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November 2007

The Massachusetts Individual Mandate Health Plan

Michael Tanner says he told us so:

Cato-at-liberty » Not to Say We Told You So, But...: The latest reports from Massachusetts warn that with just seven weeks left until the state’s mandate for individual health insurance goes into effect, more than 100,000 residents have failed to buy the required insurance. That represents nearly 20 percent of the state’s uninsured population and more than half of the uninsured with incomes too high to qualify for subsidies. According to insurance industry insiders, the plans are too costly for the target market and the potential customers — largely younger, healthy men — have resisted buying them. How could anyone know that an individual mandate for health insurance would be unenforceable? Oh yeah, we told them.

National Review and the Bush Administration Still Heart Joe McCarthy

In case anyone thinks that National Review's love of Joe McCarthy is something generations in the past. It is not. And the same applies to the Republican right more broadly. Senior Bush policymaker Eliot Abrams wrote in National Review praising McCarthy only last decade. Here's what I think, hoisted from the archives:

Eliott Abrams Identifies Himself with Joe McCarthy: Eliott Abrams, "McCarthyism Reconsidered," National Review February 26, 1996, pp. 57-60. [A review of the reissue of William McCarthy and L. Brent Bozell, McCarthy and His Enemies (Regnery).]

To read Eliott Abrams's review of Buckley and Bozell's McCarthy and His Enemies is to enter a strange and inverted world. One learns that the issue at stake in the fight over Senator Joe McCarthy was not whether General of the Army, Secretary of State, and Secretary of Defense George Marshall was a Maoist traitor, or whether there actually were 57 card-carrying Communists in the State Department--that is a left-wing delusion that distorts what the fight over Senator Joe McCarthy was about.

Instead, according to Eliott Abrams, the key issue in assessing Joe McCarthy was "whether the State Department was running its security program well or poorly." Moreover, in order to show that the State Department was running its security policy poorly, Senator McCarthy did not need to demonstrate that there were spies in the State Department. Instead, all he needed to do was to "show that there was some evidence that an employee was a security or loyalty risk--present "enough evidence to raise reasonable doubt as to whether all loyalty and security risks had been removed from the State Department."... Never mind that George Marshall was not a Maoist traitor, or that there were not 57 card-carrying Communists in the State Department. After all, "McCarthy was in a business that permitted a certain latitude," "politics, not physics." Abrams quotes with approval Buckley and Bozell's statements that "McCarthy's record is... not only much better than his critics allege, but, given his metier, extremely good," and that McCarthy "should not be remembered as the man who didn't produce 57 Communist Party cards but as the man who brought public pressure to bear on the State Department to revise its practices and to eliminate from responsible positions flagrant security risks."...

[Thus Cohen] praise[s] Buckley and Bozell for standing up to liberal anti-McCarthyite hysteria:

At precisely the moment of greatest hysteria, Buckley and Bozell insisted on clarity of thought and moral purpose. The intellectual standards they upheld here do them honor four decades later, not least because so many in the academic and intellectual elites were happy to compromise those standards in the interest of "democratic centralism." The book remains of lasting value not so much for its factual accounts or its political reasoning, but because of its moral stance.

Now this is a startling inversion of the way... it really happened. The hysteria--traitors in the cabinet, large cells of card-carrying Communists making foreign policy--was McCarthy's. The honor and moral purpose were those of McCarthy's political opponents.... So how does Eliott Abrams account for the fact that history's--strongly negative--judgment of Joe McCarthy is so wildly divergent from Abrams's--strongly positive judgment? I think the key is found in a long passage two-thirds of the way through [Cohen's] review....

As [Whittaker] Chambers had predicted, [Joseph] McCarthy's blunders became capital crimes for which his cause would be punished. His opponents' capital crimes became blunders that were not newsworthy. Thus the many hearings about McCarthy focused not on whether State Department procedures really were adequate, but first on whether McCarthy had offered legally persuasive proof that Mr. X and Mrs. Y were indeed espionage agents, and then on whether McCarthy was behaving himself.... [I]t was in the McCarthy era that the iron triangle of liberal bureaucrats, a liberal press, and liberal Democrats in control of Congress was first evident.... But from the early 1950s on, the pattern unveiled in the McCarthy era reigned supreme, reaching its apotheosis in the Watergate and Iran/Contra hearings...

But [for Abrams] to call a McCarthy opponent (albeit a cowardly one) like Dwight Eisenhower a "liberal" is very strange indeed.

Abrams concludes his review of Buckley and Bozell with:

So perhaps the optimism of this book, the hope that moral and factual argument could sway men's minds, was correct.... History is opening its files and revealing the true nature and extent of Communist activity in the United States.... At precisely the moment of greatest hysteria, Buckley and Bozell insisted on clarity of thought and moral purpose. The intellectual standards they upheld here do them honor four decades later.... The book remains of lasting value not so much for its factual accounts or its political reasoning, but because of its moral stance.... Regnery's first printing of this new edition of McCarthy and His Enemies has already sold out. That "historical rectification" may be nearer than we think.

The defense of Joe McCarthy as a "moral stance": amazing.

It's Joe McCarthy's Birthday!

The archives of National Review: The gift that keeps on giving:

What Joe McCarthy was... can[not]... be judged by weighing in the balance the niceness of his discriminations or that tactical acuity of his actions.... His was not a common role. It comes to few men to play it--sometimes to a poet, sometimes to a politician sometimes to someone of no particular position.... Joe McCarthy, who bore witness against the denial of truth that is called moderation, and died for it: "He was a prophet"...

[Joe] McCarthy was in a business that permitted a certain latitude: it was politics, not physics. [Bozell and Buckley say that] "McCarthy's record is... not only much better than his critics allege, but, given his metier, extremely good." Thus he "should not be remembered as the man who didn't produce 57 Communist Party cards but as the man who brought public pressure to bear on the State Department to revise its practices and to eliminate from responsible positions flagrant security risks"...

We cannot avoid the fact that the United States is at war against international Communism, and that McCarthyism is a program of action against those in our land who help the enemy. McCarthyism is... nine parts social sanction to one part legal sanction. But that one part legal sanction is legitimate...


Wearing black dress socks that have lost their elastic with one's best suit is not recommended unless one has much prettier ankles than I do.

UPDATE: Profgrrrl has more serious problems

Memo to Self: Krugman Calculations

Paul Krugman writing in Economic Policy estimates that at a real dollar depreciation rate of 2% per year the US is headed for a steady-state capital-account position of -15 months' GDP, and that at a rate of 4% per year is headed for -7 months' GDP. Yet foreigners--both private and central bank--are not demanding any yield premium on US assets.

This worries him, very much: situations in which large numbers of speculators, investors, and financiers hold irrational expectations are situations that could rapidly move southward overnight should reality intrude into the mind of the capital market.

185 German Divisions Against the Russians

Winston Churchill, May 11, 1943:

Never forget that there are 185 German divisions against the Russians.... We are not at present in contact with any.... We cannot afford to have idle armies while the Russians are bearing such a disproportionate weight...

From Rick Atkinson (2007), The Day of Battle

Robert Waldmann Makes a Catch on Health Care Financing...

Robert writes:

Robert's Stochastic thoughts: Jonathan Cohn puts a baseball on a tee and Jonathan Cohn hits it out of the park

The treatment Mike [Kinsley] received is called Deep Brain Stimulation, or DBS for short. [snip] It is also very costly. Medtronic, a company that makes the electrodes, says the whole procedure costs between $50,000 and $60,000. And, because the treatment's main effect is to suppress and delay the onset of symptoms, rather than cure the disease, Mike started wondering whether a system of universal health insurance would pay for it--and, if so, in which cases....


And that prompted another thought--not from Mike but from me. All of this was assuming DBS even existed. The United States is famously the world leader in medical innovation--in part, it would seem, because we spend like a drunken sailor when it comes to medical care...

it would seem that Cohn is setting up a straw man (the kind who mixes metaphors with baseballs on tees). So it is. DBS was discovered in the French public sector in the University of Grenoble. More generally, while the US is the leader in medical innovation, this is largely due to the huge immense gigantic public sector effort called the NIH.

I made the same point at Brad's blog 2 years ago (and I didn't set up the straw man myself)

update: Not only is Brad DeLong a hero of intellectual honesty for his "DeLong Smackdown Watch" posts, but this post is awesome. Brad scores a goal for universal health care (with an assist from Alex Tabbarok).

Alex Tabbarok notes

People who have the flu spread the virus so getting a flu shot not only reduces the probability that I will get the flu it reduces the probability that you will get the flu. In the language of economics the flu shot creates an external benefit, a benefit to other people not captured by the person who paid the costs of getting the shot.

Brad recalls:

The person ... said that she was on Medi-Cal and didn't have to pay the $25 for the [flu] shot--and didn't have the money to pay the $25 in any case. But the Sutter Visiting Nurse Association apparently does not take Medi-Cal.... Note that people covered by Medi-Cal are NOT counted as among the 47 million uninsured.

Game, Set, and Match to Paul Krugman...

