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June 2008

Capital and Its Complements

Project Syndicate: From Adam Smith (1776) until 1950 or so, capital was considered by economists to be absolutely essential for economic growth. You also needed a few good basic institutions. “Security of property and tolerable administration of justice,” as Smith put it.

If these fundamental institutions were right, then landlords, merchants, and manufacturers would invest and improve. In investing and improving, they would add to the capital stock: “In all countries where there is a tolerable security [of property], every man of common understanding will endeavor to employ whatever [capital] stock he can command, in procuring either present enjoyment or future profit... A man must be perfectly crazy, who, where there is a tolerable security, does not employ all the stock which he commands, whether it be his own, or borrowed of other people...”

A larger capital stock would mean thicker markets, a finer division of labor, and a more productive economy. A highly productive society based on a sophisticated division of labor was how you secured “the wealth of nations.”

Reverse the process, however, and you get the poverty of nations, which Smith believed he saw in the Asia of his time. For Smith and his successors over the first 175 years, any episode of sustained economic growth overwhelmingly required investment capital. We economists were by and large capital boosters, and our magic formula for economic development was saving, investment, thrift, and wealth accumulation. The last and fullest expression of this line of thought comes at the end of the 1950’s with W.W. Rostow’s book The Stages of Economic Growth .

Then Robert Solow and Moses Abramovitz challenged this near-consensus. They calculated that 75% to 80% of economic growth did not come from increasing the capital-output ratio – at least not if the private marginal product of capital was taken as an indicator of the social marginal product. Instead, the keys to growth and development appeared to lie beyond an increase in capital intensity as measured by capital-output ratios: skills, education, technology broadly understood, and improvements in organizational management.

Yet capital continued to be seen as necessary, if not sufficient. In the framework developed by the development economist Dani Rodrik, a shortage of capital can be a binding “growth constraint”: the place where “the biggest bang for the [policy] reform buck can be obtained.” And even when other factors constrain growth more, they cannot be changed without changing the shape and form of the economy’s capital stock. Indeed, high investment serves as a sign that other binding constraints to growth are absent, implying prosperity and that things are going right.

The problem is that for poor economies, raising the capital needed to relax binding growth constraints is difficult. That’s why the world took the neo-liberal bet in the 1990’s: international capital mobility would come to the rescue by relaxing capital constraints where they were binding, and by reducing the scope for corruption and rent-seeking, which was often a more significant binding growth constraint.

The hope was that, like the pre-1913 era of British overseas investment, which financed a huge amount of industrialization in the resource-rich, temperate periphery of the world economy, net capital outflows from the industrial core would finance much late twentieth and twenty-first century industrialization.

But we all know the outcome: while international capital flows soared, the large net flow of capital from rich to poor countries simply never materialized. In fact, the principal outcome was an enormous flow of capital from the periphery to the rich core. For most of the past generation, and looking into the future, the message of the market is that the benefits of international capital mobility do not include a relaxation of the capital constraint, and thus an acceleration of growth in the global periphery.

The reason is not that the periphery offers an attractive labor force from which capital profits, but rather that the core – especially the United States – offers a form of protection for capital against unanticipated political disturbances.

But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy’s core to its periphery. And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.

Nevertheless, a dispassionate observer might point out that for someone with limited resources and opportunities for policy reform to keep betting double-or-nothing on neo-liberalism is a strategy that has a well-deserved name: “Gambler’s Ruin.”

Unemployment Benefit Extension Blogging; Why Does George W. Bush Hate John McCain?

A crass political post...

Calculated Risk writes:

Calculated Risk: Unemployment Benefits Extended: An extension of unemployment benefits for 13 weeks was included in the war funding bill signed by President Bush today. This extension covers workers who used all their unemployment benefits between November 2006 and March 2009...

The rule of thumb, IIRC, is that the average duration of an unemployment spell increases by 1/4 of the increase in the duration of unemployment benefits. Thus a 13-week increase in unemployment insurance duration should increase the average unemployment spell by 3 weeks. With current mean unemployment spell duration at 17 weeks, and with roughly 2/3 of the unemployed eligible for UI, this would produce a 3/17 * 2/3 * 5.5% = 0.6% increase in the measured unemployment rate.

It seems to me likely that--whatever happens to the economy--George W. Bush has just produced four bad unemployment-rate headlines on the Saturdays August 2, September 6, and October 4. This cannot be news that John McCain is happy to hear.

A Remark on Friedman's "The Social Responsibility of Business is to Increase its Profits"

Conor Clarke's posting excerpts from Milton Friedman (1970), "The Social Responsibility of Business is to Increase its Profits" gives me an opportunity to get something off my chest that has been lying there for decades: Friedman's argument never made any sense to me.

As Clarke quotes:

Creative Capitalism: The Social Responsibility of Business is to Increase its Profits: What does it mean to say that the corporate executive has a "social responsibility"...?... [I]t must mean that he is... to refrain from increasing the price of the product in order to contribute to... preventing inflation.... Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law... to contribute to... improving the environment. Or... at the expense of corporate profits... hire "hardcore" unemployed... to contribute to... reducing poverty. In each of these cases, the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility"... reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so.... [R]ather than serving as an agent... he spends the money in a different way than they would have... in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

This is weak toast. This is thoroughly unconvincing. What reason is there not to turn this around? What reason is there not to say, instead:

  • If customers don't want to pay higher prices and so buy from corporations that pursue social responsibility, they are (as long as product markets are competitive) free to do so at their option.
  • If workers don't want to receive lower wages by working for corporations that pursue social responsibility, they are (as long as labor markets are competitive) free to do so at their option.
  • If investors don't want to receive lower profits by investing in corporations that pursue social responsibility, they are (as long as capital markets are competitive) free to do so at their option.

If workers, customers, and investors expect that the executives of the corporations they deal with will pursue social-responsibility objectives, where's the foul? The executives aren't doing anything wrong at any level--they are in fact performing a valuable function by as workers', customers', and investors' trusted and honest agents by pursuing social-responsibility goals. They are helping them pool their resources to achieve what they want to see happen. This pooling-of-resources agency function is an important one--it is, after all, why we have large organizations in the first place. So why limit it to narrowly profit-maximizing goals?

Differences Between Obama and McCain...

Paul Krugman:

Baselines, shmaselines: Wise words from the Tax Policy Center:

There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.

The key point, again: because of all those middle-class tax cuts in the Obama plan, he collects only 0.4% of GDP more in taxes than McCain. The tax collection comes from different people: lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?

This is why I think that Obama ought to be proposing a big oil tax, with substantial parts of it used to pay for people's FICA and extend the EITC phaseout range. This:

  • raises revenue, and puts us in a much better position for long-run growth
  • improves national security by reducing our long-run dependence on foreign oil from unstable parts of the world
  • helps on the global warming front
  • makes America a less unequal country

I think that that the Democrats ought to offer America a choice between:

  • Paying higher gasoline prices but also paying less in Social Security taxes

  • Continuing to leave our national and economic security hostage in the hands of unstable political-military events in the Middle East--which requires that we spend a fortune continuing to project a huge amount of military power into the Persian Gulf for essentially forever.

This seems like a no brainer to me.

Attempted DeLong Smackdown Watch: Origins of Central Banking Edition

Greg Ransom writes:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: Here's a suggestion for Blinder and DeLong. Read some Roger Garrison, and give two seconds to thinking about how the Fed manipulates the time structure of the production economy through it's constantly failed attempt at price controls in the market for money and credit. Until the do so, I can't see how they can have anything of validity to say to the rest of us on this subject. Posted by: PrestoPundit | June 15, 2008 at 09:11 PM.

Greg's argument that attempts to avoid depression through government financial manipulation either by cutting off speculators' resources beforehand or by making sure that they are punished and bankrupted afterwards sufficiently completely that nobody dares try that again--Greg's argument that attempts to avoid depression through government financial manipulation must necessarily fail was, to my knowledge, first made comprehensively by Karl Marx and Friedrich Engels:

Reviews from Neue Rheinische Zeitung Revue: The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation....

The years 1843-5 were years of industrial and commercial prosperity.... As is always the case, prosperity very rapidly encouraged speculation... [which] occurs... when overproduction is already in full swing... provides overproduction with temporary market outlets... precipitating the outbreak of the crisis and increasing its force.... When the Bank of England keeps its interest rates down in times of prosperity... capitalists with investments in loan capital thus see their income reduced by a third... under pressure to look for more profitable capital investments. Overproduction gives rise to numerous new projects, and the success of a few of them is sufficient to attract a whole mass of capital in the same direction, until gradually the bubble becomes general...

The view that overspeculation is not the disease but instead only a symptom of the truly serious disease of a maladjusted time structure of the production economy is not just (a) Marxist in its origins but also (b) a very powerful argument for Marxist politics because the disease existed before there were modern central banks to "manipulate the time structure of the production economy through... [interventions] in the market for money and credit" in an attempt to cure it. Indeed, central banking grew out of the belief that what appeared to be the disease--overspeculation--was in fact the disease and could be if not cured at least mitigated by central banking lies at the origins of our modern central banking institutions.

Department of "Huh?" (Bear Stearns Edition)

I cannot believe my eyes:

Bryan Burroughs:

Bringing Down Bear Stearns: Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board. Schwartz was named the new C.E.O. His immediate priority was making sure Bear posted a profit in its current quarter, which ended February 29. There were still whispers out there about Bear’s financial health, many fanned by rumors of federal investigations into the hedge-fund collapse, and Schwartz badly needed some good news to report. As mortgage-related losses struck firm after firm that winter, Schwartz kept his fingers crossed, watching the calendar tick off the days until February’s end. He sweated out an entire extra day--leap day, February 29--but Bear made it. Preliminary figures showed they would report a quarterly profit of $1.10 or so a share. With luck, Schwartz said, that would end the whispers...

I do not know what is more unbelievable:

  • That somebody who takes over halfway through a quarter thinks that his "immediate priority" as CEO should be to make it so that the business shows a profit that very quarter.
  • That somebody who takes over halfway through a quarter thinks that he can make decisions as CEO that affect whether the business shows a profit that very quarter.
  • That somebody who takes over as CEO in the middle of a financial crisis thinks that it is constructive for him to send an immediate signal that driving a wedge between actual fundamentals and reported financial results is a good business to be in.
  • That any senior executive for any financial firm thinks that one-quarter financial results will materially impact market expectations of whether his organization is overleveraged--hence vulnerable to a liquidity problem.

As of the start of 2008, it was common knowledge in the circles in which I travel that Bear Stearns was the weakest and would be the first to collapse if any Wall Street institutions were to collapse. But getting Bear Stearns into a position where it was less rather than more vulnerable than, say, Lehmann does not appear to have been somethign Schwartz thought was his job...


