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April 2009

This Week in Journamalism: Fred Hiatt Strikes Again

Yes, it is the Washington Post once again.

Steve Bebnen:

The Washington Monthly: THIESSEN RATIONALIZES MUSLIM TORTURE... Just 48 hours after President Obama was inaugurated, former Bush chief speechwriter Marc Thiessen said Obama "is already proving to be the most dangerous man ever to occupy the Oval Office." With a record like this, it's probably unwise to expect much in the way of reasoned, sensible political insights from this guy.

Nevertheless, despite the vitriol and the fact that his claims haven't withstood scrutiny, Thiessen has managed to become a regular contributor to the Washington Post's op-ed page. Today, this former Bush speechwriter -- the Post now features two -- seems to argue that torturing Muslims is acceptable because they're Muslims.

Critics claim that enhanced techniques do not produce good intelligence because people will say anything to get the techniques to stop. But the memos note that, "as Abu Zubaydah himself explained with respect to enhanced techniques, 'brothers who are captured and interrogated are permitted by Allah to provide information when they believe they have reached the limit of their ability to withhold it in the face of psychological and physical hardship." In other words, the terrorists are called by their faith to resist as far as they can -- and once they have done so, they are free to tell everything they know. This is because of their belief that "Islam will ultimately dominate the world and that this victory is inevitable." The job of the interrogator is to safely help the terrorist do his duty to Allah, so he then feels liberated to speak freely.

Got that? When U.S. officials torture detainees, some of us may be inclined to think this is illegal and morally degrading. What we didn't realize is that the torturers are giving the detainees a hand. As this argument goes, we're not torturing suspects, we're "helping" them. Sure, it seems that torture was often deemed unnecessary and unproductive; U.S. officials acquired more valuable information from less severe treatment; and "harsher handling produced no breakthroughs," but that's probably because we're confused about the tenets of Islam.

It's a good thing we have Marc Thiessen to offer this theological justification, isn't it?

Update: Adam Serwer summarizes the evolution of the rationalization: "First we had 'torture works.' Then we had 'they deserve it.' Now we have 'they need us to do it.'"

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

What Happened to Richard Cheney's Reality Testing?

Josh Marshall writes:

Into the Dark | TPM: A long time reader chimes in ...

My boss spent a lot of time working with Cheney when he was Sec. of Defense REDACTED. Despite being a liberal Democrat he had a huge amount of respect for both Cheney's intellect and character before he became VP. I don't really buy it either, but he swears that Cheney underwent some sort of transformation, possibly due to a stroke.

It sort of baffles me too. I think a lot of people just fooled themselves about Cheney's politics. But I've had enough people (with sufficient proximity to speak with some authority) say things like this that I think it's possible that something characterologically changed about Cheney between 1993 and 2001.

DeLong: Econ 202b April 21, 2009 Lecture: Notes on Bubbles

Let us begin with a very long quote from Chrles Kindleberger, who in turn begins with Hyman Minsky....

[Kindleberger] is, I think, right. And here I have a problem. For it is pretty clear to me that the conventional model of bubbles is not terribly illuminating as a model of this process. The conventional model of bubbles starts with the assumption of a constant required rate of return r. It continues with a one-period equilibrium condition for the price of an asset paying a dividend dt. If there is even one rational, utility-maximizing agent in the economy, than for that agent...

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Posted via email from at Brad DeLong's Scrapbook

Attempted DeLong Smackdown Watch: Uncle Joe He-Who-Must-Not-Be-Named Edition

Chris Bertram has not yet learned that a lecture about Marx that does not mention Pol Pot or Joe Stalin shouts their names out more loudly than would otherwise be possible:

Explaining Marx to newbies: Suppose I were lecturing about Karl Marx.... I’d probably start by discussing some of the ideas in the Manifesto about the revolutionary nature of the bourgeoisie, about their transformation of technology, social relations, and their creation of a global economy. Then I’d say something about Marx’s belief that, despite the appearance of freedom and equality, we live in a society where some people end up living off the toil of other people. How some people have little choice but to spend their whole lives working for the benefit of others, and how this compulsion stops them from living truly truly human lives. And then I’d talk about Marx’s belief that a capitalist society would eventually be replaced by a classless society run by all for the benefit of all. Naturally, I’d say something about the difficulties of that idea. I don’t think I’d go on about Pol Pot or Stalin...

links for 2009-04-21

DeLong: Understanding Marx Lecture for April 20, 2009

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Posted via email from at Brad DeLong's Scrapbook

Understanding Karl Marx
J. Bradford DeLong
University of California at Berkeley and NBER
[email protected]>
+1 925 708 0467
April 20, 2009

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and be followed by a Great Communist Social Revolution—greater than the political French Revolution—that would wash us up on the shores of Utopia.

The mature Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. This project as carried forward by others ran dry. Sometimes--as in, say, Eric Hobsbawm's books on the history of the nineteenth century--this works relatively well. But sometimes it led nowhere. The writing of western European history as the rise, fall, and succession of ancient, feudal, and bourgeois modes of production is a fascinating project. But the only person to try it seriously soon throws the Marxist apparatus over the side, where it splashes and sinks to the bottom of the sea. Perry Anderson's Passages from Antiquity to Feudalism and Lineages of the Absolutist State are great and fascinating books, but they are not Marxist. They are Weberian. The key processes in Anderson's books concern not “modes of production” but rather “modes of domination.” And when Marx and Engels's writings became sacred texts for the world religion called Communism, things passed beyond the absurd into tragedy and beyond tragedy into horror: the belief that the logic of development of the economy was the most important thing about society became entangled in the belief that Joe Stalin or Mao Zedong or Pol Pot or Kim Il Sung or Fidel Castro was our benevolent master and ever-wise guide.

But let us go back to a time before Marxism lost its innocence. Let us go back and look at the thinker, Karl Marx, and what he actually wrote and thought.

Karl Marx had a three part intellectual trajectory. He started out as a German philosopher; became a French-style political activist, political analyst, and political historian; and ended up trying to become a British- style economist and economic historian. At the start of his career he believed that all we had to due to attain true human emancipation was to think correctly about freedom and necessity. Later on he recognized that thought was not enough: that we had to organize, politically. And then in the final stage he thought that the political organization had to be with and not against the grain of the truly decisive factor, the extraordinary economic changes that the coming of the industrial revolution was bringing to the world.

At each stage Marx had the enthusiasm of the true-believing convert: it was never the case that philosophy alone could bring utopia, it was never the case that after the revolution all problems will be resolved, and it was never the case that the underlying economic mode of production was the base and that its evolution drove the shape of the superstructure. Karl Marx never completed the intellectual trajectory he set himself on. He tried as hard as he could to become a British-style classical economist- -a "minor post-Ricardian theorist" as Paul Samuelson once joked--but he did not make it: the late, mature Marx is mostly an economist and economic historian, but he is also part political activist--and also part prophet.