It appears that Paul Krugman wins his fight with David Brooks, who had written this about Paul Krugman's invocation of Ronald Reagan in Philadelphia, Mississippi:

David Brooks: History and Calumny: Today, I’m going to write about a slur. It’s a distortion that’s been around for a while, but has spread like a weed over the past few months. It was concocted for partisan reasons: to flatter the prejudices of one side, to demonize the other and to simplify a complicated reality into a political nursery tale.... But still the slur spreads. It’s spread by people who, before making one of the most heinous charges imaginable, couldn’t even take 10 minutes to look at the evidence. It posits that there was a master conspiracy to play on the alleged Klan-like prejudices of American voters, when there is no evidence of that conspiracy. And, of course, in a partisan age there are always people eager to believe this stuff.

Here, via Rick Perlstein, is Joseph Crespino:

Did David Brooks Tell the Full Story About Reagan's Neshoba County Fair Visit?: In his November 9, 2007, column in the New York Times, David Brooks discussed Ronald Reagan’s appearance at the Neshoba County Fair in 1980 and his use of the term “states’ rights.”  Brooks absolved Reagan of racism, but he ignored the broader significance of Reagan’s Neshoba County appearance.... Consider a letter that Michael Retzer, the Mississippi national committeeman, wrote in December 1979 to the Republican national committee.  Well before the Republicans had nominated Reagan, the national committee was polling state leaders to line up venues where the Republican nominee might speak.  Retzer pointed to the Neshoba County Fair as ideal for winning what he called the “George Wallace inclined voters.”...

On July 31st, just days before Reagan went to Neshoba County, the New York Times reported that the Ku Klux Klan had endorsed Reagan.  In its newspaper, the Klan said that the Republican platform “reads as if it were written by a Klansman.”  Reagan rejected the endorsement, but only after a Carter cabinet official brought it up in a campaign speech.  The dubious connection did not stop Reagan from using segregationist language in Neshoba County. 

It was clear from other episodes in that campaign that Reagan was content to let southern Republicans link him to segregationist politics in the South’s recent past.  Reagan’s states rights line was prepared beforehand and reporters covering the event could not recall him using the term before the Neshoba County appearance.  John Bell Williams, an arch-segregationist former governor who had crossed party lines in 1964 to endorse Barry Goldwater, joined Reagan on stage at another campaign stop in Mississippi.  Reagan’s campaign chair in the state, Trent Lott, praised Strom Thurmond, the former segregationist Dixiecrat candidate in 1948, at a Reagan rally, saying that if Thurmond had been elected president “we wouldn’t be in the mess we are today.”

Brooks’s defense of Reagan seemed to be a response to his fellow Times columnist Paul Krugman.... Brook’s column, however, is a good example of conservatives’ discomfort with their racial history.  Reagan is to modern conservatism what Franklin Roosevelt was to liberalism, so it’s not surprising that Brooks would feel the need to defend him.  But Brooks’s throwaway remark that “it’s obviously true that race played a role in the GOP ascent” understates what actually happened.... [Reagan] did it in 1966 when he campaigned for the California governorship by denouncing open housing and civil rights laws.  He did it in 1976 when he tried to beat out Gerald Ford for the Republican nomination by attacking welfare in subtly racist terms. And he did it in Neshoba County in 1980. 

Reagan knew that southern Republicans were making racial appeals to win over conservative southern Democrats, and he was a willing participant.  Despite what Brooks claims, it’s no slur to hold Reagan accountable for the choice that he made.  Neither is it mere partisanship to try to think seriously about the complex ways that white racism has shaped modern conservative politics.     

Flu Shots

Alex Tabarrok gets his flu shot, and opines:

Marginal Revolution: Kiss me, I'm vaccinated: I just had my flu shot.  Please send your checks to my George Mason address. People who have the flu spread the virus so getting a flu shot not only reduces the probability that I will get the flu it reduces the probability that you will get the flu.  In the language of economics the flu shot creates an external benefit, a benefit to other people not captured by the person who paid the costs of getting the shot.  The external benefits of a flu shot can be quite large.  Under some conditions each person who is vaccinated reduces the expected number of other people who get the flu by 1.5.

Since a large fraction of the benefits of the flu shot, perhaps even a majority of the benefits, go to other people and not to the person paying the costs, the number of people who get a flu shot in the United States is well below the efficient level.  I only got the shot because, as you well know, I'm altruistic.  I care about you.  But do send your checks, that will help. In lieu of a check I'm thinking of having some buttons made up to encourage people to get their shot.  Here are some possible slogans:

  • Kiss me, I'm vaccinated.
  • Take one for the herd!
  • Get a flu shot.  The life you save may not be your own.
  • Madison Avenue here I come!

Of course, we know from the Coase Theorem that there is an alternative approach.  We could charge people who do not get their flu shots. (Thus, if you haven't had a shot you must still must send me a check.)  Or to reduce transaction costs we could fine people who get the flu.  I kind of like that last one.  (But what to do about the 36,000 a year who die from the flu - charge their estates?) What do you think?  Leave your suggestions/slogans for how to encourage getting a flu shot in the comments.

Yesterday we went to a church in Concord--Nuestra Señora Reina de Todos los Santos--where a visiting nurse was giving out flu shots in order to get my wife her flu shot. The person in line after her said that she was on Medical and didn't have to pay the $25 for the shot--and didn't have the money to pay the $25 in any case. But the Sutter Visiting Nurse Association apparently does not take Medi-Cal:

Flu Shot: Each year, Sutter Visiting Nurse Association (VNA) & Hospice offers flu shots and pneumonia shots at convenient local sites, in September, October, November, and December.

  • Flu shot cost - $25.00
  • With proof of Medicare Part B, we will bill Medicare for the cost of the vaccine
  • Find a flu shot clinic near you

  • Pneumonia vaccine - cost $35.00

  • With proof of Medicare Part B, we will bill Medicare for the cost of the vaccine...

Note that people covered by Medi-Cal are NOT counted as among the 47 million uninsured.

Models of Fiscal Policy, the Trade Deficit, and the Dollar

Paul Krugman writes:

Robert Rubin is wrong about the dollar: He says: “You could have had [budget] surpluses that affected the savings rate and would have helped the trade balance. I think you would have had more confidence in the policy framework and you would have had a [stronger] dollar.”...

This is what John Williamson of the Institute for International Economics calls “the doctrine of immaculate transfer.”... Here’s a (somewhat) plainer English version:

The problem becomes apparent if one asks how a higher savings rate translates into a smaller trade deficit. It is not enough to insist that the accounting ensures that it must. A consumer deciding between a Ford and a Honda cares nothing about the US’s national income accounts. How does a lower US budget deficit persuade Americans to buy fewer foreign goods and foreigners to buy more US products?...

The chain of events would look something like this: a fall in the budget deficit reduces demand in the US economy; to avoid a recession, the Federal Reserve lowers interest rates; as a result, the dollar falls; this lower dollar makes US goods cheaper compared with foreign substitutes, causing the necessary switch in expenditure.... [I]t is naive to imagine that changes in the government’s financial balance can translate directly into changes in physical trade flows, without working through a mechanism such as the exchange rate. That is the fallacy of ‘immaculate transfer’ - confusing the accounting principle which says that the current account balance equals the savings-investment balance with the process that enforces that constraint on decision-makers...

And apparently the old fallacy continues to hold sway.

I think that Rubin is implicitly working in a different model than the NIPA-based monetarist workhorse that Krugman (and I!) instinctively reach for first. I think that in Rubin's mind the chain of causation looks something like this:

  1. A government establishes a sane, balanced long-run fiscal policy.
  2. Businesses conclude that the country is a safe one in which to invest to build export capacity: since they do not fear future random and confiscatory taxation or inflation, factories making internationally-traded goods that would have been built abroad are built here at home instead.
  3. With more export capacity at home and less abroad, exports rise and imports shrink at the current exchange rate.
  4. Supply and demand leads the domestic currency to appreciate in order to balance trade.

Rubin's channel is: good fiscal policy --> expanded export supply --> export surplus --> higher currency value.

By contrast, Krugman's channel is: good fiscal policy --> lower domestic interest rates --> reduced currency value --> export surplus.

Which side am I on? I tell my undergraduates:

  • At a time horizon of 0-3 years, be a Keynesian: the most important things are the fluctuations in unemployment, in real demand, and in capacity utilization.

  • At a time horizon of 3-8 years, be a demand-side monetarist: you can assume (provisionally) that fluctuations in employment, real demand, and capacity utilization die out; the most important things are the fluctuations in the composition of real demand (investment vs. consumption vs. government vs. net exports) and in inflation- and deflation-causing nominal demand assuming (provisionally) stable growth of the economy's productive capacity.

  • At a time horizon of 8 years or greater, be a sane supply-sider: the most important things are the processes of investment in physical, human, and organizational capital that raise the economy's productive capacity.

