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December 2007

Jonathan Gruber on Health Care Mandates and the New York Times

If you want an informed opinion about health care matters, you could not do better than to borrow one from Jonathan Gruber:

Ezra Klein: Ask The Expert: I was surprised and somewhat offended by the lack of balance in the article by Katharine Q. Seelye in today’s Times (“Clinton Attack on Obama Overlooks Some Realities”). The health plans of Hilary Clinton and Barack Obama differ in a number of respects, but most important is the fact that Clinton includes a requirement that individuals purchase insurance. Virtually every health expert in the nation would agree that such a requirement is necessary for universal insurance coverage within our private insurance-based system. As a result, Clinton correctly pointed out that Obama’s plan would leave the nation far short of universal coverage. The 15 million estimate that she used was validated by myself and other experts, as detailed in Jonathan Cohn’s recent post on the New Republic’s web site. In recent days advisors to the Obama campaign have made a series of incorrect attacks on the claim that Clinton’s and John Edwards’ plans would cover more Americans than theirs. Ms. Seelye’s article simply parrots these incorrect attacks.

She first points to the figure from the Insurance Research Council that states that 15% of drivers are uninsured. As detailed in research by J. Daniel Khazzom (paper available at here), this figure clearly overstates the rate of uninsured drivers by computing this rate as the share of accidents in which the driver did not have insurance. But since uninsured drivers are typically from groups that are more accident-prone, the share of accidents involving the uninsured will clearly overstate the share of drivers that are uninsured. Moreover, state reforms to improve compliance with auto insurance requirements have been very successful, with the rate of uninsured drivers (measured appropriately) in Georgia recently falling to 2%.

She then cites the experience of Massachusetts, where I serve on the Connector Board that is implementing our ambitious health reform passed in 2006. She correctly points out that, as part of a compromise last year, we exempted almost 20% of uninsured adults from mandated coverage. But half of these are low income individuals offered employer insurance who can be covered as part of the law, but for whom we have not yet had time to design an appropriate subsidy program. The other half are individuals above three times the poverty line who are excluded from subsidies through a compromise between then Governor Romney and our legislature. If subsidies were extended further, exemptions would have been unnecessary. Candidates Clinton and Edwards have said that under their plans all individuals would be subsidized so that no one has to pay an unaffordable amount for insurance. She has laid out no specific plans for mandate exemptions, and there is no reason why she should be tarred by what we have done under the constraints of our Massachusetts law.

As Ms. Seelye highlights, the 15 million figure is not a precise estimate. But the general point should not be lost in the debate over the numbers: a plan with an individual mandate will cover millions more individuals than a plan without an individual mandate. There can be legitimate debates over whether a mandate is necessary or not. I personally feel that it is necessary to prevent free riding in our health care system, to ensure fluid functioning of insurance markets, and to ensure that all citizens are protected against health risk. At the same time, I can also respect, while disagreeing with, Candidate Obama’s decision to exclude a mandate. But there can be no debate over the fact that a mandate is required to bring us to universal health insurance coverage in the United States, and that a plan without a mandate will leave us far shorter of that goal than any plan with a mandate, proper subsidies, market reforms, and sensible enforcement rules.

Clive Crook Puzzles About America

It is an old question: why does America regard itself as a land of upward mobility and opportunity when it does not seem to be the case, relative to western European countries?

Clive Crook (November 29, 2007) - Opportunity and equality: [T]he most surprising evidence on economic mobility compares the United States with other countries. The findings do not give strong support to the idea that America is the land of opportunity. Movement out of the top and bottom quintiles  is lower than in many other countries, including Canada and (maybe) Britain. Yes, there is opportunity, and people do move up--but not as readily (out of the lowest quintile, anyway) as elsewhere...

20071208_delong_micro.jpg Some of what may be going on is that America is--or has been--relatively welcoming to immigrants. Immigration is all by itself an enormous upward mobility event. And that is not factored into the standard transition matrix analyses.

Tanta of Calculated Risk on the Bush "New Hope" Plan

The best thing that has crossed my desk today:

Calculated Risk: The Plan: My Initial Reaction: A lot of people are very worked up over the idea that the New Hope Plan is, in essence, the government mandating a kind of reneging on private contracts (the PSAs or Pooling and Servicing Agreements that govern how securitized loans are handled). I personally think you can all stand down on that one. From what I have seen about the plan to date, it is clear to me that it is in fact structured with the overarching goal of making sure that it stays on the allowable side of the existing contracts. I proceed from the assumption that nobody could write such a convoluted and counter-intuitive plan if that wasn’t the goal. So everyone who is thinking, “Gee, we’re violating contracts and we still don’t get much out of it!” is thinking the wrong thing, in my view. It’s more like “Gee, we don’t get much out of it when we don’t violate contracts.”

American Banker has a summary of The Plan details up here (it’s free this week if you register, and the registration process is painless). The basic outline is that loans are put into three segments:

  1. Borrower appears (from fairly superficial analysis of the data, not any deep digging) to be eligible for a refinance. These borrowers are to be encouraged to refinance.
  2. Borrower appears able to make payment at current rate, but appears (again, from fairly superficial analysis) to be unlikely to be able to refinance (generally because LTV is too high with FICO too low). These borrowers are eligible for the “fast-tracked” mod (the rate freeze) if they meet some FICO and payment increase tests.
  3. Borrower appears unable to make payment even at current rate; these borrowers are presumed to be unable to refinance. They are not eligible for the “fast track” rate freeze mod; they may be eligible for some kind of work out, but it would have to be handled the old-fashioned fully-analyzed case-by-case way.

There’s some detail about the FICO and payment tests used in segment 2.

I’m guessing that structuring of things will strike folks as weird. To me, it says that a rule of thumb is being created that puts borrowers in three categories:

  1. Not in default and default not imminent
  2. Not in default and default reasonably foreseeable
  3. In default or default imminent

As it happens, the PSAs for these deals will nearly universally contain language that says loans can only be modified if they are in default, or default is imminent, or default is reasonably foreseeable. Therefore, what The Plan does is simply provide a kind of standard definition of those categories for the vintages of loans in question. That’s why the Group 1 borrowers—those who could be eligible for a refinance—are never eligible for these “fast track” mods. It is hard to say that default (in the current pool) is reasonably foreseeable for a loan that has a refinance opportunity. No, it doesn’t make any difference that the refinanced loan might be highly likely to default at some fairly soon point in some new pool. This isn’t about solving the borrower’s problems permanently in the best possible way (a mod might be a better permanent solution than a refi for the borrower). It’s about solving the problem while staying inside the security rules.

And the rules in question are really important ones, not just idiosyncratic servicing rules that could probably be waived in a crisis by the trustee with the consent of the rating agencies.

First, REMICs (go here if you have no idea what a REMIC is). REMIC election involves the tax treatment of principal and interest payments and is much too complex to summarize here. The basic issue is that it creates a trust that owns the underlying pool of loans. The trust issues two classes of securities, regular interests and a residual interest. Interest income is taxable (as ordinary income) to the holders of regular interests. Gain/loss for tax purposes is also taken by the residual holder. The trust itself is not taxed; it’s just a pass-through entity. That prevents a “double taxation” from arising, in which the trust would have to pay taxes on interest income and then the regular class holders would also pay taxes.

One of the qualifying requirements of REMIC status is that the underlying pool of loans is “fixed.” REMICs do not acquire new loans after their pools are established; they do not account for any loans on a “held for sale” basis and they do not sell any loans. (Putbacks for breach are an exception, and always transact at par, not at market value.) If at any time the trust starts taking actions that can be interpreted as “actively managing” the underlying pool, the REMIC status is in jeopardy (the trust might have to start paying taxes, which would make the whole deal uneconomical).

So while the legislation and IRS rules authorizing and dealing with REMICs are not really about defining default servicing practices, they have affected default servicing practices (loss mitigation) because they have defined a kind of transaction that might look like active management of the pool but really isn’t: modifications (or other workouts) for defaulted or about-to-default loans. In essence, the REMIC law creates an exception for these loss-mit practices, so that servicers can use them without endangering the REMIC status of the trust. This is how what might seem like unrelated issues—how to best service a mortgage loan, how trust entities are or are not taxed by the IRS—get related.

The issue is further complicated by the off-balance-sheet nature of these trusts. (They don’t have to be off-balance sheet, but most of them are.) To be accounted for off the issuer’s balance sheet, the trust must be “qualifying” under the SFAS 140 rules. The “Q status” is similar to the REMIC status: the pool must be “static” or fixed or not actively managed or, in the charming industry parlance, “brain dead.” If it is determined that a pool is being actively managed, it “loses its Q” and gets forced onto the issuer’s balance sheet. SFAS 140, like the tax code, isn’t designed to be about good mortgage servicing practices, but it, like the tax code, has to include some definitions of acceptable “managing” of individual loans that are exceptions to the “brain dead pool” rule.

There was a bit of a dust-up earlier this year over the SFAS 140 issue. In a nutshell, while the REMIC law says that modifications are OK when the loan is in default or default is reasonably foreseeable, there was some concern that SFAS 140 only allows modifications if the loan is in default. That would mean that if you modified a loan that was current today, but that you had reason to believe would default next month (say, at reset) if you didn’t do anything about it, you’d be OK with your REMIC status but not OK with your Q status. The waters were calmed when the SEC published an official opinion that “reasonably foreseeable default” was an acceptable basis for modifying a loan under SFAS 140 as well as IRS 860D.

The takeaway point: a great deal of more-or-less informed commentary and blather you will find on whether securitizations “allow” modifications is based not on a question of what verbiage is or is not in the PSA, but rather on an interpretation of what is or is not required for REMIC tax treatment or off-balance sheet accounting. All the PSAs say, somewhere, that servicers will not do things that would jeopardize REMIC status or Q election. The whole point of the letter opinion released by the SEC this summer was to create a kind of regulatory “safe harbor” here: it said that if servicers use the “reasonably foreseeable default” standard that they are already allowed to use for REMIC-status purposes, they are OK with Q-status.

