis Fight al-Qaeda -- and Maybe "Iran-Backed" Shiites?
Riverbend: Leaving Iraq
Marginal Utility on Larry Kudlow
Karen Tumulty: George W. Bush's Fantastic Freedom Institute


Why Is Michael V. Drake Still Chancellor at U.C. Irvine?

U.C. Regents chair Blum to the white courtesy phone, please:

UC Irvine reverses field on Chemerinsky - Los Angeles Times: Erwin Chemerinsky, a well-known liberal expert on constitutional law, said he had signed a contract Sept. 4, only to be told Tuesday by Chancellor Michael V. Drake that he was voiding their deal because Chemerinsky was too liberal and the university had underestimated "conservatives out to get me." Later Wednesday, however, Drake said there had been no outside pressure and that he had decided to reject Chemerinsky, now of Duke University and formerly of the University of Southern California, because he felt the law professor's commentaries were "polarizing" and would not serve the interests of California's first new public law school in 40 years.

News of Drake's decision quickly came made its way through academic and legal circles nationally where it came under criticism from liberals and conservatives scholars who said Chemerinsky was being unfairly penalized. "It seems late in the day to notice to Erwin Chemerinsky is a prominent liberal," said John Jeffries, University of Virginia Law School dean. "That's been true for as long as I've known him. It's rather like discovering that Wilt Chamberlain was tall. How could you not know?"

Drake said he worried that the controversy had the potential to harm the university's reputation. "It was the most difficult decision of my career," he said in an emotional interview, his voice at times quivering...

Is there anybody who thinks Michael V. Drake should still be chancellor U.C. Irvine? Anybody? Anybody? Bueller?


Green Mileage Auto: Grizzly Peak Prius Edition

Green Mileage Auto: Grizzly Peak Prius Edition

Jeebus! That was totally lame!

Still 100 vertical meters above the Berkeley campus, and the battery is showing full.

That is 100m x 1000kg x 10m/a/a = 1000000 useful joules that could have gone into the battery it I had managed it properly that were instead dissipated as heat. That is 300 watt-hours gone.

Entropy wins another one.

Sigh.


Hoisted from Comments: Robert Waldmann Comes to My Weber-Keynes-WWI-and-Consequences Lecture

From a great-circle distance of 6000 miles away, my ex-roommate Robert Waldmann virtually comes to my Weber-Keynes-WWI-and-Consequences political economy lecture, sits in the back, and heckles:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: A wonderful Post on people you care about: No point quibbling. However, I will quibble.... First a word "managerialism". This was, I think, introduced by James Burnham and it did not mean muddling through. I met it in 1984 as the work of Emanuel Goldstein who repeats Burnham. Orwell had only criticms for Burnham, but he nicked his ideas...

The question is: who is to be master here? I need a word--"neoliberalism" won't do. Burnham is dead. He doesn't get to hog the word forever. I want a word that means "muddling through and trying to realize the dreams of classical liberalism through clever government action and regulation"--trying to make Say's Law, et cetera, true in practice even though it is not true in theory.

On early Keynes.... I have read volume 1 of Skidelsky's biography of Keynes and he presents a very different picture. Not just an Aesthete but an advocate of eqoism. According to Skidelsky Keynes noted that the logical implication of rational intuitionism is rational egoism, and the arguments Moore made to avoid this conclusion are nonsense (basically Moore said if we can't prove something beyond all doubt we can ignore the argument -- perhaps the most feeble reasoning humanly possible). Skidelsky... claimed that the treatise on probability was... written in defense of selfishness. Skidelsky may have emphasized Keynes's declared indifference to the fate of the lower orders in order to make the transition to volume II more dramatic, or to stress the irony of the great contribution to the sum of utils made by an anti-utlititarian. That is, he may have tricked me, since I have no other source on Keynes. However, you are doing a bait and switch, claiming that you follow Skidelsky then suppressing the argument which is inconvenient to a modern Keynesian such as yourself...

I was just trying to acknowledge Skidelsky, but you're right: I should say "draw on"...

Finally on the final quote of Keynes. I find it is impossible to read without hearing a whispering voice saying "Marx Marx Marx Marx" who is clearly the defunct scribbler and simultaneously the strongest proof and the most rigid denier of the power of ideas. To find another mixture of praise and snark I turn, of course, to Orwell who wrote something like this anti Marxist praise of Marx (I quote from memory)

the motivations of a thinker are irrelevant to the evaluation of his ideas. While Marx was largely motivated by spite and bitterness, his conclusions are mostly accurate...

Admirably offending everyone there, although I disagree with Orwell on both points.


Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Also the Huns were not Germanic (the Visigoths were). The Huns were notably yellow skinned. Due to their fearless quest for national power, greatness and "elbow room" there aren't any of them left as far as anyone can tell.

Also no nationalist can really admit that Attila existed. The army which withdrew from the field of Chalons (it certainly wasn't routed) was a polyglot multiethnic mix which made the USA look monochromatic. The "Huns" vanished from history instantly when Attila died, because the Hun nation was never a protagonist.

I suspect a miss translation or typo. Weber's statement makes some sense if one replaces "the victory of the Huns" with "the defeat of the Huns" or "the victory over the Huns".

As best as I can tell, not so. I admit I don't have an original-language copy of "Der Nationalstaat und die Volkswirtschaftspolitik" handy. But I do have two separate translations: historians "dilate at length about 'mother-right', that monstrous notion, and force into a subordinate clause the victory of the Huns on the Catalaunian plain" and "expatiate today on the monstrous notion of 'matriarchy', while regulating to a subordinate clause the victory of the Huns on the Catalaunian Plain."

Now the main point, that a German liberal was more German than liberal, is most embarrassing to liberals. It almost makes me believe in such concepts as "national character" and the Zeitgeist. I think I will decide that Max Weber is just one data point.

Also I remember when you disovered the dark side of Max Weber. You were sincerely shocked.

IIRC, not so much that a German liberal turned out to have a strong component that was a social darwinist who believed the aim of German policy should be the demographic replacement of Poles and Russians by Germans so Germans could have Lebensraum, but rather that the Freiburg lecture or others of its ilk were not in the five weeks of Weber readings I was assigned...


David Wessel on the Credit Crunch and the Economic Outlook

David Wessel writes:

Banks' New Credit Austerity to Help Set Economy's Path: The outlook for the U.S. economy turns on two factors: One is how much worse the nation's housing market gets. That may be hard to predict, but it's easy to understand. The other is how much of the continuing disturbance in financial markets infects the rest of the economy. That's neither easy to predict nor easy to understand. The key is what banks will do and how much impact it will have. There's irony in that because a salient feature of 21st-century finance is that banks have become increasingly less important players.

Today, banks make loans, turn many of them into securities, and sell them to investors, pocketing the fees. Someone else gets burned if the borrower defaults. Think of this as composite-metal-baseball-bat finance. The game is quicker, the ball goes farther. But, it turns out, banks may not have unloaded as much of the risk as they thought. And that's the rub. Wall Street firms and commercial banks, according to Citigroup estimates, hold about $250 billion in bridge loans made to finance acquisitions -- loans they intended to lay off in markets that are no longer quite so interested in them. The banks may be stuck with those merger loans....

Then there's the mushrooming problem -- one hardly anyone saw coming -- of entities called structured investment vehicles and conduits. Many of them hold subprime mortgages and related securities, and counted on selling more than $1 trillion in short-term IOUs called commercial paper to finance their holdings. Investors no longer want that commercial paper. So what do these entities do now? They turn to U.S. and European banks, some of which sponsored the conduits, and remind them of the commitments the banks made to provide credit if the commercial-paper market dried up. Goodbye metal bats. Hello, old-fashioned wooden-bat-style banking....

Saddled with loans to finance mergers or back-stop conduits that can't sell commercial paper, banks are likely to be less willing to lend to ordinary consumers and businesses or, at the very least, will be charging more for those loans. So, consumers and businesses are likely to borrow a little less -- and spend a little less -- and a financial disturbance could be transmitted through the banking system to the rest of the economy. No wonder there's growing worry the U.S. is going to slide into recession....