Thus I was happy telling my undergraduates in 1985 that the reason the dollar was strong was because of the five years of Reagan deficits--high domestic interest rates, you see, pushing up the value of the dollar (and raising the trade deficit). And I was happy in 1992 telling my undergraduates that the reason the dollar was weak was because of the twelve years of Reagan-Bush deficits--large budget deficits starving the economy of capital that made us less productive than in some counterfactual in which we had elected some Eisenhower Republican in 1981.

And so today I call this one for Paul Krugman: we are only in year six of the Bush II derangement of American fiscal policy, and so I think the dollar is a little higher than it would be if the U.S. budget deficit were lower. But in two years I may have a different answer.

Agreeing to Negotiate on Trade Issues...

At the FT, Eoin Callan sees good news on trade. It is, however, kinda scary that they are not negotiating--that they are just negotiating about how to negotiate: / World - US and Europe aim to resolve trade disputes : Diplomats from the US and European Union are laying the groundwork for an unprecedented round of bilateral bargaining in which all of the main transatlantic trade disputes would be put on the table and negotiated in one go. The talks between the world’s two largest trading blocs would link the resolution of billions of dollars-worth of simmering trade disputes and aim to “clear the decks” with one all-encompassing deal, officials said. The negotiations would tie the fate of a range of US and European industries, including computer manufacturers and producers of genetically modified foods, to a back-and-forth round of bartering that would produce “winners and losers on both sides”, a senior European official said.

The plans appear to have originated in Brussels and coalesced around the Transatlantic Economic Council, which met for the first time on Friday in Washington and brought together senior policymakers from the Bush administration and European Commission. Officials concede the drive for a single round of bilateral trade negotiations is ambitious, fraught with drawbacks and could quickly falter. They are also concerned that some industry groups and influential companies will try to scupper the effort because they fear their bargaining position will be weakened. But a European trade official said the transatlantic economic relationship was sufficiently mature that there was potential to “build consensus around bilateral issues”....

Officials said they saw a chance in the new year to press Boeing and Airbus to sit down to negotiate a dispute over airline subsidies that is being heard by the World Trade Organisation. The areas of trade friction include politically controversial differences over hormone-treated meat, genetically modified goods and internet gambling. There are also a number of non-tariff barriers inhibiting trade, such as EU rejection of the way US chickens are washed. Industries likely to be affected include US makers of personal technology and European IT service groups.

Fred Hiatt Self-Parody Watch

Why oh why can't we have a better press corps? Fred Hiatt of the Washington Post outdoes himself:

Deal With Colombia: Colombia's exports already enjoy preferential access to the U.S. market.... The TPA would expand [these preferences] and make them permanent.... But congressional Democrats say no, citing Bogota's alleged failure to stem the murders of trade unionists, which have made the country, in the words of the International Confederation of Free Trade Unions, "the most perilous place in the world for union activity."

The issue dramatically links human rights concerns with concerns about globalization's impact on workers. But is it really a good argument...? Among the tens of thousands of people killed in Colombia since 1991, 2,245 were labor union members.... (Of these victims, about 500 were union "leaders.") This sounds like a lot of people.... Lately, though, labor union members have been less likely to be murdered than other Colombians....

To the extent any perpetrator can be identified, right-wing paramilitary units appear to be the most culpable -- but the murders are not always connected to the victims' political or union activism. On June 6, for example, a group of armed men killed the son of Hernando Melan Cardona, leader of a textile workers union. At the time, Mr. Melan's union was involved in contract talks, and nongovernmental organizations around the world suggested that the murder might be related to the bargaining. Subsequent investigations have shown that it was not, according to human rights activists.

Mr. Uribe has offered protection for unionists and set up a special prosecution team to try those accused of killing them. His critics argue that he shouldn't get the TPA until his prosecutors win some convictions. The issue of "impunity" for such killings is real, but Mr. Uribe's critics are rarely specific about how many past cases must be cleared before they'll drop their objections.... To make [Colombians] wait indefinitely while Colombian authorities go through cold-case files would be to substitute some Americans' priorities for those of the Colombian voters.... It's time for Democrats to drop their strained human rights objections to the Colombia trade promotion agreement and deal with it on its merits.

To this Clinton Democrat, successful prosecutions of thugs who kill union leaders would seem to be the lowest possible bar one could set for a country to pass in return for long-run trade preferences written in stone by legislation.

Already it is a mystery to me why the people producing the print Washington Post don't just down tools and walk away--saying "this isn't doing anybody any good." It isn't.

Armistice Day 1941: "The Czechs too Know the Answer. The Poles. The Danes. The Dutch. The Serbs. The Belgians. The Norwegians. The Greeks."


Arlington Cemetery, November 11, 1941: Among the great days of national remembrance, none is more deeply moving to Americans of our generation than the Eleventh of November, the Anniversary of the Armistice of 1918, the day sacred to the memory of those who gave their lives in the war which that day ended.

Our observance of this Anniversary has a particular significance in the year 1941. For we are able today as we were not always able in the past to measure our indebtedness to those who died. A few years ago, even a few months, we questioned, some of us, the sacrifice they had made. Standing near to the tomb of the Unknown Soldier, Sergeant York of Tennessee, on a recent day spoke to such questioners. "There are those in this country today," said Sergeant York, "who ask me and other veterans of World War Number One, 'What did it get you?'"

Today we know the answer--all of us. All who search their hearts in honesty and candor know it. We know that these men died to save their country from a terrible danger of that day. We know, because we face that danger once again on this day. "What did it get you?" People who asked that question of Sergeant York and his comrades forgot the one essential fact which every man who looks can see today. They forgot that the danger which threatened this country in 1917 was real--and that the sacrifice of those who died averted that danger.

Because the danger was overcome, they were unable to remember that the danger had been present. Because our armies were victorious, they demanded why our armies had fought. Because our freedom was secure, they took the security of our freedom for granted and asked why those who died to save it should have died at all.

"What did it get you?" "What was there in it for you?" If our armies of 1917 and 1918 had lost there would not have been a man or woman in America who would have wondered why the war was fought. The reasons would have faced us everywhere. We would have known why liberty is worth defending as those alone whose liberty is lost can know it. We would have known why tyranny is worth defeating as only those whom tyrants rule can know.

But because the war had been won we forgot, some of us, that the war might have been lost.

Whatever we knew or thought we knew a few years or months ago, we know now that the danger of brutality and tyranny and slavery to freedom-loving peoples can be real and terrible. We know why these men fought to keep our freedom-and why the wars that save a people's liberties are wars worth fighting and worth winning-and at any price.

"What did it get you?" The men of France, prisoners in their cities, victims of searches and of seizures without law, hostages for the safety of their masters' lives, robbed of their harvests, murdered in their prisons--the men of France would know the answer to that question. They know now what a former victory of freedom against tyranny was worth. The Czechs too know the answer. The Poles. The Danes. The Dutch. The Serbs. The Belgians. The Norwegians. The Greeks.

We know it now.

We know that it was, in literal truth, to make the world safe for democracy that we took up arms in 1917. It was, in simple truth and in literal fact, to make the world habitable for decent and self-respecting men that those whom we now remember gave their lives. They died to prevent then the very thing that now, a quarter century later, has happened from one end of Europe to the other.

Now that it has happened we know in full the reason why they died.

We know also what obligation and duty their sacrifice imposes upon us. They did not die to make the world safe for decency and self-respect for five years or ten or maybe twenty. They died to make it safe. And if, by some fault of ours who lived beyond the war, its safety has again been threatened then the obligation and the duty are ours. It is in our charge now, as it was America's charge after the Civil War, to see to it "that these dead shall not have died in vain." Sergeant York spoke thus of the cynics and doubters: "The thing they forget is that liberty and freedom and democracy are so very precious that you do not fight to win them once and stop. Liberty and freedom and democracy are prizes awarded only to those peoples who fight to win them and then keep fighting eternally to hold them."

The people of America agree with that. They believe that liberty is worth fighting for. And if they are obliged to fight they will fight eternally to hold it.

This duty we owe, not to ourselves alone, but to the many dead who died to gain our freedom for us--to make the world a place where freedom can live and grow into the ages.

Prince Alwaleed on Citigroup

Prince Alwaleed bin Talal bin Abdul Aziz al Saud:

Citigroup: Fortune: When Citigroup first reported the writedown three weeks ago, you said that you supported Citi and Chuck Prince. Do you feel like you were misled? Did the situation change? What happened there?

Prince Alwaleed: Let me tell you the facts. Basically when Citigroup pre-announced the $6.4 billion writeoff, Chuck Prince called me within five minutes of the announcement and informed me of that loss and I told him bluntly and openly, "Is this the end of the story? Did you think of everything?"

His answer was "yes" and he expected normalization in the fourth quarter. I listened to the analyst discussion he had with everybody else and he said there would be normalization in the fourth quarter. So obviously, this gave me comfort that this was a onetime event and only an aberration and I backed off.

Although the writeoff said $6.4 billion, post-tax $3.4 billion, if you compare this to the equity of Citibank and the profits of Citibank in the third quarter, there was a $2.4 billion profit. So it was a hiccup assuming that this was a onetime event. But what happened two or three weeks later, another $8 to $11 billion additional write-off, the situation changed completely.