Marx the prophet, here is a sample: Marx on India:

The ruling classes of Great Britain.... The aristocracy wanted to conquer [India], the moneyocracy to plunder it, and the millocracy to undersell it. But now the... millocracy have discovered that the transformation of India into a reproductive country has become of vital importance.... They intend now drawing a net of railroads over India... exclusive view of extracting at diminished expenses the cotton and other raw materials for their manufactures....

You cannot maintain a net of railways over an immense country without introducing all those industrial processes necessary to meet the immediate and current wants of railway locomotion, and out of which there must grow the application of machinery to those branches of industry not immediately connected with railways. The railway-system will therefore become, in India, truly the forerunner of modern industry.... All the English bourgeoisie may be forced to do will neither emancipate nor materially mend the social condition of the mass of the people, depending not only on the development of the productive powers, but on their appropriation by the people. But what they will not fail to do is to lay down the material premises.... Has the bourgeoisie ever done more? Has it ever effected a progress without dragging individuals and people through blood and dirt, through misery and degradation?...

The bourgeois period of history has to create the material basis of the new world... universal intercourse founded upon the mutual dependency of mankind... the development of the productive powers of man.... When a great social revolution shall have mastered the results of the bourgeois epoch... and subjected them to the common control of the most advanced peoples, then only will human progress cease to resemble that hideous, pagan idol, who would not drink the nectar but from the skulls of the slain...

Large-scale prophecy of a glorious utopian future is bound to be false when applied to this world. The New Jerusalem does not descend from the clouds "prepared as a Bride adorned for her Husband." And a Great Voice does not declare: "I shall wipe away all tears from their eyes; and there shall be no more death, neither sorrow, nor crying, neither shall there be any more pain: for the former things are passed away..." But Marx clearly thought at some level that it would: he never got to the island of Patmos on which John the Divine lived, but there is a sense that he got too much into the magic mushrooms.

Marx the political activist. As I see it, he had three big ideas:

  1. that while previous systems of hierarchy and domination maintained control by hypnotizing the poor into believing that the rich in some sense “deserved” their high seats in the temple of civilization, capitalism would–replace masked exploitation by naked exploitation. Then the scales would fall from people's eyes, for without its masking ideological legitimations unequal class society could not survive. This idea seems to me to be completely wrong. Cf. Antonio Gramsci, passim, on legitimation and hegemony. See also Fox News.

  2. that even though the ruling class could appease the working class by using the state to redistribute and share the fruits of economic growth it would never do so. They would be trapped by their own ideological legitimations--they really do believe that it is in some sense “unjust” for a factor of production to earn more than its marginal product. Hence social democracy would inevitably collapse before an ideologically-based right-wing assault, income inequality would rise, and the system would collapse or be overthrown. The Wall Street Journal editorial page works day and night 365 days a year to make Marx’s prediction come true. But I think this, too, is wrong.

  3. that factory work was the wave of the future, and factory work-- lots of people living in cities living alongside each other working alongside each other--would lead people to develop a sense of their common interest. Hence people would organize, revolt, and establish a free and just society in a way that they could not back in the old days when the peasants of this village were suspicious of the peasants of that one, and peasants formed not a class for themselves but, rather, a sack of potatoes which can attain no organization but simply remains a sack of potatoes. Here I think Marx mistook a passing phase for an enduring trend. Active working-class consciousness as a primary source of loyalty and political allegiance was never that strong. Nation and ethnos trump class, never more so that when the socialists of Germany told their emperor in 1914 that they were Germans first and Marxists second.

Add to these the fact that Marx's idea of the "dictatorship of the proletariat" was clearly not the brightest light on humanity's tree of ideas, and I see very little in Marx the political activist that is worthwhile today.

Marx the economist--well, Marx the economist had six big things to say, some of which are very valuable even today across more than a century and a half, and some of which are not. I would call them the three goods and the three bads:

  1. Marx the economist was among the very first to recognize that the fever-fits of financial crisis and depression that afflict modern market economies were not a passing phase or something that could be easily cured, but rather a deep disability of the system--as we are being reminded once again right now, this time with Ben Bernanke, Tim Geithner, and Larry Summers in the Hot Seats. Marx pointed the spotlight in the right direction here. However, I don't think that his theory of business cycles and financial crises holds up. Marx thought that business cycles and financial crises were evidence of the long-term unsustainability of the system. We modern neoliberal economists view it not as a fatal lymphoma but rather like malaria: Keynesianism--or monetarism, if you prefer--gives us the tools to transform the business cycle from a life- threatening economic yellow fever of the society into the occasional night sweats and fevers: that with economic policy quinine we can manage if not banish the disease.

  2. Marx the economist was among the very first to get the industrial revolution right: to understand what it meant for human possibilities and the human destiny in a sense that people like Adam Smith did not. In his Politics Aristotle observed that it was not possible to run a household in a way that permitted its head enough leisure and freedom to, say, become a lover of wisdom unless the household owned slaves, and that this would be true unless and until we had instruments like "the statues of Daedalus, or the tripods of Hephaestus, which, says the poet, 'of their own accord entered the assembly of the Gods;' if, in like manner, the shuttle would weave and the plectrum touch the lyre without a hand to guide them, chief workmen would not want servants, nor masters slaves..." Karl Marx was among the very first to see that the industrial revolution was giving us the statues of Daedalus, the tripods of Hephaestus, looms that weave and lyres that play by themselves--and thus opens the possibility of a society in which we people can be lovers of wisdom without being supported by the labor of a mass of illiterate, brutalized, half-starved, and overworked slaves.

  3. Marx the economist got a lot about the economic history of the development of modern capitalism in England right--not everything, but he is still very much worth grappling with as an economic historian of 1500-1850. Most important, I think, are his observations that the benefits of industrialization do take a long time--generations--to kick in, while the costs of redistributions and power grabs in the interest of market efficiency and the politically- powerful rising mercantile classes kick in immediately. You have to take seriously the idea that the industrial revolution did not make most or even many people better off right away. Reflect also that, as Tyler Cowen observes, capitalist systems can produce less autonomy than small scale production. Standards of living do rise from industrialization--which can undercut the cultures and networks of suppliers that make the choice of a petit bourgeois lifestyle sustainable.

Now on to the three bads:

  1. Marx believed that capital is not a complement to but a substitute for labor. Thus technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system simply could not deliver a good or half-good society but only a combination of obscene luxury and mass poverty. This is an empirical question. Marx's belief seems to me to be simply wrong.