Taxing Income from Capital: Utilitarianism-Maoism-Waldmannism Edition

Robert Waldmann has a nice little toy model--an intuition pump--that leads to positively Maoist conclusions: In his model, a benevolent utilitarian government is not only not averse to taxing income from capital but taxes that income at the highest rate possible.

In general, there are two reasons to be leery of taxing income from capital:

  • By essentially taxing the movement of purchasing power forward in time from the present to the future, such a tax tilts individuals' consumption toward the present and away from the future: their consumption does not grow over time as rapidly (or falls over time faster) than is optimal given individual tastes and social production possibilities.

  • The movement of purchasing power from the present to the future is also the process of capital accumulation, and taxing it reduces capital accumulation and so creates an economy with a productive inefficiency: too low a capital-output ratio.

And there are two reasons to be enthusiastic about taxing income from capital:

  • It makes individuals feel poorer and thus--for those whose lifetime consumption is too high relative to the social optimum--leads them to consume less.

  • Already-existing capital is inelastically supplied, and thus can be taxed without imposing any excess-burden deadweight losses at all.

Waldmann presents a model in which (i) the holders of capital are all too rich with too high a level of consumption, hence (ii) you want to tilt their consumption profile so that their consumption declines as fast as possible, and (iii) the capital-output ratio is fixed--hence there are no productive inefficiencies. Thus the optimal government policy is to tax the capital income of the rich as much as possible until they become so poor that their consumption level hits the social optimum value, and use the resources raised to boost the consumption of the poor.

It's a very nice intuition pump. The way I like to think about it is that the problem that Waldmann has set his benevolent utilitarian government is one that is ideally solved via a 100% tax on excessive consumption, and that a capital income tax is good because it is a close approximation to such a 100% excessive consumption tax.

Barry Eichengreen: Like the 1930s, in Reverse

Barry Eichengreen, in the hall outside my office, says:

There are now fifty countries in the world with inflation rates over 10%. It's like the early 1930s, but just reverse the sign: back then everybody with their currency linked to the dollar imported deflation; now everybody is importing inflation.

The solution then as now is the same: delink your currency from the dollar.

This is the first major test of inflation-targeting in emerging markets. I wrote up a little something on this this morning, but I have been unable to submit it anyplace because for some reason my email is down...

Paul Krugman Misreads the Political Situation, I Think

Paul Krugman writes:

The Obama Agenda: It’s feeling a lot like 1992 right now. It’s also feeling a lot like 1980. But which parallel is closer? Is Barack Obama going to be a Ronald Reagan of the left, a president who fundamentally changes the country’s direction? Or will he be just another Bill Clinton?... [T]he odds are that this will be a “change” election — which means that it’s very much Mr. Obama’s election to lose. But if he wins, how much change will he actually deliver?

Reagan, for better or worse — I’d say for worse, but that’s another discussion — brought a lot of change.... America at the end of the Reagan years was not the same country it was when he took office. Bill Clinton also ran as a candidate of change... portrayed himself as someone who transcended the traditional liberal-conservative divide, proposing “a government that offers more empowerment and less entitlement.”... The Clinton administration achieved a number of significant successes, from the revitalization of veterans’ health care and federal emergency management to the expansion of the Earned Income Tax Credit and health insurance for children. But the big picture is summed up by the title of a new book by the historian Sean Wilentz: “The Age of Reagan: A history, 1974-2008.” So whom does Mr. Obama resemble more? At this point, he’s definitely looking Clintonesque....

[F]or Democrats, winning this election should be the easy part. Everything is going their way: sky-high gas prices, a weak economy and a deeply unpopular president. The real question is whether they will take advantage of this once-in-a-generation chance to change the country’s direction. And that’s mainly up to Mr. Obama.

Reagan had ideological majorities in both houses of congress throughout his presidency--remember the "boll weevils"? Clinton did not even have ideological majorities in his first two years.

Yet Reagan's conservative achievements were remarkably limited:

  • A tilting of the tax code to redistribute income to the rich

And were more than offset, IMHO at least, by his major liberal achievements:

  • To end the Cold War by trusting Gorbachev's good faith--in spite of everything the Republican foreign-policy establishment and the wingnut ideologues could throw in his path to try to stop them.
  • To cement the government's entitlement-spending role as provider of a mind-bobbling amount of primarily middle-class social insurance: Social Security, Medicare, and Medicaid as we know them.

And then there were Reagan's "achievements" that were simply stupidities:

  • Arming Iraq to fight Iran and at the same time arming Iran to fight Iraq
  • Letting Menachem Begin and Ariel Sharon off their leash to launch their "Peace for Galilee" invasion of Lebanon
  • Wasting a fortune on a military buildup just as the Red Army was atrophying
  • Slowing American economic growth via the drag put on the economy by his huge budget deficits.

The true history of the U.S. since 1980, IMHO at least, is not Sean Wilentz's "Age of Reagan" but is instead composed of a half dozen or so deeper and broader tides, like:

  1. The end of the Cold War
  2. Other winner-take-all factors that have, in combination with education, pushed American income polarization back to Gilded Age levels.
  3. The failure of American taxpayers to support their state and local governments in expanding funding for public education--and the impact of reduced public education effort in sharpening the distinction between rich and poor.
  4. The computer revolution in productivity growth.
  5. The rise of China (and soon, we hope, India) as industrial powers.
  6. The extraordinary social liberalization of America--if you had told any Republican in 1980 that 2008 would see (a) a Negro with an Arabic-Swahili name beating a veteran figher pilot in the presidential polls and (b) gay marriage as the big cultural issue of the day, said Republican would have blown several gaskets. And if you had said that this would have been the result of an "Age of Reagan" said Republican would have melted down completely.

Ronald Reagan (or perhaps Nancy Reagan, her astrologer, and George Shultz--we are not sure how advanced his Alzheimer's was when) played a constructive role in (1). He played a role in amplifying the destructive effects of (2) and (3). His deficits and the reduced investment seen in the 1980s as a result played a role--how large we are not sure--in delaying (4). And he was essentially irrelevant as far as (5) and (6) are concerned.

I think Obama would have a better chance than Clinton or Reagan of being a positive, transformational president if he takes office supported by ideological majorities in the congress. It would, I think, be hard to do as little with his ideological majority as Reagan did with his. (It would be impossible to do as little with his ideological majority as Bush has done with his.) And Clinton never had the chance--think of Sam Nunn, John Breaux, Buddy Tauzin, Bob Kerrey, and the other congressional barons whom Clinton had to deal with in 1993-94 even before Gingrich.

Whether an Obama presidency would see him having an ideological majority in congress is an open question. I think that both John Ellwood and Robert Reischauer are on record as thinking not: that just as in 1993-94 the congressional balance of power in 2009-2010 is likely to be held by the boll weevils...

Impeach Antonin Scalia. Impeach Him Now

Outsourced to Hilzoy:

Obsidian Wings: Returned To The Battlefield: In his dissent in Boumedienne (pdf), Justice Scalia wrote: "At least 30 of those prisoners hitherto released from Guantanamo Bay have returned to the battlefield."

When I read this, I wondered about the word 'returned', since it seems to assume that these detainees were enemy combatants when they were captured. But I didn't wonder whether 30 prisoners had, in fact, taken up arms against the US since their release. I don't keep track of these things, and the idea that people whom we had locked up for years, without justification, might take up arms against us didn't seem all that farfetched.

Silly me. Luckily, researchers at the Seton Hall Law Center for Policy and Research were paying closer attention. They tracked down the sources of Scalia's claim... a DoD press release.... [I]t says that 30 detainees have returned not to the battlefield, but to "the fight". Since I have become accustomed to treating the words of this administration the same way I treat such words as "Orange Juice Drink: Made With Real Orange Juice!"... I naturally thought: ah, "the fight"... the DoD elaborates:

We are aware of dozens of cases where they have returned to militant activities, participated in anti US propaganda or other activities.... (Examples: Mehsud suicide bombing in Pakistan: Tipton Three and the Road to Guantanamo; Uighurs in Albania)

Well, this clarifies things somewhat. The Tipton Three were three British citizens who were captured... suspected of being members of al Qaeda... thought, wrongly, to be in a videotape of a rally featuring bin Laden. After British intelligence cleared them... they were released. And after that, they participated in the movie The Road To Guantanamo. Apparently, this counts as "returning to the battlefield".

And then there are the Uighurs.... "What fight had they returned to? Abu Bakker Qassim had published an op-ed in The New York Times. Adel Abdul Hakim had given an interview. These press statements were deemed hostile by the Department of Defense. Surely the Pentagon was joking? They weren't... giving hostile interviews constituted 'returning to the fight.'"...

Last December, the researchers at Seton Hall compared the DoD's claims to publicly available government documents and concluded (pdf): "Extending to the Government the benefit of the doubt as to ambiguous cases, the list of possible Guantánamo recidivists who could have been captured or killed on the battlefield consists of two individuals: Mohammed Ismail and Mullah Shazada..."

In this country, we assume that people are innocent until proven guilty.... We think it is worth it because we do not have the option of locking up all and only guilty people against whom we have insufficient evidence. We have to choose between letting the government lock people up when it cannot make a case against them, knowing that some, perhaps most, of these people will be innocent; and requiring that the government actually make a case against someone, in which case we will of course let some guilty people go free.

If we want to call this principle into question, it's not enough to say: if we let people go, they might kill Americans. That's what I call "cost analysis": asking whether some alternative has costs, and if it does, deciding that we can't possibly adopt it, without asking whether it has benefits as well.... [I]f we're going to get into a debate about whether the costs of taking people to be innocent until proven guilty are too high, it's crucial to know what those costs actually are. And claiming that participating in a documentary about your arrest and detention, granting an interview, or writing an op-ed constitute "returning to the fight" do not help at all. They merely darken counsel by words without wisdom.

New York Times Death Spiral Watch (Liquidity Problem Edition)

Andrew Ross Sorkin fails to get what a liquidity problem is:

What Really Killed Bear Stearns?: Did Bear Stearns melt down — or was it murdered?: That is one of the big questions that Bryan Burrough, who co-wrote the best-selling 1990 book “Barbarians at the Gate,” tries to answer in a lengthy article in the August Vanity Fair magazine. Mr. Burrough spoke with many Bear executives and board members who described in vivid detail the events that unfolded that fateful week in March when Bear Stearns was ultimately forced to sell itself to JPMorgan Chase for a pittance. According to Mr. Burrough’s account, Bear did not have a liquidity problem, at least at first. In fact, he said it had more than $18 billion in cash to cover its trades when the week began. There were no major withdrawals until late in the week, after rumors flew that the company was in trouble...

And here we have to stop the tape. It doesn't matter what your cash reserves are: if they are less than your callable short-term liabilities, you are vulnerable to developing a liquidity problem; and if your cash reserves at the start of a week are less than desired withdrawals during that week, then you have a liquidity problem.