This “safe harbor” for Q-status did not and does not “override” any explicit contractual limitations on modifications that might be in any given PSA. In other words, if the PSA says explicitly that mods are allowed only for loans in default, but not for loans that are current (but likely to default), then that’s the standard. If a servicer went ahead and modified a current loan (under the “reasonably foreseeable” standard), then the servicer could be in breach of the PSA contract, even though the servicer is OK on the REMIC status and Q status. This raises the interesting question of whether there are actually any PSAs that so explicitly forbid this kind of modification, and if so, how many; that’s our next subject. But I know of no informed, sane observer who is claiming that the SEC letter, for instance, was a form of government abrogating of existing contracts. It was simply a case of a regulator ruling that if the PSA allows a certain class of modifications (implicitly or explicitly), the servicer’s exercise of the option to pursue those mods would not create an accounting nightmare. You may, if you like, interpret that as a regulator removing an obstacle to the enforcement of contracts as written.

So what do the PSAs say?

This is a hard question to answer definitively, because the PSAs for mortgage-related securitizations have not been forced to be uniform on this (or about 100 other) subjects. It is possible that some verbiage related to loss mit and modifications differs between contracts because someone somewhere really thought it was important; it is possible that some of it differs just because different law firms with different styles were used to draft the PSAs; it is possible that some of this is a matter of a lapse of attention somewhere. I think it never pays to underestimate the extent to which the industry does certain things because they did it that way back when they did their first securitization, and at no time since then has it ever become an issue, and nobody makes bonuses by making issues out of things that aren’t issues. Certain people have reacted to proposals for “safe harbor” legislation involving mortgage modifications by assuming, not necessarily wisely, that the contractual provisions in question are always and everywhere something that the parties to the contract have a real interest in defending or enforcing. The possibility that both servicers and investors are going back, reading these things, slapping themselves on the heads and saying, “Damn, why’d we put that in there?” is very real. Unfortunately, “investors” are so diverse and numerous and diffused that you just don’t get two parties sitting down and amicably agreeing to amend these PSAs to clear up a little problem.

So we get back to the apparently empirical question of what these PSAs actually do say. I have read many of them, but I sure haven’t read all of them. I am therefore willing to take the American Securitization Forum’s word for it here:

These agreements typically employ a general servicing practice standard. Typical provisions require the related servicer to follow accepted servicing practices and procedures as it would employ “in its good faith business judgment” and which are “normal and usual in its general mortgage servicing activities” and/or certain procedures that such servicer would employ for loans held for its own account.

Most subprime transactions authorize the servicer to modify loans that are either in default, or for which default is either imminent or reasonably foreseeable. Generally, permitted modifications include changing the interest rate on a prospective basis, forgiving principal, capitalizing arrearages, and extending the maturity date. The “reasonably foreseeable” default standard derives from and is permitted by the restrictions imposed by the REMIC sections of the Internal Revenue Code of 1986 (the “REMIC Code”) on modifying loans included in a securitization for which a REMIC election is made. Most market participants interpret the two standards of future default – imminent and reasonably foreseeable – to be substantially the same.

The modification provisions that govern loans that are in default or reasonably foreseeable default typically also require that the modifications be in the best interests of the securityholders or not materially adverse to the interests of the securityholders, and that the modifications not result in a violation of the REMIC status of the securitization trust.

In addition to the authority to modify the loan terms, most subprime pooling and servicing agreements and servicing agreements permit other loss mitigation techniques, including forbearance, repayment plans for arrearages and other deferments which do not reduce the total amount owing but extend the time for payment. In addition, these agreements typically permit loss mitigation through non-foreclosure alternatives to terminating a loan, such as short sales and short payoffs.

Beyond the general provisions described above, numerous variations exist with respect to loan modification provisions. Some agreement provisions are very broad and do not have any limitations or specific types of modifications mentioned. Other provisions specify certain types of permitted modifications and/or impose certain limitations or qualifications on the ability to modify loans. For example, some agreement provisions limit the frequency with which any given loan may be modified. In some cases, there is a minimum interest rate below which a loan's rate cannot be modified. Other agreement provisions may limit the total number of loans that may be modified to a specified percentage (typically, 5% where this provision is used) of the initial pool aggregate balance. For agreements that have this provision: i) in most cases the 5% cap can be waived if consent of the NIM insurer (or other credit enhancer) is obtained, ii) in a few cases the 5% cap can be waived with the consent of the rating agencies, and iii) in all other cases, in order to waive the 5% cap, consent of the rating agencies and/or investors would be required. It appears that these types of restrictions appear only in a minority of transactions. It does not appear that any securitization requires investor consent to a loan modification that is otherwise authorized under the operative documents.

The ASF goes on to propose model contract language that it encourages the industry to adopt. This would go a long way to preventing this kind of chaos in the future. But even with existing documents, you will note that it appears that very few have explicit restrictions on modifications (aside from the “golden rule” standard of generally accepted servicing practices, with the expectation that the servicer will treat the pooled loans in the same way it would treat its own portfolio of loans). Those that do have explicit restrictions have mechanisms for those restrictions to be amended, in most cases by less than 100% concurrence of all investors.

So is all this uproar over contractual provisions just a tempest in a teapot? Well, some of it is. The issue around “safe harbor” and enforcement of contracts heated up once we moved from the proposition of doing mods the old-fashioned “case by case” way, and into this new idea of the “freeze” or a kind of across-the-board approach to modifications. It is that, specifically, that appears to some people to be a violation of contract provisions; therefore, to give servicers “safe harbor” for using the “freeze” approach would, it seems to many people, be a case of the government invalidating contracts.

Whether this is really a serious issue or not depends on how the “freeze” thing works out in detail. It seems likely to me that Sheila Bair’s original proposal for the “across the board” freeze of all ARM rates would, in fact, have run into this very serious problem. It’s not that in that case the number of modifications would exceed the set caps in the contracts; it would clearly do so for those contracts with caps, but as we’ve seen those caps can be waived or amended in most cases. The problem with the Bair proposal is that it doesn’t measure each modification against the standard of benefit to or neutral effect on the trust, and that loans that are probably not in any reasonably foreseeable danger of default would get included. That would cause the REMIC and Q status problems to come back into play.

The Hope Now proposal is intended to be an improvement on the Bair proposal by limiting the “freeze” precisely to the “in reasonably foreseeable danger of default” category. That solves the REMIC and Q-related problems. The difficulty that remains is whether, in any given case, the default that is in foreseeable danger of happening would cost more to the security than the modification. That is where the rubber meets the road.

That’s the rationale for excluding loans that could qualify for a refinance. The presumption is always that the trust would lose less by a refinance (since it would get paid off at par) than a mod, and so you can’t say that modifying one of these loans shows a net benefit to the trust. The rationale for defining the modification-eligible group, number 2, as “not refinanceable” is that that creates a presumption that a mod would be a net benefit or neutral to the trust (since the only other option, given that we believe default is reasonably foreseeable, is foreclosure).

So it’s not that we’re necessarily replacing the old-fashioned case-by-case mods with the fast-track “freeze” mods. We’re creating a way of segmenting the borrower class so that one class of borrowers can be presumed to meet all the requirements in the PSAs for modifications. If the borrower isn’t in that group (2), then a modification could still be done, but it doesn’t have the presumption of meeting the rules, you still have to determine whether a mod is less loss to the trust than not modifying (and therefore letting the loan default and foreclosing), you have to examine the borrower’s circumstances (to make sure that they are no longer in reasonably foreseeable danger of default after the mod), get a new appraisal or AVM or broker price opinion on the property (to estimate losses in event of foreclosure), and run the comparative numbers.

At the end of it, then, it gets a lot easier to figure out the rationale of some of the details of the Group 2 process (FICOs here or there, income verified or not, etc.). None of that is about figuring out whether the borrower "needs" or "deserves" to be helped. It is about figuring out whether the borrower has any realistic option of refinancing, given current contraints in the mortgage market and the HPA outlook. That, in turn, is crucial because to modify a loan that could have refinanced opens up the servicer to liability for contract violations (and potentially loss of REMIC tax status and Q-status, too).

There isn't, as far as I can see, any "safe harbor" provision in all of this. That tells me, at this point, that the authors of this plan believe it is liability-proof (that it basically meets the requirements of the existing PSAs, with the caveat that it isn't a legally binding mandate on all servicers and securities, so a deal with a very restrictive PSA that this isn't compatible with can just opt out).

Is it all kind of anemic after all the build-up? Yep. Does it mean contracts are now invalidated in the U.S.? Not as far as I can see; in fact, I'd say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.

A Good Take on the CDO Mess from Steven Pearlstein

An excellent piece from Steven Pearlstein, who is still at the Washington Post:

It's Not 1929, but It's the Biggest Mess Since: It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one. We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon. But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts. It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion. But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond. In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next. With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired. It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value. One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent. And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio. Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans. And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole. That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically. It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets. It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year. And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

Circular Firing Squad of Flying Wingnut Attack Monkeys Do Theology!!

First, David Frum denies the canonicity of Job. For Frum writes:

David Frum's Diary on National Review Online: That Dog Won't Hunt: Sorry to dissent from my colleagues on the Corner.... To be blunt, Romney is saying:

It is legitimate to ask a candidate, "Is Jesus the son of God?"

But it is illegitimate to ask a candidate, "Is Jesus the brother of Lucifer?"

It is hard for me to see a principled difference between these two questions, and I think on reflection that the audiences to whom Romney is trying to appeal will also fail to see such a difference...

And the Mormon belief that Jesus and Lucifer are "brothers of the spirit" does come originally from Job, which places Satan among the sons of God:

Job 1:6: Now there was a day when the sons of God came to present themselves before the LORD, and Satan came also among them...

Second, Gregg Easterbrook falls down and worships the false god Metatron:

Easterbrook writes:

ESPN Page 2 - TMQ: BCS Madness!: Meanwhile, TMQ asked in August whether the three Golden Compass books would carry their very strong anti-Christian view onto the silver screen -- the first big-budget installment opens this week. In the Golden Compass trilogy, God is both a fraud (a space alien pretending to be divine!) and the source of every evil in the universe; Christianity is "a very powerful and convincing mistake, that's all"; God has created not heaven but hell and sends all souls, even those of the righteous, to hell; Christian churches are run by corrupt power-mad conspirators whose goal is to abolish pleasure in life; the quest of the astonishingly competent English schoolgirl who is the trilogy's heroine is to locate ancient magical objects that will allow her to kill God and free the world from religion...

Very curious--but not surprising--that Gregg Easterbrook thinks that a literary creation that is a bad guy pretending to be God actually is Α-Ω.