  2. Marx the economist did not like the society of the cash nexus. He believed that a system that reduced people to some form of prostitution--working for wages and wages alone--was bad. He saw a society growing in which worked for money, and their real life began only when the five o’clock whistle blows--and saw such an economy as an insult, delivering low utility, and also sociologically and psychologically unsustainable in the long run. Instead, he thought, people should view their jobs as expressions of their species-being: ways to gain honor or professions that they were born or designed to do or as ways to serve their fellow- human. Here, I think, Marx mistook the effects of capitalism for the effects of poverty. The demand for a world in which people do things for each other purely out of beneficence rather than out of interest and incentives leads you down a very dangerous road, for societies that try to abolish the cash nexus in favor of public- spirited benevolence do not wind up in their happy place. We neoliberal economists shrug our shoulders and say that we are in favor of a market economy but not of a market society, and that there is no reason why people cannot find jobs they like or insist on differentials that compensate them for jobs they don’t.

  3. Marx believed that the capitalist market economy was incapable of delivering an acceptable distribution of income for anything but the briefest of historical intervals. As best as I can see, he was pushed to that position by watching the French Second Republic of 1848-1851, where the ruling class comes to prefer a charismatic mountebank for a dictator--"Napoleon III"--over a democracy because dictatorship promises to safeguard their property in a way that democracy will not. Hence Marx saw political democracy as only surviving for as long as the rulers could pull the wool over the workers' eyes, and then collapsing. I think that Western Europe over the past fifty years serves as a significant counterexample. It may be difficult to maintain a democratic capitalist market system with an acceptable distribution of income. But "incapable" is surely too strong. Beveridgism or Myrdalism--social democracy, progressive income taxes, a very large and well-established safety net, public education to a high standard, channels for upward mobility, and all the panoply of the twentieth-century social- democratic mixed-economy democratic state can banish all Marx’s fears that capitalist prosperity must be accompanied by great inequality and great misery.

The good things that Marx was able to think must, I believe, be credited to his own account--to his thoughtfulness, his industry, his intelligence, and his desperate desire to try to get things right. The bad things have, I believe, two of his intellectual origins: Marx's beginnings in German philosophy, and the fact that he hooked up in the 1840s with Friedrich Engels whose family owned textile factories in Manchester. German philosophy, or perhaps rather Hegel. I remember reading Capital for the first time. The first three sections of chapter 1 seemed (a) boring, and (b) tautological. For example:

When, at the beginning of this chapter, we said in common parlance that a commodity is both a use value and an exchange value, we were, accurately speaking, wrong. A commodity is a use value or object of utility and a value. It manifests itself as this twofold thing that it is as soon as its value assumes an independent form – viz., the form of exchange value. It never assumes this form when isolated but only when placed in a value or exchange relation with another commodity of a different kind. When once we know this such a mode of expression does no harm...

And then I hit section 4: "The Fetishism of Commodities and the Secret Thereof":

A commodity is… a mysterious thing… in it the social character of men’s labour appears to them as an objective character stamped upon the product… the relation of the producers to the sum total of their own labour is presented… as a social relation… not between themselves but between the products…. In the same way the light from an object is perceived by us not as the subjective excitation of our optic nerve but as the objective form of something outside the eye…. But in the act of seeing there is at all events an actual passage of light from one thing to another, from the external object to the eye. There is a physical relation between physical things. But it is different with commodities. There the existence of the things quâ commodities and the value relation between the products of labour which stamps them as commodities have absolutely no connection with their physical properties… [I]t is a definite social relation between men that assumes in their eyes the fantastic form of a relation between things… we must have recourse to the mist-enveloped regions of the religious world… the productions of the human brain appear as independent beings endowed with life and entering into relations both with one another and the human race. So it is in the world of commodities with the products of men’s hands. This I call the Fetishism which attaches itself to the products of labour so soon as they are produced as commodities…. This Fetishism of commodities has its origin, as the foregoing analysis has already shown, in the peculiar social character of the labour that produces them...

Marx describes this as coquett[ing] with the modes of expression peculiar to [Hegel].

Put me on record as saying that this “coquetting” is profoundly unhelpful.

What is going on here? What I think is going on inside Marx's head is something strange. To say that "the value relation[s] between the products of labour... have absolutely no connection with their physical properties" is simply wrong: if the coffee beans are rotten--or if their caffeine level is low--they have no value at all, for nobody will buy them. Marx says that the value of a good is something inscribed within it and attached to it--the socially-necessary labor time for its production—that then bosses people around. And it is the values--not the prices at which things are actually bought and sold--that are the elements of the real important reality. And those values: "appear as independent beings endowed with life and entering into relation both with one another and the human race." Now I have never found anybody who thinks this way.

Nobody I talk to believes that "values" are objective quantities inherent in goods by virtue of the time it took to produce them.

Everybody I talk to believes that things are both (a) useful to me and (b) useful to other people, and moreover (c) we live in a society where we exchange stuff--where we, in Adam Smith's words, truck, barter, and exchange. If the combination of my wealth and its usefulness to me makes me value it the most, then I use it--it is to me what Marx calls a use value. If there is somebody else out there whose combination of their wealth and its usefulness to them makes them value it more than I do, then I trade it away to them directly or indirectly for stuff that I value more--they consume it, and it is to me what Marx calls an exchange value. But what Marx calls exchange values are really use values to others: a combination of (a) bargaining power--wealth--and (b) utility to actual concrete breathing humans. Things have value not because of the abstraction that socially-necessary labor time is needed to produce them but because of the concretion that somebody somewhere wants to use it and has something ese that others find useful to trade in turn. What Marx calls the mysterious and bizarre dual character of commodities is nothing mysterious or bizarre: it is simply the fact that I am not the only person in the world, and that things very useful to me may be less useful to others, and vice versa.

Moreover, capitalist production has nothing to do with what Marx describes as this mysterious dual character of commodities. The distinction between use-value and exchange-value is not something invented by or peculiar to the capitalist mode of production: it is found in all human societies, no matter how large or small, no matter what the glue that holds them together. The cattle slaughtered and cooked by the thralls of Hrothgar, King of the Geats, have use-value to Hrothgar: He and his family can eat (some of) them. The cattle have exchange-value to Hrothgar as well: He feeds them to his warriors at their nightly banquets in his great hall of Heorot. In exchange for livery and maintenance, the warriors fight Hrothgar's wars. Success in war gains Hrothgar more thralls, more cattle, and a bigger and better reputation as a great drighten worth following--until Grendel comes along and makes eating Hrothgar's cattle in exchange for following him into battle too hazardous to life and limb.

In my view, Marx has trapped himself. He has been primed to expect a deeper layer of real reality underneath mere appearances. And he has chosen the wrong model of the underlying real reality--the labor theory of value, which is simply not a very good model of the averages around which prices fluctuate. Socially-necessary labor power usually serves as an upper bound to value--if something sells for more, then a lot of people are going to start making more of them, and the prices at which it trades are going to fall. But lots of things sell for much less than the prices corresponding to their socially-necessary labor power lots of the time. And so Marx vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out.

This matters because one conclusion Marx reaches is that markets and their prices are a source of oppression--that they aren't sources of opportunity (to trade your stuff or the stuff you make to people who value it more) but rather of domination by others and unfreedom: the system forces you to sell your labor-power for its value which is less than the value of the goods you make. And it is that conclusion that human freedom is totally incompatible with wage-labor or market exchange that leads the political movements that Marx founded down very strange and very destructive roads.