To say that "Bear Stearns did not have a liquidity problem" is simply wrong on so many levels. As is Sorkin's next paragraph:

A top Bear executive told Mr. Burrough, “There was a reason [the rumor] was leaked, and the reason is simple: someone wanted us to go down, and go down hard.”

No. It was not the case that "someone wanted [Bear Stearns] to go down, and go down hard." The various "someones" did not care whether Bear Stearns lived or died. The "someones" wanted to make money--and thought that if they moved fast and shorted Bear Stearns that they could be the ones who made the most money fastest.

Sorkin goes on, summarizing Burroughs:

Bear executives frantically tried to find the source of the rumors, but failed to do so. They have their suspicions, and they have turned over the names to federal authorities that are investigating the matter. Two possible sources named in the article — albeit with few supporting details — are hedge funds: Chicago-based Citadel, run by Ken Griffin, and SAC Capital Partners of Stamford, Conn., run by Steven Cohen. The third was one of Bear’s main competitors, Goldman Sachs.... Bear executives also told Mr. Burroughs that an individual may have been spreading rumors about the firm that week — Jeff Dorman... [who] briefly served as global co-head of Bear’s prime brokerage business.... But the rumors caused a run on the bank and depleted Bear’s capital base...

Well, yes. But if Bear Stearns cannot find timely financing to replace the cash that the rumor-generated withdrawals have produced, then the rumors that Bear Stearns is illiquid and unstable aren't rumors, are they? They are facts.

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

Straws in the Wind and Lines in the Sand

Louis Uchitelle, two weeks ago:

The Rubin camp and the group loosely led by union leaders also differ on which should take precedence: balancing the budget or public investment. The Rubin camp gives preference to budget balancing, but Mr. Rubin says the choice is no longer as stark as it was when Bill Clinton came to office in 1993...

Brad DeLong, today:

Project Syndicate: Ever since the 1928 work of Frank Ramsey, economists have accepted the utilitarian argument that a good economy is one in which returns on investment are not too great a multiple — less than three — of the rate of per capita economic growth. An economy in which profits from investment are high relative to the growth rate is an economy that is under-saving and under-investing. This idea has also given rise to a very strong presumption that if an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. This is why most economists are deficit hawks.

Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment. Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment. Franklin Delano Roosevelt could have made no better investment for the future of America and the world than to wage total war against Adolf Hitler. Likewise, Presidents George H.W. Bush and Bill Clinton ought to have recognized in the 1990’s that something like a Marshall Plan for Eastern Europe to help with the transition from communism would have been an excellent investment for the world’s future. But the rule is that governments should run surpluses and not deficits, so various American presidents’ economic advisers have been advocates of aiming for budget surpluses except in times of slack demand and threatening depression. This was certainly true of Eisenhower’s, Nixon’s, and Ford’s economic advisors, and of George H.W. Bush’s and Bill Clinton’s economic advisers.

It was true of Reagan’s economic advisers as well. Some of Reagan’s advisers sincerely did not believe that the tax cuts of the early 1980’s would generate the large deficits that they did (Beryl Sprinkel and Lawrence Kudlow come to mind). Others, like Martin Feldstein and Murray Weidenbaum, understood the consequences of the Reagan tax cuts and were bitter bureaucratic opponents, even if they did not speak out publicly.

In fact, since WWII, only George W. Bush’s economic advisers have broken with this consensus. A few have done so because they are making careers as party-line Republicans, so their priority is to tell Republican politicians what they want to hear (Josh Bolton and Mitch Daniels come to mind here). As for the rest, their reasons for supporting the Bush administration’s savings-draining policies remain mysterious. It is not as though they were angling for lifetime White House cafeteria privileges, or that having said “yes” to George W. Bush will open any doors for them in the future.

But their failings do pose a dilemma for Democratic deficit-hawk economists trying to determine what good economic policies would be should Barack Obama become president. Those of us who served in the Clinton administration and worked hard to put America’s finances in order and turn deficits into surpluses are keenly aware that, after eight years of the George W. Bush administration, things look worse than when we started back in 1993. All of our work was undone by our successors in their quest to win the class war by making America’s income distribution more unequal.

A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal advice when the Republican links are not just weak but absent. Political advisers to future Democratic administrations may argue that the only way to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it.

They might be right. The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor. But what is the right fiscal policy for a future Democratic administration to follow when there is no guarantee that any Republican successors will ever be “normal” again? That’s a hard question, and I don’t know the answer.

There is, however, one fiscal principle that must be respected at all costs. Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster. A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations. Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed.


To quote the immortal Guy Fleegman: "I don't like this. I don't like this at all.... [I]n a second they're gonna get mean, and they're gonna get ugly somehow, and there's gonna be a million more of them..."

Robin Givhan:

Just before Barack Obama celebrated his victory, Hillary Clinton celebrated her tenacity. She was in New York and she took the stage with Bill Clinton, who was wearing a dark suit and a burgundy tie. One desperately wanted to speed-dial one of his aides to suggest he stop wearing those red and orange ties because they have a tendency to make him look inflamed. As Hillary Clinton spoke, she was smiling that talk-show smile -- the one that never wavers. She was dressed all in cobalt blue: her pants, her jacket and the blouse or tunic she had on underneath it. Stylists will often advise clients to dress in a single hue to elongate their figure, but they're usually talking about subdued colors such as black or navy. The only people who dress from head to toe in bright blue are more than likely telling you to put your seat tray in the upright and locked position. What would possess a woman seeking the highest office to dress in a manner that only Veruca Salt could love?...

Tom Sowell:

There is one big difference between now and the 1930s.... [W]hen all the West's industrial and military forces were finally mobilized, the democracies were able to turn the tide and win decisively. But you cannot lose a nuclear war for three years and then come back. You cannot even sustain the will to resist for three years when you are first broken down morally by threats and then devastated by nuclear bombs. Our one window of opportunity to prevent this will occur within the term of whoever becomes President of the United States next January.... [W]e do not have the luxury of waiting for our ideal candidate or of indulging our emotions by voting for some third party candidate to show our displeasure-- at the cost of putting someone in the White House who is not up to the job. John McCain has been criticized in this column many times. But, when all is said and done, McCain has not spent decades aiding and abetting people who hate America...

Mary Grabar:

Obama’s advance troops have already taken over our college campuses, have bound and gagged our conservative professors, have ravished our virgins, have pillaged our stores of wisdom, and have ensconced themselves in the thrones of power in deans’, presidents’ and department heads’ offices...

The Environment: What Can We Do? (Megan McArdle Unleashes Her Inner Hayek Edition)

Megan writes:

Megan McArdle: The great, great Tom Lee on the ineffable problems of trying to lower your environmental footprint:

Doing this stuff is impossibly difficult, as is amply demonstrated every time someone tries to figure out the comparatively narrowly-defined problem of biofuels' net energy balance. This is the first problem: literally every human endeavor consumes energy — and of course, it's very hard to reduce any action in civilization to just one step. It's tough to figure out how much energy something took, very tough to accurately guess, and nearly impossible to know how much carbon it took to generate that energy.... There are unambiguous things, of course: don't leave the water running when you brush your teeth, and minimize electricity use, and don't leave your car idling. Although sometimes even those wind up ambiguous: I've heard that restarting a car takes about as much gas as running it for a minute. But then, I probably heard that from someplace like Wired. So who knows? This is the real problem... the only people with an incentive to really figure this out are academics... the only people with an incentive to talk about it are those who sell ad space to people targeting an audience that likes green content or an audience that likes counterintuitive content.... And the press is more than comfortable enough with their anecdotes and innumeracy to continue publishing hunches they had while shopping at Whole Foods, as if a half-day's worth of googling and algebra was sufficient to untangle the world's unimaginably complicated economic and energy-use web...

Oh, no, seasoned readers are already saying to themselves; I see a Hayek fit coming. Yes, my friends, you are right, like those dogs that can sense an epileptic seizure minutes before it actually appears. It is too late to force the pills down my throat; you'll just have to hang on and hope I don't hurt myself. Hayek on why prices are so, so great compared to command-and-control:

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

This, of course, leaves us with the problem of setting a price. But as long as we are sure--and I think we're pretty sure--that the price of greenhouse emissions ought to be higher than it is, a modest start will be adding valuable new information to a system that is very good at handling information.... [I]t's probably best for the government to do something--as long as that something is raising the price of carbon--rather than rely on individual guesses.

There is one thing you can [individually] do, if you care about global warming: eat lower on the food chain.... But will you do it? In most cases, no you will not, because chicken legs are tasty.... [The other individual thing] you can do right now is not complain so much about gas prices.

Why Oh Why Can't We Have Better Republican Presidential Candidates?

Ezra Klein:

EzraKlein Archive: Alex directs me to this Fortune interview where McCain unsheathes a SuperSoaker of crazy:

Senator, what do you see as the gravest long-term threat to the U.S. economy?" That was the first question we put to John McCain when he sat down for an interview with Fortune on a sunny afternoon in June. The moment felt charged....McCain at first says nothing. He sits in the corner of a sofa, one black, tasseled loafer propped against a coffee table. We're in the presidential suite on the 41st floor of the New York Hilton. McCain has come here - between a major speech on the economy in Washington, D.C., this morning and a fundraiser tonight at the 21 Club - to talk to us and to let us take his picture. He is wearing a dark suit, as he almost always does, with a blue shirt and a wine-colored tie. He's looking not at us but into the void. His eyes are narrowed. Nine seconds of silence, ten seconds, 11. Finally he says, "Well, I would think that the absolute gravest threat is the struggle that we're in against radical Islamic extremism, which can affect, if they prevail, our very existence. Another successful attack on the United States of America could have devastating consequences."

"If they prevail."

There are essentially two sets of premises under which you could answer this question. The first is the real world, which contains likely threats to the American economy. Things like a deep recession that's worsened by a credit contraction. Or oil prices that turn out to be skyrocketing not because of transient speculation, but enduring global instability and a dawning recognition of peak oil. Or a health system that isn't fixed, and is chewing up 30 percent of our GDP in two decades.

The other set of premises is the fantasy world. This is more like Marvel's "What If?" series. What is the Supervolcano explodes? What if we have an "I Am Legend" style pandemic? Or a "28 Days Later" zombie virus? What if "radical Islamic extremism" prevails and terrorists establish a global caliphate?

McCain chose... neither. Radical Islamic extremism has no chance of "prevailing." Bin Laden lives on a rock in a cave near some mountains. He does not control the USSR, and he is not leading an Ultimates 2-style alliance of secondary powers determined to pool their militaries and decapitate America's command structure. He's a guy with a small, but occasionally effective, terrorist organization. That makes it impossible that he'll prevail and threaten our existence, so he's not an acceptable answer under the first premise. And even if you do suspend reality and assume the emergence of Bin Ladinstan. I think we can all agree that the eruption of the Yellowstone Supervolcano would do more direct damage to the United States. So he's not the most direct threat there, either.