My First Dead-Tree Literary Theory Publication Is...

...a contribution to Framing Theory’s Empire. John Holbo writes:

The Valve - A Literary Organ | Framing Theory’s Empire - Event and Text: It’s finally a book! Framing Theory’s Empire [amazon]; or get it from the publisher, Parlor Press, directly. You can download the entire book as a free PDF from the Parlor site.  I’m still waiting for my paper copy to show up. (Any of you contributors out there gotten yours yet?) I think the cover is rather handsome. But, then: a father should love his child. The lovely Belle Waring and I designed it together.

A book, eh? See here! What’s all this about? ‘Theory’? Yes, exactly! In the English/humanities department sense: the idiomatically ofless sort, you might say; as in, ‘I do theory’. The stuff that started in the 60’s, got really big in the 80’s. Then either went away or is still hanging around, depending who you ask. (If you ask me: it’s still hanging around.)

If you spent late 2005 in a coma and missed all the glory, we staged a ‘book event’, round-table reviewing the Patai and Corral edited Theory’s Empire (Columbia UP, 2005). See the sidebar for link. Framing Theory’s Empire contains contributions to that event, cleaned up, polished up, edited. (I’ve written an introduction, talking about these issues. If you care to read it.)

The contributors are: Scott McLemee (he generously contributed a preface), John Holbo, Mark Bauerlein, Michael Bérubé, John McGowan, Scott Kaufman, Sean McCann, Daniel Green, Adam Kotsko, Tim Burke, Amardeep Singh, Jonathan Mayhew, Jonathan Goodwin, Chris Cagle, Christopher Conway, Kathleen Lowrey, Brad DeLong, Matthew Greenfield, Morris Dickstein, Jeffrey Wallen, John Emerson, Mark Kaplan, Jodi Dean, Kenneth Rufo, Daphne Patai, Will H. Corral. (Patai and Corral were kind enough to contribute an “Afterword”. At the moment Amazon is giving them erroneous prominence, in the author line. I’ll have to see whether I can get Amazon to correct that. Not that I mind so very much. They themselves will probably be even more annoyed, because it might create some product confusion with Theory’s Empire itself.)

It’s the perfect stocking stuffer for the humanities graduate student on YOUR list!

I think it turned out to be a really great book. In addition to several posts that turned out to be just plain really solid essays, there is some lively, sharp conversation between several participants. There’s intelligent back and forth, actual addressing of critical points and hashing of differences, which is not something one always gets in themed anthologies. I think the informal quality of many of the pieces turns out to be a real virtue as well. It suits the topic. But you tell me. What do you think of the book? What do you think about our event, two years on?

I’m glad to get this done as well because, frankly, my Glassbead Books efforts for Parlor haven’t been quite rolling off the assembly-line, as I had originally hoped. It turns out making books is incredibly hard and time consuming, and folks don’t do stuff when you tell them to, and it’s hard to get folks to commit to helping out. Academics are always busy. I’m hoping that, with a grand total of TWO titles out now we’ve actually got a series. That is, a line, not just a single point. Anyway, next comes our Moretti book - I think. I want to get these things rolling out a lot faster.

We Are Legion!

Peter Orszag, Director of the Congressional Budget Office, joins the throngs:

Director’s Blog: Welcome! Welcome to the CBO Director’s Blog!

As technology evolves, the Congressional Budget Office is working hard to improve the ways in which we communicate with the Congress and the public. Our analysis has always been of the highest quality, and we’d like to make sure we meet the same high standards in our electronic communications.

We’ve already added new functions to our website — — for example, to improve our list server and to provide the Congress and citizens with audio files of speeches and presentations along with the materials that go with them. This blog is the latest addition to our communications modernization effort.

What are you likely to read on this blog? First, you will learn more about CBO — the types of work we do, how we do it, and more about the outstanding analysts we have. For example, when we come out with a new report or important cost estimate, I may write a bit about the analytical substance and also introduce you to the key staff who took the lead in the analysis. Second, CBO’s research and cost estimates are often discussed extensively in the media and elsewhere — and not surprisingly, from time to time misunderstandings or misinterpretations arise about some analysis we have done. In those kinds of situations, I will use the blog to further explain our work and address possible or potential misunderstanding. Finally, when it seems appropriate, I will use the blog to link our work to relevant outside research from academic or other institutions that may shed additional light on the challenging issues the Congress is working to address.

I will write several times each week while Congress is in session — perhaps less often when it is not. Since this is CBO’s first attempt to dip its toes into blogging waters, I will begin slowly. For that reason, at least for now I have decided not to post responses on the blog. I would, though, be delighted to hear from anyone who would like to comment upon something I have written — and may ask to post a particularly interesting comment if it adds substantively to the discussion on a particular subject. If you wish to write in, please address your comments to:

I look forward to hearing from you and for any feedback you may have for me on the blog. Here we go!

links for 2007-12-06

Global Climate Change Economic Analysis Cage Match: Robin Robert Hansen Misreads Marty Weitzman

Robin Robert Hansen writes:

Robert Hansen's Blog: The Stern Review on the Economics of Climate Change: Blistering Peer Reviews: In the latest issue of the Journal of Economic Literature, two papers deliver devastating reviews on the Stern Review on the Economics of Climate Change... by serious, mainstream economists: William Nordhaus of Yale and Martin Weitzman of Harvard. These are not individuals and articles that can or should be ignored. Of course, they will be ignored by the mainstream media – while at the same time Al Gore’s receipt of the Nobel Prize carries the media day....

I have always said that my objections to the prescriptions of the most vocal climate change advocates are on three levels: one, the climate models depend too much on positive feedbacks that are not understood; two, the models have not really been tested, but instead are calibrated to the historical data; and three, even if one accepts the models, one then has to move into the economics of optimal policy, and there the best analysis suggests relatively modest reductions in carbon emissions for the near term. I like to ask environmentalists to summarize their prescriptions with the appropriate tax per barrel of oil: tell me what you think the price of oil should be increased by, in order to recognize the impact of carbon.

But back to the reviews of the Stern Review. So the Stern Review made big headlines when it came out, as it was commissioned by the UK government and was ostensibly a serious analysis of the economics of climate change. Both Nordhaus and Weitzman deliver fatal blows.... Weitzman says: "However, in my opinion, Stern deserves a measure of discredit for giving readers an authoritative-looking impression that seemingly objective best-available-practice professional economic analysis robustly supports its conclusions, instead of more openly disclosing the full extent to which the Review’s radical policy recommendations depend upon controversial extreme assumptions and unconventional discount rates that most mainstream economists would consider much too low...."

To summarize the contrast: The Stern Review calls for a carbon tax of $350 per ton of carbon in 2015. Nordhaus’ model, which has been peer-reviewed many times, calculates the optimal carbon tax in 2015 to be ONE-TENTH of that, or only $35 per ton carbon. I find it useful to put these quantities in terms of something we understand more readily: $350 per ton carbon converts to $1 per gallon of gasoline, while $35 per ton carbon converts to 10 cents per gallon of gasoline. We are talking big differences here.

So what is wrong with the Stern Review’s economics? It is real simple – they use an extremely low interest rate, close to zero. Everything follows from this, and in my opinion, the assumption is crazy....

Another point in this criticism is the essential inter-generational fairness issue. Per capita income worldwide has been growing at around 1.3% over many decades – and this is the number that the Stern Review uses. At that growth rate, per capital world consumption will grow from today’s $10, 000 to about $130,000 in two centuries. Which generation is the relatively poor generation? Are we so sure that we are impoverishing our children and our children’s children? What about all the new technologies, institutions such as democracy and market economies, physical infrastructure, and knowledge that we are bequeathing them? Do we not think that people 200 years from now will enjoy more leisure, better health, better technology, and generally be better able to pursue life, liberty, and happiness?

Read the articles, they are really convincing. For most of the media, of course, that will be too difficult. Much easier to report on Al Gore winning an Academy Award – oops, I meant a Nobel Prize.

20071208_delong_micro.jpg When Robin Robert Hansen argues that we should do little about climate change in the near future because "the climate models depend too much on positive feedbacks that are not understood... the models have not really been tested," he makes the decisive error of failing, as Tyler Cowen puts it, to recognize that on this issue uncertainty is not our friend.

And this is how Robin Robert misreads Marty. Because Marty's major point in his review is that uncertainty is not our friend and that because uncertainty is not our friend the Stern discount rate is not crazy:

Marty Weitzman: There is a general point here and a particular application to the economics of climate change. The general point is that from experience alone one cannot acquire sufficiently accurate information about the probabilities of tail disasters to prevent the expected marginal utility of an extra sure unit of consumption from becoming unbounded for any utility function having everywhere-positive relative risk aversion, thereby effortlessly driving [the conclusions of] cost-benefit applications of expected utility theory [to an endorsement of the generalized precautionary principle]. The degree to which this kind of "generalized precautionary principle" is relevant in a particular application must be decided on a case-by-case basis that depends upon... a priori knowledge.... In the particular application to the economics of climate change, where there is so obviously limited data and limited information about the global catastrophic reach of climate extremes for the case T > 6 C, to ignore or suppress the signiÖcance of rare tail disasters is to ignore or suppress what economic theory is telling us loudly and clearly is potentially the most important part of the analysis. While it is always fair game to challenge the assumptions of a model, when economic theory provides a generic result (like "free trade is Pareto optimal") the burden of proof is commonly taken as resting on whomever wants to overturn the theorem in a particular application. The take-away message here is that the burden of proof in the economics of climate change is presumptively upon whomever wants to model optimal-expected-utility growth under endogenous greenhouse warming without having structural uncertainty tending to matter much more than risk. Such a middle-of-the-distribution modeler needs to explain why the inescapably-thickened tails of the posterior-predictive distribution... rare disasters under uncertain structure, [are] not the primary focus of attention and does not play the decisive role in the analysis.