I've done Hegel. Now let me do Manchester.

The British interests of the German partnership of Ermen and Engels were not in London or in Birmingham but instead in Manchester. Engels's 1845 Condition of the Working Class in England, cribbed for section 1 of the Manifesto, was about the condition of the working class in Manchester. Yet as Asa Briggs (1963) stressed most strongly, Manchester was not typical of England. Briggs quotes Tocqueville's descriptions of Manchester as a city with "a few great capitalists, thousands of poor workmen and little middle class" compared to Birmingham with "few large industries, many small industrialists... workers work in their own houses or in little workshops in company with the master himself... the working people of Birmingham seem more healthy, better off, more orderly and more moral than those of Manchester..." Briggs speculated that Engels's book would have been very different indeed had Ermen and Engels's interests been elsewhere than Manchester: "his conception of ‘class’ and his theories of the role of class in history might have been very different.... Marx might have been not a communist but a currency reformer..."

Back in 1998, we got George Boyer of Cornell to take a look at the historical circumstances of the composition of the Manifesto:

[A]verage age of death of "mechanics, labourers, and their families" in Manchester was 17, as compared to 38 in rural Rutlandshire... despite the fact that laborers’ wages were at least twice as high in Manchester... 57 percent of children born in Manchester to working class parents died before their fifth birthday.... Engels arrived in Manchester in the late fall of 1842, Britain was just beginning to recover from the deep depression of 1841-42... "crowds of unemployed working men at every street corner, and many mills were still standing idle" (Engels, 1845 [1987], pp. 121 – 22).... The Economist reported that in the first six months of 1848 [as the Manifesto was being written], 18.6 percent of the workforce in Manchester’s cotton mills was unemployed, and another 9.5 percent was on short time (Boyer, 1990, p. 235)....

John Stuart Mill (1848 [1909], p. 751)... concluded that "hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes."... Marx and Engels… were not alone in asserting that the standard of living... was quite poor, and perhaps declining... during the "hungry ’40s."... [A]rmy recruits born around 1850 were shorter than those born around 1820...

It looks as though Marx and Engels wrote the Manifesto--and made their permanent intellectual commitments--in 1848, at the nadir of living standards as far as British Lancashire textile workers were considered. Their assertion that wages declined as capitalism progressed looks good up until 1848 if you take Manchester as your guide. Thereafter it proved wrong. By 1880 manual workers were earning 40% more than in 1850. Parliament began to regulate conditions of employment in the 1840s. Parliament began to regulate public health in the 1850s. Parliament doubled the urban electorate in 1867, just as volume 1 of Capital was published. Parliament gave unions official sanction to bargain collectively in the 1870s.

Marx appears to have responded to this not by rethinking his opposition to markets as social allocation mechanisms or by reworking his analyses of the dynamics of economic growth, capital accumulation, and the real wage level, but by blaming British workers for not acting according to his model in response to predictions by Marx of continued impoverishment and ever- larger business cycles that had not come to pass. Boyer quotes Marx writing in 1878 about how British workers "had got to the point when [the British working class] was nothing more than the tail of the Great Liberal Party, i.e., of the oppressors, the capitalists." And Boyer quotes Engels writing in 1894 of how "one is indeed driven to despair by these English workers... bourgeois ideas... viewpoints... narrow-mindedness..."

In the late 1870s--after the failure of the British working class to become more militant, the failure of the Paris Commune and the founding of the French Third Republic, and Bismarck's creation of a unified Prussified German Empire--Marx and Engels started to turn their attention toward Russia.

4500 words

links for 2009-04-19

Apple Computer's Marketing Becomes Much Much More Sophisticated...

And Henry Farrell succumbs:

Switch and bait: I was working in my office, when a work-study knocked on my door with a brand new MacBook Pro.... I was nonplussed, and told him that he must be wrong, that I hadn’t ordered one etc, but he insisted, and indeed my name was on his work-order form. So I finally acquiesced, on the grounds of gift-horses.... 2 hours later, I was completely hooked.... 3 hours later, I discovered that of course it had been a mistake, and that it was in fact intended for a colleague with a vaguely similar name....

I have finally taken the plunge and bought a MacBook Pro for the new book that I hope to start writing. Good software recommendations and general tips are gratefully appreciated...

Samuel Brittan Worries About Secular Stagnation

He writes:

A long cool look at budget deficits: it would have been much better if the UK could have entered the [current] recession with much lower initial deficit and borrowing ratios – if only because the financial markets do not understand the very good arguments for fiscal deficits in depressed times.... What fundamentally is wrong with a budget deficit? The basic argument is that if borrowing is too high the government can get into a debt trap, having to borrow more and more simply to pay the interest on past borrowings.... Keynes in his General Theory maintained, however, that the propensity to save was much greater than the private propensity to invest, not just at the bottom of a recession but more or less permanently – a state known as secular stagnation.... We could easily have a good few years in which secular stagnation might seem to prevail again, if only because of the near destruction of the world financial system. If we are in such a state then an attempt to adhere rigidly to a fiscal rule could lead to a permanent and unnecessary loss of output outweighing any welfare loss from the debt trap risk itself.

I have sympathy with those economists who favour a mainly monetary approach to sustaining demand. But I fear that the present dangers are great enough to require a belt and braces – monetary and fiscal – approach. I go back to an early suggestion of Milton Friedman... tax rates should be set to balance government spending at a hypothetical level of national income corresponding to “reasonably full employment at a pre-determined price level”... the beauty of the suggestion is that, should the economy go back to a recognisable trend growth rate, then the budget would automatically achieve the target balance. Yet should there really be secular stagnation then deficits would run on as long as necessary...

Silvio Gesell and Stamped Money: Another Thing Fisher and Wicksell Knew that Modern Economists Have Forgotten

Greg Mankiw in 2009, in the New York Times:

It May Be Time for the Fed to Go Negative : The problem with negative interest rates... is... it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less. Unless, that is, we figure out a way to make holding money less attractive.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that.... Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender.... That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10....

The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it. John Maynard Keynes approvingly cited the idea...

Ummm... Greg... You make it sound as though Keynes noted it in an obscure footnote somewhere. But Silvio Gesell is the topic of part VI of chapter 23 of Keynes's flagship work, The General Theory of Employment, Interest and Money. And it's not just Keynes in his flagship work. There are 55,000 google hits for "Silvio Gesell." Patinkin (1993) reports that Irving Fisher advocated Gesell-based "velocity control" in his 1932 Booms and Depressions. Nobel prize-winning Maurice Allais was an advocate as well. Gerardo della Paolera and Alan Taylor are Gesell's biggest boosters today in their book Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935, a University of Chicago Press book that is part of the NBER's series on "long term factors in economic development." Willem H. Buiter and Nikolaos Panigirtzoglou writing in the Economic Journal in 2003: "Overcoming the Zero Bound on Nominal Interest Rates with Negative Interest on Currency: Gesell's Solution."