McCain's answer, like a lot of his answers, doesn't make any sense. But he wears a dark suit. He's an experienced looking white guy. He stares into "the void." He's the Republican nominee for president. And so we're supposed to take this stuff seriously. But it's absurd. Fortune gushes that he "starts by deftly turning the economy into a national security issue - and why not?" Why not? Well, McCain doesn't have a better answer because he knows utterly uninterested in the economic condition of this country, and didn't feel safe making something up. Happily, he's confident that the reporter in front of him wants a good story, not a shouting match where he pisses off the Republican nominee and possibly loses his job. So he just says whatever he feels like saying. But running for the president isn't like the final exam in your creative writing class. You don't get to explore whatever subject you find most interesting.

At least, you don't if you're not John McCain.

The in-the-tank journalist who breathlessly reports that McCain "starts by deftly turning the economy into a national security issue - and why not?" is David Whitford, editor-at-large of Fortune. Remember that name. He is one of the answers to the question "why oh why can't we have a better press corps?": we can't because people like David Whitford work for the press.

I suggest a change of career for Mr. Whitford. I suggest animal cosmetics safety testing--but not as a lab supervisor or as a janitor; as an experimental animal.

Impeach George W. Bush. Impeach Him Now

Tim F. of Balloon Juice:

Balloon Juice: Message to all of those rightwing net warriors who demanded over the years that I accept that THERE WAS A PLAN and the Rumsfeld/neocon warhawks are not a bunch of criminal incompetents: you were completely f---ing wrong. Give up. Let’s hear from patchouli-soaked hippies at the Army War College:

“The transition to a new campaign was not well thought out, planned for, and prepared for before it began,” write Wright and Reese, historians at the Army’s Combat Studies Institute at Fort Leavenworth, Kan. “Additionally, the assumptions about the nature of post-Saddam Iraq on which the transition was planned proved to be largely incorrect.” The results of those errors, they add, were that U.S. forces and their allies lacked an operational and strategic plan for success in Iraq, as well as the resources to carry out a plan.

The capsule summary is not entirely accurate in that Rumsfeld certainly did have a plan. He and the neocons planned to install a friendly strongman and leave. To guage just how stupid the war planners were, a useful question is who. Unless we had in mind a Saddam cousin or Muqtada Sadr, who wasn’t on our radar at the time, the only credible option would be a friendly exile. Aside from Ahmad Chalabi, how many of those can you name?

It really was Chalabi or bust. We got bust.

William Greider's "The Education of David Stockman" Once Again

People are continuing to comment on William Greider's article "The Education of David Stockman". The article itself is online as part of the Atlantic's magazine archive, with all of its famous passages about:

Stockman's mendacity:

  • Stockman thought he had taken care of embarrassing questions about future deficits with a device he referred to as the "magic asterisk.".. [which] would blithely denote all of the future deficit problems that were to be taken care of with additional budget reductions...

  • Stockman... hoped ["recalibration"] could be executed discreetly over the coming months to eliminate the out-year deficits for 1983 and 1984 that alarmed Wall Street--without alarming political Washington...

  • Stockman... cheerfully conceded that the administration's own budget numbers were constructed... [by] mixing cuts from the original 1981 budget left by Jimmy Carter with new baseline projections from the Congressional Budget Office in a way that... did not add up.... "None of us really understands what's going on with all these numbers," Stockman confessed.... "People are getting from A to B and it's not clear how they are getting there. It's not clear how we got there..."

Stockman on equity:

  • "Kemp-Roth was always a Trojan horse to bring down the top rate." A Trojan horse? This seemed a cynical concession for Stockman to make in private conversation while the Reagan Administration was still selling the supply-side doctrine to Congress...

*"It's kind of hard to sell 'trickle down,'" [Stockman] explained, "so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory..."

  • [It] was not generally understood [in early February] that the new budget director had already lost a major component of his revolution—another set of proposals, which he called "Chapter II," that was not sent to Capitol Hill because the President had vetoed its most controversial elements. Stockman had thought "Chapter II" would help him... provide substantially increased revenues... mollify liberal critics... it was aimed primarily at tax expenditures (popularly known as "loopholes") benefiting oil and other business interests.... Two weeks later, Stockman cheerfully explained that the President had rejected his "tax-expenditures" savings. The "Chapter II" issues had seemed crucial to Stockman when he was preparing them, but he dismissed them as inconsequential now that he had lost.... "I call them equity ornaments. They're not really too good. They're not essential to the economics of the thing..."

  • "We are interested in curtailing weak claims rather than weak clients.... The fear of the liberal remnant is that we will only attack weak clients. We have to show that we are willing to attack powerful clients with weak claims. I think that's critical to our success--both political and economic success..."

Greider and Stockma on the magnitude of the budget problem created by the Reagan tax cuts:

  • Another young man... might have seized the moment to claim his full share of praise. Stockman did appear on the Sunday talk shows, and was interviewed by the usual columnists. But in private, he was surprisingly modest.... Stockman was willing to dismiss the accomplishment as less significant than the participants realized... much more traumatic budget decisions still confronted them... the budget-resolution numbers were an exaggeration.... "There was less there than met the eye. Nobody has figured it out yet. Let's say that you and I walked outside and I waved a wand and said, I've just lowered the temperature from 110 to 78. Would you believe me? What this was was a cut from an artificial CBO base..."

  • "Do you realize the greed that came to the forefront?" Stockman asked with wonder. "The hogs were really feeding. The greed level, the level of opportunism, just got out of control..."

  • [T]he budget director made an extraordinary confession in private: the original agenda of budget reductions... was... inadequate.... How... did Ronald Reagan expect to balance the federal budget?... Stockman said... "The thing was put together so fast that it probably should have been put together differently..."

  • The initial [budget] figures were frightening--"absolutely shocking," [Stockman] confided.... OMB... predicted that if the new President went ahead with his promised three-year tax reduction and his increase in defense spending, the Reagan Administration would be faced with a series of federal deficits without precedent in peacetime--ranging from $82 billion in 1982 to $116 billion in 1984.... [Stockman and] like-minded supply-side economists... discarded orthodox premises.... New investment, new jobs, and growing profits—and Stockman's historic bull market. "It's based on valid economic analysis," [Stockman] said, "but it's the inverse of the last four years. When we go public, this is going to set off a wide-open debate on how the economy works, a great battle over the conventional theories of economic performance..."

  • Stockman... conceded that his... [belief] that dramatic political action would somehow alter the marketplace expectations... had been wrong.... "I take the performance of the bond market deadly seriously. I think it's the best measure there is... of what, on balance, relevant people think about what we're doing.... It means we're going to have to make changes.... We're still not winning. We're not winning..."

Stockman on the incompetence of him and his team at OMB:

  • "The reason we did it wrong--not wrong, but less than the optimum--was that we said, Hey, we have to get a program out fast.... [W]e didn't think it all the way through. We didn't add up all the numbers. We didn't make all the thorough, comprehensive calculations.... [W]e ended up with a list... of things to be done, rather than starting... [by] asking, 'What is the overall fiscal policy required to reach the target?'..."

Stockman on the cluelessness of the White House staff:

  • If the new administration would not cut defense or Social Security... that Reagan had put off limits, then it must savage the smaller slice remaining. Otherwise, balancing the budget in 1984 became an empty promise.... [Stockman] had to begin educating "the West Wing guys."... He was surprisingly optimistic. "They are now understanding all those things," Stockman said. "A month ago, they didn't. They really thought you could find $144 billion worth of waste, fraud, and abuse. So at least I've made a lot of headway internally..."

  • Reagan's policy-makers knew that their plan was wrong, or at least inadequate... but the President went ahead and conveyed the opposite impression.... Reagan appeared on network TV to rally the nation in support of the Gramm-Latta resolution... when Stockman knew they still had not found the solution...

But what is not readily available online--not anywhere, as best as I can tell--as Greider's introduction to the article:

20080627_greider_intro.pct (10 documents) 20080627_greider_intro2.pct (9 documents) 20080627_greider_intro2.pct (9 documents) 20080627_greider_intro3.pct (9 documents) 20080627_greider_intro3.pct (9 documents) 20080627_greider_intro4.pct (9 documents) 20080627_greider_intro4.pct (9 documents) 20080627_greider_intro5.pct (9 documents) 20080627_greider_intro5.pct (9 documents) 20080627_greider_intro6.pct (9 documents) 20080627_greider_intro6.pct (9 documents) 20080627_greider_intro7.pct (9 documents) 20080627_greider_intro7.pct (9 documents) 20080627_greider_intro8.pct (9 documents) 20080627_greider_intro8.pct (9 documents) 20080627_greider_intro9.pct (9 documents) 20080627_greider_intro9.pct (9 documents) 20080627_greider_intro10.pct (9 documents)

I think that most of the people defending Greider have not read Greider's introduction, which in my view at least provides interesting reading.

Memory Errors...

This is bad. What I have thought for a long time--nigh on thirty years--was the theme from "The Magnificent Seven" is actually the theme from "The Good, the Bad, and the Ugly."

OK. Now then: What is the theme from "The Magnificent Seven"?

Uhoh. This is very bad. I had thought that was the theme from "Bonanza."

So what is the theme from "Bonanza"?

I thought that was the theme from "Gunsmoke."

I dare not go any further...


From Wikiopedia:

Contango - Wikipedia, the free encyclopedia: Origin of term

The term originated in mid-19th century England, and is believed to be a corruption of "continuation", "continue" or "contingent": (

In the past on the London Stock Exchange, contango was a fee paid by a buyer to a seller when the buyer wished to defer settlement of the trade they had agreed. The charge was based on the interest forgone by the seller not being paid.

The purpose was normally speculative. Settlement days were on a fixed schedule (such as fortnightly) and a speculative buyer did not have to take delivery and pay for stock until the following settlement day, and on that day could "carry over" their position to the next by paying the contango fee. This practice was common before 1930, but came to be used less and less, particularly after options were reintroduced in 1958. It is still prevalent in some exchanges such as Bombay Stock Exchange where it is referred to as Badla.

This fee was similar in character to the present meaning of contango, i.e. future delivery costing more than immediate delivery, and the charge representing cost of carry to the holder.

A Historical Document: Mistaking the Birth Pangs of Capitalism for Its Death Throes

Karl Marx and Friedrich Engels from the Neue Rheinische Zeitung Revue at the start of 1850:

Reviews from Neue Rheinische Zeitung Revue: [T]he greatest threat to 'order' in England does not lie in the dangers emanating from Paris but is a direct consequence of [England's political, commercial, and financial] order... a fruit from the English liberty tree: a commercial crisis....