The issue isn't whether all this is happening. It is. The issue is how big an impact banks' behavior will have on the economy. Some analysts say it's a sideshow compared with the housing slump. Others say it's the most important factor in whether the markets and the economy bounce back as quickly as they did in 1987, 1998 and 2000. No doubt it will be one of the big issues on the table when Mr. Bernanke and his colleagues meet next week...

This is why Ben Bernanke, Tim Geithner, and company have opened the discount window...


General Lecture and Other Audio File Archives

For those wanting an easy download of mp3 and m4a files, general Berkeley lecture and other recorded audio archive files for this fall will be at:

http://www.j-bradford-delong.net/2007_audio/


101_9_11_07.m4a 11-Sep-2007 19:32 64.2M: World in 1900 PE 101 Lecture
101_9_13_07.m4a 13-Sep-2007 14:32 61.3M: Keynes PE 101 Lecture
101_9_4_07.m4a 05-Sep-2007 07:44 70.8M: World in 1900 PE 101 Lecture
113_8_27_07.m4a 12-Sep-2007 22:12 65.3M: Opening Econ 113 Lecture
113_8_28_07.m4a 12-Sep-2007 22:06 54.4M: Opening PE 101 Lecture
113_8_29_07.m4a 12-Sep-2007 22:14 65.5M: Colonization Econ 113 Lecture
113_9_10_07.m4a 10-Sep-2007 21:31 60.4M: Northern Industry + Slavery Econ 113 Lecture
113_9_12_07.m4a 12-Sep-2007 20:13 51.0M: Slavery + Civil War Econ 113 Lecture
113_9_5_07.m4a 05-Sep-2007 19:12 68.9M: Northern Agriculture Econ 113 Lecture
Bloomberg_Keene_9_14..> 14-Sep-2007 16:37 8.2M: Bloomberg Radio
EHA_9_8_07.m4a 09-Sep-2007 11:41 24.5M: Economic History Association Talk
Global_Imbalances_9_..> 12-Sep-2007 20:16 43.2M: Global Imbalances Talk


Mark Thoma Points Us to Partha Dasgupta's Critique of Bjorn Lomborg

The extremely thoughtful and smart Partha Dasgupta does not think Bjorn Lomborg is playing with a full deck. Mark Thoma:

Economist's View: "If The Uncertainties Are Not Small, Standard Cost–Benefit Analysis As Applied To The Economics Of Climate Change Becomes Incoherent": Partha Dasgupta reviews Cool It: The Skeptical Environmentalist's Guide to Global Warming, by Bjorn Lomborg (via email):

Bjorn Lomborg's _The Skeptical Environmentalist{ created a sensation six years ago. The author offered figures to dismiss claims that the ecological-resource base in many parts of the world is deteriorating, and argued that the costs of reducing ecological losses are usually higher than the benefits.... [P]rominent publications such as The Economist promoted the book vigorously... People learning of my own work in developing ecological economics would ask, "And have you read Lomborg?" — implying, "Why have you thrown away so much of your working life?"

Things have changed over the past year... many now regard global warming to be the central problem facing humanity. Lomborg's latest book, Cool It doesn't question the science... he questions whether we should do much about it....

The book is a series of exercises in cost–benefit analysis, interspersed with quotes on climate change from the writings of famous people who should know better than to speak in hyperbole.... whereas the smart strategies he outlines... would cost a mere $52 billion a year. By his reckoning, those strategies would limit the rise in concentration of carbon dioxide to 560 parts per million (p.p.m.) and the accompanying temperature rise to 4.7 °C. Smart strategies would cost far less than Kyoto, deliver higher economic growth worldwide, and markedly reduce poverty. From the vantage point of Kyoto, there is a free lunch to be had wherever you look....

Unfortunately, Lomborg's thesis is built on a deep misconception of Earth's system and of economics when applied to that system. The concentration of CO2 in the atmosphere is now 380 p.p.m., a figure... in excess of the maximum reached during the past 600,000 years. If there is one truth about Earth we all should know, it's that the system is driven by interlocking, nonlinear processes running at different speeds... an unknown number of tipping points.... We have no data on the consequences if Earth were to cross those tipping points. They could be good, or they could be disastrous. Even if we did have data, they would probably be of little value because nature's processes are irreversible. One implication of the Earth system's deep nonlinearities is that estimates of climatic parameters based on observations from the recent past are unreliable for making forecasts about the state of the world at CO2 concentrations of 560 p.p.m. or higher....

These truths seem to escape Lomborg. His cost–benefit analysis involves only point estimates of variables... implying that he believes we shouldn't buy insurance against potentially enormous losses resulting from climate change....

[E]ven a small amount of uncertainty — when allied to only a moderate aversion to uncertainty — would imply that humanity should spend substantial amounts on insurance, even more than the 1–2% of world output that has been advocated. If the uncertainties are not small, standard cost–benefit analysis as applied to the economics of climate change becomes incoherent, even if those uncertainties are judged to be thin-tailed (gaussian, for example); this is because the analysis would say that no matter how much humanity chooses to invest in protecting Earth from passing through those later tipping points, we should invest still more.

Economics helps us to realize what we are able to say about matters that will reveal themselves only in the distant future. Simultaneously, it helps us to realize the limits of what we are able to say. That, too, is worth knowing, for limits on what we are able to say are not a reason for inaction. Lomborg's seemingly persuasive economic calculations are a case of muddled concreteness.


Greenspan Concedes Error

From Jeannine Aversa, AP:

Greenspan Concedes Mortgage Dilemma: Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.... Greenspan said he was aware of "subprime" lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn't initially realize the harm they could do. "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said in a CBS "60 Minutes" interview to be broadcast Sunday. "I really didn't get it until very late in 2005 and 2006," Greenspan said....

When he was at the helm, Greenspan maintained there was little the Fed — which also oversees the safety and soundness of banks — could do about the subprime situation. One of the Fed's governors, however, had raised a red flag about questionable lending practices. "Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan said in the interview.

Some blamed Greenspan's interest rate policies for feeding the housing frenzy.... Greenspan, however, defended the institution's actions. "They are mistaken," he said of the critics. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," he said.

Meanwhile, some believe that Greenspan would have acted more aggressively than Bernanke in dealing with the current financial crisis. "I'm not sure that's true," Greenspan said. "I think (Bernanke) is doing an excellent job," he said...


Lecture Notes for September 13: After World War I: Weber and Keynes: Political Economy 101: "Modern" Political Economy

September 13 PE 101 Lecture

Marxism, liberalism, nationalism--to be polite...

  • We've talked about Marxism...
  • We've talked about classical liberalism...
  • We haven't talked about "nationalism"...

We read Norman Angell: We did not read Max Weber. Nationalism as social-darwinist doctrine:

Max Weber, "The National State and Economic Policy": [W]e all consider the German character of the East as something that should be protected, and that the economic policy of the state should enter into the lists in its defense. Our state is a national state, and... we have a right to make this demand....

[T]he economic struggle between the nationalities follows its course even under the semblance of 'peace'. The German peasants and day-labourers of the East are not being pushed off the land in an open conflict by politically-superior opponents. Instead, they are getting the worst of it in the silent and dreary struggle of everyday economic existence, they are abandoning their homeland to a race which stands on a lower level, and moving towards a dark future in which they will sink without trace. There can be no truce even in the economic struggle for existence; only if one takes the semblance of peace for its reality can one believe that peace and prosperity will emerge for our successors at some time in the distant future. Certainly the vulgar conception of political economy is that it consists in working out recipes for making the world happy; the improvement of the 'balance of pleasure' in human existence is the sole purpose of our work that the vulgar conception can comprehend. However... [reality] prevents us from imagining that peace and happiness lie hidden in the lap of the future, it prevents us from believing that elbow-room in this earthly existence can be won in any way than through the hard struggle of human beings with each other....