This is, I think, yet another example of how much economics has lost by cutting itself off from its moral philosophical and historical roots. Something that Keynes and Fisher and the other founders of monetary economics seriously wrestled with is today seen as something unknown and new to be thought of by clever graduate students. Once again the answer to Olivier Blanchard's question "What Do We Know that Fisher and Wicksell Did Not?" is that Olivier is asking the wrong question: what did they know that we have forgotten?

Here is John Maynard Keynes writing in 1936, summarizing Silvio Gesell writing in 1916:

J.M. Keynes, General Theory of Employment, Interest and Money, chapter 23: It is convenient to mention at this point the strange, unduly neglected prophet Silvio Gesell (1862-1930), whose work contains flashes of deep insight.... [T]he English version (translated by Mr Philip Pye) being called "The Natural Economic Order". In April 1919 Gesell joined the short-lived Soviet cabinet of Bavaria as their Minister of Finance, being subsequently tried by court-martial.... Professor Irving Fisher, alone amongst academic economists, has recognised its significance. In spite of the prophetic trappings with which his devotees have decorated him, Gesell's main book is written in cool, scientific language; though it is suffused throughout by a more passionate, a more emotional devotion to social justice than some think decent in a scientist.... I believe that the future will learn more from the spirit of Gesell than from that of Marx.... Gesell's specific contribution to the theory of money and interest is... that the peculiarity of money, from which flows the significance of the money rate of interest, lies in the fact that its ownership as a means of storing wealth involves the holder in negligible carrying charges.... [H]e had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed... the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of 'stamped' money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher.... [C]urrency...would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps... should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per week, equivalent to 5.2 per cent per annum.... The idea behind stamped money is sound...

UPDATE: Ah. Here's the original draft of Greg's New York Times column, with Alan Taylor weighing in. And here is Bruce Champ of the Cleveland Fed writing about this a year ago

Why Does Tom Delay Think Texas Is a Wealthy State?

Matthew Yglesias:

Matthew Yglesias: Delay Claims Poorer-than-Average Texas is “Wealthy” Because Texans “Work Hard”: A few bloggers have noted that Tom DeLay went on a strange neo-secessionist binge yesterday on Hardball with Chris Matthews. This segment of the interview in which he lays out his substantive rationale has gotten less attention. But DeLay’s conceit is that Texas is a “wealthy state” because of it’s right-wing business-friendly policies, a situation that he specifically contrasts with the environment in California, New York, and New Jersey which have allegedly impoverished themselves with high taxes and overregulation.

One problem here is that Texas isn’t a wealthy state. Its median household income of $47,548 made it 28th in the country. Below average, in other words. New Jersey is second, California is eighth, and New York is nineteenth. Indeed, of the top ten states in per capita income nine are “blue” states.

The exception is Alaska, whose wealthy is due not to “hard work” on the part of the population or a business-friendly policy environment but to the combination of substantial natural resource wealth and a small population. Texas is like a poor man’s Alaska, with the substantial natural resource wealth but with the wealth spread across a much greater population. Absent oil, Texas would probably look more like its even poorer neighbors Louisiana (46), Oklahoma (44), Arkansas (49), and New Mexico (45). To some extent, I think the relative poverty of the South can really be attributable to the harmful consequences of Dixie-style conservative policies. But beyond that, it’s generally the case that state wealth is highly path-dependent—economic vibrancy attracts high-skilled workers which in turn leads to more economic vibrancy. But however you weigh that balance, the idea that Texas points us forward to a wealth-generating policy environment is absurd.

The conventional line of political argument was always that we are virtuous and hard-working and if we are poor it is because the evil others are manipulating the system to steal from us--and, indeed, that's what Tom Delay is about when he talks about welfare recipients. But there is no argument here that New Jersey and California are rich because they manipulate the system--instead, the idea that there are other states that are richer than Texas is simply something that Tom Delay has never learned.

After-Tax Income Changes from the CBO


One would imagine that a shift in a single generation from the top living 8 to the top living 24 times as high as the middle would have produced a substantial leftward shift in economic politics, but instead the reverse has happened. Our social politics has moved steadily leftward; our economic politics here in the United States has not.

Posted via web from at Brad DeLong's Scrapbook

Who Have We Become?

Or, rather, who have George W. Bush and his Republican Party turned us into?

Hilzoy is up at 2:21 AM, worrying:

The Washington Monthly: A couple of other things that are missing from the torture memos:

First, the memos cite various legal precedents for the definition of torture. They are particularly fond of Mehinovic v. Vuckovic, which involved "a course of conduct that included severe beatings to the genitals, head, and other parts of the body with metal pipes and various other items; removal of teeth with pliers; kicking in the face and ribs; breaking of bones and ribs and dislocation of fingers; cutting a figure into the victim's forehead; hanging the victim and beating him; extreme limitations of food and water; and subjection to games of 'Russian Roulette'." (p. 24; the details of this case are repeated on four separate occasions in this memo alone, like an incantation.) Isn't it strange, then, that not a single one of the cases in which the United States has prosecuted people for waterboarding turns up in these memos? You'd think they might be apposite. Oddly enough, though, Steven Bradbury didn't think to include them.

Second: As I noted last night, under the US Code, an important issue in determining whether something counts as producing "severe mental pain or suffering" is whether it produces "prolonged mental harm". In discussing this question, especially with regard to sleep deprivation and waterboarding, Steven Bradbury spends a lot of time discussing the scientific literature on these topics. And yet, once you think about it, he had a much better source of information available to him. These memos were written in May, 2005. The CIA had been using these "methods of interrogation" for nearly three years. Moreover, the memos fall all over themselves describing the repeated psychiatric evaluations that detainees are given:

"Prior to interrogation, each detainee is evaluated by medical and psychological professionals from the CIA's Office of Medical Services ("OMS") to ensure that he is not likely to suffer any severe physical or mental pain or suffering as a result of interrogation." (p. 4)

Bradbury then quotes the OMS' guidelines:

"[T]echnique-specific advance approval is required for all "enhanced" measures, and is 'conditional on on-site medical and psychological personnel confirming from direct detainee examination that the enhanced technique(s) is not expected to produce "physical or mental pain or suffering"'. As a practical matter, the detainee's physical condition must be such that these interventions will not have lasting effect, and his psychological state strong enough that no severe psychological harm will result." (p. 4)


"Medical and psychological personnel are on-scene throughout (and, as detailed below, physically present or otherwise observing during the application of many techniques, including all techniques involving physical contact with detainees), and "[d]aily physical and psychological evaluations are continued throughout the period of [enhanced interrogation technique] use." (p. 5; square brackets in the original.)