So Weitzman concludes that good policy today:

combines the gradualist climate-policy ramp of ever-tighter GHG reductions... with the option value of waiting for better information about the thick-tailed disasters... fnding out beforehand [whether] we are on a runaway-climate trajectory... [confronting] honestly the possible options of undertaking currently-politically-incorrect emergency measures if a worst-case nightmare trajectory happens to materialize... having some semblance of a game plan for dealing realistically with what might conceivably be coming down the road... supplement mainstream economic analysis of climate change (and mainstream ramped-up mitigation policies for dealing with it) by putting serious research dollars into... contingency planning for worst-case scenarios.... It may well turn out that... early detection is impossible... too expensive... comes too late... so we should stop stalling and start making serious down payments on catastrophe insurance by cutting CO2 e emissions drastically. But these are conclusions we need to reach empirically.... Instead of declaring immediate all-out war on greenhouse-gas emissions as advocated by Stern, maybe we would do better by steadily but surely ramping up GHG cuts over the next decade or two while simultaneously investigating seriously the nature of the runaway-climate disasters.... We can always come back in ten or twenty years time and declare all-out war on global-warming emissions then if we then think it is the best option.... The Stern Review has its heart in the right place -- it is not nice for us to play the role of nature's grim reaper by bequeathing the enormously unsettling uncertainty of a very small, but essentially unknown (and perhaps unknowable), probability of a planet Earth that in hindsight we allowed to get wrecked on our watch. However, Stern does not follow through formally on this really unsettling part of the global warming equation.... I don't mean to imply that there is some off-the-shelf turnkey consensus model of the economics of uncertain catastrophes that the Stern Review was negligent in not using.... But I think progress begins by recognizing that the hidden core meaning of Stern vs. Critics... is] tails vs. middle and about catastrophe insurance vs. consumption smoothing.

Ezra Klein Is Shrill!

He calls his post "Why Oh Why Can't We Have A Better Press Corps?" My work here is done:

Ezra Klein: Why Oh Why Can't We Have A Better Press Corps?: By the way, lets be really clear about what's going on in this Kit Seelye piece: In evaluating a policy debate between two Democratic candidates for president, Seelye went to a right wing think tank (AEI) and asked them to adjudicate. They picked the more conservative plan. Proof!

And the actual reasoning of the piece is, and excuse my intemperance, absolutely idiotic. It's so bad, that I'm betting Seelye misquoted the AEI guy, because think tank employees at least know how to sound rigorous. Here's how Seelye comes to the conclusion that Clinton's plan may cover more people than Obama's: First she says, "Mandates have not worked with auto insurance. While all drivers are required to have it, 15 percent of the nation’s drivers have none, according to the Insurance Research Council."

Then she wanders over to AEI where she hears, "Mr. Obama’s health plan could actually have a better compliance rate. The 15 million who would supposedly be left out equal about 5 percent of the population — a smaller portion than are going without auto insurance, said Joseph Antos, a health policy expert at the American Enterprise Institute, a nonpartisan[!] group."

So start with a fallacious comparison -- health mandates to auto insurance -- and assume perfect equivalency. Then, take the number without auto insurance, so a number from data set X. Then, take the number who'll possibly lack health coverage in Obama's plan, from data set Y. Then compare the two. I almost can't express how ridiculously innumerate the logic is. Suffice to say, Seelye could have called a fucking health care expert and asked what the modeling on the two plans showed. That she instead looked at auto insurance for one number and then health care for another is bad enough. But in evaluating Clinton's plan, she also pretended that the only relevant policy was the mandate -- subsidies, access, employer mandates, etc are all ignored. Probably because she's never read the policy and doesn't know how it works. She is, after all, a campaign reporter, not a policy expert of any type. But as an educated person, working with editors and fact checkers, somebody should have noticed that this would be like me comparing car crashes to bed wetting simply because both are called "accidents."

If I'd read her article on a blog, I'd assume the author a fool and never read it again. Instead, this is in The New York Times.

Paul Krugman points out:

Nonpartisan AEI - Paul Krugman - Op-Ed Columnist - New York Times Blog: I have a lot of problems with this Kit Seelye piece... this takes the cake:

Joseph Antos, a health policy expert at the American Enterprise Institute, a nonpartisan group.

Is it really possible for a veteran reporter to believe that AEI is nonpartisan? Not even a qualifier, like “right-leaning” or “free-market-oriented”?

I have swung around to the view that in the minds of people like Kit Seelye, "what I believe" or "what would inform the public" are simply not things that they think about; it's all "how can I please my editors?" and "how can I please my sources?"

Which is why intelligent and informed people increasingly rely on intelligent webloggers who have and care about their reputations, rather than on the Kit Seelyes, Tom Friedmans, and Peter Bakers of the world.

Shut Down the Washington Post Today!

Kevin Drum writes:

The Washington Monthly: [T]ake a look at the front page bug for the Post's editorial coverage of the NIE. It's classic. Everyone basically agrees that the NIE's assessment that Iran is probably not pursuing a nuclear bomb is good news and provides us with an opening. Everyone except for the editorial page itself, which can barely stand the thought.... [T]he editorial board... [are] aghast at the very idea of talks, and are upset that the new NIE might give us talk-mongers fuel for our talk-mongering fire. Sheesh...

John Conyers: Setting the Record Straight on FISA

Representative John Conyers writes:

Rep. John Conyers: Setting the Record Straight on FISA - The Huffington Post: In recent weeks, there has been lot of conflicting information floating around about efforts by House Democrats to protect the country by adopting rules for intelligence gathering that are both flexible and constitutional. This week, President Bush suggested that my legislative alternative to this summer's hastily-enacted Foreign Intelligence Surveillance Act (FISA) reform, the "Protect America Act," would take away important tools from our intelligence community. He characterized as "obstruction" the skepticism that many of us have about granting amnesty to telecommunications carriers who may have cooperated in warrantless surveillance. I was disappointed that the President did not propose any concrete steps to improve our capabilities or protect our freedoms -- he just repeated his demand for immunity.

This comes close on the heels of a recent controversy concerning the House Democrats' FISA legislation stemming from Joe Klein's column in Time Magazine on November 21st, in which his Republican sources seem to have spun a tale that led Mr. Klein to characterize our efforts as "more than stupid."

I believe that it is time for a comprehensive and detailed response to the President's accusations of obstruction, the misinformation in the Time Magazine column, and the debate over warrantless surveillance. Below is that response. Please let me know what you think, and feel free to pass along to your friends and colleagues.

Joe Klein's recent column deriding the House-passed FISA legislation, along with his subsequent stumbling efforts to clarify its intent, and Time Magazine's failure to publish the protests my Democratic colleagues and I had regarding its many inaccuracies are only the most recent manifestation of disinformation put forth concerning the Bush Administration's warrantless surveillance program and legislative efforts to modify the law. As the lead author, along with Silvestre Reyes, of the RESTORE Act, allow me to set the record straight once and for all.

First, contrary to GOP and media spin, the RESTORE Act does not grant "terrorists the same rights as Americans." Section 105A of the RESTORE Act explicitly provides that foreign-to-foreign communications are totally exempt from FISA - clearly, this exception for foreigners such as members of Al Qaeda does not apply to Americans. In cases involving foreign agents where communications with Americans could be picked up, Section 105B of the legislation provides for liberalized "basket warrant" procedures by which entire terrorist organizations can be surveilled without the need to obtain individual warrants from the FISA court. Again, this new authority is aimed at foreign terrorists, not Americans.

Mr. Klein appears to base much of his criticism of our bill on our use of the term "person" to describe who may be surveilled, based on the suggestion of a Republican "source" that this risks an interpretation that terrorist groups would not be covered. The truth is that under FISA the term person has been clearly defined for almost thirty years to include "any group, entity, association, corporation, or foreign power." It is also notable that both the RESTORE Act, and the Administration's bill passed this summer, contain the exact same language that Mr. Klein questions, yet we've never heard an objection to the Administration's bill on this score.

Second, I must strongly disagree with Mr. Klein's assertion that the Speaker "quashed ... a bipartisan [compromise] effort." As the Chairman of the Committee with principal jurisdiction over FISA, the House Judiciary Committee, I am aware of no effort to prevent bipartisan compromise on this issue. As a matter of fact, last summer, beginning in July, Democrats tirelessly negotiated with Director of National Intelligence (DNI), Mike McConnell, to develop consensus legislation to address the Administration's stated concerns about our intelligence capability.

We addressed every one of the concerns Mr. McConnell raised. He said he needed to clarify that a court order was not required for foreign-to-foreign communications -- our bill did just that. McConnell said he needed an assurance that telecommunications companies would be compelled to assist in gathering of national security information - our bill did that. The DNI said he needed provisions to extend FISA to foreign intelligence in addition to terrorism - the bill did that. He asked us to eliminate the requirement that the FISA Court adjudicate how recurring communications to the United States from foreign targets would be handled - the bill did that. McConnell insisted that basket warrants be structured to allow additional targets to be added after the warrant was initially approved - again, the bill did that. When this legislation was described to DNI McConnell, he acknowledged that "it significantly enhances America's security.''

In recent weeks, there has been lot of conflicting information floating around about efforts by House Democrats to protect the country by adopting rules for intelligence gathering that are both flexible and constitutional. This week, President Bush suggested that my legislative alternative to this summer's hastily-enacted Foreign Intelligence Surveillance Act (FISA) reform, the "Protect America Act," would take away important tools from our intelligence community. He characterized as "obstruction" the skepticism that many of us have about granting amnesty to telecommunications carriers who may have cooperated in warrantless surveillance. I was disappointed that the President did not propose any concrete steps to improve our capabilities or protect our freedoms -- he just repeated his demand for immunity.

This comes close on the heels of a recent controversy concerning the House Democrats' FISA legislation stemming from Joe Klein's column in Time Magazine on November 21st, in which his Republican sources seem to have spun a tale that led Mr. Klein to characterize our efforts as "more than stupid."

I believe that it is time for a comprehensive and detailed response to the President's accusations of obstruction, the misinformation in the Time Magazine column, and the debate over warrantless surveillance. Below is that response. Please let me know what you think, and feel free to pass along to your friends and colleagues.

Joe Klein's recent column deriding the House-passed FISA legislation, along with his subsequent stumbling efforts to clarify its intent, and Time Magazine's failure to publish the protests my Democratic colleagues and I had regarding its many inaccuracies are only the most recent manifestation of disinformation put forth concerning the Bush Administration's warrantless surveillance program and legislative efforts to modify the law. As the lead author, along with Silvestre Reyes, of the RESTORE Act, allow me to set the record straight once and for all.