The overwhelming majority of the of the fruits of the economic, social, and political endeavours of the present are garnered not by the generation now alive but by the generations of the future.... [T]here can... be no real work in political economy on the basis of optimistic dreams of happiness.... The question... is not 'how will human beings feel in the future' but 'how will they be'.... We do not want to train up feelings of well-being in people, but rather those characteristics we think constitute the greatness and nobility of our human nature....

The economic policy of a German state, and that standard of value adopted by a German economic theorist, can therefore be nothing other than a German policy and a German standard.... Our successors will not hold us responsible before history for the kind of economic organization we hand over to them, but rather for the amount of elbow-room we conquer for them in the world.... Processes of economic development are in the final analysis also power struggles, and the ultimate and decisive interests at whose service economic policy must place itself are the interests of national power.... The science of political economy is a political science... a servant of politics... of the lasting political-power interests of the nation.... [F]or questions of German economic policy... the ultimate and decisive voice should be that of the economic and political interests of our nation's power, and the vehicle of that power, the German national state...

http://books.google.com/books?id=WaV7Q35jy_AC&pg=PA128&lpg=PA128&dq=max+weber+%22vulgar+conception+of+political+economy%22&source=web&ots=sCHQNhK5qG&sig=ScmEe6_9HEO5XmtjjoaSijYZUy4#PPA129,M1

  • This is a pre-WWI German liberal
  • This is a German talking about Poles--Konrad Adenauer: "A Prussian [an eastern German] is a Pole who has forgotten who his grandfather was..."
  • World War I did not change Weber's mind...

Yet more:

In the outstanding works of our historical colleagues we find that today instead of telling us about the warlike deeds of our ancestors they dilate at length about "matriarchy," that monstrous notion, and force into a subordinate clause the victory of the Huns on the Catalaunian Plain...

But in 451 the Huns lost the Battle of Chalons to the Visigothic-Roman coalition led by Comes et Magister Utriusque Militae et Patricius Flavius Aetius http://en.wikipedia.org/wiki/Battle_of_Chalons...

A second view of nationalism. Nationalism as way to distract people from domestic political concerns:

The Search for an Enemy: Matthew Yglesias: I've actually heard that Francis Fukuyama has said this before, but that information didn't come to me in reportable form. During a BloggingHeads.tv appearance with Robert Wright, Fukuyama says of Bill Kristol and his circle at The Weekly Standard that during the 1990s "There was actually a deliberate search for an enemy because they felt that the Republican Party didn't do as well" when foreign policy wasn't on the issue agenda. The obvious candidates were either China or something relating to Islamic fundamentalism and, as Fukuyama notes, what they came up with was China. Then 9/11 changed things around, at least for a few years. I think this is very telling, and reveals a great deal about the mentality that's been guiding America's foreign policy during the Bush years... http://bloggingheads.tv/?id=81&cid=271&in=04:59

William Shakespeare:

Henry IV to Prince Harry: [A]all my friends, which thou must make thy friends... by whose fell working[s] I was first advanc'd, and by whose power I well might lodge a fear to be again displac'd.... [R]est and lying still might make them look too near unto my state.

Therefore, my Harry, be it thy course to busy giddy minds with foreign quarrels, that action, hence borne out, may waste the memory of the former days...


The point of all this: World War I makes it impossible to be a liberal believer in progress, peace, rationality, equilibrium, the benevolence of the market, the triumph of reasoned discussion, et cetera. So what do you do?

The answer is "managerialism." Muddling through. Trying desperately to somehow cobble together something like pre-WWI liberalism--to make it true in practice even though it isn't true in theory, and to do so somehow.

Hence Keynes. And here I have little to say that I haven't stolen from Robert Skidelsky's magnificent three-volume biography of Keynes:

Skidelsky's first two volumes give us John Maynard Keynes's life up to 1937 entire, and he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important.

Who was this guy?> Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician--trying to advance the chances of Britain's Liberal Party between the wars--but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the "Bloomsbury Group" of artists and intellectuals that did so much to shape interwar culture.

For the literati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. That story contains things like Virginia Woolf on Keynes. She wrote of her:

vivid sight of Maynard by lamplight—like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books... (page 15).

There is a clear lesson: if your circle includes future Nobel Prize-winning novelists with wicked pens, read their books and praise them as often as possible.

For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world--whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith's "system of natural liberty" but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

The first volume of Skidelsky's biography is the story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through or something to be done.

Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one's life to achieve the most good, where "good" was nothing more or less than "states of mind... states of mind... not associated with action or achievement or with consequences [but]... timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth." Thus Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).

This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to "be in love with one’s friends, with beauty, with knowledge" and who was and remained an enthusiastic member of the Bloomsbury group, sharing "its intellectual values and its artistic enthusiasms," and participating "in its wild fancy dress parties" (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with "...a party for seventeen… at the Café Royale.... Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio... and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses...’" (HB, page 300).

But at the same time Keynes's pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote:

[Edmund] Burke ever held, and held rightly, that it can seldom be right... to sacrifice a present benefit for a doubtful advantage in the future.... It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear... We can never know enough to make the chance worth taking..." (ES, page 62).

Keynes's industry and intelligence thus made him a trusted and effective member of Britain's intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.

Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I--and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.

Keynes's friend David Garnett wrote him a letter condemning his work for the government, calling Keynes:

an intelligence they need in their extremity.... A genie taken incautiously out... by savages to serve them faithfully for their savage ends, and then--back you go into the bottle.... Oh... our savages are better than other savages.... But don’t believe in the profane abomination.

The interesting thing was that Keynes "agreed that there was a great deal of truth in what I had said..." (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles--when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible ("until the pips squeak").

Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles:

Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense... (HB, page 373).

Keynes exploded with the book you have read: The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace: "German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges...."

And Keynes prophesied doom--if the treaty were carried out and Germany kept poor for a generation:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for 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... the civilization and progress of our generation... (HB, page 391).

The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by "passion and despair," Keynes "spoke like an angel with the knowledge of an expert" and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes:

the Cambridge [professor] selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of [the literate geniuses of] Bloomsbury.

He was also--because of what he had done with his pen after Versailles:

the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity... (HB, page 400).

Keynes to Lopokova:

In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises? (page 181)

So after World War I Keynes used what power he had to--don't laugh--try to restore civilization. In Skidelsky's--powerful and I believe correct--interpretation, Keynes before 1914:

believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts... to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings... (ES, page xv).

After World War II Keynes in the 1920s fought a brave but losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party's attempted revenge for the German defeat in World War I. Keynes struggled for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today's populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing

... the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts.... Deflation does not reduce wages 'automatically.' It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression! (page 203).

But in the end Keynes failed. He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough. His allies were too few. And among central bankers and cabinet ministers understanding of the situation in which they were embedded was rare.

So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought

...will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change... (pages 520-521).

And he succeeded.

His General Theory of Employment, Interest, and Money did change the world. It ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil... (page 570).

The extraordinary thing is that Keynes was right.


Max Weber: Only If One Takes the Semblance of Peace for Its Reality Can One Believe that Peace and Prosperity Will Emerge

I made my political economy students read Norman Angell. I did not make them read Max Weber:

Max Weber, "The National State and Economic Policy": [W]e all consider the German character of the East as something that should be protected, and that the economic policy of the state should enter into the lists in its defense. Our state is a national state, and... we have a right to make this demand....

[T]he economic struggle between the nationalities follows its course even under the semblance of 'peace'. The German peasants and day-labourers of the East are not being pushed off the land in an open conflict by politically-superior opponents. Instead, they are getting the worst of it in the silent and dreary struggle of everyday economic existence, they are abandoning their homeland to a race which stands on a lower level, and moving towards a dark future in which they will sink without trace. There can be no truce even in the economic struggle for existence; only if one takes the semblance of peace for its reality can one believe that peace and prosperity will emerge for our successors at some time in the distant future. Certainly the vulgar conception of political economy is that it consists in working out recipes for making the world happy; the improvement of the 'balance of pleasure' in human existence is the sole purpose of our work that the vulgar conception can comprehend. However... [reality] prevents us from imagining that peace and happiness lie hidden in the lap of the future, it prevents us from believing that elbow-room in this earthly existence can be won in any way than through the hard struggle of human beings with each other....