You cannot come to the public and say that this normalization is expected in the fourth quarter and then three weeks later, not three months later, you come and say there is an $11 billion writeoff. This is unacceptable. That's when the events changed completely. My backing was withdrawn dramatically. You should never commit to something that you can't deliver. Never.

Can We Retire Bob Herbert?

Yes, it is yet another edition of why oh why can't we have a better press corps. This time it is Bob Herbert who should be retired and sent to doing something socially useful:

Recession? What Recession?: If it looks like a recession and feels like a recession.... “Quite frankly,” said Senator Charles Schumer, peering over his glasses at the Fed chairman, Ben Bernanke, “I think we are at a moment of economic crisis, stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices.” He asked Mr. Bernanke, at a Congressional hearing Thursday, if we were headed toward a recession.

An aide handed the chairman his dancing shoes, and Mr. Bernanke executed a flawless version of the Washington waffle.... With all due respect to the chairman, he would see the recession that so many others are feeling if he would only open his eyes. While Mr. Bernanke and others are waiting for the official diagnosis (a decline in the gross domestic product for two successive quarters), the disease is spreading and has been spreading for some time...

This is simply wrong: We may fall into a recession in the near future--odds are 50-50. We might be in a recession right now--but probably not. We almost surely were not in a recession in July-September. Ben Bernanke won't say whether we are headed for a recession because he does not know.

Herbert goes on:

Bankruptcies and homelessness are on the rise. The job market has been weak for years. The auto industry is in trouble. The cost of food, gasoline and home heating oil are soaring at a time when millions of Americans are managing to make it from one month to another solely by the grace of their credit cards. The country has been in denial for years about the economic reality facing American families. That grim reality has been masked by the flimflammery of official statistics (job growth good, inflation low) and the muscular magic of the American way of debt: mortgages on top of mortgages, pyramiding student loans and an opiatelike addiction to credit cards at rates that used to get people locked up for loan-sharking...

This is at most one-quarter true. The job market has not been as strong as the unemployment rate suggests, but it has not been extraordinarily weak. Inflation has been low--in 2002, we were scared that it was going to go too low. The problem is not that middle America's incomes have been falling since 2000: the problem is that middle America's spending has been rising rapidly while incomes have not.

And then there is:

In an interview after the hearing, Representative Hinchey discussed the disconnect between official government reports and the reality facing working families.... [T]he most popular measure of inflation, the Consumer Price Index, does not include the cost of energy or food, “the two most significant aspects of the increased cost of living for the American people.”

Yes, it does.

How has the New York Times managed to pick Bob Herbert out of the 75 million liberal adults in America? It is a mystery.

How Large Are the Distributional Effects of Increased Trade?

Dani Rodrik suspects that they are smaller than Josh Bivens thinks they are:

Dani Rodrik's weblog: The pains from trade: The workhorse model of international trade (the 2x2 Heckscher-Ohlin model) has very stark implications for the effect of trade with poor, labor-abundant countries. Low-skilled workers in rich countries (read the U.S.) must end up as losers--not in relative terms, but in absolute terms.  Moreover, the larger the overall gains from trade, the bigger must this adverse distributional effect be.  In that world, it is inconsistent to claim there are large gains from globalization while downplaying the distributional impacts. Which is why many economists teach the model in their classrooms, but shift to other, more complicated models when they engage in the public debate about the effect of trade on wages.

A recent paper by Josh Bivens carries out a quantitative simulation of the basic 2x2 model which suggests that the increase in U.S. trade with the developing countries between 1995 and 2006 would have reduced labor earnings by 4 percent while increasing the payment for skills by 3 percent, for a 7% increase in the differential altogether.  This is an interesting exercise, to be compared to that undertaken by my colleague Robert Lawrence. The latter gives much less of a role to trade, in large part because it finds there is little reduction in real earnings once adjustments for productivity, prices and benefits are made. 

One clear difference between the two perspectives is the extent to which one thinks of trade with developing countries as competing directly with U.S. production.  Lawrence says that developing country exports hardly displace any domestic production anymore because much of that activity has already shut down.  So whatever adverse impact may have existed in the 1980s, the current situation is much more benign. (But of course, less impact on productive re-allocation means fewer overall gains from trade too!). In Bivens' world (and that of the standard 2x2 model), by contrast, head-to-head competition is critical in driving the distributional effects.

I am on Dani's side, only more so. Two additional points are important, I think:

  1. For competition to be head-to-head, the two countries have to be making very similar goods with similar production processes. Hand-spinners in Pakistan don't compete with labor here in the United States but with the capital embodied in our large automated spinning mills.

  2. What trade does to our distribution of income can be undone by normal domestic redistributionist policies. The right way to deal with the issue is to (a) maximize the third world's ability to take advantage of our demand to spur its own growth, and (b) use domestic redistribution here to compensate for any adverse distributional impact.

Fire David Brooks. Fire David Brooks Now!

Why oh why can't we have a better press corps? (Yet another New York Times should be deeply ashamed edition.)

Let's start with the reminiscences of Republican Svengali Lee Atwater:

Lee Atwater: As to the whole Southern strategy that Harry Dent and others put together in 1968, opposition to the Voting Rights Act would have been a central part of keeping the South. Now [the new Southern Strategy of Ronald Reagan] doesn’t have to do that. All you have to do to keep the South is for Reagan to run in place on the issues he’s campaigned on since 1964... and that’s fiscal conservatism, balancing the budget, cut taxes, you know, the whole cluster.... You start out in 1954 by saying, 'Nigger, nigger, nigger.' By 1968 you can't say 'nigger' - that hurts you. Backfires. So you say stuff like forced busing, states' rights and all that stuff. [And now] you're getting so abstract now [that] you're talking about cutting taxes, and all these things you're talking about are totally economic things and a byproduct of them is [that] blacks get hurt worse than whites. And subconsciously maybe that is part of it. I'm not saying that... obviously sitting around saying, 'We want to cut this,' is much more abstract than even the busing thing, and a hell of a lot more abstract than 'Nigger, nigger.'

However, it did not sound so 'abstract' when Reagan talked about the:

Chicago welfare queen... [who] has 80 names, 30 addresses, 12 Social Security cards and is collecting veterans' benefits on four nonexisting deceased husbands. And she's collecting Social Security on her cards. She's got Medicaid, getting food stamps and she is collecting welfare under each of her names. Her tax-free cash income alone is over $150,000...

As Sidney Blumenthal writes:

Look Away, Dixieland: Reagan opposed the Civil Rights Act of 1964, opposed the Voting Rights Act of 1965 (calling it "humiliating to the South"), and ran for governor of California in 1966 promising to wipe the Fair Housing Act off the books. "If an individual wants to discriminate against Negroes or others in selling or renting his house," he said, "he has a right to do so."

Now comes David Brooks to say that mentioning any of this is a "calumny":

History and Calumny - New York Times:[T]he slur spreads... spread by people who, before making one of the most heinous charges imaginable, couldn’t even take 10 minutes to look at the evidence. It posits that there was a master conspiracy to play on the alleged Klan-like prejudices of American voters, when there is no evidence of that conspiracy. And, of course, in a partisan age there are always people eager to believe this stuff.

More of Brooks's context:

[Reagan, in Mississippi,] spoke mostly about inflation and the economy, but in the middle of a section on schools, he said this: “Programs like education and others should be turned back to the states and local communities with the tax sources to fund them. I believe in states’ rights. I believe in people doing as much as they can at the community level and the private level.”

The use of the phrase “states’ rights” didn’t spark any reaction in the crowd, but it led the coverage in The Times and The Post the next day....

It’s callous, at least, to use the phrase “states’ rights” in any context in Philadelphia. Reagan could have done something wonderful if he’d mentioned civil rights at the fair. He didn’t. And it’s obviously true that race played a role in the G.O.P.’s ascent.

Still, the agitprop version of this week--that Reagan opened his campaign with an appeal to racism--is a distortion, as honest investigators ranging from Bruce Bartlett, who worked for the Reagan administration and is the author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” to Kevin Drum, who writes for Washington Monthly, have concluded.

But still the slur spreads. It’s spread by people who, before making one of the most heinous charges imaginable, couldn’t even take 10 minutes to look at the evidence. It posits that there was a master conspiracy to play on the alleged Klan-like prejudices of American voters, when there is no evidence of that conspiracy. And, of course, in a partisan age there are always people eager to believe this stuff.

Richard Baldwin Channels Paul Krugman from Two Decades Ago

Baldwin writes:

Krugman’s view on the dollar | vox - Research-based policy analysis and commentary from Europe's leading economists: Flashback to 1985: Krugman’s view on the dollar: Rummaging around the web last night I came across a Paul Krugman paper on the how far and how fast the dollar needs to fall. What’s noteworthy is the date. Paul wrote it in August 1985 for the Jackson Hole conference when the US trade deficit seemed huge and the dollar had just started its 3-year slide. The 1985 abstract could be the abstract for his February 2007 article on the same subject.