[T]he surplus capital of the period of prosperity found its usual outlets blocked. For the speculators there remained only the possibility of unloading all their capital either into industrial production, or into speculative ventures in colonial foodstuffs and the key industrial raw materials.... [I]ndustrial production naturally grew with extraordinary speed, and as a result the markets became saturated. Thus the outbreak of the crisis was significantly accelerated.... For four weeks the situation in the key industry, cotton, has been completely depressed and within this industry it is the main branches — in particular the spinning and weaving of coarse fabrics — which are suffering most. Cotton yarn and coarse calico have already fallen in price far more than raw cotton. Production is being cut back, and almost without exception the factories are working short time....

The results of the commercial crisis now impending will be more serious than ever before.... This dual crisis in England will be accelerated, widened in scope and made even more explosive by the convulsions which are now simultaneously imminent on the Continent; and the continental revolution will take on an unprecedentedly socialist character as a result of the repercussions of the English crisis on the world market.... The Tories have no popular universal panacea for the crisis, such as the repeal of the Corn Laws. They will be forced at least to carry out a parliamentary reform. This means that they cannot avoid assuming power under conditions which will open the doors of Parliament to the proletariat, place its demands on the agenda of the House of Commons and pitch England into the European revolution...

Mistaking the birth pangs of modern capitalism for its death throes

Hoisted from Comments: J. Thomas on the Ethics of William Greider

In the comments, J. Thomas writes:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: [William Greider says] "Supply-side economics was a scandal from the beginning."

Sure, except a whole lot of fools believed in it. Responsible economists said it couldn't possibly balance the budget. Fools believed otherwise.

Greider sent his reporters out to interview Stockman, and Stockman told them the budget was going to be balanced. Stockman told Greider personally that there was no way the budget was going to be balanced. Greider told his reporters to say "Stockman says there's no problem, balanced budget, everything's fine" and to also say something along the lines of "Some left-wing economists disagree". When Stockman himself had told Greider himself that it was lies.

If Greider had told his reporters "The headline for today's article is "Supplyside Scandal Exposed" and they were supposed to point out known administration lies as lies and use the word "scandal" at least 4 times per article....

But he didn't. The articles he edited encouraged fools to continue acting like fools. He got the truth straight from Stockman's mouth and he reported the lies instead.

Is there something about these events that you don't believe? Is there something about my interpretation that you disagree with? If you agree the events happened, what interpretation leaves Greider a nonhack?

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

Stan Collender on Republican Attack Dog Robert Dole

Robert Dole never outgrew his role as Nixon's henchman. Here's Stan Collender:

Hey, Scott. Bob Dole Did the Same Thing to Me: As far as I know, Scott McClellan and I only have one thing in common: Bob Dole has attacked us both. Dole’s attack on McClellan occurred last week when he sent an e-mail to the former White House press secretary to express his unhappiness about his tell-all book. Dole, a Kansas Republican who served as Senate Majority Leader, never said anything in the book was wrong. He simply implied that, because of his character, McClellan¹s opinion wasn¹t worth reading.

Dole’s attack on me occurred three weeks shy of 15 years ago. As you might suspect, it had to do with the federal budget. As was the case last week, he didn¹t dispute the substance of what I said. It was 1993, and the Senate was debating the budget resolution, which was based on the first Clinton budget. I had been quoted the day before in the Philadelphia Inquirer saying the economic forecast in that budget was the most honest in more than a decade. Coming after a series of budgets that had economic outlooks derisively named “Rosy Scenario” (and that was the most polite name used), this was actually a pretty easy call....

Around lunchtime the next day, Dole came to the Senate floor and went after me by name... he never disputed anything I had said or even tried to argue that it was incorrect. Instead, and again as he did in his e-mail to McClellan, he attacked me personally. He implied that my opinion wasn¹t worth anything because I had worked for three Democratic House Members. Somehow that made what I was saying incorrect or not credible even though by that time I hadn’t worked for anyone on Capital Hill for more than a decade.... He subsequently did an interview with another paragon of bipartisanship -- Rush Limbaugh -- and repeated his comments about me.

About a month or so after he attacked me on the Senate floor, I saw Dole being interviewed live on television and I called the studio to ask that he call me. Much to his credit, Dole returned the call. He didn’t apologize for what he had done but did say that I shouldn’t take it personally. He said my quote in the Inquirer was being used too effectively for it to be ignored and that he had wanted to limit the damage during the budget resolution debate by hurting my credibility. He then suggested I stop by his office for coffee....

Dole... [on] McClellan last week... used the same tactic on him that was used on me 15 years ago. Dole wasn’t disputing the substance of anything McClellan was saying, but he obviously felt the need to reduce the credibility of the person saying it because it was perceived to be damaging....

I still have a framed copy of the page from the Congressional Record with Dole’s attack on me hanging in my office. I smile whenever I look at it.

Jay Rosen Says that the Press Corps Heads for the Greasy Grass...

Jay Rosen gives a talk about why oh why can't we have a better press corps:

PressThink: Migration Point for the Press Tribe: [E]ven more difficult—and more challenging to the political wisdom of the [professional press] tribe--is that on the terrain where the press has to be re-built, there are people already there... building a kind of alternative civilization to professionalized news and commentary.... One of the most perplexing questions journalists today face is what to make of these determined settlers and their ways, how to stand toward them.... Horizontal sharing is as important as top-down messaging. Readers have become writers and the people formerly know as the audience are flourishing as content producers, expert sharers and self-guided consumers.

This is something the news tribe did not understand went it first went online around 1996. It saw the Web as a good way to re-purpose its content from the old platform... [and this] idea... had a huge intellectual cost. It did not help the tribe understand the ground on which it had to rebuild...

I think that the press corps's flaws are much deeper than that--it's not just that it doesn't understand the new ground to which it is migrating, it's that it did a lousy job on its own ground as well. Consider the Washington Post. I think of:

None of these problems have anything to do with "new media." They all consist of doing old media badly.

Paul Krugman: Iron resolution

Iron resolution: Chinese steelmakers have agreed to a 96 percent increase in the price they pay for Australian iron ore. One interesting point about this case is that, as I understand it, iron ore isn’t traded on an international exchange; trade takes place through bilateral deals between producers and consumers. In other words, there isn’t any easy way to speculate on future iron ore prices. Yet ore prices are surging like oil prices. A bit more evidence against the speculative frenzy hypothesis.

Why We Don't Have a Better Press Corps: Hoisted from Comments

John Hart writes, in comments:

Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong: I've taken the press's fawning over the likes of early GWB & McCain to be a form of exercising power. If you just report the truth, which is (by definition, I suppose) self-evident in light of the facts, then what have you really done? You've just written down something obvious.

But if you elide McCain's inanities, and you pretend his policies are equal to Obama's, well, then, you've done something hard - you've put one over one the reading public, and used your journalistic power to aid & abet in the telling of a lie. I think there's a thrill for some journalists in that.

I think that also helps explain why so many articles have the "well, the knowing reader will be able to suss out the lies, but I (the journalist) will only do 'he said, she said' and avoid even the simplest of conclusions."

Don't journalists get extra points for being "counter-intuitive"? What could be more so than dressing a lie as the truth? Plus there's something breathtaking about someone who keeps lying to your face, and every now & again the journalist wants to be in on the lie, and be the one who gets to wink.

I think John Hart is on to something. I recall the Washington Post's Clay Chandler as somebody who made it very clear that he would, if he thought it would advance his career, mislead his readers.

Marty Lederman Gets Shrill on John Yoo

Marty Lederman on John Yoo:

Balkinization: John Yoo Testimony: Here are John Yoo's prepared remarks for the hearing before the House Judiciary Committee this morning. (I don't believe David Addington is submitting a prepared statement.) CSPAN covering it live here. I'm out of town and don't have time just now to blog in detail about this statement, except for a handful of very quick reactions:

  1. John claims that the 2004 Levin torture memo, which superseded his 2002 OLC opinion, concluded that all interrogation methods OLC had previously approved as legal "were still legal." We now know that that's dead wrong. As Levin testified before this same committee last week, the footnote in question, which Attorney General Gonzales insisted that OLC include, merely indicated that the writers of the 2002 memos -- i.e., John Yoo -- would not have changed their bottom line, even if they had employed Levin's analysis. Levin himself, however, was uncertain about the legality of some of the CIA techniques, and was in the process of reviewing them when he was effectively removed from OLC.

  2. John is testifying that his torture memos could have had no bearing on the abuse that took place in Iraq, because "the Geneva Conventions provided the relevant rules for the war in Iraq." There are several problems with this statement. Most important is that OLC itself, when John was there, had advised the Pentagon that the Fourth Geneva Convention did not protect "unlawful combatants," which includes most if not all of the insurgents in Iraq. (See page 4 of the April 2003 DOD Working Group Report.) As Jack Goldsmith reports in his book, the very first thing he decided when he arrived at OLC in October 2003 was that the Fourth Geneva Convention did protect Iraqi civilians -- a decision that hocked and dismayed the White House. It is fairly clear (as reflected in the Working Group Report) that until that time, the Administration, based presumably on John's own advice, was acting on the assumption that the insurgents in Iraq were not protected by the Geneva Conventions. This explains why, according to several reports (most importantly those of Sy Hersh and Jane Mayer), the Pentagon and CIA placed Special Forces and CIA operatives in Iraq in 2001 or 2002, whose basic instructions were that there was no law -- certainly not Geneva -- that protected detainees, and that the "gloves were off" and that they could engage in widespread, wanton abuse and cruelty. Which they did. (And as the Fay, Jones and Schlesinger Reports found, and many accounts attest, the conspicuous abuse by CIA and Special Forces in Iraq was an important contributing factor to the breakdown of ordinary norms among the regular military forces, as well.) The Pentagon and CIA would not have given these forces the green light to abuse prisoners if OLC had not previously advised that neither the Geneva Conventions nor any relevant statutes stood in the way of such abuse. Finally, John's broad Commander-in-Chief override theory, which was a prominent part of the DOD Working Group Report, and which was briefed to General Miller on his way to "GTMOize" Iraq, obviously conveyed the message that the President could ignore any applicable statutes and treaties, even if they would otherwise apply. John's legal advice, then, was a fairly direct cause -- certainly a necessary cause -- of the abuse in Iraq in 2002 and 2003.

  3. John stresses, as he has in the past, that he was without much guidance in interpreting the federal torture statute, since there had not been any prosecutions under it, or any court cases construing it. But the virtually identical definition of "torture" is included in statutes governing removal of aliens and asylum applications, and that definition had received extensive treatment from courts under those statutes (which were also enacted in order to implement the Convention Against Torture). The INS and the State Department, therefore, had very extensive knowledge and expertise on the question. And yet those experts were cut out of the loop -- they were not consulted on the OLC opinion. Indeed, John's testimony states that the NSC ordered OLC not to discuss its work with the State Department! -- something that is in itself fairly scandalous.