The overwhelming majority of the of the fruits of the economic, social, and political endeavours of the present are garnered not by the generation now alive but by the generations of the future.... [T]here can... be no real work in political economy on the basis of optimistic dreams of happiness.... The question... is not 'how will human beings feel in the future' but 'how will they be'.... We do not want to train up feelings of well-being in people, but rather those characteristics we think constitute the greatness and nobility of our human nature....

The economic policy of a German state, and that standard of value adopted by a German economic theorist, can therefore be nothing other than a German policy and a German standard.... Our successors will not hold us responsible before history for the kind of economic organization we hand over to them, but rather for the amount of elbow-room we conquer for them in the world.... Processes of economic development are in the final analysis also power struggles, and the ultimate and decisive interests at whose service economic policy must place itself are the interests of national power.... The science of political economy is a political science... a servant of politics... of the lasting political-power interests of the nation.... [F]or questions of German economic policy... the ultimate and decisive voice should be that of the economic and political interests of our nation's power, and the vehicle of that power, the German national state...

http://books.google.com/books?id=WaV7Q35jy_AC&pg=PA128&lpg=PA128&dq=max+weber+%22vulgar+conception+of+political+economy%22&source=web&ots=sCHQNhK5qG&sig=ScmEe6_9HEO5XmtjjoaSijYZUy4#PPA129,M1

  • This is a pre-WWI German liberal
  • Konrad Adenauer: "A Prussian is a Pole who has forgotten who his grandfather was"

Yet more:

In the outstanding works of our historical colleagues we find that today instead of telling us about the warlike deeds of our ancestors they dilate at length about "matriarchy," that monstrous notion, and force into a subordinate clause the victory of the Huns on the Catalaunian Plain...

But in 451 the Huns lost the Battle of Chalons to the Visigothic-Roman coalition led by Comes et Magister Utriusque Militae et Patricius Flavius Aetius http://en.wikipedia.org/wiki/Battle_of_Chalons


September 12, 2007: Today's Audio Files

Wow! I did do a lot of talking yesterday:

And a stray file from September 11: Political Economy 101 Lecture:

  • The Coming of World War I: War--at least war in the North Atlantic core of the industrializing economy--seemed very remote in the decades before World War I. But the war came--and it was a horrifyingly destructive war when it did come. "What passing bells for those who die as cattle?"

Post-Lecture iPhone Blogging

Is something horribly wrong? Or is something wonderfully right?

Here I am, picking up after lecture. I am packing away:

  • the iPod in my left shirt pocket that was recording the audio from the lecture
  • the iPhone in front of me that has my lecture notes on it (and that I am blogging from)
  • the laptop to my left which was controlling the screen
  • the laptop to my right which I had connected via wireless and was checking quotes from Lincoln during the lecture

I am reminded of a wonderfully cheesy line from Isaac Asimov's wonderfully cheesy Second Foundation:

There you would have been invulnerable, in the midst of your minions and machines, and with your mental power...

I have no minions. But the machines and mental power I have.


Mama Said There'd Be Days Like This

Actually, Mama did not say there would ever be days that would have a major calendar overload like this:

I am going to be sooo dead by 5:30...


Readings: September 12, 2007: Pre-Industrial Modes of Production

September 12, 2007: Pre-Industrial Modes of Production


Global Imbalances Handout

A Possible Peak in Global Imbalances?

Large Audio File


Fed Chair Ben Bernanke said yesterday:

Ben Bernanke:

  • In sum, considering the 1996-2004 period, we have three facts to explain: (1) the substantial increase in the U.S. current account deficit, (2) the swing from moderate deficits to large surpluses in emerging-market countries, and (3) the significant decline in long-term real interest rates. Many observers have focused on the expansion of the U.S. current account deficit in isolation and have argued that it is due largely to domestic factors, particularly declines in both public and private saving rates. But accounting identities assure us that any movement in the current account must involve changes in realized saving rates relative to investment rates. The question at issue, therefore, is whether the decline in the realized saving rate in the United States reflected a decline in desired saving or was instead a response to other, possibly external, economic developments...
  • The U.S. current account deficit has widened further in the past two years, from $640 billion in 2004 (5.5 percent of GDP) to $812 billion in 2006 (6.2 percent of GDP), although it fell a bit in the first quarter of this year, to $770 billion at an annual rate. In an accounting sense, the increase in the U.S. deficit over this period reflects primarily an increase in the investment rate...
  • Although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy. The net international investment position (NIIP) of the United States, although at a substantial negative 19 percent of GDP, is still smaller than the negative NIIP of several other industrial economies...
  • The ability of the United States to make debt service payments and the willingness of foreigners to hold U.S. assets in their portfolios are both limited. Adjustment... will have both real and financial consequences.... [T]he necessary reduction in the trade and current account deficits will entail shifting resources out of sectors producing nontraded goods and services to those producing tradables.... [E]xternal adjustment for China and other surplus countries will involve shifting resources out of the export sector and into industries geared toward meeting domestic consumption needs; that necessary shift, too, will likely be less disruptive if it occurs earlier and thus less rapidly and on a smaller scale...

Time to Shut Down the New Republic

The New Republic regards a suitable debating partner on tax policy to be... Grover Norquist:

How The GOP Became the Anti-Tax Party. A TNR Debate, Part 1.: A TNR ONLINE DEBATE: by Jonathan Chait & Grover G. Norquist: Editor's Note: Today we present the first part of a debate between Grover Norquist, president of Americans for Tax Reform, and TNR Senior Editor Jonathan Chait about Chait's new book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, and America's tax policy. (You can read an excerpt from the book here.) The debate will continue this week.

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


One Could Wonder If the Extraordinary Visages... Were... Not the Tragic-Comic Masks of Some Strange Drama or Puppet-Show...

The opening of John Maynard Keynes (1919), The Economic Consequences of the Peace:

Very few of us realise with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organisation by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin which Germany began, by a peace which... must impair yet further... the delicate, complicated organisation, already shaken and broken by war, through which alone the European peoples can employ themselves and live....

France, Germany, Italy, Austria, and Holland, Russia and Roumania and Poland, throb together, and their structure and civilisation are essentially one. They flourished together, they have rocked together in a war which we, in spite of our enormous contributions and sacrifices (like though in a less degree than America), economically stood outside, and they may fall together. In this lies the destructive significance of the Peace of Paris. If the European civil war is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds.... Paris was a nightmare.... A sense of impending catastrophe overhung the frivolous scene; the futility and smallness of man before the great events confronting him; the mingled significance and unreality of the decisions; levity, blindness, insolence, confused cries from without--all the elements of ancient tragedy were there. Seated indeed amid the theatrical trappings of the French saloons of state, one could wonder if the extraordinary visages of Wilson and of Clemenceau, with their fixed hue and unchanging characterisation, were really faces at all and not the tragic-comic masks of some strange drama or puppet-show...


The PE 101 Students Have Spoken!

They have voted 90%-10% that when I next teach this course, students should be spared:

In their view, it is nearly unreadable: much too dense, and relying too much on the details of what Chamberlain said to Salisbury that nobody remembers anymore.

It's too bad, because I really like Schumpeter, "Imperialism"...


The Pile Grows...

The pile of things to read grows:


The PE 101 Students Have Spoken!

They have voted 90%-10% that when I next teach this course, students should be spared:

In their view, it is nearly unreadable: much too dense, and relying too much on the details of what Chamberlain said to Salisbury that nobody remembers anymore.

It's too bad, because I really like Schumpeter, "Imperialism"...


We Remember 911

If you had asked me six years ago what the odds were that Osama bin Laden would still be living out his alloted lifespan in the fall of 2007, I would have said that the odds were zero.

No matter how feckless, incompetent, and stupid George W. Bush and his administration are, I would have said, nobody would let an Osama bin Laden kill 3000 Americans in an act of terrorism and survive.

Silly me.