This paper presents evidence strongly suggesting that the current strength of the dollar reflects myopic behavior by international investors; that is, that part of the dollar's strength can be viewed as a speculative bubble. At some point this bubble will burst, leading to a sharp fall in the dollar's value. The essential argument is that given the modest real interest differentials between the U.S. and its trading partners, the dollar’s strength amounts to an implicit forecast on the part of the market that with high probability the dollar will remain very strong for an extended period. The paper shows that such sustained dollar strength would lead the U.S. to Latin American levels of debt relative to GNP, which is presumably not feasible. Allowing for the possibility that something will be done to bring the dollar down before this happens actually reinforces the argument that the current value of the dollar is unreasonable.

Of course, Paul has become a much better writer since then, so the “bubble will burst, leading to a sharp fall in the dollar's value” is now the “Wiley E. Coyote moment,” but the economic logic has not changed. Paul’s thesis adviser was Mr. Overshooting, Rudi Dornbusch. You could not complete Rudi’s course at MIT, 14.582, without having the link between current interest rates and market expectations of depreciation tattooed inside your brain. Paul’s prediction in 1985 and this year simply adds a rough calculation as to whether the US trade deficit would become unsustainably large if the dollar fell as slowly as the interest rate gap would suggest. Here are a couple of quick charts that provide historical perspective. Both are flawed since they are in nominal terms, but they illustrate the point.



Press Criticism from Anita Esterday of Central Iowa

Via Unfogged:

Unfogged: Indeed: The waitress says,

"You people are really nuts," she told a reporter during a phone interview. "There's kids dying in the war, the price of oil right now -- there's better things in this world to be thinking about than who served Hillary Clinton at Maid-Rite and who got a tip and who didn't get a tip."

"The reporter" is, We believe, Jim Rutenberg or Sarah Wheaton of the New York Times.

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

Tyler Cowen Likes Bob Reich's Supercapitalism

Tyler writes:

Marginal Revolution: Supercapitalism, by Robert Reich:

Finally, I will come to some conclusions you may find surprising -- among them, why the move toward improved corporate governance makes companies less likely to be socially responsible.  Why the promise of corporate democracy is illusory.  Why the corporate income tax should be abolished.  Why companies should not be held criminally liable.  And why shareholders should be protected from having their money used by corporations for political purposes without their consent.

That's from Robert Reich's Supercapitalism.  I'm coming late to this party, but mostly I liked the book.  It's full of fresh thinking and most of all it is excellent on just how much invisible hand mechanisms shape an economy.  It has the best explanation (and partial defense) of high CEO pay I've seen, namely supply and demand.  If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs.  And as the above quotation indicates, Reich is willing to rethink just about all the old left-wing shibboleths (what a biased word) about corporations.  He separates the analysis from the moral narrative, so when you disagree with him, that point is an isolated one and it does not infect everything he says.

Reich recommends that we strengthen atrophied democratic constraints on capitalist outcomes; in his view special interest politics are just another form of capitalism and special interests are crushing voter influence.  "Bryan Caplan, telephone!"

Menzie Chinn on the Budget Situation

Recall that we ought to be running a full employment surplus of $300+ billion a year right now to prepare for the retirement of the baby-boom generation--that's the policy that generates stable tax rates for the non medical care part of the budget. Menzie Chinn writes:

Econbrowser: If this is what Federal receipts look like at full employment...


...then a balanced budget is far off.

The CBO released its November budget review yesterday. In this figure, the red dashed line (receipts) is slowing its ascent. Expenditures are falling, but to the extent that transfers rise in slowdowns, one knows the likely trajectory of the blue line.

Note: Blue line, expenditures; red dashed line, receipts. Source: CBO, Monthly Budget Review, November 6, 2007; improved image, courtesy of J. Teter.

Tobin Harshaw Continues to Trash Chris Suellentrop's Reputation...

And he arouses Kevin Drum's ire:

The Washington Monthly: SPEAK FOR YOURSELF....Responding to my suggestion earlier today that the American public increasingly opposes the Iraq war regardless of how well it's going, Tobin Harshaw of the Opinionator says:

It's a good point, but I suspect some will feel Mr. Drum shows a bit too much pleasure in making it.

Not only is this baseless (read the post and judge for yourself), it's craven. Even worse, it's bad writing...

A little backstory. Chris Suellentrop started the Opinionator on January 24, 2006, and built a good reputation. Then somehow Tobin Harshaw showed up on it, grabbed top billing--it's listed as by "Tobin Harshaw and Chris Suellentrop"--and began trashing that reputation. We've seen him before.

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Tobin Harshaw of the New York Times: "I Am Not Authorized to Explain Why I Am Not Authorized..."

As you may recall, last Friday there was a lot of discussion about revisions to the GISS global warming series of estimated average temperatures in the United States--a revision that changed the hottest year to date from 1998 (which in the old data was 1/100 of a degree hotter than 1934) to 1934 (which in the new data is 2/100 of a degree hotter than 1998) One surprising thing was that the New York Times's Opinionator weblog, run by the thoughtful and intelligent Chris Suellentrop, went way overboard on the story:

Among global warming Cassandras, the fact that 1998 was the “hottest year on record” has always been an article of faith.... James Hansen, the climate scientist who has long accused the Bush administration of trying to “silence” him.... [A] Y2K bug played havoc with some of the numbers.... Michael Ashe... explains.... "The changes are truly astounding. The warmest year on record is now 1934. 1998 (long trumpeted by the media as recordbreaking) moves to second place.... [T]he effect on the U.S. global warming propaganda machine could be huge...

This surprised me: "effect... huge," "havoc," the scare quotes around "silence," "data meltdown," et cetera seemed very out of place for a three-one-hundredths of a degree shift--either complete mendacity or total innumeracy, or both. So I swung by the Opinionator, and found:

  • The Opinionator is no longer written by Chris Suellentrop alone, but also by Tobin Harshaw, who wrote the post in question.
  • Tobin Harshaw also served as an enthusiastic stenographer for last Friday's Stupidest Man Alive nominee, Tom Nugent of National Review, who slipped a decimal points and wrote a totally off-the-rails piece about taxing university endowments how much money such a tax might raise by a factor of ten.

It seemed that Harshaw had failed to do the slightest amount of quantitative due diligence on either story before he committed fingers to keyboard and thus electrons to the noosphere.

It struck me that here I had an interesting angle: an opportunity to strike while the iron is hot, and find out why the New York Times has employees for whom it is unthinkable that they eyeball a graph or look at a table or even add up twenty numbers to see if what they are about to say makes any sense at all. The quantitative innumeracy of so many journalists is a big problem, and it would be nice to gain more insight into why innumerate journalists don't regard it as a problem.

So I called Toby Harshaw. I don't think he did himself any favors: it seems to me that he and the New York Times have much bigger problems than simple innumeracy:

Brad DeLong: Good afternoon. I'm Brad DeLong, an economics professor calling from UC Berkeley. I read your Cassandra post about global warming data revisions, and had a couple of questions. Can you help me out?

Tobin Harshaw: Certainly.

Brad DeLong: Did you eyeball the data--either in a graph or a table--before you wrote your "Cassandra" post about GISS global warming data revisions?

Tobin Harshaw: Are you writing something about this?

Brad DeLong: I will be, yes.

Tobin Harshaw: Then no, I cannot speak to you. You will have to speak to our public relations department.

Brad DeLong: Why won't you talk to me?

Tobin Harshaw: Because I am not authorized to speak to the press.

Brad DeLong: Because?

Tobin Harshaw: Because that is our policy. Our policy is that editorial staff are not allowed to speak to the press.

Brad DeLong: Seriously? Why is that your policy?

Tobin Harshaw: I am not authorized to speak. You will have to speak to our public relations department.

Brad DeLong: So you cannot even explain why your policy is that you cannot explain what you write?

Tobin Harshaw: I will have to transfer you to the operator.

Brad DeLong: But surely you can at least give a reason for the policy that keeps you from explaining...

Tobin Harshaw: I've spoken to you clearly.

Brad DeLong: You have not.

Tobin Harshaw: I've explained to you that our policy is that I am not authorized to speak to the press.

Brad DeLong: Why aren't you authorized to explain and elaborate on what you wrote?

Tobin Harshaw: I am not authorized to say why I am not authorized. It is our policy...

Brad DeLong: You are sure?...

Tobin Harshaw: Goodbye Mr. DeLong.

I thought about calling public editor Clark Hoyt, but he picks up his voice mail about once a week.