First, contrary to GOP and media spin, the RESTORE Act does not grant "terrorists the same rights as Americans." Section 105A of the RESTORE Act explicitly provides that foreign-to-foreign communications are totally exempt from FISA – clearly, this exception for foreigners such as members of Al Qaeda does not apply to Americans. In cases involving foreign agents where communications with Americans could be picked up, Section 105B of the legislation provides for liberalized "basket warrant" procedures by which entire terrorist organizations can be surveilled without the need to obtain individual warrants from the FISA court. Again, this new authority is aimed at foreign terrorists, not Americans.

Mr. Klein appears to base much of his criticism of our bill on our use of the term "person" to describe who may be surveilled, based on the suggestion of a Republican "source" that this risks an interpretation that terrorist groups would not be covered. The truth is that under FISA the term person has been clearly defined for almost thirty years to include "any group, entity, association, corporation, or foreign power." It is also notable that both the RESTORE Act, and the Administration's bill passed this summer, contain the exact same language that Mr. Klein questions, yet we've never heard an objection to the Administration's bill on this score.

Second, I must strongly disagree with Mr. Klein's assertion that the Speaker "quashed ... a bipartisan [compromise] effort." As the Chairman of the Committee with principal jurisdiction over FISA, the House Judiciary Committee, I am aware of no effort to prevent bipartisan compromise on this issue. As a matter of fact, last summer, beginning in July, Democrats tirelessly negotiated with Director of National Intelligence (DNI), Mike McConnell, to develop consensus legislation to address the Administration's stated concerns about our intelligence capability.

We addressed every one of the concerns Mr. McConnell raised. He said he needed to clarify that a court order was not required for foreign-to-foreign communications -- our bill did just that. McConnell said he needed an assurance that telecommunications companies would be compelled to assist in gathering of national security information – our bill did that. The DNI said he needed provisions to extend FISA to foreign intelligence in addition to terrorism – the bill did that. He asked us to eliminate the requirement that the FISA Court adjudicate how recurring communications to the United States from foreign targets would be handled – the bill did that. McConnell insisted that basket warrants be structured to allow additional targets to be added after the warrant was initially approved – again, the bill did that. When this legislation was described to DNI McConnell, he acknowledged that "it significantly enhances America's security.''

Yet, suddenly, on the eve of the vote, Director McConnell withdrew his support after consultation with the White House. If the media wanted to identify over-the-top partisanship, they could begin by citing the declaration of David Addington, Vice President Cheney's Chief of Staff, that "We're one bomb away from getting rid of that obnoxious FISA Court," and DNI McConnell's assertion that by merely having an open debate on surveillance, "some Americans are going to die."

Third, the RESTORE Act legislation is badly needed to provide accountability to the Bush Administration's unilateral approach to surveillance. The warrantless surveillance program has been riddled with deceptions that only began to come to light when The New York Times first disclosed the existence of the program in 2005. The program itself appears to directly violate FISA and the Fourth Amendment, as a federal court, the non-partisan Congressional Research Service, numerous Republican legislators, and independent legal scholars have found.

The Administration has also mischaracterized the existence, degree, extent and nature of the program itself as well as how much information it has shared with Congress. For instance, compare the President's speech in 2004 with his admission that there was indeed a program of warrantless surveillance. When high-ranking DOJ officials found the program lacking, the White House went to absurd, if not comical lengths, to convince a dangerously ill and hospitalized Attorney General Ashcroft to overrule them. Even today, the Administration continues to obscure its own past misconduct with extravagant claims that the "state secrets" doctrine bars any legal challenges whatsoever - a position that has been rejected by the Court of Appeals.

The Administration's hastily enacted legislation, signed this summer, is little better. Instead of being limited to the stated problem of foreign-to-foreign electronic surveillance, it could apply to domestic business records, library files, personal mail, and even searches of our homes.

Against that backdrop, it is clear we need a new law with the critical oversight provisions included in the RESTORE Act, such as requiring the Administration to turn over relevant documents to Congress, mandating periodic Inspector General reports, and acknowledging that the Administration is indeed bound by FISA.

Finally, the Administration has yet to explain why offering retroactive immunity to telephone giants who may have participated in an unlawful program is vital to our national security. Under current law, the phone companies can easily avoid liability if they can establish they received either an appropriate court order or legal certification from the Attorney General. Asking Congress to grant legal immunity at a time when the Administration has refused to provide the House of Representatives with relevant legal documents for more than eleven months is not only unreasonable, it is irresponsible.

Civil liberties and national security need not be contradictory policies, rather they are inexorably linked. Perhaps nowhere is this interrelationship more true than in intelligence gathering, where information must be reliable and untainted by abuse to be useful. So when we discuss FISA, the first thing we need to do is drop the partisan rhetoric, and stick to the actual record. Under the RESTORE Act, the intelligence community has the flexibility to intercept communications by foreign terrorists without obtaining individual warrants, and the Court and Congress are given the authority to perform their constitutional oversight roles. The only parties who lose in this process are the terrorists, and those who want the executive branch to have absolute and unreviewable power.

Rather than being, in Mr. Klein's words, "well beyond stupid," the RESTORE Act offers a smart and well balanced approach to updating FISA and reining in the excesses of an unchecked executive branch.

Calling the Business Cycle Peak?


My subjective probabiliy odds are now better than 50-50 that 2007Q3 was the business cycle peak:

  • Productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter of 2007...
  • The expected value of 2007Q4 GDP now looks to be 0.1% lower than 2007Q3 GDP--that's a growth rate of -0.4% per year.

Riverside County, California on $1.70 a Day

Belle Waring writes:

Crooked Timber » » Help a Blogger Out: Gary Farber has been scraping by for a while on your previous generous donations, CT readers, but he’s in a world of hurt at the moment, so show some love.

In perhaps related news, some people just don’t know anything about being broke:

“The risk is that you could be modifying loans for people who don’t need it,” said Sharon Greenberg, director of mortgage strategy at Barclay’s. “There’s only so much you can do without talking to the borrower. You’re spending $60 a month on cable TV; can you get by with less? You’re spending $200 a month on food for two people, but food costs in your area show that you should be able to get by with $100 a month. These are the kinds of conversations that loan-servicing companies have to have with borrowers.”

Food costs in your area show that when there are no crawdads, you should be able to eat sand. No refinancing for you, Mr. Moneypants McRichington!!

Mortgage Reset Freezes

Fed Vice Chair Don Kohn:

There's no need to hold the economy hostage to teach a very small minority of the population a lesson...

Chris Farrel writse:

APM's Marketplace: My Two Cents: Paulson Makes A Move: Having criticized U.S. Treasury Secretary Henry Paulson for not taking a leadership role with the subprime crisis, it's good to see that he is adopting an idea put forward by the head of the FDIC and adopted by Governor Arnold Schwartzenegger in California: A rate freeze on the adjustable rate subprime mortgages that will reset at a higher rate in 2008. Estimates are that there are more than $350 billion in such mortgages nationwide that will reset in 2008.

From the news reports he is negotiating a temporary reprieve (and it's unclear how long the freeze will last; my guess is up to five years, a long enough period of time for the real estate market to revive.) I'd prefer a permanent freeze. Nevertheless, for those that are able to make payments on their adjustable rate subprime mortgages at current rates (typically between 7% and 9%) but won't be able to stay current on their payments when their mortgage adjusts to 11% to 13%--or higher--this is good news. It's also a boon to the economy.

To be sure, the plan will bail out some speculators and wealthy homeowners that gambled with a subprime loan. But that's always the case with a comprehensive solution. But these folks are also in the minority. And all the evidence we have in recent months is that the case-by-case loan modification attempts between lending institutions and homeowners wasn't working out....

By the way, let's be clear: These homeowners aren't paying "cheap" rates. Certainly, that the message of recent Congressional testimony by Michael Krimminger, a special advisor to the head of the FDIC. "The typical structure of these loans is to provide for a starter rate (typically between 7 and 9 percent), followed in 24 or 36 months by a series of steep increases in the interest rate (often totaling 5 percent or more) and a commensurate rise in the monthly payment," said Krimminger. He went on to say that "Almost three quarters of subprime mortgages securitized in 2004 and 2005 were structured in this manner, as were over half the subprime loans made in 2006. Most of these loans also imposed a prepayment penalty if the loan was repaid while the starter rate was still in effect."

This is a disgrace. Lenders should be ashamed of themselves. I don't mind teaching lenders a lesson. It doesn't bother me in the least that the balance sheets of banks and other lenders that wrote these loans take a hit. I just wish it was permanent rather than temporary...

I think Chris should be much more wary. We do not want to have a bunch of banks that have inadequate capital cushions and so cut back on their lending across the board, do we?

No Man Is an Island

Our thoughts and sympathy are with Jeff Perrin and Jeff Perrin Jr. and the rest of their family in their mourning tonight. For Dennis Perrin (whom Daniel Davies calls "the same bloke as the Dennis Perrin I used to have really nasty flamewars with on a mailing list five years ago") writes:

Dennis Perrin: Holly Corey: My sister-in-law, Holly Corey, was randomly murdered Friday afternoon on the north side of Indianapolis. Seems a disturbed young man, who had access to a handgun, shot her several times while she pumped gas into her car. No one knows why this happened, since the guy didn't rob her. He just shot her, then killed himself. A personal free-fire zone.

Whenever tragedies like this happen, the survivors always paint the deceased in bright colors. To be expected and not to be dismissed. But please trust me friends when I tell you that Holly was one of the sweetest, most positive individuals I've ever known. Holly faced some serious adversity in her life, but it never seemed to drag her down. She remained optimistic and upbeat no matter what. I don't know how she swung that, but I'll always be amazed and impressed that she did.

Holly leaves behind my brother Jeff, and their son Jeff Jr. who is 12. Now I must drive down there and be with my family. And the book? It can wait.

links for 2007-12-05

Morning Mendacious Incompetence--or Is that Incompetent Mendacity?--Watch

Matthew Yglesias shakes his fist at the heavens and notes:

And Robert Waldmann points out that corrupt Washington Post stenographers Peter Baker and Robin Wright know how to write an honest, factual lead paragraph--they just usually choose not to:

Robert's Stochastic thoughts:

A Blow to Bush's Tehran Policy

By Peter Baker and Robin Wright
Washington Post Staff Writers
Tuesday, December 4, 2007; Page A01

President Bush got the world's attention this fall when he warned that a nuclear-armed Iran might lead to World War III. But his stark warning came at least a month or two after he had first been told about fresh indications that Iran had actually halted its nuclear weapons program.