Two Weeks of Lectures: Audio Podcasts

August 26-September 9, 2007:

September 8: Marx, Rostow, Kuznets, Gerschenkron: Economic History Association Plenary Session

September 5: Northern Agriculture Lecture: American Economic History

September 4: Slow Spread of Industrialization Lecture: Political Economy 101

August 30: MISSING

August 29: Colonization Lecture: American Economic History

August 28: Opening Lecture: Political Economy 101

August 27: Opening Lecture: American Economic History


Marx, Rostow, Kuznets, Gerschenkron

September 8, 2007: 5:00-6:30 PM: What remains after 50 years: The role of economic history as a guide to economic development.

Moderator: James K. Galbraith, UNIVERSITY OF TEXAS AT AUSTIN

Panelists: J.Bradford DeLong, UNIVERSITY OF CALIFORNIA, BERKELEY. Dick Easterlin, UNIVERSITY OF SOUTHERN CALIFORNIA


Marx, Rostow, Kuznets, Gerschenkron

Large Audio File


We might as well start with Karl Marx. "De te fabula narratur! Marx wrote in the preface to the first edition of the first volume of Capital: it is about you. Why should Marx's German audience read the details of the industrial and social history of England mixed up with pieces of classical economic theory and a coquette's flirtation with Hegelian philosophy? Because, Marx wrote: "The country that is more developed industrially only shows, to the less developed, the image of its own future." --Karl Marx, Capital, preface. In short, it is about you.

Thus in Marx's view, economic historians and development economists were or ought to be the same. In fact, all economists and economic historians ought to be the same. In fact, everybody ought to be an economic historian: studying the social and industrial history of England, and then applying its lessons everywhere around the globe, was the most important task. Economic historians ought to rule the world, for they held the key to the lock that opened the door behind which was concealed the answer to the riddle of human destiny. There was one qualification. As a secondary task one needed to be a political historian--and not a political historian of England, but of France. As Friedrich Engels said in a revealing moment, "Generally speaking, for the economical development of the bourgeoisie England is here taken as the typical country; for the political development, France." But the politics was added-on superstructure: the economy was fundamental base.

Now the cup that Marx offered turned out to be a poisoned chalice, and I think there were three reasons for this.

First, as a matter of historical understanding--well, (the mind does boggle at the grafting of France's political history onto England's industrial one. No country, anywhere, anytime has had the political history of France and the industrial history of England. A focus on politics tends to make one anticipate revolutions and seizures of state power and expect state-led economic transformation. But thumb-fingered states are capable of only certain types of economic transformations, and the free society of wealthy and productive associated producers that Marx tried to order was simply not on the menu. Taking France's political and England's economic history leading to mass revolution that produces a left anarchy as the model, and trying to explain every deviation from that as second-order factors imposing transitory disturbances on a dominant tendency--well, that is not an easy task.

Second, as a matter of practical politics--Marx and Engels's insights into economic history were intended to provide a set of guideposts: make people aware of the power of market-economic capitalist development, warn people of the dangers of market-economic capitalist development, and also make people aware of the opportunities for socialism in a rich, advanced, high-tech economy thereby opened up. But those who ruled nations and tried to apply Marx's lessons ruled not advanced industrial economies but poor agricultural ones. So the Preobrezhenskys and the Liu Shaoquis tended to view the brutal historical chapters of Capital not as warnings but as models: So that's how you do it! That's how you become a powerful country with a developed economy! Do everything you can to keep peasant standards of living as close to subsistence as possible. Extract as much surplus as possible from the countryside, and invest it in urban industry. And since you don't have a labor market and a flood of immigration from Ireland to enforce the iron law of wages, reenserf the peasantry.

Third, the economic mechanisms did not seem to work very well. Absolute immiserization doesn't seem to happen, so you retreat to relative immiserization and then to the cultural critique of advertising. The falling rate of profit did not fall. A theory of business cycles based on economies of scale and overaccumulation committed you to a neo-Hayekian anti-Keynesian view of the macroeconomy. Nobody who ventured into the labor theory of value has ever emerged. So the economic-historical research program that tried to draw on Marx found itself throwing the "economic" part overboard. The river jumped its banks and found itself in a new channel: Gramsci and Foucault and modes of thought rather than Hobsbawm and his children.

If the Marxists turned out not to be very Marxist, others did take up the torch. The most Marxist of economic historians--in the sense of believing that economic history was the key to the lock on the door behind which was the secret of history--was the University of Texas's own Walt Whitman Rostow. He must have been the most hawkish person ever named after Walt Whitman--just as his brother was the most hawkish person ever named after Eugene V. Debs. And he was the only development economist/economic historian ever named to the post of American National Security Advisor.

Adam Smith had said, in lecture: "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice." For Rostow much more was required: The traditional economy. The creations of the preconditions for takeoff--an honest government, good market institutions, and commercial and financial sophistication. The "takeoff" itself--a substantial rise in the savings and investment rate made possible by the opportunities in leading sectors opened up by modern technology and financial mobilization, and that would transform the economy from an earth-bound to a sky-free creature. Followed by the drive to maturity, and the age of high mass consumption.

But in the decolonization age of the High Cold War the first priority of the Dulleses and the Rusks was to line up newly-independent countries and the older states of Latin America on the U.S. team for the great tug-of-war. And this required gaining the favor of the new princes who ruled. And as Machiavelli taught us long ago, there is nothing more difficult than being a new prince: all of one's energy must be devoted to state-building so that one does not rapidly become an ex-prince.

State-building requires that you make friends who will be your supporters, which requires that you make people who want to be your friends happy, which often means rich, which requires that you give them some other people's money, which requires that you find some other people with money whose money you can give, which tends not to be great for economic development. Rostow went with Kennedy to Indonesia. Rostow had primed Kennedy to negotiate on how the U.S. could aid Indonesian economic development. But Indonesian dictator Sukarno, stuck between a large rural land redistribution-seeking Communist movement and an army officered by the relatives of local notable landlords, did not think he could take the long view. Kennedy talked about the Peace Corps and aid and technical assistance and economic development and a South Asian Development Bank. Sukarno's response? "Mr. President, development takes too long. Give me West Irian instead"--West Irian being the western half of the island we westerners call New Guinea. Sukarno got West Irian, and the Year of Living Dangerously.

This should not have come as a great surprise. State-building, the pursuit of empire, and political organization always had an uneasy relationship with economic prosperity and growth. Back in 1992 Andrei Shleifer and I were tremendously excited when we discovered an inverse correlation between political reach and city growth in Paul Hohenberg and Jan de Vries's numbers on comparative early modern city growth. It wasn't until 1996 that I realized that Charles Wilson in 1967 had put this better than we could, and done so in a parenthetical aside:

The two areas... in 1500... richest and most advanced... the quadrilateral... Milan, Venice, Florence, and Genoa; and the strip... from Ypres... to Antwerp. It was not merely coincidence that these were the areas where the tradesmen of the cities had been most successful in emancipating themselves from feudal interference, and in keeping at bay the newer threat of more centralized political control offered by the new monarchies. In the fleeting intervals between the storms of politics and war, men here glimpsed the material advance that was possible when tradesmen were left in peace unflattered by the attentions of strategists who regarded their activities as the sinews of war.... The precocious economic development of the cities of Italy and the Low Countries was cradled in the civic independence of those cities where merchants had achieved political power...

Indeed, back in 1776 Adam Smith had warned that Britain's politico-military state's success might well crush its economy, writing about even successful debt-funded wars:

The practice... has gradually enfeebled every state which has adopted it. The Italian republicks... Spain seems to have learned the practice from the Italian republicks, and (its taxes being probably has, in proportion to its natural strength, been still more enfeebled.... France... languishes under an oppressive load.... The republic of the United Provinces is as much enfeebled by its debts as either Genoa or Venice.... Is it likely that in Great Britain alone a practice, which has brought either weakness or desolation into every other country, should prove altogether innocent?