With all those psychological workups having been conducted on CIA detainees over a period of nearly three years, one might think that the CIA, and specifically its Office of Medical Services, would have lots of information on whether or not the techniques under discussion actually did produce any "prolonged mental harm." And yet, strange to say, the memos don't mention any evidence at all about the effects of these techniques on CIA detainees[1]. It's pretty strange that the CIA had all that data about the psychiatric effects of its interrogation techniques ready to hand, and yet no one mentions it.

Or then again, maybe not.

[1] This is particularly striking in the case of Abu Zubaydah, whose psychiatric condition is described at considerable length in the August 1, 2002 memo. As Emptywheel has noted, the description of Abu Zubaydah in the memos is completely different from the FBI sources quoted by Ron Suskind -- they called him "certifiable". But let's pretend we don't know that, and ask: given the 2002 memo's extensive description of Abu Zubaydah, and given that he was the detainee on whom these techniques had been used the longest, wouldn't it be natural for Bradbury to explain what dazzling psychological health he was enjoying several years after the CIA had begun using "enhanced techniques" on him?

On reflection, though, maybe using Abu Zubaydah as a poster child for the benignity of the CIA's methods would not have been such a good idea:

"The sadistic treatment of Abu Zubayda also seems to have affected him psychologically in bizarre ways. Two sources said that he became sexually obsessive, masturbating so much his captors feared he would injure himself. One described him as acting "like a monkey at the zoo." A physician was called in for consultation -- one of many instances in which health professionals have played truly disturbing roles in this program."

links for 2009-04-17

Economics 202b, Part II: Relevant Macroeconomics Reading List

TTh 11-12:30



Sections: Week of April 6: Review Problem Set 1



  • Kindleberger, ch. 15 "Financial Crises" of A Financial History of Western Europe

Sections: Week of April 13: Review Problem Set 2




Sections: Week of April 20:



Sections: Week of April 27: Review Problem Set 3




Sections: Week of May 4: Review Problem Set 4






May 19: 8-11 AM: FINAL EXAM

Zachary Seward: How Alan Murray Hopes to Survive the Coming of the Internet

Zachary susses out five pillars of faith:

Five tips on charging for content from Alan Murray of » Nieman Journalism Lab:

  1. The best model is a mix of paid and free content. “It’s not pay wall/no pay wall,” Murray told me. The Journal allows free access to all of its political, arts, and opinion coverage, in addition to certain breaking news stories and all of its blogs. But the rest of the site requires a subscription.

  2. You can’t charge for exclusives that will just be repeated elsewhere. This was my favorite lesson from Murray, who explained, “If it’s a big news story, if we report a takeover and — we could hold that behind the pay wall, but if we do, BusinessWeek or someone else will simply write a story saying ‘The Wall Street Journal is reporting x,’ and they’ll get all the traffic. Why would we do that?” So they drop the pay wall, “and take the traffic ourselves, thank you very much,” Murray said.

  3. Don’t charge for the most popular content on your site. “That’s the been the mistake that some people have made in the past,” Murray said. Items with broad appeal are better used to build traffic that can be turned into advertising revenue.

  4. Content behind a pay wall should appeal to niches. It may be easier to identify those opportunities with financial news, but Murray suggested, for instance, that a local newspaper could consider charging for coverage of high school sports. “To the people who want to read it,” he said, “they really want to read it because maybe their kids are involved. Maybe they’re willing to pay for that or maybe there’s a photography service that’s connected to that where you can download pictures of your kids or of the game. But only if you’re a subscriber.”

  5. The narrower the niche, perhaps the better. This was the bit of news in our interview: The Journal is planning what Murray called a “premium initiative” to sell “narrower information services” at a higher subscription rate to subsets of its readership. He was coy about what services will be offered but mentioned, as examples, energy coverage and some sort of news service for chief financial officers. (According to someone else I know at the Journal, those are, in fact, likely to be among the first offerings of this tiered-premium service.)

Matt Duss on the Strange Case of Ahmed Chalabi

Matt writes:

Wonk Room:Chalabi: ‘Iran Benefited From Toppling Saddam’: The idea that Iran has been the main beneficiary of the Iraq war isn’t particularly controversial any more — except, of course, among the war’s neoconservative advocates, who continue to insist that removing Iran’s greatest enemy and empowering Iraqi factions with longstanding close ties to Iran was a huge defeat for Iran.... [M]any of these people — Sen. John McCain and his adviser Randy Scheunemann among them — were also Chalabi’s biggest boosters.... Given what’s known now about Chalabi’s cooperation with Iran’s intelligence services, though, it’s pretty chilling to consider how close some of Chalabi’s marks came to taking the White House last November. Unfortunately, as shown by the continuing prominence of McCain, Bill Kristol, Robert Kagan and other neocon fantasists, inadvertently aiding America’s enemies is no barrier to influence in American foreign policy, as long as one is always careful to err on the side of war, and meticulous in dressing one’s belligerent strategic stupidity in patriotic drag...

It Looks Like Scott Beauchamp's Pieces for the New Republic Were Accurate

Duncan Black:

Eschaton: Morning Thread: Epilogue: Since the right-wing blogs likely will not revisit and the press certainly will not. The coda of the Beauchamp Affair:

A senior enlisted Army soldier was convicted on Wednesday of killing four handcuffed and blindfolded Iraqi men with pistol shots to the backs of their heads shortly after arresting them in Baghdad two years ago, The Associated Press reported. A military jury in Germany, where his unit is deployed, found the soldier, Master Sgt. John E. Hatley, guilty of premeditated murder in the deaths of the men, whom he and several other members of his unit had detained after a firefight with insurgents in Baghdad in spring 2007, according to testimony in the case...

If you cannot place the name, Master Sgt. Hatley was the direct superior of Pvt. Scott Beauchamp and the person most used to discredit (along with the gay porn star) the New Republic diary of the life of a soldier in Iraq and the ways they dealt with the pressures of Operation Clusterfuck. All of which Hatley said was absolutely not what his ever virtuous soldiers did.

In February, another military jury convicted the unit’s medic, Sgt. Michael Leahy Jr., 28, of premeditated murder and sentenced him to life in prison. On March 30, Sgt. First Class Joseph P. Mayo, 27, pleaded guilty to murder and received a 35-year sentence. Military legal experts said the soldiers’ rank showed the frustration of fighting insurgents who blended in with the locals...

Which was exactly the subject Scott Beauchamp was writing about.

Will Fox News and Rush Limbaugh Kill the Republican Party?

Perhaps they will.

Matthew Yglesias muses on the insights of DEL. DEL:

Conservatism as Entertainment: One interesting thing about how much Fox news and friends are covering these tea parties is that it’s illustrative how much conservatism has been transformed from a political movement into an entertainment demographic. Political movements, I would think, are defined by a common set of semi-coherent policies and proposals that movement sympathizers hope to see implemented by government. Entertainment demographics are defined by shared tastes or predilections that media companies can target for ratings.