  4. John states that his 2002 torture opinion was "reviewed, edited and re-written by the assistant attorney general in charge of the office at the time [Jay Bybee], as is the case with all opinions that issue from OLC." John is correct that virtually all written OLC opinions -- certainly those of great importance or dispute -- are at the very least reviewed by the AAG. How, then, does he explain the fact that two of the most momentous OLC opinions has ever issued -- the September 25, 2001 Opinion on the President's war powers and the March 14, 2003 opinion informing DOD (over the vociferous objections of numerous DOD lawyers) that its interrogators had virtual carte blanche to ignore federal statutes -- were signed by John Yoo himself (a mere deputy), rather than by the head of OLC (Dan Koffsky in 2001; Jay Bybee in 2003)?

Posted 8:42 AM by Marty Lederman [link]

Joe Klein Is Shrill!!

In the immortal words of Keanu Reeves: "Whoa!!"

Joe Klein:

Surge Protection - Swampland - TIME: The notion that we could just waltz in and inject democracy into an extremely complicated, devout and ancient culture smacked--still smacks--of neocolonialist legerdemain. The fact that a great many Jewish neoconservatives--people like Joe Lieberman and the crowd over at Commentary--plumped for this war, and now for an even more foolish assault on Iran, raised the question of divided loyalties: using U.S. military power, U.S. lives and money, to make the world safe for Israel. And then there is the question--made manifest by the no-bid contracts offered U.S. oil companies by the Iraqis--of two oil executives, Bush and Cheney, securing a new source of business for their Texas buddies...

I really don't think it works that way. It's not that loyalties are in any sense "divided." Instead, it's an inability to even think of the idea that (interest of Likud) ≠ (interest of Israel) ≠ (interest of United States) or the idea that (interest of Texas oil barons) ≠ (interest of United States of America)...

And Andrew Sullivan is shrill too:

The Daily Dish | By Andrew Sullivan: Max Boot is admirably candid. He helps us realize that this election is indeed at root a decision on whether to keep troops in Iraq for the next century or more:

In order to build on the success that General Petraeus and his soldiers have had, we need to maintain a long-term commitment in Iraq - for 100 years if need be, as John McCain has said. That doesn’t mean 100 years of fighting; clearly, that would be unsustainable. It does mean a long-term troop presence designed to reassure Iraqis of our commitment to their security against an array of enemies.

Their security? Heh. In fifty years' time, the Iraqis will not be able to defend themselves against Iran? Or Syria? Please. If they've managed this much progress in the last year, we could be almost out of there in the next president's term of office. Even under Saddam, the Iraqis weren't defeated by the Iranian mullahs. Notice also how a few months of relative calm are instantly deployed to justify a century of occupation. Can you imagine what the next platform for invasion will be? And on what planet does Boot live to think that permanent US troops in the heart of the Muslim Middle East will not require endless, endless fighting?

This obviously isn't about Iraq, as we are fast discovering. It's about an ever greater American entanglement in the Middle East in part to secure oil supplies we need to wean ourselves off and in part a foolish attempt to protect Israel. And Joe Klein is in no way engaging in anti-Semitism - please - by pointing out the increasingly obvious fact that the Iraq war was in part launched to assist Israel (even though many Israelis were against it):

You want evidence of divided loyalties? How about the "benign domino theory" that so many Jewish neoconservatives talked to me about--off the record, of course--in the runup to the Iraq war, the idea that Israel's security could be won by taking out Saddam, which would set off a cascade of disaster for Israel's enemies in the region? As my grandmother would say, feh! Do you actually deny that the casus belli that dare not speak its name wasn't, as I wrote in February 2003, a desire to make the world safe for Israel?

Bill Gates Reviews Windows...

This is the good version of Windows--XP, I think:

Full text: An epic Bill Gates e-mail rant:

From: Bill Gates
Sent: Wednesday, January 15, 2003 10:05 AM
To: Jim Allchin
Cc: Chris Jones (WINDOWS); Bharat Shah (NT); Joe Peterson; Will Poole; Brian Valentine; Anoop Gupta (RESEARCH)
Subject: Windows Usability Systematic degradation flame

I am quite disappointed at how Windows Usability has been going backwards and the program management groups don't drive usability issues.

Let me give you my experience from yesterday.

I decided to download (Moviemaker) and buy the Digital Plus pack ... so I went to They have a download place so I went there.

The first 5 times I used the site it timed out while trying to bring up the download page. Then after an 8 second delay I got it to come up.

This site is so slow it is unusable.

It wasn't in the top 5 so I expanded the other 45.

These 45 names are totally confusing. These names make stuff like: C:\Documents and Settings\billg\My Documents\My Pictures seem clear.

They are not filtered by the system ... and so many of the things are strange.

I tried scoping to Media stuff. Still no moviemaker. I typed in movie. Nothing. I typed in movie maker. Nothing.

So I gave up and sent mail to Amir saying - where is this Moviemaker download? Does it exist?

So they told me that using the download page to download something was not something they anticipated.

They told me to go to the main page search button and type movie maker (not moviemaker!).

I tried that. The site was pathetically slow but after 6 seconds of waiting up it came.

I thought for sure now I would see a button to just go do the download.

In fact it is more like a puzzle that you get to solve. It told me to go to Windows Update and do a bunch of incantations.

This struck me as completely odd. Why should I have to go somewhere else and do a scan to download moviemaker?

So I went to Windows update. Windows Update decides I need to download a bunch of controls. (Not) just once but multiple times where I get to see weird dialog boxes.

Doesn't Windows update know some key to talk to Windows?

Then I did the scan. This took quite some time and I was told it was critical for me to download 17megs of stuff.

This is after I was told we were doing delta patches to things but instead just to get 6 things that are labeled in the SCARIEST possible way I had to download 17meg.

So I did the download. That part was fast. Then it wanted to do an install. This took 6 minutes and the machine was so slow I couldn't use it for anything else during this time.

What the heck is going on during those 6 minutes? That is crazy. This is after the download was finished.

Then it told me to reboot my machine. Why should I do that? I reboot every night -- why should I reboot at that time?

So I did the reboot because it INSISTED on it. Of course that meant completely getting rid of all my Outlook state.

So I got back up and running and went to Windows Update again. I forgot why I was in Windows Update at all since all I wanted was to get Moviemaker.

So I went back to and looked at the instructions. I have to click on a folder called WindowsXP. Why should I do that? Windows Update knows I am on Windows XP.

What does it mean to have to click on that folder? So I get a bunch of confusing stuff but sure enough one of them is Moviemaker.

So I do the download. The download is fast but the Install takes many minutes. Amazing how slow this thing is.

At some point I get told I need to go get Windows Media Series 9 to download.

So I decide I will go do that. This time I get dialogs saying things like "Open" or "Save". No guidance in the instructions which to do. I have no clue which to do.

The download is fast and the install takes 7 minutes for this thing.

So now I think I am going to have Moviemaker. I go to my add/remove programs place to make sure it is there.

It is not there.

What is there? The following garbage is there. Microsoft Autoupdate Exclusive test package, Microsoft Autoupdate Reboot test package, Microsoft Autoupdate testpackage1. Microsoft AUtoupdate testpackage2, Microsoft Autoupdate Test package3.

Someone decided to trash the one part of Windows that was usable? The file system is no longer usable. The registry is not usable. This program listing was one sane place but now it is all crapped up.

But that is just the start of the crap. Later I have listed things like Windows XP Hotfix see Q329048 for more information. What is Q329048? Why are these series of patches listed here? Some of the patches just things like Q810655 instead of saying see Q329048 for more information.

What an absolute mess.

Moviemaker is just not there at all.

So I give up on Moviemaker and decide to download the Digital Plus Package.

I get told I need to go enter a bunch of information about myself.

I enter it all in and because it decides I have mistyped something I have to try again. Of course it has cleared out most of what I typed.

I try (typing) the right stuff in 5 times and it just keeps clearing things out for me to type them in again.

So after more than an hour of craziness and making my programs list garbage and being scared and seeing that is a terrible website I haven't run Moviemaker and I haven't got the plus package.

The lack of attention to usability represented by these experiences blows my mind. I thought we had reached a low with Windows Network places or the messages I get when I try to use 802.11. (don't you just love that root certificate message?)

When I really get to use the stuff I am sure I will have more feedback.

Oil and Speculation

As best as I can determine, Paul Krugman is right.

Paul Krugman says that either the price of a storable commodity can be determined by supply-and-demand on the spot market, with no stored reserves held off the market for speculative purposes:

Or the price can be determined by speculators, with them holding enough of the commodity off the market in their speculative inventory in order to drive the current spot price up to a level where it no longer pays for speculators to take even more of the current supply off the market:

In which case the current and the futures price of the commodity should be in contango: the future price should be higher than the current price by the cost of storage plus the interest rate. Since we don't see either large inventories of tanker cars filled with oil on the sidings or futures prices for oil above spot prices to make storing marginally profitable, he concludes that speculation is not driving oil prices today: [H]ere’s the thing: the actual data we have on crude oil don’t show the signatures of a market driven by speculative demand. Inventory data don’t show a big accumulation; and the market has mostly been in backwardation, not contango. It made news when, late last month, a slight contango developed – because until then there had been backwardation. Maybe I’m misinterpreting what the advocates of a speculative story are thinking. But in that case, what are they thinking? I’m curious.


Various notes on speculation: Right now I see well-trained economists getting caught up in an equivalent fallacy — the doctrine of immaculate hoarding? — because they’re getting hung up on the financial relationships between spot and futures. Whatever you say about the futures market, it can only drive up the spot price by causing physical hoarding of physical goods.... [S]ome readers have asked me why my inventory argument didn’t apply to the housing bubble. The answer is that a house is a durable good, which unlike oil, which you have to burn, isn’t used up by the consumer; what we consume are housing services — in effect, consumers rent houses, from themselves if they happen to be homeowners. To see the equivalent in housing of what the oil bubble types think they’re seeing in oil, we’d have to have seen a sharp rise in rental rates. It didn’t happen....

Third, some people have asked what I said about the California energy crisis of 2000-2001, perhaps history’s greatest example of market manipulation.... During that whole period, I was pretty much the only voice in a major news outlet even suggesting that market manipulation might be a central factor. And here’s the thing: I applied pretty much the same reasoning to that crisis that I’m applying now. The only way market manipulators could have been driving up prices was by keeping physical supply off the market. And they were in fact doing just that: there was huge unused generating capacity, consistent with the idea of deliberate withholding. Some years later we would actually get hold of control room tapes in which Enron traders called plants and told them to shut down, and boasted about cutting off Grandma Millie’s power.

I’m still waiting for evidence that physical withholding is going on in the oil market.

Dangerous populists?: Dangerous populists? Martin Wolf calls for

abandonment of the silly idea that price jumps in oil or food are the result of wicked “speculation” – a fantasy promoted by dangerous populists across the globe.