Rostow's The Stages of Economic Growth: A Non-Communist Manifesto served much more as a hard rake of the spurs than as the laying of a foundation for a collaborative research program. Reread the International Economic Association's critique volume--Rostow, ed., The Economics of Take-off into Sustained Growth, and it is brutal. As Dacy, Galbraith, and Inman (2004) wrote:

Rostow's identification of and focus on the "take-off"... stage of relatively short duration... became a lightning rod.... The criticisms.... Rostow's "theory" was not theory... [but] taxonomy... [with] no predictive usefulness.... [P]reconditions for take-off could not be distinguished from take-off proper... sustained growth did not always follow...

Rostow was not much good for those who thought that economic historians should be supported because their work had direct and immediate application. Dacy, Galbraith, and Inman quote Mancur Olson:

There is a paradox here.... How can we explain this absence of any consensus in favor of Rostow's main conclusions and formulations, and at the same time explain the extraordinary amount of attention and tribute his work has received?...

And Henry Rosovsky:

I invariably learn more by disagreeing with Professor Rostow than I do by agreeing with most other writers...

Rostow did not help himself, as far as the East Asian Plains Ape sociodynamics were concerned, with his scorn for Simon Kuznets's national accounts project, and its implicit claim that national product could serve as an effective summary statistic for the economy. Rostow did not believe in aggregation. Kuznets had labored in the vineyards of Arthur Burns and Wesley Mitchell, identifying business cycle turning points and laboriously calculating the coherence of myriads of individual economic time series. Kuznets thought that there had to be a better way.

In the end Kuznets won. It was not clear how one developed Rostow's line of research. It was very clear how one developed Kuznets's: one calculated national product, or decomposed national product, or accounted for changes in national product sector-by-sector, or accounted for changes in national product factor-by-factor. In his Ely lecture critique of Milton Friedman--a critique that Milton never forgave--Harry Johnson argued that the Monetarist Counterrevolution had succeeded for the same reason that the Keynesian Revolution had succeeded: not because it was true, but because it provided young scholars with (a) an excuse for ignoring the work of their elders as wrongheaded and irrelevant, and (b) relatively straightforward yet high-value things that they could do--estimate consumption functions, estimate money demand functions, account for changes in national product. Yet as I look back I am somewhat uneasy. Yes, real national product as an excellent first-order summary statistic. Yes, the insights into the striking importance of innovation from Abramovitz, Solow, and Denison were as blinding as any light on the Damascus Road. Yes, I do teach my students every year that global total factor productivity growth was roughly:

0.03%/year for 1-1650
0.21%/year for 1650-1800
0.53%/year for 1800-1900
1.82%/year for today

But when I look at the orerry of Solow and post-Solow growth models and at the twelve million regressions with nation-state real national product growth rates on the right-hand side, I cannot help but think that all this energy might have been better deployed elsewhere.

Even Simon Kuznets identified a single process: modern economic growth. It started--takeoff-like--at different moments in different countries. But it was the same process.

It was Gerschenkron who pointed out most strongly that economic development was not economic history--that it was not the same process repeating itself over and over again, because successive episodes took place in very different technological and international environments. In 1600 Antonio, the Merchant of Venice, can draw upon the skills of the craftsmen who work at the Venetian Arsenal to build his ships, write incentive-compatible contracts with his captains and quartermasters, diversify his portfolio, and largely keep his accounts in his head. In 1800 Francis Cabot Lowell employs a staff of ten managers and technicians--including a high-priced engineer, Paul Moody, poached from Britain and given an equity kicker--at his first spinning mill far up the Charles River in Waltham, Massachusetts. But by 1850 to build railroads in France you need the cooperation of Baron James de Rothschild to mobilize capital--not the enthusiastic cooperation, mind you: he said that spending money on the fair sex and fine wines were much more pleasant but not as sure ways of losing it than railroad engineers. By 1900 you needed to draw on an oligarchic universal bank--a Dresdner, a Deutsche, or a Morgan--to do your infrastructure or your heavy industry on a scale where you had a hope of being efficient.

Gerschenkron extrapolated this line in "Economic Backwardness in Historical Perspective": he saw the Stalinist industrialization of the 1930s as, at one albeit not the most important level, a response to twentieth-century technological necessity: only a state could mobilize savings and thus resources on the scale needed for the hydroelectric dam at Dnepropetrovsk and for the tractor factories of Magnitogorsk. And he expected that trend to continue: successful economic development in the post-WWII era, Gerschenkron thought, would be state-led and state-financed even if market-oriented.

Alongside Gerschenkron came Prebisch and Singer, and the development of underdevelopment. In poor countries labor was cheap because they were poor, and technological capability was small. Poor countries had to export resource-intensive products of unskilled labor for they had no chance of attaining a comparative advantage in manufacturing. But many low-wage countries exporting the same ores and foodstuffs found themselves with bad and worsening terms of trade, hence with no ability to buy the technology-embodying products of the core needed to industrialize. Successful economic development in the late twentieth century required something very different than walking in the footsteps of the North Atlantic, for an iron-handed state pursuing trade policies to squeeze down elite consumption of imported luxuries and to abandon comparative advantage in order to acquire domestic manufacturing competence. Or maybe it wasn't something very different: recall the Tariff of Abominations, after all, and Andrew Jackson's threat to hang his own vice president on the White House south lawn if South Carolina moved one step closer to treason.

But, once again, they were wrong. The comparative advantage that poor countries have been revealed to have in the past generation appears to have been a comparative advantage in assembly line-based light industrialization based on relatively low wage levels as anything. State-led development has not been necessary--especially not when pursued by anti-developmental states. Adam Smith's dictum:

Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice...

may have been more close to being true in the past generation than in any of the eight previous ones--if one adds also a functioning electric power grid, working ports, and roads without potholes and rails with switches.

"De te fabula non narrator! The story is not about you. The country that is more developed industrially does not show, to the less developed, the image of its own future. The experience of the North Atlantic does provide a useful set of benchmarks, comparisons, and yardsticks for countries going through urbanization, globalization, marketization, democratization, and industrialization. But that is all it provides, and all it has ever provided.

What, then, is the value of economic history? Why should history departments train and hire people like us? Jan de Vries says that the students he will teach in graduate early modern history in Berkeley's history department next year--well, that not that many of them are focusing on proto-industrialization or the Nederland Vereenigde Oostindische Compagnie. Instead, they are focusing on what happens to the world of women as a result of the Reformation: on the one hand, you have to learn to read because you must read the Bible to your children; on the other hand, the honorable estate of being a nun if you don't like the potential husbands your father offers is no longer open. I find this disappointing--for there is an awful lot of economic history still to be done in history departments, and I think it fascinating--but it is not as though studying the Reformation through a gender-culture-sociology lens is not honorable.

In economics departments I hear that it's unfair to spend so much time studying history when there are the crying needs for more theory. And when I hear this I want to respond: what do you think theory is? Theory is, after all, nothing but distilled history, processed history, freebase or crack history--you know, it reaches the brain and alters your neurotransmitter balance in five seconds. But freebase and crack or very dangerous: better to simply chew the leaves. As Alan Greenspan said on Friday night, to gain insight into the state of financial markets today you would have been much better advised to do a narrative and institutional study of the panic of 1907, or of that seventeenth century episode that Voth and Temin's spellchecker calls the "Turnip Bubble," than building a statistical model or applying Ito's lemma to the no-arbitrage condition.

Housekeeping:

4500 words


Alex Harrowell on Adam Tooze's The Wages of Destruction

Alex writes:

Review: The Wages of Destruction, Adam Tooze: The Wages of Destruction: The Making and Breaking of the Nazi Economy... is getting some very good reviews, and this one will be no different. Tooze’s thesis is that the Nazi German economy was a more powerful factor in many decisions taken by the leadership than hitherto assumed, that its structural weaknesses were determining in the failure of Nazism, and that Nazism itself can be understood as an effort to escape them by a combination of will and technology. The first is fairly original, and certainly controversial, the second is hardly controversial (although it is surprising that it still needs restating; the image of impregnable fascist might dies hard), and the third is both new and highly controversial.