Now that is what I call a lead*. The contrast couldn't be more sharp with Baker's recent effort to thoroughly inform all readers who get to paragraph 8 that Karl Rove is a liar about which I posted at the linked post...

Scott Eric Kaufman Examines the Wonders of the Google World

Scott Eric Kaufman writes:

Acephalous: Google's Images, Searched for Me: A reader who attended a function I'd planned to (but, due to illness, could not) attend suggested I spend a few minutes skimming the results of a Google Image Search for my name.  (He wanted to be sure he could spot me in the crowd.) Intrigued, I took him up on his offer.  The results are ... interesting. A search for my full name, bookended by quotation marks, returns: a photo of Eric Lott on the beach; Scott McLemee's Simpson's self; some books McLemee bought for Kotsko in Canada a few years in; the header of the Iranian Supreme Leader's blog.... Chard Orzel; Salma Hayek; an angry duck; Salma Hayek; Brad DeLong; Salma Hayek... Salma Hayek... Salma Hayek.... Something must've gone horribly wrong with Google.  I don't even like Salma Hayek, much less—what do you mean "Page Rank"?  This post will do what? Seriously?...

At least it is not Friedrich Hayek.

And "Chard" Orzel?

End of Semester iPhone Camera Punchiness

Professor David Romer, having won the struggle with Professor Emmanuel Saez for possession of Berkeley's copies of Statistics of Income:


Graduate student Andy Jalil with his evening's light reading:


Professor Joachim Voth fulfills his long-time ambition to be featured on this weblog:


Adam Smith: On Public Debt

From <>:

Adam Smith - An Inquiry into the Nature and Causes of the Wealth of Nations - The Adam Smith Institute: To transfer from the owners of... land and capital stock... persons immediately interested in the good condition of every particular portion of land, and in the good management of every particular portion of capital stock, to... the creditors of the public... must, in the long-run, occasion both the neglect of land, and the waste or removal of capital stock.... [A] creditor of the public, considered merely as such, has no interest in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock....

The practice of funding has gradually enfeebled every state which has adopted it. The Italian republics seem to have begun it.... Spain seems to have learned the practice from the Italian republics, and (its taxes being probably less judicious than theirs) it has, in proportion to its natural strength, been still more enfeebled.... France, notwithstanding all its natural resources, 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?

The system of taxation established in those different countries, it may be said, is inferior to that of England. I believe it is so. But it ought to be remembered that, when the wisest government has exhausted all the proper subjects of taxation, it must, in cases of urgent necessity, have recourse to improper ones.... To the honour of our present system of taxation, indeed, it has hitherto given so little embarrassment to industry that, during the course even of the most expensive wars, the frugality and good conduct of individuals seem to have been able, by saving and accumulation, to repair all the breaches which the waste and extravagance of government had made in the general capital of the society. At the conclusion of the late war, the most expensive that Great Britain ever waged, her agriculture was as flourishing, her manufacturers as numerous and as fully employed, and her commerce as extensive as they had ever been before.... Great Britain seems to support with ease a burden which, half a century ago, nobody believed her capable of supporting. Let us not, however, upon this account rashly conclude that she is capable of supporting any burden, nor even be too confident that she could support, without great distress, a burden a little greater than what has already been laid upon her...

Next Semester's Teaching: Econ 101b

We have been moved:

UCB Online Schedule of Classes: Search Results: 3-DEC-07, Spring 2008


22579 P 101B 001 LEC MW 8-9A 247 CORY Economic Theory--Macro 4 DELONG, J B
22582 S 101B 101 DIS MW 8-9A 237 CORY Economic Theory--Macro
22585 S 101B 102 DIS WF 11-12P 61 EVANS Economic Theory--Macro

This is a go-faster do-more course--intended for people who would be bored in Economics 100b. (And, I think, not nearly enough people take it.)

Notes to self:

  • Daily index card feedback--what was confusing/boring/interesting about today...
  • Weekly web assignments--largely using spreadsheets...
    • Use Facebook!
  • Weekly problems sets (10)--due at start of Friday lecture...

  • MW lectures--spend them on theory and tools

  • F lectures--spend them on current events

  • W sections... do problems like those on the next problem set

  • FM sections... go over last problems and clean-up from the destruction and unclarity left by the previous week's lecture


  • Exams
    • Early professorial reality check exam...
    • Pre-spring break core theory exam...
    • Late applications exam...
    • (Short) final to be thought of as a makeup or recovery exam...
  • Points
    • 101 points in all
    • 2 points per problem set x 10 = 20
    • 1 point per web assignment x 10 = 10
    • 1/4 point per index card x 40 = 10
    • 10 points for section participation
    • 51 points for exams

Proposed Schedule


W Jan 23: INTRODUCTION: The Problems of Macroeconomics

  • Case Study: The Federal Reserve, August 2007-December 2007
  • Macroeconomics, 1-3

Theory (with Examples and Illustrations)

The Long Run: Economic Growth

F Jan 25: The Solow Model: Capital and Equilibrium

M Jan 28: The Solow Model: Dynamics and Feedback

W Jan 30: How Much of Today's World Can We Explain with the Solow growth model?

  • Macroeconomics, 5

F Feb 1: What happened this week in the macroeconomy?

M Feb 4: From Malthus to Modernity: Understanding the Industrial Revolution

  • Macroeconomics, review 5.1
  • Notes: Industrial Revolutions
  • Explorations in the Theory of Economic Growth](

W Feb 6: Technology

F Feb 8: What happened this week in the macroeconomy?

  • Problem Set 2 due

M Feb 11: Institutions

  • Notes: Institutions

W Feb 13: Resources

  • Notes: Resources


The Medium Run: Economic Fluctuations with Flexible Prices

W Feb 20: Components of Aggregate Demand

  • Macroeconomics, 6

F Feb 22: Full-Employment Equilibrium

M Feb 25: The International Side--Plus Government Budgets and Investment Booms

  • Macroeconomics, review 6.3, review 7.5

W Feb 27: The Monetary Side: The Quantity Theory of Money, Inflation, and Expectations

  • Macroeconomics, 8

F Feb 29: What happened this week in the macroeconomy?

  • Problem Set 4 due

The Short Run: Economic Fluctuations with Sticky Prices

M Mar 3: Sticky Prices and Aggregate Demand

  • Macroeconomics, 9

W Mar 5: The IS Curve and Employment

  • Reading: Macroeconomics, 10 including 10a

F Mar 7: What happened this week in the macroeconomy?

  • Problem Set 5 due

M Mar 10: The Phillips Curve and Inflation

  • Macroeconomics, 12, including 12a (optional: 11)

W Mar 12: Tying Up the Short-Run and the Medium Run

F Mar 14: What happened this week in the macroeconomy?

  • Problem Set 6 due

M Mar 17: Loose Ends

  • Notes: Core Theory Loose Ends


Applications (with Additional Theory)

Domestic Monetary and Fiscal Policies

M Mar 31: Stabilization Policy since WWII

  • Macroeconomics, review 10.3, review 12.4, 13, 14.1, 16.1-16.4

W Apr 2: Should Conservatives Be Central Bankers?

F Apr 4: What happened this week in the macroeconomy?

  • Problem Set 7 due

M Apr 7: Looking Back at the Great Depression: What Went So Wrong?

  • Macroeconomics, 16.3, 16.5
  • Notes on the Great Depression
  • Notes on Liquidity Traps

W Apr 9: Is There a Political Business Cycle?

  • Macroeconomics, review 13.6

F Apr 11: What happened this week in the macroeconomy?

  • Problem Set 8 due

M Apr 14: U.S. Long-Run Budget Balance

W Apr 16: "Fixing" Social Security

  • Notes on Social Security

F Apr 18: What happened this week in the macroeconomy?

  • Problem Set 9 due

Growth and Distribution

M Apr 21: Productivity Speed-Ups and Slow-Downs

W Apr 23: U.S. Income Distribution

  • Notes: American Income Distribution

F Apr 25: What happened this week in the macroeconomy?

  • Problem Set 10 due

M Apr 28: European Youth and Structural Unemployment

  • Macroeconomics, 16.5
  • Notes: The Western European Macroeconomy

Domestic and International Finance

W Apr 30: "Animal Spirits": Understanding the Stock and Real Estate Markets

F May 2: What happened this week in the macroeconomy?

M May 5: Global Imbalances


Summary and Review

F May 9: What happened this week in the macroeconomy?


Th May 15: FINAL EXAM 8-11

Creative Destruction's Reconstruction: Joseph Schumpeter Revisited -

20071208_delong_micro.jpg Creative Destruction's Reconstruction: Joseph Schumpeter Revisited: my review of Tom McCraw's excellent Schumpeter biography for the Chronicle of Higher Education. Thanks to Alex Kafka for editing it into shape.

Print: Creative Destruction's Reconstruction: Joseph Schumpeter Revisited - From the issue dated December 7, 2007: THE MATERIAL WORLD: Creative Destruction's Reconstruction: Joseph Schumpeter Revisited

My guess is that average literate Americans know of three 20th-century economists: John Maynard Keynes, Milton Friedman, and Alan Greenspan. Perhaps they also know of Paul Samuelson (but as textbook author, not economic theorist), of Friedrich Hayek (but think that he is the father of an actress), and of John Kenneth Galbraith (as William F. Buckley Jr.'s friend who appeared on TV). The rest of us disappear into a blur of gray suits, spectacles, and, usually, baldness — an assemblage of personalities too bland to be successful accountants.

In Prophet of Innovation: Joseph Schumpeter and Creative Destruction (Belknap Press/Harvard University Press, 2007), Thomas K. McCraw, an emeritus professor of business history at Harvard Business School, tries to add another name to the list — Joseph Schumpeter. From the start, you should know that I am partial to Schumpeter; McCraw quotes me and Larry Summers saying that if Keynes was the most important economist of the 20th century, then Schumpeter may well be the most important of the 21st. McCraw's fascinating book details why that is so, but McCraw, too, is so partial to Schumpeter that he fails to fully explain how Schumpeter tripped himself up over a political understanding as clumsy as his economic understanding was brilliant.