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

Import iPhone Call Log to iCal - iphonelogd

Import iPhone Call Log to iCal - iphonelogd

Ruby script by Jamie Hardt — it reads your iPhone call log from your iPhone backup (created by iTunes) and copies phone calls into the iCal calendar of your choice. (via daring fireball) How to: Download script, create new calendar in iCal named "Call Log," then run this in terminal: ruby Downloads/iphonelogd.rb

links for 2007-11-08

Felix Salmon Praises the Excellent Calculated Risk

Felix Salmon writes:

Finance Blog - Market Movers by Felix Salmon: The Best Subprime Reporting and Analysis - Jack Flack and Jack Shafer look to the MSM today for help in unscrambling the subprime mess. (Weirdly, however, Shafer asks journalists to nominate the best journalists on this beat, rather than asking genuine housing experts.) In the broader media world, however, by far the broadest, deepest, and smartest coverage of the subprme crisis and housing meltdown comes not from any newspaper but rather from the blog Calculated Risk.... The blog is a one-stop shop for all your housing-related news and analysis, and must be mentioned in any round-up thereof. Now, if only they would serve a full RSS feed...

And here is what you find at Calculated Risk:

Calculated Risk: Moody's: SIV "situation not stabilized": From MarketWatch: Moody's cuts more SIV ratings (hat tip REBear, sr)

Moody's ... downgraded more ratings on structured investment vehicles on Wednesday and warned that the funds are in a more precarious position than they were in early September, previously considered the height of this year's credit crisis. Moody's said it cut or may downgrade ratings on structured investment vehicles (SIVs) with roughly $33 billion in debt. ... More than 10% of all SIV debt was affected by the move. ... "The situation has not yet stabilized and further rating actions could follow," Moody's said in a statement. "SIV senior note ratings continue to be vulnerable to the unprecedented large and sustained declines in portfolio value combined with a prolonged inability to refinance maturing debt."

From Bloomberg yesterday: Citigroup SIVs Draw $7.6 Billion of Emergency Funds

Citigroup Inc., the largest U.S. bank by assets, provided $7.6 billion of emergency financing to the seven structured investment vehicles it runs after they were unable to repay maturing debt. The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup ...

This is getting ugly. Also the MLEC SIV Superfund has apparently stalled as the SIV situation is deteriorating. (sorry for all the posts today - a lot of news and little analysis)....

NY AG: WaMu "Improperly pressured appraisers" Here is the press release from NY AG Cuomo. A couple of excerpts:

“Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.” Attorney General Cuomo, Nov 7, 2007

And from the Appraisal Institute:

“I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years. As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.” Terry Dunkin, President of the Appraisal Institute Nov 7, 2007....

From Bloomberg: Banks Face $100 Billion of Writedowns on Level 3 Rule, RBS Says

U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

And on total credit losses:

This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' London-based Janjuah said.The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark-to-make believe.''

Back in July, when Bernanke suggested the losses would be in the $50 Billion to $100 Billion range, I joked that he had dropped a zero. "Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems," [Bernanke] said (July 19, 2007). I thought I was exaggerating for effect - although $50 to $100 Billion seemed too low, I didn't really think the losses would reach $500 Billion to $1 Trillion. Based on this new estimate from RBS, maybe I wasn't far off.

Note: these losses don't include the coming $2+ Trillion in household net worth losses due to house prices falling over the next couple of years.

Robert Samuelson vs. the Mammon of Unrighteousness

Kevin Drum alerts Matthew Yglesias to

Matthew Yglesias: Liquidate!: Kevin Drum notes Robert Samuelson pointing out that recessions have benefits, too. Benefits like low wages:

Recessions also have often-overlooked benefits. They dampen inflation. In weak markets, companies can't easily raise prices or workers' wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don't pay off. These disciplining effects contribute to the economy's long-term strength, but it seems coldhearted to say so because the initial impact is hurtful.

I sometimes complain that the Post should make Samuelson write something other than his endless bellyaching about the need for Social Security cuts, but that was just a polite way of saying I think they should fire him. This sort of thing isn't really what I was after. At any rate, Samuelson seems to be a party to what J.M. Keynes would have called the "liquidationist" view of such matters -- recession is the population getting its comeuppance for having been not-poor just a little while back:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity.

Note in particular that there's no particular reason to think a recession is necessary in order to prompt people to pull out of bad investments. If you've got money to invest, you want to invest it in the most lucrative way possible. If things are really booming, it may be possible to earn some profit with a really dumb scheme. But if things are really booming, then you could earn even more profit with a non-dumb scheme. In a bad recession, meanwhile, even perfectly reasonable schemes may go bad. Either way, smarter investments are always better-rewarded than bad ones; recessions seem bad because they're bad.

Rea comments:

Samuelson is saying exactly what Herbert Hoovers's economic advisors were telling him in 1930. To quote Hoover himself:

the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...

Robert Samuelson's piece really is that bad:

Robert J. Samuelson - Recession's Hidden Virtues - [A] recession is widely regarded as a calamity or something close to it.... [P]opular rhetoric exaggerates the damage [of recessions]. By and large, recessions are problems, not tragedies.... Recessions also have often-overlooked benefits. They dampen inflation. In weak markets, companies can't easily raise prices or workers' wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don't pay off. These disciplining effects contribute to the economy's long-term strength, but it seems coldhearted to say so....

"Moral hazard" is a phrase frequently bandied about now.... If [the Fed] tries too hard to prevent a recession -- through easy-money policies -- investors, businesses and workers may conclude that they have nothing to fear. They may then engage in precisely the risky and inflationary behavior that makes matters worse.... The real "moral hazard" problem today is not starting down that path again.

We don't have an inflation problem. If you don't have an inflation problem, "dampening inflation" is not a good thing--"dampening inflation" then means "causing deflation" which is very bad indeed.

Clive Crook Has Finally Had Enough of the Odious Stuart Taylor, Jr.

Clive writes: | Clive Crook's blog: Update: It depends what you mean by torture: Stuart Taylor on the criticism Michael Mukasey, the White House nominee for attorney-general, has faced over his reluctance to say that waterboarding is torture, and hence illegal....

The surge of Democratic opposition to President Bush's nomination of former Judge Michael Mukasey to be attorney general says a lot about certain Democrats.... The attacks on Mukasey are an exquisite example of Congress's penchant for avoiding accountability by leaving the law unclear and then trashing the executive for whichever interpretation it adopts whenever something goes wrong....

I look forward to hearing Sen. Hillary Rodham Clinton, D-N.Y., Sen. Barack Obama, D-Ill., and others who oppose Mukasey's nomination because of this issue explain why the undoubted moral and diplomatic benefits of a blanket criminal prohibition of waterboarding would outweigh the possible costs, which might be zero but just might be thousands of lives. But... isn't waterboarding a form of torture?... [D]ebatable.... [N]ot every interrogation practice that sounds horrible or has been deemed illegal in some contexts clearly meets, in all contexts, the vague but narrow definitions embedded in the 1994 ban on "torture."...

Clive Crook writes:

Whether the law leaves room for doubt about whether waterboarding is torture is one thing; whether the law ought to leave room for doubt on that point is quite another. In my view, the law should be clear: waterboarding is torture, and all torture is illegal. Stuart is sympathetic to the view that ruling out a technique like waterboarding under any and all circumstances would be a mistake. Would it still be wrong, he asks, if the information elicited saved hundreds or thousands or millions of lives? It is a fair question, and one that most commentators on this issue are reluctant to confront. But one could ask the same question of any kind of torture, however vile. Would it be immoral to roast somebody over a slow fire,  if the information elicited saved hundreds or thousands or millions of lives? I dare say that nobody, not even Alberto Gonzales, will argue that roasting somebody over a slow fire is not torture. And therefore nobody is going to argue that such a practice is legal. Is Stuart arguing that it should be--albeit under exceptionally narrow circumstances?...

To say that torture is always and necessarily immoral seems to me to betray a lack of imagination. But a wise government would not allow for that contingency by making the practice legal. In those very rare cases, the interrogators would have to expose themselves to prosecution, and a jury would decide whether or not to convict, weighing what they did against their reasons for doing it. To make torture legal, even under rare circumstances, is to institutionalise it. That is both immoral, and for the reasons just cited, deeply unproductive in the war on terror.

I had enough of the odious Stuart Taylor, Jr. on February 4, 2002, when he denounced our NATO allies for being "already in an overwrought tizzy about the supposed mistreatment of the 158 detainees at Guantanamo Bay..." The National Journal should fire him forthwith.

Circular Firing Squad of Flying Attack Monkeys!

When wingnuts cheat and sue each other. Kevin Drum reports:

The Washington Monthly: SCHADENFREUDE ALERT....The New York Times reports today that a group of conservative authors, including Swift Boat nutball Jerome Corsi, is suing right-wing darling Regnery Publishing. The lead plaintiff is Richard Miniter, author of Shadow War: The Untold Story of How Bush Is Winning the War on Terror, who apparently got his hands on a royalty statement he wasn't supposed to see:

"It suddenly occurred to us that Regnery is making collectively jillions of dollars off of us and paying us a pittance." He added: "Why is Regnery acting like a Marxist cartoon of a capitalist company?"

....The authors, who say in the lawsuit that [Regnery's parent company] has been "unjustly enriched well in excess of one million dollars," are seeking unspecified damages. But Mr. Miniter said, "We're not looking for a payoff; we're looking for justice."

Well, we're all looking for justice, aren't we? But if a conservative is a liberal who's been mugged, what do you call a conservative who's come face to face with the naked face of vertically integrated capitalism?