The GOP has abandoned the business of coming up with and articulating a political platform, opting instead to host and promote counter-cultural parties that seem strange and foreign to the vast majority of their co-nationalists. Then, Fox, Glenn and Rush cover these events relentlessly because it’s an effective way of getting the attention of a specific demographic and boosting ratings. As for the rest of us, when we think of conservatives we no longer think “fiscal responsibility” or “national security”; rather, we see one more alternative lifestyle choice among many - and a very odd one at that.

And Matt writes:

You hear a lot these days that Republicans are “in disarray.” But they’re not, really. It’s just that the way our political institutions work, a congressional minority party doesn’t generate a high-profile leader. Now you combine this leadership vacuum with the fact that the right has developed a very robust ideological media apparatus on talk radio and on Fox News and you have a problem. In effect, Rush Limbaugh and Glenn Beck are more prominent public figures than are John Boehner and Mitch McConnell, to say nothing of legislators who might actually be appealing figure. And since only a tiny minority of Republican members of congress are willing to suffer the dread “RINO” tag, the vast majority of elected officials seem to feel the need to kowtow to the whims of conservative movement media leaders.

The problem is that the incentives facing a media figure are very different from the incentives facing a politician. A politician needs, basically, a majority. And the decisive votes are bound to come from people who don’t like politics much or really care about it. For a media figure, however, a much smaller audience than “half the people” would still constitute enormous success. But you need to appeal, intensely, to the small minority of people who care enough about politics to bother watching, reading, or listening to political commentary.

Impeach John Yoo. Impeach Jay Bybee. Impeach Alberto Gonzales. Impeach Richard Cheney. Impeach George W. Bush. Do It Now.

Hilzoy makes The Obvious Comparison:

John Yoo, Jay Bybee, Alberto Gonzales, Richard Cheney, and George W. Bush: "You would like to place Zubaydah in a cramped confinement box with an insect. You have informed us that he appears to have a fear of insects.... As we understand it, you plan to inform Zubaydah that you are going to place a stinging insect into the box, but you will actually place a harmless insect in the box, such as a caterpillar. If you do so, to ensure you are outside the predicate death requirement, you must inform him that the insects will not have a sting that would produce death or severe pain. If, however, you were to place the insect in the box without informing him that you are doing so, you should not affirmatively lead him to believe that any insect is present which has a sting that could produce severe pain or suffering or even cause his death..."

OLC memo of August 1, 2002, signed by Jay Bybee.

George Orwell, 1984: "'You asked me once,' said O'Brien, 'what was in Room 101. I told you that you knew the answer already. Everyone knows it. The thing that is in Room 101 is the worst thing in the world.' The door opened again. A guard came in, carrying something made of wire, a box or basket of some kind. He set it down on the further table. Because of the position in which O'Brien was standing. Winston could not see what the thing was. 'The worst thing in the world,' said O'Brien, 'varies from individual to individual. It may be burial alive, or death by fire, or by drowning, or by impalement, or fifty other deaths. There are cases where it is some quite trivial thing, not even fatal.' He had moved a little to one side, so that Winston had a better view of the thing on the table. It was an oblong wire cage with a handle on top for carrying it by. Fixed to the front of it was something that looked like a fencing mask, with the concave side outwards. Although it was three or four metres away from him, he could see that the cage was divided lengthways into two compartments, and that there was some kind of creature in each. They were rats. 'In your case,' said O'Brien, 'the worst thing in the world happens to be rats...'"

Edmund Burke Denounces George F. Will

Edmund Burke does not approve of such a rash and ill-founded abandonment of the traditions of California and the United States as is advocated by a George Will who cannot think of anything intelligent to write about. It is denim--not the bow tie and the silk shirt so beloved by George F. Will--that is the fabric of our society here in America. We dress as lumberjacks and gold miners because we remember and to remind us that it was lumberjacks and gold miners--not effete swells--who built this country.

Edmund Burke:

Edmund Burke: [O]e of the first and most leading principles... is, lest the temporary possessors and life-renters... unmindful of what they have received from their ancestors or of what is due to their posterity should act as if they were the entire masters, that they should not think it among their rights to cut off the entail or commit waste on the inheritance by destroying at their pleasure the whole original fabric of their society [i.e., denim].... By this unprincipled facility of changing... in as many ways as there are floating fancies or fashions, the whole chain and continuity of the commonwealth would be broken.... Barbarism with regard to science and literature, unskilfulness with regard to arts and manufactures, would infallibly succeed to the want of a steady education and settled principle; and thus the commonwealth itself would, in a few generations, crumble away, be disconnected into the dust and powder of individuality, and at length dispersed to all the winds of heaven.

To avoid, therefore, the evils of inconstancy and versatility, ten thousand times worse than those of obstinacy and the blindest prejudice, we have consecrated... that no man should approach to look into its defects or corruptions but with due caution, that he should never dream of beginning its reformation by its subversion.... By this wise prejudice we are taught to look with horror on those children of their country who are prompt rashly to hack that aged parent in pieces and put him into the kettle of magicians, in hopes that by their poisonous weeds and wild incantations they may regenerate the paternal constitution and renovate their father's life...

If We Fix the Banks, Do We Fix the Economy?

Bob Reich says "probably not." Fixing the banks is important, but it is not clear that it is sufficient for fixing the economy:

Robert Reich's Blog: We Need More Stimulus, Not More Bailout: With only $110 billion remaining in the TARP bailout fund, all signs are that Tim Geithner is preparing to return to Congress seeking more bailout money. He’ll bring along the results of his bank “stress tests,” which will probably show many that big banks are still technically insolvent, along with bankruptcy scenarios for General Motors and Chrysler, and a couple of CEO scalps – he’s already got GM’s. Congress won’t be happy but in the end it will cough up another 300 to 500 billion.

Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he’s dead wrong. Most consumers cannot and do not want to borrow lots more money. They’re still carrying too much debt as it is. Even if they refinance their homes – courtesy of the Fed flooding the market with so much money mortgage rates are dropping – consumers are still not going to borrow more. And until there’s enough demand in the system, businesses aren’t going to borrow much more to invest in new plant or machinery, either.

That’s the big issue – the continued lack of enough demand in the economy. The current stimulus package is proving way too small relative to the shortfall between what consumers and businesses are buying and what the economy could produce at full capacity. (According to today's report from the Commerce Department, retail sales fell in March, as did prices paid to U.S. producers.)

Worse yet, the states are pulling in the opposite direction. States cannot run deficits, which means that as their revenues drop in this downturn they’re cutting vital services and raising taxes to the tune of $350 billion over this year and next. This fiscal drag is wiping out about half of the current federal stimulus.