Tooze begins with a discussion of Germany’s economic problems and relative place in the world whilst passing through the Depression. He provides an excellent account of Stresemann’s policy in terms of a special relationship with the United States.... America in German eyes is a main theme of the book, and a little-remembered sub-theme of Nazi discourse more generally. Not only were leading Nazis concerned about the potential power of the US, they both idealised what they took to be the unique efficiency of 1920s US industry, and demonised what they took to be the decadence and miscegenation of US society....

Stresemann and his fellow liberals, and the Social Democrats, thought the answer to America was to preserve the international political and trading structure; perhaps with a European community in the far future. The Nazi response was to shake the structure until it fell down....

What got Germany back to work was rearmament, and Tooze argues that much of what is thought of as civilian investment was actually more like disguised military investment, or investment in war-supplying industry. It is well worth pointing out here that Tooze is excellent on the corporate world of Nazi Germany, and especially the fast-growing influence and power of the top technical executives of big industry (especially chemicals and aeronautical engineering), who made up something like an independent technocratic lobby in their own right. J.K. Galbraith’s technostructure comes to mind; this may have been the most malevolent and evil manifestation of it ever....

The upshot was that the decision for war, and then the decision to take the offensive in the West, and finally the decision to take the offensive into Russia, were at each step driven by a logic of economic bootstrapping. War, and the consequent loss of world trade, had a serious initial impact on the German economy; inflation threatened to burst out of control, there was a constant struggle between interests over short-supply assets, and a key feature of the German economy caused deep discontent....

Peasants were a key Nazi constituency, as well as occupying an important place in ideology; unfortunately this image of virtue didn’t translate into grain all that well.... Here, the appalling figure of Herbert Backe, State Secretary and later Minister of Agriculture, stands out; Backe wrote a PhD thesis years before entering office on the Russian grain business, in which he explained that the superior people without space must get rid of the Russians in order to secure the Ukraine’s surplus and settle enough of their urban working class to overcome the unrooted, degenerate tendencies created by the modern nomads, that is to say the Jews....

[A]lthough the conquest of western Europe turned a very bad economic position into a tolerable one with considerable potential, Europe was far more globalised than the Nazi economists assumed. Oil is the canonical example, but Europe also imported a lot of animal feed, and also British coal. Problems with transport, and the planners’ inability to come up with a settlement of coal supply between the mighty interest groups concerned, exacerbated the feed problem. As agricultural productivity fell, so did productivity down the mines; it probably would have done anyway, French communists not being likely to bend their backs any harder for German fascists, but hunger is enough to explain the droop in coal output per hour.... The upshot was a European economy operating massively below capacity and a German economy running red hot, with a continent-wide shortage of key inputs. Soviet trade, under the Molotov-Ribbentrop pact, matched part of the difference, but the Soviet government demanded its price, especially in terms of technology transfer....

[W]ith the occupied territories only a marginal benefit, and much capital investment not yet producing, Germany was faced with the rapid spin-up of US production. Where to go for the next bootstrap, before US industrial power took effect? Russia, clearly. Tooze’s book may be a final slam-dunk demonstration for the “functionalist” view of Nazism, dominant since the 1980s, which argues that the regime’s internal politics, shared assumptions, and the incremental radicalisation caused by a succession of crises drove Germany into war and genocide, rather than a clear rationalist design. Independent decisions, taken for different reasons, mutually reinforced each other....

In nearly all British accounts of the second world war, the author takes sides regarding one or more of the morality, effectiveness, and wisdom of the RAF’s strategic bomber offensive against Germany; it’s an identity-creating decision for any British historian.... Tooze argues, against Galbraith, that the bombing was indeed effective....

In conclusion, what stands out is that the Third Reich was fascinated by the United States, perhaps even more than the Soviet Union; Hitler spoke of the Volga as Germany’s Mississippi, and various SS Schreibtischtäter of treating its inhabitants as “Red Indians”. The size of the proposed empire was frequently compared to Canada or Australia. It is clear that a major motivating factor for many leading Nazis was a wish to escape from an increasingly integrated world economy, and a matching desire to have a Grossraumwirtschaft to match the people seen as controlling the world economy; Tooze’s book leaves the disturbing sensation that this is us.


In Defense of the Honor of the Great Eastern

Last night at the Economic History Association annual meeting, Dick Easterlin quoted J.H. Clapham making fun of the Great Eastern as part of an argument that there is nothing to the idea of "economies of scale" as a factor driving economic growth independent of better technology.

Afterwards Alex Field and I caucused. While we don't want to maintain that the investors in and owners of the Great Eastern profited, we do want to maintain that the Great Eastern's construction was a positive social net present value investment. A lot was learned about materials (and their limits) as a result of its construction and operation. And a great deal was done that had a very high social value that could have been acomplished by no other ship at that time: chiefly the laying of the second first two transatlantic telegraph cables, the unsuccessful Whitehouse cable of 1858 and, the successful Thompson cable of 1866.

It's not that we want to attack Easterlin's critique of the growth-accounting tradition (well, maybe I do: it seemed to me that Dick was attacking weak targets--that growth accounting can be done well, but not always is), but we do want to defend the memory and honor of a mighty if unprofitable vessel.


Charles Krauthammer Drives Shrillness into Matthew Yglesias

And his High Shrillness writes:

Matthew Yglesias: In his May 14, 2004 column, "The Abu Ghraib Panic," Krauthammer wrote that "the Sadr insurgency seems to be waning." Sadr, whose survival in 2004 Krauthammer now sees as the key turning point on the war, them goes unmentioned in his columns for almost two years.... [S]uch is the war in Iraq as seen through neocon lenses. Mistakes are always in the past. The current policies are always working. When the mistakes are being made, those who point them out are tarred as near-treasonous. Then, after a year or two... It is conceded that mistakes were made in the past. But now we are right on track. And the liberals, once again, just don't get it.


How Much Does Inequality Matter Today?

Mike Boskin once asked me a question that I did not have a good answer to so I will channel him in the hope that someone like Bob or Larry can.

In the first Gilded Age, says Mike, inequality really mattered, and mattered a lot: it mattered for life expectancy, for health status, for height, for access to culture, for the human capital and even the energy to enable you to make good use of your leisure time.

Today, that is much less true.

Today, Benthamite utility is flat and much less sharply curved than log. So average income is much better as a summary statistic than it used to be.


Was Judy Miller Ever a Journalist, or Always a Right-Wing Hack at the Core?

The evidence is in, and it says that she was always a right-wing haci:

Judith Miller's New Post: She'll Take Manhattan: NEW YORK Judith Miller, the former New York Times reporter who left the paper amid tumult over her role in the Plame/CIA leak case, has accepted a position at the the conservative Manhattan Institute in New York City.

New York magazine on its Web site, in an item titled, "Judith Miller Finally Lands in the 'Right' Place," noted that she has written for the think-tank's City Journal already.

It quoted a release from her: “The Manhattan Institute is doing pioneering work in policing and counter-terrorism. As an adjunct fellow, I hope to continue writing about how best to enhance national security and public safety without sacrificing our freedom and civil liberties.”

I thought that she left the Times not over the CIA/leak case, but because she had published as true a great many claims about Saddam Hussein's nuclear weapons program that she had no sound reason to believe were true.


Matthew Yglesias Summarizes Jason Furman

Matthew writes:

Matthew Yglesias: It should be said, that though belief in "tax cuts will pay for themselves" type theories is frequently expressed by Republican Party politicians and Republican-oriented columnists, talk show hosts, and think tankers, I do think it's unlikely that this theory actually causes Republicans to advocate for tax cuts. For that, you need to look to something more like Jason Furman's testimony today (PDF) before the Ways and Means Committee....

What we're seeing here are dynamic analyses of the effect of tax cuts on the income of people at different income levels, under different scenarios. The top selection shows what happens if you pay for tax cuts via decreases in spending -- i.e., what conservatives typically say should be done. Most households -- 74 percent of them, in fact -- wind up worse under this scenario than they would have been without the tax cuts. But 57 percent of families in the top twenty percent benefit. And 99 percent of families in the top one percent benefit. If, by contrast, the tax cuts are paid for simply by a future re-raising of taxes, then 76 percent of households wind up worse off, but 43 percent of households in the top one percent benefit.