Conservative Authors Sue Regnery Publishing Over Royalties: By MOTOKO RICH: Five authors have sued the parent company of Regnery Publishing, a Washington imprint of conservative books, charging that the company deprives its writers of royalties by selling their books at a steep discount to book clubs and other organizations owned by the same parent company.

In a suit filed in United States District Court in Washington yesterday, the authors Jerome R. Corsi, Bill Gertz, Lt. Col. Robert (Buzz) Patterson, Joel Mowbray and Richard Miniter state that Eagle Publishing, which owns Regnery, “orchestrates and participates in a fraudulent, deceptively concealed and self-dealing scheme to divert book sales away from retail outlets and to wholly owned subsidiary organizations within the Eagle conglomerate.”

Some of the authors’ books have appeared on the New York Times best-seller list, including “Unfit for Command: Swift Boat Veterans Speak Out Against John Kerry,” by Mr. Corsi and John E. O’Neill (who is not a plaintiff in the suit), Mr. Patterson’s “Dereliction of Duty: The Eyewitness Account of How Bill Clinton Compromised America’s National Security” and Mr. Miniter’s “Shadow War: The Untold Story of How Bush Is Winning the War on Terror.” In the lawsuit the authors say that Eagle sells or gives away copies of their books to book clubs, newsletters and other organizations owned by Eagle “to avoid or substantially reduce royalty payments to authors.”

The authors argue that in reducing royalty payments, the publisher is maximizing its profits and the profits of its parent company at their expense.

“They’ve structured their business essentially as a scam and are defrauding their writers,” Mr. Miniter said in an interview, “causing a tremendous rift inside the conservative community.”

Traditionally, authors receive a 15 percent royalty based on the cover price of a hardcover title after they have sold enough copies to cover the cost of the advance they receive upon signing a contract with a publisher. (Authors whose books are sold at steep discounts or to companies that handle remaindered copies receive lower royalties.)

In Regnery’s case, according to the lawsuit, the publisher sells books to sister companies, including the Conservative Book Club, which then sells the books to members at discounted prices, “at, below or only marginally above its own cost of publication.” In the lawsuit the authors say they receive “little or no royalty” on these sales because their contracts specify that the publisher pays only 10 percent of the amount received by the publisher, minus costs — as opposed to 15 percent of the cover price — for the book.

Mr. Miniter said that meant that although he received about $4.25 a copy when his books sold in a bookstore or through an online retailer, he only earned about 10 cents a copy when his books sold through the Conservative Book Club or other Eagle-owned channels. “The difference between 10 cents and $4.25 is pretty large when you multiply it by 20,000 to 30,000 books,” Mr. Miniter said. “It suddenly occurred to us that Regnery is making collectively jillions of dollars off of us and paying us a pittance.” He added: “Why is Regnery acting like a Marxist cartoon of a capitalist company?”

links for 2007-11-07


If you are not reading Econobrowser, you should be; consistent extraordinarily high-quality thoughts from James Hamilton and Menzie Chinn. Most recently, from Jim Hamilton:

Econbrowser: Well then, would $100 a barrel worry you? A week ago I reviewed the reasons why $90-a-barrel oil by itself would not be enough to cause an economic recession. As oil prices charged up to $96 on Friday, a reporter asked me at what price I'd change my mind.

Last week I described recent research by Olivier Blanchard and Jordi Gali and Munechika Katayama, among others, that concludes that the U.S. economy today may be substantially less vulnerable to oil price increases than it appeared to be in the 1970s. I noted that one common basis for all such claims is the observation that the fraction of our income that is spent on energy purchases is significantly lower today than it was in the 1970s. But I also noted that this is due in large part to the decline in the relative price of energy between 1981 and 1997, and that recent price increases have been reversing that trend....

The U.S. consumed 20.7 million barrels of oil per day for the first six months of 2007, which would be 7.5 billion barrels over a year. If prices today were still at the 2004 average oil price of $40 a barrel but the quantity of oil used and nominal GDP were at their values so far in 2007, $40 oil would imply an annual expenditure of about $300 billion, which would be just a little over 2% of our current $14 trillion GDP. But so far in 2007, we've seen an average oil price of $68 a barrel, which means an expenditure of $500 billion, over 3.5% of GDP. The above graph extends these calculations into some hypotheticals-- What if the oil consumption and GDP stayed where they have been so far this year, but oil prices averaged $100 or $150 over the year? It turns out that a price of $150 a barrel would put us back up to an expenditure share as high as it's ever been historically. Consumers cannot continue to ignore oil price increases for much longer.

But even if we return to those historical expenditure shares, an oil price increase need not have the same potential to produce a recession as it may have had in the 1970s. I believe that a key reason that we saw economic recessions following the oil supply disruptions of 1956, 1973, 1978, 1980, and 1990 was that these events were associated with sudden changes in consumer spending on items such as domestically manufactured automobiles, and that these demand shifts were a key cause of the subsequent economic downturns. Even if we return to a point where we are spending as much on energy as we were in 1981, the domestic auto companies are not as important to the U.S. economy as they were then....

[T]he key question as to whether an oil price increase would push the economy into a recession remains the context of the price change. The oil price increases over the last few months were not associated with any actual disruption in petroleum supplies, and do not have the same potential to change consumer sentiment and spending patterns as dramatically as occurred in many of the earlier historical oil shocks. For this reason, even if oil does go above $100, my biggest concern remains the housing sector and financial problems.

But if the tanks start rolling or missiles start flying in the Middle East, my worry factor is going to soar along with the price of oil.

Freakonomics Clones

I have a review of Freakonomics clones in the Chronicle of Higher Education Review

In the beginning were the Steves--Steve Dubner and Steve Levitt, that is. And Steve Dubner interviewed Steve Levitt, who taught at the University of Chicago and had won the American Economic Association's Clark Medal as the outstanding young economist in his two-year cohort. And Steve Dubner and Steve Levitt begat, or conceived or brought forth, Freakonomics, which sold many copies and populated the land. And the publishers of America looked upon Freakonomics, and saw that it was good.

And the publishers of America said, "Let us commission and publish many books sort-of like Freakonomics, for here is a previously-unexploited market segment, and there is unexpectedly-high demand for books that use economists' reasoning presented in clear prose to investigate and explain curious events and patterns in our social life. And let there be marketing campaigns. And TV appearances. And review copies."

And Basic Books and Robert Frank begat The Economic Naturalist. And the Free Press and Steven Landsburg begat More Sex Is Safer Sex. And Dutton Press and Tyler Cowen begat Discover Your Inner Economist. And they were fruitful, and multiplied, and replenished the Earth, and subdued it: and had dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the Earth.

And there was evening and there was morning, another day...

My favorite is Tyler's Discover Your Inner Economist.

Continue reading "Freakonomics Clones" »

Cary Crittendon, CFO of Citigroup, Speaks

Citigroup's CFO Gary Crittendon speaks:

Citigroup Business Update Call - Seeking Alpha: Gary Crittenden:

The way I would think about that is these were super senior securities, right? So they were in theory better than investment grade securities. If you track that index, at least the numbers that I have, just as an example, the AAA ABX, just to pick one, the O-62, had very, very little deterioration during the course of the first nine months of this year. I think in total it was off about 4%, so it dropped about 0.5% a month.

If you go into the month of October, after the first seven or eight days -- I don't know exactly when it was -- you see a very significant crack and it drops from 96 down to about 88 and losses 8% of its value in a very short period of time. The other indices had been down. I am talking about the As, the BBBs, had been down during the course of the year; the big movement there was a reduction by about half during the course of October so they have had movements but again you had significant movements in those. But it’s really at the high investment grade end where the values had held up very well during the course of the year but obviously you see that movement now.

Now, when we had thought about taking these marks, we have obviously if you look at what the ABX would imply in terms of real estate price reduction, it starts to imply very, very high numbers of price reduction in real estate. I guess our view is that it’s unlikely that those very high levels of price reduction in real estate will take place. So what’s actually happening is implicitly the market is saying that the cash flows associated with those securities have become more risky and so as we have thought about valuing those cash flows, we have put different discount rates on those cash flows and that’s reflecting the range that you see in the estimate here.

We’ll see, obviously, how that actually plays out over time. With that higher discount rate, looking at those cash flows in essentially or actually exactly the same way we did in the third quarter, you come up with a much larger reduction in revenue than we saw during the course of the third quarter.

The actual real realized cash flow will work out over time. I mean it depends on how the underlying mortgages actually get paid, how that cash actually flows. As you know, as a result of the rating agency downgrades the cash flow gets redirected from the subordinate tranches to the more senior tranches in the structure. We’ll see how that all get realized over time and the valuation I suspect of the super senior tranches will go up and down and we may liquidate some of these if market prices come back. We just simply don’t know.

We wanted to give you a sense of what we thought the impact would be during the course of the fourth quarter, but it really is very dependent on how the market evolves here now over the next eight weeks or so...