Schumpeter was born in 1883 in what is now the Czech Republic, and died in America in 1950. When he was four, his father died. When he was 10, his mother remarried and moved to Vienna, where his aristocratic stepfather helped him enter elite schools. He was a star: youngest professor in the empire at 26, finance minister of Austria (briefly) at 36, a bank president, and then a professor again. His mother, wife, and newborn son died in rapid succession in 1926 — an awful and tragic shock. He was important enough for Harvard to pluck him from Europe in 1932 to make him one of its superstars. And, after his move to America, he was one of the most famous American economists.

But as fascinating as his life was, it is Schumpeter's economics that sing to me, because he tried to set long-term economic growth — entrepreneurship and enterprise — at the top of the discipline's agenda.

Over the previous two and a half centuries, three different economic worldviews, in succession, reigned. In the late 18th and early 19th centuries, Adam Smith's was the key economic perspective, focusing on domestic and international trade and growth, the division of labor, the power of the market, and the minimal security of property and tolerable administration of justice that were needed to carry a country to prosperity. You could agree or you could disagree with Smith's conclusions and judgments, but his was the proper topical agenda.

The second reign was that of David Ricardo and Karl Marx. Their preoccupations dominated the late 19th and early 20th centuries. They worried most about the distribution of income and the laws of the market that made it so unequal. They were uneasy about the extraordinary pace of technological, organizational, and sociological change, and about whether an ungoverned market economy could produce a distribution of income — both relative and absolute — fit for a livable world. Again, you could agree or disagree with their judgments about trade, rent, capitalism, and machinery, but they asked the right questions.

The third reign was that of John Maynard Keynes. His agenda dominated the middle and late 20th century. Keynes's theories centered on what economists call Say's Law — the claim that except in truly exceptional conditions, production inevitably creates the demand to buy what is produced. Say's Law supposedly guaranteed something like full employment, except in truly exceptional conditions, if the market was allowed to work. Keynes argued that Say's Law was false in theory, but that the government could, if it acted skillfully, make it true in practice. Agree or disagree with his conclusions, Keynes was in any case right to focus on the central bank and the tax-and-spend government to supplement the market's somewhat-palsied invisible hand to achieve stable and full employment.

B ut there ought to have been a fourth reign, for there was a set of themes not sufficiently explored. That missing reign was Schumpeter's, for he had insights into the nature of markets and growth that escaped other observers. It is in that sense that the late 20th and early 21st centuries in economics ought to have been his: He asked the right questions for our era.

He asked those questions in a book he wrote while working at the University of Czernowitz in his mid-20s: the Theory of Economic Development. Previous first-rank economists (with the partial exception of Marx) had concentrated on situations of equilibrium. In that model, development is a gradual process, in which competition keeps goods high-quality and affordable, and the abstemious owners of capital await the long-term rewards of deferred gratification.

Schumpeter pointed out that that wasn't how market economies really worked. The essence of capitalist economies was, as Marx had recognized before him, the entrepreneur and the innovator: the risk taker who sets in motion new and more-efficient ways of making old or new products, and so produces an economy in constant change. Marx saw that the coming of capitalist economies destroyed all feudal, traditional, and patriarchal relationships and orders. Schumpeter saw farther: that market capitalism destroys its own earlier generations. There is, he wrote, a constant "process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in, and what every capitalist concern has got to live in."

In a later book, Capitalism, Socialism, and Democracy, Schumpeter wrote that the traditional view of competition must be abandoned. "Economists," he said, "are at long last emerging from the stage in which price competition was all they saw. ... However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization ... that ... monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization — competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives."

Entrepreneurs innovate new ways of manipulating nature, and new ways of assembling and coordinating people. It is important to stress that a Schumpeterian entrepreneur is not an inventor, but an innovator. The innovator shows that a product, a process, or a mode of organization can be efficient and profitable, and that elevates the entire economy. But it also destroys those organizations and people who suddenly find their technologies and routines outmoded and unprofitable. There is, Schumpeter was certain, no way of avoiding this: Capitalism cannot progress without creating short-term losers alongside its short- and long-term winners: "Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist ... propulsion. The atmosphere of industrial revolutions ... is the only one in which capitalism can survive."

Schumpeter's ideas lay waste to economists' smooth graphs of long-run growth trends and economic evolution. Growth produces progress and wealth, but in unforeseeable ways and in discrete lumps that create many small winners (for example, the people who can now buy their shirts at Wal-Mart for $8.99 as opposed to $12.99 at its less-efficient competitors), a few huge winners (for example, the Walton family of Bentonville, Ark.), and notable substantial losers (the Main Street merchants of the Mississippi Valley, the Great Plains, and the Sun Belt).

Schumpeter, like his contemporary Karl Polanyi, feared for the long-term survival of capitalism. Bureaucrats and ideologues threatened by creative destruction would resist it. The challenge for the government in managing the market thus becomes not just the Adam Smithian task of securing property rights, enforcing contracts, and providing civil order, but also the tremendously difficult job of managing the creative destruction so that capitalism does not undermine and destroy itself for essentially political reasons. Schumpeter did not think the beast could be managed, because democracy is hostile to great inequalities, and socialism even more so.

Capitalism, however, inevitably generates these mammoth inequalities through creative destruction. The combinations of market economies and political democracies that we see today in the richest countries in the world were, Schumpeter thought, unlikely to be stable. No country that wanted to see rapid economic growth could afford to remain a political democracy for long.

He did not think governments could maintain enough social insurance to counter the destructive part of capitalism without strangling the sources of rapid growth. But why Schumpeter's Capitalism, Socialism, and Democracy places so much blame on "democracy" is unclear to me: Oligarchs fear change at least as much as democratic electorates do.

All told, Schumpeter's economic theorizing was keen, but his political judgment was abysmal. Franklin D. Roosevelt was not a communist aiming to abolish elections and turn himself into a dictator — but Schumpeter thought he was. Efforts to boost demand and employment in 1933 via deficit spending, abandoning the gold standard, and trying to keep interest rates as low as possible were not counterproductive and destructive — but Schumpeter argued that they were. He was, to put it mildly, unsuccessful as finance minister for the brand-new post-World War I Austrian Republic. He erred greatly in his assessment of Germany: A strong Germany was not a stabilizing bulwark against Bolshevism and a source of peace, order, and strength in Europe — at least not in Schumpeter's day.

Moreover, truth be told, even Schumpeter's academic judgment was not that great. His Theory of Economic Development is genius. Much of Capitalism, Socialism, and Democracy is superb. His pre-World War I essay "The Sociology of Imperialism" is also very fine. It argues that imperialism and empire were from an older political tradition given new power and energy by modern capitalism's explosion of wealth, but that in the long run, market capitalism was unsympathetic to imperial domination. Why pay to rule when you can get almost all of what you want through trade? Nevertheless, there are many dry holes and detours in Schumpeter's academic work.

Indeed, Schumpeter's writing late in his career is, in my view at least, not worth reading. The signal-to-noise ratio is simply too low. For instance, the dull, posthumous History of Economic Analysis grades thinkers of the past depending on how closely they were able to approach what Schumpeter regarded as the proper vision and analytical tools of his present.

I think he had decided that he was a Great Man, and that Great Men write Great Books, and so anything that was not a Great Book was beneath him. But the two Great Books written in economics while Schumpeter was working on his were written by people who were not trying to write Great Books but who had something important to say. Keynes's The General Theory of Employment, Interest and Money says that demand management through fiscal and monetary policy can make Say's Law true in practice even though it is false in theory. Samuelson's Foundations of Economic Analysis says that mathematics is a superbly useful language for economics.

Thus Schumpeter's influence was limited. He died half a decade later than Keynes, but Keynes's reputation put Schumpeter's in near-total eclipse for more than a generation. McCraw greatly prefers Schumpeter's Business Cycles to Keynes's General Theory, which he scorns as having no mention of any individual businesses in its 400-odd pages.

McCraw is thus too devoted to his subject to see one essential strand of Schumpeter's story: the academic undervaluation that resulted from his political delusions. This is not the place to write about the rhetorical excellence and the analytic diamonds in Keynes's General Theory (that place is Paul Krugman's introduction to Keynes's book). But I can say that General Theory develops, justifies, rationalizes, extends, applies, and shows economists how to use what had by then become the author's standard themes and approaches in a way that Business Cycles, the History of Economic Analysis, and even Capitalism, Socialism, and Democracy do not. Back in 1970, the economist Harry G. Johnson pointed out that all successful founders of schools not only are geniuses with profound insights but also provide a road map that tells their followers and successors what to do to make a successful academic career within the school. Schumpeter did not do that second part.

Perhaps this next century will give Schumpeter's work its proper place as the power of innovation to transform, create, enrich, and destroy makes itself manifest globally. And while we marvel at how much he got right, we can hope Schumpeter was wrong in his political analysis. One great test of our era will be whether creative destruction can flourish alongside public order and political liberty. If not, we're in big trouble. But if so — and I'm an optimist on the point — the results could be a marvel.

J. Bradford DeLong is a professor of economics at the University of California at Berkeley.

Section: The Chronicle Review Volume 54, Issue 15, Page B8

The Dollar and Its Implications: Project Syndicate

Taipei Times - archives: Is the dollar leading us into a depression?

The falling US dollar has emerged as a source of profound global macro-economic distress. The question now is how bad that distress will become. Is the world economy at risk? There are two possibilities. If global savers and investors expect the US dollar's depreciation to continue, they will flee the currency unless they are compensated appropriately for keeping their money in the US and its assets, implying that the gap between US and foreign interest rates will widen. As a result, the cost of capital in the US will soar, discouraging investment and reducing consumption spending as high interest rates depress the value of households' principal assets: their houses.

The resulting recession might fuel further pessimism and cutbacks in spending, deepening the downturn. A US in recession would no longer serve as the importer of last resort, which might send the rest of the world into recession as well. A world in which everybody expects a falling US dollar is a world in economic crisis.

By contrast, a world in which the US dollar has already fallen is one that may see economic turmoil, but not an economic crisis. If the US dollar has already fallen -- if nobody expects it to fall much more -- then there is no reason to compensate global savers and investors for holding US assets.

On the contrary, in this scenario there are opportunities: the US dollar, after all, might rise; US interest rates will be at normal levels; asset values will not be unduly depressed; and investment spending will not be affected by financial turmoil.