In the real world, of course, you're likely to see a mix of spending cuts and tax increases used to close deficits (so indicate the precedents of the major deficit reduction packages of the past) so that Republican Party advocacy of tax cutting does, according to Furman's analysis, probably achieve its purpose of further enriching the richest Americans, albeit at the expense of the vast majority of Americans. For some of the movers behind this policy, it's a question of self-interest (they're rich or being paid by the rich to serve their ends) and for others it's a simple question of justice -- a not entirely trivial minority of the population regards the fact that the very richest Americans aren't even richer as deeply immoral.


Greg Ip on Greenspan on Euphoria, Bubbles and Fear

Greg Ip writes, apropos of Alan Greenspan's very short Friday night talk:

Economics Blog : Greenspan on Euphoria, Bubbles and Fear: Former Federal Reserve Chairman Alan Greenspan has long argued that economic models don’t adequately capture the way the economy behaves. Mr. Greenspan expanded on that view Thursday night, saying human nature, which is prone to euphoria and fear, may be the principle driver, and it can’t be captured by economic models.

The dinner marked the handover of the editorship of the Brookings Papers on Economic Activity after 37 years from George Perry and Bill Brainard to Greg Mankiw, Larry Summers, and Doug Elmendorf.

“I ask you if anybody in early June could contemplate what we are now confronted with?” Mr. Greenspan said, referring to the eruption in credit market turmoil and risk aversion that originated with rising delinquencies on subprime mortgages. Mr. Greenspan cited business cycle pioneers Wesley Mitchell and Arthur Burns whose “underlying notion is what drives the economy was this vague and unquantifiable statistic called business confidence.” Through his career at both the Council of Economic Advisers under President Ford and Fed chairman from 1987 to 2006, he learned “the best of models don’t work all that well [because] the underlying structure that we’re endeavoring to model is continuing to morph into something else all the time.”

“There’s something we don’t model appropriately, which is a profoundly important statistic, and that is the unchanging, innate character of human nature. The behavior of what we are observing in the last seven weeks is identical to what we saw in 1998, what we saw in the stock market crash of 1987, I suspect what we saw in the land boom collapse of 1837, an certainly 1907,” when a major bank panic was only stopped by the intervention of J.P. Morgan. Economists try to build a model of the economy whose structure is the same during expansions and contractions, he said, and “when we endeavor to apply [it] to periods like this [it] gives us very little.”

There’s a basic euphoric aspect to human nature, he said, that kicks in when an expansion has been going on for several years, and produces bubbles. “Those bubbles cannot be defused until the fever breaks,” he says. “For example, we at the Fed raised the federal funds rate by 300 basis points starting in February, 1994. We stopped … the nascent stock market boom, stock prices did not change in that period. As soon as we stopped, prices took off.... We tried to do it again in 1997,” when the Fed raised rates by a quarter of a percentage point, “and the same phenomenon occurred.” If the economy behaved as models suggest, “we should be able to defuse bubbles by pushing the appropriate elements in the model and the problem that is very evident is the world didn’t work that way.”

He urged future scholars to study the fact that expansions are quite different from contractions. “Fear as a driver, which is going on today, is far more potent than euphoria” which drives the upside. “It happens all the time and it all works the same. The human race has never found a way to confront bubbles. [There’s a] long list of various bubbles, all of which broke because the fever broke and none of which was defused prior to breakdown.”

Well, the principal--or at least one of the principal--reasons the stock market bubble of 1929 broke when it did was because the economy was in recession, in part because the Federal Reserve had raised interest rates to try to stop stock market speculation. There is little doubt that the Federal Reserve can deflate bubbles with monetary policy--if it does enough collateral damage to employment, capacity utilization, and corporate profits in the process.

This is of great interest to me because I have just agreed to review Alan Greenspan's book--coming out on the 17th, I believe--and because it seemed to me that Alan Greenspan's Friday talk was addressed more to his own past tenure at the Fed than at Ben Bernanke's present and the future. He seemed, to me at least, to be mostly defending his cautious approach to the twin bubbles in the stock market and then in real estate that marked the second half of his tenure at the Federal Reserve. And it was interesting to hear Greenspan say so frankly that he really wished that he had had more reliable economic models and thus more powerful tools at his disposal.


Why My Father Gets the Financial Times, but Not the Post or the NY Times

From Mark Kleiman:

The Reality-Based Community: How it's done: Andrew Ward of the Financial Times shows what a real reporter does when a candidate's assertions don't match the facts:

Until now, Mr Thompson’s policy pronouncements have amounted to little more than broad expressions of conservative principles. Much of his appeal stems from his charisma and star quality. Obvious parallels with Ronald Reagan, another B-list actor who became president, have also helped at a time of rampant Republican nostalgia for the Reagan era.

Once on the campaign trail, however, Mr Thompson’s policies, leadership abilities and life history will come under closer scrutiny.

Like Mr Reagan, he projects himself as an outsider intent on challenging the Washington establishment. In reality, he has spent much of his life in the capital, dating back to his role as a congressional lawyer during the Watergate investigation. He went on to become a political lobbyist, representing big business on Capitol Hill.

There! Now that wasn't so hard, was it?

In fact, it is hard for somebody like me to understand why anybody reads the Post or Times these days when they can read the FT or McClatchy, which shows how journalism is done:

Dissent and discussion: Casualties in Iraq: By Mark Seibel: A story by Pentagon Correspondent Nancy A. Youssef... sparked a huge outcry.... Critics charged that the piece uncritically accepted the Bush administration's line that the surge of additional American troops to Iraq is working and that its statistical underpinning was flawed. McClatchy usually is associated with questioning administration claims, from the reasons for the war to Pentagon assertions about civilian casualties. We've earned a reputation for not accepting something just because someone says it's true, so being accused of uncritical reporting stings. But one of our mottos here is "Truth to Power," and that cuts both ways, so here's a more in-depth look at the story and some of the criticism of it.

The genesis of the story was pretty straight forward. In June, the Pentagon announced that all of the troops involved in the so-called surge finally were in place and that American offensive operations would begin in earnest... U.S. casualties would rise.... So what happened? Not what had been predicted. U.S. deaths caused by enemy action peaked at 120.... Combat casualties then fell consistently for the next three months, reaching a low of 56 in August....

That discovery surprised many analysts, as Nancy wrote. Maybe it shouldn't have been such a surprise. Reporters in Iraq had noted a startling lack of U.S. deaths or frustration on the part of soldiers that they weren't finding the gangs of insurgents they'd expected. One British analyst told Nancy that Iraq's armed groups may simply have avoided combat with the Americans.... Of course, some supporters of the surge credited the surge, and Nancy reported that, as well.... [N]o one claimed to know precisely why the decline had taken place....

So where did the statistics come from? Almost since the beginning of the war, McClatchy and, before that, Knight Ridder, which McClatchy acquired last year, have relied on the Iraq Casualty Count.... [W]e chose to examine only those deaths that were caused by enemy action, which icasualties refers to as hostile.... What deaths are left out in such a consideration?

Those caused by accidents, illness and helicopter crashes unrelated to enemy activity. In August, that was a large number, including 19 soldiers who died in helicopter crashes not related to combat....

Some critics argue that there's an annual drop-off in casualties in the summer, and that we erred by not accounting for that. Using that approach, any decline in casualties from May's peak was simply to be expected and has nothing to do with the surge or combat operations. But that doesn't explain why this August, in particular, when the U.S. supposedly was increasing combat operations, deaths dropped....

So who's correct, surge supporters who say the August numbers show that sending in more troops is working? Or surge opponents, who say the statistics mean nothing more than that Sunni Muslim insurgents and Shiite militiamen simply slipped away to fight another day? There's no definitive answer yet. But the outpouring of commentary shows that it was a good question to ask.... Watch this space.