When Crittendon says that "if you look at what the ABX would imply in terms of real estate price reduction, it starts to imply very, very high numbers... it’s unlikely that those... will take place" the sentence should not come to an end. There should be a comma, and after the comma the sentence should continue "therefore Citigroup is sponsoring and investing in a new hedge fund to take advantage of the undervaluation of the ABX and similar market opportunities, and we are now raising capital." If you say:

  • We're taking a markdown based on the ABX.
  • But we believe the ABX is underpriced.

Shouldn't the very next sentence be:

  • We are moving to profit from this mispricing?

Now it is true that Citigroup cannot be patient Graham-and-Dodd capital: it is leveraged 15 to 1, for Jeebus's sake. But it can sponsor and contribute talent to vehicles that are patient Graham-and-Dodd capital, can't it?

Good for John Edwards on Foreign Policy!

Matthew Yglesias writes:

Matthew Yglesias: John Edwards... [makes what] seems like an important point:

But there is a difference between doing everything in our power to keep America safe and a reckless, belligerent policy that actually makes us less safe. The preventive war doctrine was a stunning departure from the policy that had kept America safe during both world wars and during the Cold War. It is wrong on the merits, wrong on the morals, and wrong for America.

Good for Edwards. I've found it infuriating how little the leading Democrats seem inclined to engage with the key strategic elements of Bush's response to 9/11 and this is the biggest nail that needs hammering down. Bush replaced decades of non-proliferation policy, to say nothing of centuries of good sense and basic morality, to decide that unilateral preventive military action should be at the center of our approach to dealing with the world. This is nonsense. The United States has long got along fine without waging such wars, and our effort to wage one has been a disaster. And yet somehow Bush has managed to recenter the American political debate so that an idea that would have seemed shocking ten years ago -- waging aggressive unilateral warfare against countries that haven't attacked us or anyone else -- is now meekly accepted by all as a vital part of the toolkit.

Again, good for Edwards.

And goes on:

Matthew Yglesias: [L]eading Democrats [should] articulate commonplace notions like "starting a war with Iran would be a strategic disaster for the United States," "expending finite resources investigating people who there's no probable cause to suspect is probably a waste of time," "we should focus on fighting al-Qaeda rather than other Muslims who haven't attacked us," "invading Iraq was a huge mistake," "Harry Truman and Franklin Roosevelt founded the UN because a strong UN is good for America," "getting other countries to follow non-proliferation agreements is going to require us to follow them too," or "reviving the Israeli-Arab peace process would make it easier for us to find Muslim allies."... [T]he ideas are important ones, and the real political professionals need to think about finding the best ways to express them.

Teen Sex, Health Insurance Mandates, and Poutine

Hoisted from Comments: Robert Waldmann writes in from sunny Italy:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: I think teen age pregnancy has a small effect on infant mortality.... [T]he raw correlation... is... that infants of teenagers are more likely to die, but teenage mothers are poorer and less likely to get prenatal care than older mothers. When controls for race, income and medical care... [are added] the teenage effect becomes small (on the order of 10% of the baseline risk). See: Arlene Geronimus (1987), "On teenage childbearing and neonatal mortality in the United States," Population & Development Review 13(2):323-334.... [T]he factor stressed by Mankiw turns out to be less important than the ones he claims are not critical when they go head to head in a regression.

You are, of course, correct that difference across developed countries in teenage fertility are not explained by differences in sexual activity (which are small: median age of first intercourse is around 16 everywhere) but rather in contraceptive use.

Of course you are much more expert than Mankiw on the first topic you discuss (sorry I really really couldn't resist). More generally, Mankiw seems to be blaming the uninsured for their lack of insurance. Odd that he is opposed to mandating insurance given that view.

With respect to Canada's ability to deliver extremely calorie-dense foods incredibly cheaply, all I can say is: Poutine!

With respect to mandates: yes. If the principal market failure in health care is indeed (as Mankiw seems to say) that people can freeload off of others and still get treated when they get sick, then mandated insurance purchase is the efficiency-maximizing road to take.


Madlen Read of AP:

Citigroup CEO Resigns; Interim Named: : Citigroup Inc. Chairman and Chief Executive Charles Prince, beset by the company's billions of dollars in losses from investing in bad debt, resigned Sunday and is being replaced as chairman by former Treasury Secretary Robert E. Rubin.

The nation's largest banking company announced Prince's widely expected departure in a statement following an emergency meeting of its board. Citi also said Sir Win Bischoff, chairman of Citi Europe and a Member of the Citi management and operating committees, would serve as interim CEO. Rubin, a former co-chairman of Goldman, Sachs & Co., has served as the chair of Citi's executive committee, and it was also expected he would take a greater role in leading the company.

In a separate statement, Citi, which took a hit of $6.5 billion from asset writedowns and other credit-related losses in the third quarter, said it would take an additional $8 billion to $11 billion in writedowns...

A remarkably large number considering that nothing terrible has happened to any of the underlying--nothing to interest rates, nothing to GDP, nothing to employment, and only a little so far to Riverside County, CA housing prices. But the total is still less than ten percent of Citi's book capital.

Why Oh Why Can't We Have a Better Press Corps? (Robert Pear of the New York Times Edition)

Outsourced to Robert Waldmann, who watches Robert Pear do the "opinions on shape of earth differ" shuffle:

Robert's Stochastic thoughts: Sometimes You Just Can't Overcome the Left Wing Balance of the Facts: Robert Pear has an interesting article in the New York Times on SCHIP. Pear covers the debate between Republicans and Republicans. As a result, it is unsurprising that many of the people he quotes assign some of the blame to Democrats. He does quote one Democrat. Guess Who ? John D. Rockefeller IV. A bit blatant I wold say. Pear manages the difficult feat of claiming Rockefeller is even more out of it than he is, presenting Rockefeller's claim that he was confident that Bush wouldn't veto the bill as a sincere prediction and not standard politics.

The substance of the article is that the Bush administration refused to compromise and lied:

Representative Michael R. Turner, an Ohio Republican who voted for the bill, said, “The administration did not come forward with any real offer of a solution or a compromise that would break the logjam.”


Explaining why he vetoed it, Mr. Bush said “we weren’t dialed in” to the negotiations. But after checking their calendars, lawmakers said they and their aides had had more than 35 meetings and telephone conversations on the issue with Mr. Hubbard, Mr. Hennessey and Ms. Goon from January through September.

The second is, by the standards of the Times, like screaming "pants on fire".

Still Mr Pear tries mightily for balance. I think he introduced a new kind of anonymity -- the anonymous target:

“I was told last January or February by Democrats that their game plan was to send the president a bill that was too big to swallow, and it would be a beautiful political issue for them,” Mr. Hubbard said.

Are you accusing me Mr Hubbard ? I am a Democrat and I never said that to you !

Seriously, there is no way for Democrats to defend themselves against Hubbard's accusation, since he didn't name anyone in particular, people saying they never said that would sound as silly as I just did. Hubbard does not, for example, claim that said Democrats had anything to do with writing the bill.

I'd say that claims so vague that they can not possibly be proven false should not be quoted. Pear could have demanded the names of the alleged Democrats, but that would leave him with no criticisms of Democrats who don't have Roman numerals in their names and we can't have that can we ?

Simon Johnson on the Dollar

Simon writes:

Simon Johnson's Blog: The Dollar (answering your questions): Many key currencies, including the dollar, have market determined values.  The IMF doesn't try to predict short-run (daily, weekly, monthly etc) movements in market determined exchange rate; that is simply not the business we are in. 

We look over a "medium-term" horizon -- by which we mean 5 years out -- and we analyze where an exchange rate is relative to its medium-term equilibrium value.  When we say that a currency is "overvalued", that means we think that -- over the medium term (but not necessarily over shorter time periods!) -- a currency will likely tend to depreciate.  And when we say a currency is "undervalued" that means -- over the medium term again -- we expect the currency will likely tend to appreciate....

The U.S. dollar has depreciated in real effective terms about 20% since its most recent peak in 2002.  It has also depreciated since the financial turmoil of the summer -- about 3% since the beginning of August.  And at today's exchange rate, we still regard the dollar as overvalued relative to its medium-term equilibrium value -- just remember this is NOT a statement about what the dollar will do today or any time soon!!

With regard to addressing the issue of "global imbalances," which is the term used to describe the large current account deficits and surpluses around the world, we think that exchange rate adjustment -- changes in the value of the dollar and other currencies -- can play a role.  But exchange rates are not the only issue; it's also about appropriately adjusting the balance of savings and investment around the world.  The strategy for doing this was laid out most recently in a set of mutually consistent policy plans known as the Multilateral Consultation.  This framework provides the best way to ensure that adjustment around the world will be orderly and symmetric, i.e., everyone does their part and global growth is sustained.

And there Simon stops, demonstrating a true mastery of IMF-speak. If he weren't working for an organization loathe to criticize its governmental masters in public, he would say that China needs to (a) boost domestic consumption, and (b) let its exchange rate appreciate more rapidly, while the United States needs to (a) boost private savings, and (b) raise taxes.