Of course, there may well be turbulence: When US wage levels appear low because of a weak US dollar, it is hard to export to the US, and other countries must rely on other sources of demand to maintain full employment. The government may have to shore up the financial system if the changes in asset prices that undermined the US dollar sink risk-loving or imprudent lenders.

But these are, or ought to be, problems that we can solve. By contrast, sky-high US interest rates produced by a general expectation of a massive ongoing US dollar decline is a macroeconomic problem without a solution.

Yet so far there are no signs that global savers and investors expect a US dollar decline. The large gap between US and foreign long-term interest rates that should emerge from and signal expectations of a falling US dollar does not exist. And the US$65 billion needed every month to fund the US current-account deficit continues to flow in. Thus, the world economy may dodge yet another potential catastrophe.

That may still prove to be wishful thinking. After all, the US' still-large current-account deficit guarantees that the US dollar will continue to fall. Even so, the macroeconomic logic that large current-account deficits signal that currencies are overvalued continues to escape the world's international financial investors and speculators.

On one level, this is very frustrating: We economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests. Yet the typical investor in US dollar-denominated assets -- whether a rich private individual, a pension fund, or a central bank -- has not taken the steps to protect themselves against the very likely US dollar decline in our future.

In this case, what is bad for economists is good for the world economy: We may be facing a mere episode of financial distress in the US rather than sky-high long-term interest rates and a depression. The fact that economists can't explain it is no reason not to be thankful.

Mark Thoma Interprets William Poole

Mark Thoma turns Fed bank president William Poole's speech into a pretend interview:

Economist's View: Market Bailouts and the "Fed Put":

Thoma: Some people aren't going to make it to the end of this discussion. Any chance you could give a summary of the bottom line?

Poole: I can state my conclusion compactly: There is a sense in which a Fed put does exist. However, those who believe that the Fed put reflects unwise monetary policy misunderstand the responsibilities of a central bank. The basic argument is very simple: A monetary policy that stabilizes the price level and the real economy cannot create moral hazard because there is no hazard, moral or otherwise. Nor does monetary policy action designed to prevent a financial upset from cascading into financial crisis create moral hazard. Finally, the notion that the Fed responds to stock market declines per se, independent of the relationship of such declines to achievement of the Fed’s dual mandate in the Federal Reserve Act, is not supported by evidence from decades of monetary history.

Very much worth reading.

Felix Salmon Shakes His Head at Ben Stein

A New York Times that prints things like this from Ben Stein isn't long for this world. Just sayin'.

Let's give the mike to Felix Salmon:

Finance Blog - Market Movers by Felix Salmon: Ben Stein Watch: December 2, 2007 - The invisible government of Goldman? Do you think they have a secret handshake, too?

Stein, in this column, is accusing the honest and blameless Goldman economist Jan Hatzius of much more than mere intellectual dishonesty: he's saying that Goldman and Hatzius are using economic research notes to drive down the bond market and make profits on the firm's bearish trades. He compares their conduct to that of Henry Blodget, who was charged with securities fraud and is now banned from the securities industry for life. And he says that anyone who used to run such a shop should never have been considered for the job of Treasury secretary.

It's not illegal – in this country – for Stein to make such allegations. But it is quite shocking, and depressing, that the Gray Lady would willingly allow herself to be used as a vehicle for this kind of yellow journalism – and would place it on the front page of its business section, no less.

Do I have to slowly explain why Stein's column is in fact unmitigated garbage? Thankfully, I don't, because Dean Baker and Yves Smith have got there before me. In a nutshell: Goldman sold the CMO that Stein complains about in mid-2006; it made its big profit on subprime shorts a full year later. Stein's ridiculous assertion that a credit crunch and growth slowdown "has not happened on any scale in the postwar world" can be refuted with one word: Japan. And as for Stein's statement that a correspondent of his in Florida "may be right, but he’s not", I'm sure that that will turn out to be false as well, the minute that anybody can work out what on earth it's supposed to mean.

More generally, macroeconomic research notes do not move markets. And a mortgage-bond origination team is hardly likely to disband and retire for a life of sheep farming just because an economist employed by the same organization is bearish on the housing market. Is that really what Stein would have had them do? By all means criticize Goldman for underwriting nuclear waste, as Allan Sloan did – that's fine. But there's an oceanic gulf between that and securities fraud.

: Stein's NYT stablemate, Paul Krugman, weighs in.

Maybe I don’t have what it takes to be a serious columnist. I mean, it would never have occurred to me to suggest that the only way to explain an economic forecast I don’t agree with is to say that it must be part of an evil plot to drive down the market, so that Goldman Sachs can make money off its short position — and to suggest that Goldman should be the subject of a federal investigation.

Peter Baker of the Washington Post Lies to All Readers of His Headline and Paragraphs 1-7

Robert Waldmann shakes his head in disbelief at Peter Baker of the Washington Post: only if you read not just the headline and paragraphs 1-7 of Baker's article but paragraph 8 does he come clean.

The headline:

Rove's Version of 2002 War Vote Is Disputed

Paragraph 1:

Former White House aide Karl Rove said yesterday it was Congress, not President Bush, who wanted to rush a vote on the looming war in Iraq in the fall of 2002, a version of events disputed by leading congressional Democrats and even some former Rove colleagues.

Paragraph 2:

Rove said that the administration did not want lawmakers to vote on a resolution authorizing the use of force against Iraq that soon because it would "make things move too fast," before Bush could line up international allies, and politicize the issue ahead of midterm elections. But Democrats and some Republicans involved with the issue at the time said yesterday that Bush wanted a quick vote.

Paragraph 3:

The fresh clash over the five-year-old vote made plain how political leaders on all sides are trying to shape the history of that moment. Former president Bill Clinton this week asserted that he flatly opposed the war from the beginning, a contention challenged by a former White House official who briefed him at the time. Some presidential candidates, including Sen. Hillary Rodham Clinton (D-N.Y.), have portrayed themselves as more skeptical than others recalled.

Paragraph 4:

Speaking on PBS's "Charlie Rose" talk show last week, Rove said Congress pushed to have the vote before the election. "The administration was opposed to voting on it in the fall of 2002," Rove said. Asked why, he said: "Because we didn't think it belonged within the confines of the election. There was an election coming up within a matter of weeks. We thought it made it too political. We wanted it outside the confines of it. It seemed to make things move too fast. There were things that needed to be done to bring along allies and potential allies abroad."

Paragraph 5:

Democrats accused him of rewriting history. "Either he has a very faulty memory, or he's not telling the truth," said ex-Senate majority leader Thomas A. Daschle (D-S.D.). In an interview, Daschle said he asked Bush during a breakfast to delay the vote until after the election. "They told us time was of the essence and they needed the vote and they were going to move forward," he said.

Paragraph 6:

Steve Elmendorf, chief of staff to then-House Minority Leader Richard A. Gephardt (D-Mo.), said it would not benefit Democrats to vote before the elections. "That does not ring true to me," he said of Rove's remarks. "I can't imagine why it would be in our interest to do that."

Paragraph 7:

Rove repeated his assertion in an interview yesterday, pointing to comments made by Democrats in 2002 that they wanted a vote. "For Democrats to suggest they didn't want to vote on it before the election is disingenuous," he said. The vote schedule, he said, was set by lawmakers. "We don't control that."

And finally, paragraph 8:

News accounts and transcripts at the time show Bush arguing against delay. Asked on Sept. 13, 2002, about Democrats who did not want to vote until after the U.N. Security Council acted, Bush said, "If I were running for office, I'm not sure how I'd explain to the American people -- say, 'Vote for me, and, oh, by the way, on a matter of national security, I think I'm going to wait for somebody else to act.' "

Four years, Washington Post. I give you four years. Four years. And after that who do those of you who have worked so enthusiastically for Graham and Downie and Hiatt think will ever hire you?

Jailbreaking the iPhone

Jailbreaking the iPhone is fun.

Is it useful? I think Sketches and the PDF and eBook readers will be very useful. The other stuff? We will see...

Intellectual Garbage Pickup: Donald Luskin

Yes, it's time for our once-every-three months websurf over to Donald Luskin. Why? As a public service: somebody needs to lay down a marker that he simply does not know what he is talking about, and that anyone who believes anything he writes without very careful verification is asking for big trouble.

And it is unbelievable. You don't have to read a dozen paragraphs before you run across something so bats--- ignorant that it should cause every National Review editor and writer to resign in shame, move to Rwanda, and take up a life of anonymous service to others.

But I don't have the heart to surf over and read any more. So let me pull out a true turkey from the archives: the time Luskin denied the existence of the entire discipline of statistics:

The Conspiracy to Keep You Poor and Stupid: The Times and the Journal cite many authoritative-sounding studies.... But to get an accurate picture [of inequality]... you'd have to track hundreds of millions of individuals.... [N]one of this is reliable... the Panel Study of Income Dynamics... tracks only 8,000 families out of a U.S. population of 295 million individuals.

The whole science of statistics exists because Luskin is wrong. As long as you can take a random sample of your population, you can find out an enormous amount about the population from a relatively small number of observations. You can find out what proportion of rich people had poor paretns, or what proportion of twenty year olds think they will graduate from college, or pretty much any other average proportion that you want.

Now the "random sample" part of this is very important. But if your sample is random--if the fact that the yes-no pattern of observations so far makes it no more (or less) likely that you next observation will be a "yes"--then the law of large numbers tells us that the sample average you compute will converge to the true population average at a frighteningly rapid speed.

The standard demonstration of this is to repeatedly flip a coin and count the excess proportion of heads over tails. We know that--with a coin flipped and caught in the air by a human being at least--the population average taking all coins that have ever been flipped of the excess proportion of heads is zero. How many observations do we have to take--how many coin flips--before the sample average converges to this population average of 0% excess heads?

Let's see. Here's one run of 1,000 "flips" from Excel's internal random number generator:

Here are ten more:

Here are ten more:

Impressive, no?

Try some yourself.

You could have a population of 295 million flipped coins. Yet you don't need to look at "hundreds of millions" of them to determine what is going on. Looking at a couple of thousand will do.

This is the principal insight of the science of statistics. it is an important insight. It is a powerful insight. It is also not an obvious insight--that's what makes it powerful and important. Yet it is one that Donald Luskin has never managed to grasp.

That's really sad.