Hmm. Who are these “dangerous populists”? Well, elsewhere in the FT there’s an article titled “U.S. senator seeks clampdown on speculation in oil markets”, which quotes Joe Lieberman saying that speculators are a:

significant contributing factor to the economic distress now being felt by American consumers every time they stand in the grocery store checkout line or pay for a fill-up at the gas pump

Joe Lieberman, the Huey Long of Greenwich! And let’s not forget those wild-eyed, shaggy-haired leftists at National Review, who have been telling us that high oil prices are a bubble that’s about to burst for more than 5 years. By the way, the FT article on Lieberman mentions that

Some observers say lawmakers have not explained how speculators or pension funds are boosting prices or why the prices of raw materials such as iron ore, rice or coal - in which speculators have limited access - are also booming.

I’m delighted at the promotion. I used to be one of Those Who; now I’m Some Observer...


Confusions about speculation: I’m asking whether expectations of a higher future price and/or investment in the futures market by institutional investors are pushing up the current price. If the answer is yes, then we can ask whether there’s a bubble — that is, whether the expected future price is unreasonable. It’s quite possible to have speculation that isn’t a bubble.... [B]ut is speculation, rational or not, driving the price of crude?

Basically, it’s hard to reconcile the view that it is with two facts: for most of the recent runup, inventories were static or declining and the futures market was in backwardation, not contango. (Can the futures market pull up the spot price when the futures price is less than the spot price?)

OK, you can offer excuses. Maybe the oil inventories are being held in the ground; but do we have any evidence that oil producing countries are withholding output? (And for those who blame speculators, are Kuwait and Saudi on the other side of those futures contracts?) Maybe there’s a shifting liquidity premium that mucks up the relationship between spot and future. But this really is starting to sound like epicycles — an attempt to rescue the speculation hypothesis, which originally was supposed to be based on compelling evidence, by saying that there’s actually no evidence that could refute it...

New York Times Death Spiral Watch (Maureen Dowd Edition)

Wny oh why can't we have a better press corps? Searching on Google for "'Maureen Dowd' Obambi" produces 74 hits, typical of which is this from last March:

The Monster Mash: After losing Texas, Ohio, Rhode Island and his mojo, and getting whipsawed around by Hillary and his own chuckleheaded coterie of advisers, [Barack Obabma] will now have to come to grips with something he has always skittered away from: You can’t be elected president unless you prove you’re tough. Hillary’s undeniably tough.... Ma Clinton knows where Obambi’s soft spots are; she knows he likes being petted on his pedestal, that he’s unnerved by her...

Today she writes:

More Phony Myths: Karl Rove... sees [Barack Obama] as a “coolly arrogant” elitist.... “Even if you never met him, you know this guy. He’s the guy at the country club with the beautiful date, holding a martini and a cigarette that stands against the wall and makes snide comments about everyone who passes by.”...

The cheap populism is really rich coming from Karl Rove.... The absurd spectacle of rich white conservatives trying to paint Obama as a watercress sandwich with the crust cut off seems ugly and fake.... Obama doesn’t have a chip on his shoulder and he doesn’t make a lot of snarky remarks. He tries to stay on a positive keel and see things from the other person’s point of view. He’s not Richie Rich, saved time and again by Daddy’s influence and Daddy’s friends....

Conservatives love playing this little game, acting as if the “elite” Democratic candidates are not in touch with people like themselves.... Haven’t we had enough of this hypocritical comedy?...

[A]t least Obama wants to catch Osama and doesn’t think he’s getting his directions on war from “a higher Father.”... If [Rove] means that Obama has brains, what’s wrong with that? If he means that Obama is successful, what’s wrong with that? If he means that Obama has education and intellectual sophistication, what’s wrong with that? Many of Obama’s traits are the traits that people in the population aspire to.

Is there any way for somebody writing in good faith to write both these columns in three months?

Bear Stearns Hedge Fund Blogging

47 up months in a row for any fund indicates either (a) they have a hell of a lot of alpha which they are not leveraging sufficiently to make the most money for themselves and their investors, or (b) they are being paid to take on a lot of large and correlated risks for which the bill has just not come due yet.

Patricia Hurtado and David Scheer of Bloomberg report:

Bloomberg: June 19 (Bloomberg) -- Former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin, arrested early this morning at their homes in New Jersey and Manhattan, were indicted for mail fraud and conspiracy to commit securities fraud, the first prosecution in a U.S. crackdown on subprime fraud. The two men were charged with misleading investors about the health of two Bear Stearns hedge funds whose collapse last year ignited the subprime mortgage crisis.... Federal prosecutors and regulators have been investigating possible fraud by banks and mortgage firms whose investments in subprime loans and securities plunged in value, causing losses that now total $396.6 billion....

The collapse of the hedge funds began a credit squeeze that led to lawsuits against Countrywide Financial Corp., American Home Mortgage Investment Corp., Citigroup Inc. and JPMorgan Chase & Co. After demands by clients and lenders for payment threatened Bear Stearns with bankruptcy, the 85-year-old firm agreed to sell itself to New York-based JPMorgan in March....

Cioffi managed the two funds that collapsed, and Tannin served as his chief operating officer. The hedge funds invested almost all of their assets in subprime-mortgage-related securities. Their investment bets failed last June when prices for collateralized-debt obligations, called CDOs, linked to loans plummeted amid rising late payments by borrowers with poor credit histories or heavy debt. U.S. prosecutors are focusing on an e-mail allegedly sent by the two suggesting that their funds were headed for trouble, four days before they told investors they were comfortable with their holdings, the Wall Street Journal reported today, citing people familiar with the situation.

Tannin allegedly e-mailed Cioffi saying he was afraid that the market for bond securities they had invested in was ``toast,'' and suggested shutting the funds, the Journal said. The two have told colleagues that they quickly were convinced that Tannin's concerns were misplaced....

Investors in the two Bear funds, which filed for bankruptcy in July, lost $1.6 billion. Barclay's Bank PLC said in a lawsuit that the funds once held a total of about $20 billion in assets. Cioffi allegedly pulled the $2 million of his own money, one third of the amount he'd invested in one of the funds, before March 2007, so he could commit it to another fund he set up, said a person familiar with the investigation. The withdrawal occurred before the funds ran into trouble, the person said.... The two Bear Stearns funds... were the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd....

Barclays PLC... claimed... that it was misled about the health of Bear's so-called enhanced fund. Bear Stearns, Cioffi and Tannin are named as defendants in London-based Barclays suit.... The suit cites a February e-mail to Barclays in which Tannin allegedly said the fund is having our best month ever'' and that ourhedges are working beautifully.'' By then, the fund was having severe'' liquidity problems, said Barclays, which said it losthundreds of millions of dollars,'' as a result. Internally, Cioffi and Tannin discussed the ``wipe out'' of the fund, according to the complaint...

Curses, Foiled Again!

My clever plan to get lots of work done this summer--by losing my cell phone, seizing Laura D'Andrea Tyson's unused office Room 203 at BRIE's 2234 Piedmont Avenue, and hiding out there so that nobody could find me--has gone badly awry.

Yes, it is true that very few people from the Economics Department know where I am.

But my time is being absorbed by a large number of very smart and interesting people I haven't heard from in a while: people like Derek Bok, Richard Layard, Louis Gerstner, Michael Lind, Ray Kurzweil, George Soros, Gordon Brown, Frances Cairncross, John Seely Brown, Bill Emmott, and Amartya Sen.

They are all across the room clamoring for my attention, encased as they are in rows and rows of these small virtual-reality boxes.

You see, when Professor Tyson moved her base of operations back to her Business School office, she left too many of her books behind. So I am now distracted not just by my books, but by hers as well.

This is very dangerous. This is very distracting. I try to resist by repeating over and over again Rudi Dornbusch's mantra: "They don't pay me to read the literature; they pay me to write the literature."

But it is not working--not very well, at least.

Ah. Here is Sherry Gleid's Chronic Condition...

I am doomed.

Washington Post Death Spiral Watch (Lori Montgomery Edition)

Why oh why can't we have a better press corps? Outsourced to Dean Baker:

Big Bump in Post's Budget Reporting: It Doesn't Add Up: [A] front page article complaining that the presidential candidates may have problems paying for their campaign promises warns that the $340 billion deficit projected for 2009 is likely to grow "as the economy weakens." Yeah, as the economy weakens, we will collect less money in tax revenue and we will pay out more money in unemployment benefits, food stamps, and other transfer programs. Would the Post rather the deficit did not increase in the downturn? This would not only increase the suffering, but it would also worsen the downturn, since the deficit helps to create a source of demand that would otherwise be absent....

[R]eaders would be especially hard-pressed to make any sense of this piece because it never puts any numbers in context... it doesn't... use numbers consistently.... [I]t tells readers that "economists expect the deficit to top $400 billion when the fiscal year ends Sept. 30, rivaling the all-time high set in 2004." This is wrong and wrong. The [nominal GDP of the] economy will be almost 25 percent larger in 2008 than it was in 2004.... [And m]easured as a share of GDP, the 2004 deficit was not close to a record... 3.6 percent of GDP in 2004, compared to 6.0 percent in 1983. (Adding in money borrowed from Social Security can get you to 4.6 percent of GDP in 2004.)

While [Montgomery's deficit]... numbers... [exclude] money borrowed from Social Security... [her] debt [number]... approaching $10 trillion... does include money borrowed from Social Security.... [She] warns of projections that show the debt rising by $3.3 trillion by 2018 under Obama's proposals and $4.3 trillion by 2018 under McCain's proposals... [that] do not include the $2.3 trillion in projected borrowing from Social Security over this decade.... [S]ince the numbers are neither adjusted for inflation nor expressed as a share of the economy, almost none of the Post's readers has any idea what they mean. It would have been equally useful to substitute "really big number that should scare you" for either of these projected debt figures.

The article also includes a comment about Social Security which does not make any obvious sense....

But the more immediate problem is the depletion of excess cash in the Social Security trust fund, which has been used for years to cover a portion of the annual budget deficit. Government economists predict that the Social Security surplus will start shrinking in 2011 and dry up completely by the end of the next decade, exposing government-wide budget deficits of a magnitude not seen since Bush's first term.

This should prompt a huge "huh?"... [T]he Congressional Budget Office projects the annual Social Security surplus to continue grow in dollar terms until 2016 and even as a share of GDP until 2013.... The annual surplus is not projected to disappear... until after [2020].... It is possible that [Montgomery] is referring to the surplus of Social Security taxes over benefits, but this peaked in 2006... as a share of GDP... peaked in 2000.

There are other errors.... For example, it reports that Senator Obama's... health care plan would add $65 billion to the annual deficit. This figure does not include the revenue from the fee that he has proposed for firms who do not provide health care insurance for their workers.

In short, readers can learn from this article that the Washington Post is very concerned about deficits. They cannot learn much else.

I still have no informed opinion about why this state of affairs. Lori Montgomery is giving her bosses up through Len Downie and Katherine Weymouth and Donald Graham what they want, clearly--and what they want is not to inform their readers about the budget. They could have chosen differently--the editors of the Wall Street Journal news section and of the Financial Times have chosen differently, If Len Downie and company truly want to entertain rather than inform, why not have Lori Montgomery write about Hollywood or professional sports? The people in Hollywood are much more aesthetic than politicians or budget experts. Professional sports not only has prettier and much more athletic people but also superbly structured narrative story lines without the awkward ambiguities and loose ends of government and policy.

It is a mystery...

Dawn Patrol...

Just back from Lake Tahoe and out with the dog on dawn patrol. The sun rises over the Diablo Valley at 5:52, blood-red, obscured by the smoke from the wildfires. The entire valley looks like... Beijing, and it smells as though the most enormous piece of toast in all the world has just met its maker.

Closer to home--in the thicket where the spring lies a fifth of a mile from home--there is quite a party going on this morning: four crows are harassing a red-tailed hawk up above, while six turkeys gobble in the trees. Two does with their fawns crash through the thicket wanting to put more distance between themselves and the dog. A small grey fox scurries across the road in the dawn, also anxious to put more distance between itself and the Labrador.

But the striped skunk does not. It waddles up the hill from the spring out of the blackberry thicket onto the road, and looks at us from twenty yards away. God! It's eyesight must be absolutely awful!

It raises its tail...

Because His Heart Is Pure, Firefox 3 Gives Scott Eric Kauffman the Strength of Ten

Or something like that:

Acephalous: If you're the kind of person who likes to open 423 articles in JSTOR so as to bring the CPU of his relatively new computer to its knees, you should download Firefox 3. Right now, I have 78 tabs open.  More than half of them are JSTOR articles--for those without access, that means gigantic memory-hogging images—--Firefox is currently occupying 298,732 K of memory.  Yesterday, it would've easily engorged 1,400,000 K and had my CPU in tears. 

Short of extreme protestation, I'm not sure how to make this endorsement sound earnest at this point. But it is. This has been a public service announcement from the good people at SEK Industries. 

Washington Post Death Spiral Watch (Yet Another Deborah Howell Edition)

Apropos of ombudsman whatever-she-is Deborah Howell's claim that:

When Speech Isn't Free: Downie unearthed a 1995 memo outlining the rules on speeches, but it is not widely known about in the newsroom.... The Post needs an unambiguous, transparent well-known policy on speaking fees and expenses. It should deal with charities and those on contract. Approvals for speeches that involve fees should be sought and given in writing by a high-ranking editor. Fees should be accepted only from educational, professional or other nonprofit groups for which lobbying and politics are not a major focus -- with no exceptions.

A former denizen of the Washington Post print newsroom writes that:

[Perhaps the] folks in the newsroom didn't specifically know about the 1995 [Downie memo], but Howell is wrong in saying that the rules weren't well known [inside the newsroom]...

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

Bloomberg Might Make a Fun Vice President

Idle speculation.

But this is very nice to see coming from an (ex-) Republican:

Bloomberg Criticizes Whisper Campaign Around Obama: Mayor Michael R. Bloomberg on Friday morning forcefully rejected what he called a “whisper campaign” in the Jewish community linking Senator Barack Obama, the presumptive Democratic presidential nominee, to Islam. Mr. Bloomberg... told an audience of Jewish residents here that rumors that Mr. Obama is a Muslim represent “wedge politics at its worst, and we have to reject it loudly, clearly and unequivocally.” He added, “Let’s call those rumors what they are: lies.”

Mr. Bloomberg... said the worries about the faith of Mr. Obama... “are cloaked in concern for Israel, but the real concern is about partisan politics. Israel is just being used as a pawn, which is not that surprising, since some people are willing to stoop to any level to win an election.”

David Pogue Tries to Buy a Second Prius

And fails:

Where Are All Those Priuses?: [the dealership manager] told me quite a tale. His dealership used to get, from Toyota Corporate, about 30 Priuses a month to sell. But starting in May, his allocations inexplicably dropped to about four cars--and base-model cars, at that. He said he’s actually calling people on the waiting list to offer them these stripped-down models, since the better equipped cars they wanted aren’t available—and they’re taking them!

So when might I get the new Prius? “We’ve got 50 people ahead of you on the waiting list,” he said. “And we’re getting about three or four cars a month. You do the math.” (As for the call I’d gotten that said they’d found the car I was looking for: the manager had no explanation. He said he’d look into it.)

But then came the punch line. “You’re not the only customer accusing us of selling your car out from under you,” the manager told me. “But you know what? I think Toyota’s selling our cars out from under us! They’re manufacturing the same number of cars, but we’re just not seeing ‘em. So I figure they’re selling them in Europe, where they can get much more money for them.”

Firefox 3 Now Controls Scott Eric Kauffman

Who writes:

Acephalous:: If you're the kind of person who likes to open 423 articles in JSTOR so as to bring the CPU of his relatively new computer to its knees, you should download Firefox 3. Right now, I have 78 tabs open.  More than half of them are JSTOR articles—for those without access, that means gigantic memory-hogging images—and Firefox is currently occupying 298,732 K of memory.  Yesterday, it would've easily engorged 1,400,000 K and had my CPU in tears. 

Short of extreme protestation, I'm not sure how to make this endorsement sound earnest at this point. But it is.

Higher-Level Languages and Genetic Programming

The Quintessence writes::

Quintessence of Dust: Wait...did you say "eldritch?": Comparison of the various chordate genomes reveals that there are very few chordate-specific genes. Specifically, the authors described 239 "chordate gene novelties" out of 22,000 genes in the lancelet. The nature and function of these genes is intensely interesting, and indeed the authors devote a separate report to issues related to this. But think about it: only 1% of the genes in chordates (vertebrates and all their relatives) are "novel" among genes from all other organisms. So if the toolbox isn't all that different between lancelets and lions, despite divergence at least 550 million years ago, then what is different? Anything? As John Timmer notes on Nobel Intent, the authors could find relatively few examples of regulatory DNA sequences that are conserved between lancelets and vertebrates, pointing to the likelihood that changes in regulation of a (mostly) common genetic toolkit is a major factor in evolution of form. (Okay, so that was just a plug for evo-devo. It's my blog.)...

Now that is scary. The DNA genome is best conceptualized not just as machine language for the cell and the organism, not just machine plus assembly language, not just machine plus assembly language plus Fortran, but all of those and overlaid over the whole, controlling everything, the highest-level genetic code for our humanity written in the molecular equivalent of Java...

Paul Krugman Critiques Guillermo Calvo on Commodity Prices

The fact that somebody has bought an oil futures contract means that somebody else has sold one--hence no effect on demand without real storage. Paul Krugman critiques Guillermo Calvo and others:

Calvo on commodities - Paul Krugman - Op-Ed Columnist - New York Times Blog: When I think about speculation, I always start from Paul Samuelson’s classic analysis in terms of intertemporal price equilibrium (a 1957 paper — and not available, as far as I can tell, online. Why isn’t Weltwirtschaftliches Archiv on JSTOR?). Speculation can affect spot prices because it takes physical stuff off the market. Argue, if you like, that the inventory data are unreliable, or that stuff is being held in the ground [or in gas tanks]; but don’t tell me that physical quantities are irrelevant.

Second, Calvo argues that inflation risks stem mainly from excess liquidity. He’s in good company there, but... I don’t trust hydraulic metaphors for monetary economics. And we are in a world where central banks target interest rates.... On a happier note, it’s great to see top-flight economists weighing in on the crucial issues of the day. It’s kind of like the Asian financial crisis of 1997-1998, which was bad for the world but a sort of golden age for policy-relevant theory.

Update: Some correspondents have asked me what I think about the Congressional testimony of Michael Masters, who told a Senate subcommittee that “index speculators” — institutions that buy commodity futures as an investment — are responsible for the price surge. The short answer is that I think his testimony is just stupid. Here’s what he says:

Index Speculators’ trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits.

That quote pretty much epitomizes what’s wrong with a lot of what people say about speculation. Buying a futures contract for oil does not reduce the quantity of oil available for consumption; there’s no such thing as “virtual hoarding”. And Masters really is confused about the difference between paper contracts and physical stuff. He compares the growth in the futures market with increased consumption from China, and says

The increase in demand from Index Speculators is almost equal to the increase in demand from China!

Again, the fact that someone bought a futures contract (which means that someone else sold one) doesn’t reduce the amount of oil available to consume. I’m willing to listen to serious arguments about how speculation might be affecting the price, but you do see a lot of dumb stuff. And this is really, really dumb.

Atlantic Monthly Death Spiral Watch (Ambinder on McCain on Offshore Drilling Edition)

The number of mulligans that America's press corps gives John McCain is truly remarkable. I'm becoming increasingly convinced that it's because he doesn't threaten them--just as George W. Bush doesn't threaten them. By contrast, Bill Clinton and Al Gore and John Kerry and John Edwards and Hillary Rodham Clinton and Barack Obama are scary-smart, in the way that my ex-boss Alicia Munnell once spoke of Lloyd Bentsen: "It only takes fifteen minutes before it is very clear why he is the Secretary of the Treasury and I am the Assistant Secretary." That seems to provoke a reaction from many journalists--I am not sure why.

Outsourced to Mark Kleiman:

The Reality-Based Community: Ambinder on McCain on offshore drilling: Does not compute.: Marc Ambinder of The Atlantic is doing his best to maintain his objectivity as between McCain and Obama in the face of the well-known liberal bias of the facts. But sometimes Ambinder leans over too far in his attempt to be upright. Here's Ambinder on McCain's flip-flop on offshore drilling (which McCain now hints may be followed up by a flip-flop on the Alskan Natural Wildlife Reserve):

So McCain changed his mind about an issue. He's moving away from the default environmentalist position, so his "flipflopping" is automatically an issue. Criticizing the policy is an appropriate way to approach it if you're an Obama supporter, but why begrudge the man for changing his mind as conditions (our general awareness of climate change, the Iraq war, gas prices, etc) have changed? Perhaps he changed his mind for the wrong reason... but that's an argument that one has to make, not just assume....

Yes, if you ignore the numbers you can imagine that drilling offshore would do something about gas prices. And yes, the Iraq war reminds us that reliance on Middle East crude has costs other than the dollar costs. But the climate change issue points in precisely the opposite direction; it would be a good reason for someone to switch from support for offshore drilling to opposition, but not the otherway around. When we didn't know about climate change, the argument "We're importing too much oil, so we should produce more domestically" made a certain amont of sense (again, ignoring the numbers). Now that we know about climate change, the problem isn't just that we're importing too much oil, it's that we're burning too much oiL. Offshore drilling is no part of the solution to that problem. So the least hypothesis still seems to be that McCain changed his position because the oil and gas industry is a big part of the Republican coalition generally, and of his own donor base specifically.

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