If Geithner gets Congress to give him more bailout money, Congress won’t be in any mood to do what it really needs to do – which is to enlarge the stimulus package. Voters are already worried about too much government spending. At most, the administration is going to get only one more bite at the congressional apple. Make that more stimulus rather than more bailout

Too Many or too Few Narratives

Paul Krugman:

Too many narratives: Brad DeLong lists three possible explanations for the Obama administration’s bank policy, and expresses angst that officials don’t seem to be clear about what they’re actually up to. Matthew Yglesias points out that the president seemed to offer a fourth narrative yesterday. I’d add that in the past we’ve heard yet another narrative — that we can’t imitate Sweden because we have too many banks — that happens to be all wrong.

Can I say that this very proliferation of narratives is disturbing? I don’t want to claim moral equivalence with the Bushies, who were utterly cynical about such things, but the ever-shifting rationales for an unchanging policy do bring back unhappy memories of the selling of the 2001 tax cut, and for that matter — again, no moral equivalence! — of the selling of the Iraq War.

Well, I am not so much complaining about the proliferation as the absence of narratives. You can be (a) agnostic about the world, but believe that current policies are a necessary initial step because of political constraints in getting to whatever the long run policy is going to be; (b) confident that markets are irrationally depressed and think the government should push prices to fundamentals through the world's largest risk-arb operatin; or (c) think that we have no choice because the bankers have us by the plums. I favor (b) myself, but what distresses me at the moment is that the Obama administration doesn't seem to have a position, or a narrative, or an explanation.

I wish that they would pick just one, rather than zero.

The Panic of 1825: We Are Live at The Week

The Panic of 1825 - THE WEEK: If you’re not satisfied with Paul Krugman or Nouriel Roubini as your guide to the current turmoil, you can always rely on E.M. Forster. It was Forster who grasped the essential drawback of the Internet long before anyone else, depicting, in his 1909 story "The Machine Stops" a world in which individuals communicate in isolation via machine. It turns out he’s pretty good on 21st-century financial crises, too, mostly because the underlying processes remain so similar to those of a financial crisis he studied. Only the scale has changed.

Forster’s great-aunt Marianne Thornton helped raise him after his father's death, leaving him 8,000 pounds upon her death, when Forster was 8. That legacy gave him the financial cushion to become a writer. So he wrote Marianne Thornton: A Domestic Biography 1797-1887, stringing her voluminous letters together with scene-setting prose. As it happens, the fortunes of the Thornton family turn on history’s first episode of successful central banking: the Bank of England's intervention in the 1825 financial crisis.

Marianne’s younger brother, Henry Thornton, was 25 in 1825. Though the Thornton ancestors had built a successful bank, it had passed out of family control a decade earlier. But in the middle of 1825 young Henry was invited to join it as the most junior of six partners. Marianne writes of profits of 40,000 pounds a year, which is quite a lot when you reflect that Jane Austen's creation, Fitzwilliam Darcy, the richest commoner in early 19th-century England—other than Nathan Meyer Rothschild—receives (I refuse to write "earns") only 20,000 pounds a year from his estate of Pemberly. Forty thousand pounds a year in income corresponds to a market capital value of 1 million pounds, which bears the same proportion to the size of the British economy then as $10 billion would bear today.

The bank—renamed Pole, Thornton upon Henry's joining—was not small change. To join it as one of the profit-splitting partners was one hell of a 25th birthday present. But, then, these were the kind of people whose house had not an address but a name: "Battersea Rise."

And now let me turn the microphone over to 28-year-old Marianne Thornton. Writing in December 1825 to her friend Hannah More, she said: "There is just now a great pressure in the mercantile world, in the consequence of the breaking of so many of these scheming stock company bubbles."

Sound familiar? These were not bubbles in high-tech stocks or in mortgage lending and house prices, however, but bubbles in shipping lines, canals, and textile-spinning factories. And, of course, the bank of which young Henry had been a partner for only four months had gotten itself badly undercapitalized. The managing partner "had been inexcusably imprudent in not keeping more cash in the House, but relying on [the bank's] credit ... which would enable them to borrow whenever they pleased."

Except, of course, that in 1825 just as in 2009, no bank can borrow cash on the one day it really needs to, for every other bank really needs it on that same day. Which is why there came a “dreadful Saturday I shall never forget,” when a run on the bank was made, with “one old steady customer” withdrawing, without warning, his entire 30,000 pounds, leaving the bank vault “literally empty."

According to Marianne, the other bank partners fell apart: The managing partner "insisted on proclaiming themselves bankrupts at once, and raved and self-accused himself." Senior partner Scott "cried like a child of 5 years old." Partner Pole was away at his country estate. Another was on a business trip. It fell to 25-year-old Henry to deal with the fact that in the last business hour of Saturday, "they would have to pay 33,000 [pounds], and they should receive only 12,000 [pounds]. This was certain destruction."

Henry Thornton frantically searched the City of London looking to borrow money. He found banker John Smith, who always has been “particularly kind to Henry." He told Smith he could hardly expect him to lend the bank funds, but asked if Smith could at least tide them over until the 5 p.m. closing time. Smith asked if the bank was solvent and Henry gave his word. Well, then, Smith said, Pole, Thornton would have all he could spare.

“Never, [Henry] says, shall he forget watching the clock to see when 5 would strike, and end their immediate terror. ... The clock did strike ... as Henry heard the door locked, and the shutters put up, he felt [Pole, Thornton] would not open again but would be forcibly liquidated Monday morning."

There were, however, other characters in motion. Robert Banks Jenkinson, Second Earl of Liverpool, first lord of the Treasury and prime minister of His Majesty George IV, had been having whispered conversations with Bank of England Gov. Cornelius Buller and his deputy John Baker Richards. Liverpool said that it was of vital importance that the banking system of London not collapse under the weight of speculation and the popping of all those stock company bubbles.

Liverpool claimed he could not get Parliament to appopriate money to save the banks or to prop up asset prices: Parliament was populated by tax-paying landlords who did not especially trust the stock-jobbing financiers of London. Liverpool had spent much of the past year warning bankers that if their "overtrading" were followed by "revulsion" and "discredit," that he would not spend Treasury money to rescue them.

However, Liverpool told Buller, the Bank of England might. The Bank of England had a peculiar semi-private status with enormous autonomy. And everyone knew it was too big to fail—it was, after all, the bank for the entire British Empire, and the empire would stand behind it. So the Bank of England could save the situation even if the government could not. Moreover, it seems Lord Liverpool said to Buller, if it becomes necessary I want you to print up banknotes in excess of the legal limit, and to lend out your gold reserves even though the bank’s charter requires you to keep them in your vaults.

Banker John Smith had gotten wind of these conversations between Liverpool and Buller. And that Saturday evening, after the banks had closed, John Smith told Henry Thornton that if Henry truly believed that Pole, Thornton was solvent he, John Smith, would undertake to get it cash from the Bank of England. This was a shock. "[T]he Bank [of England]," Marianne Thornton wrote, "had never been known to do such a thing in the annals of banking," and so "Henry had little hope from this."

Nevertheless, the following morning, Sunday, at 8 o'clock, Bank of England Gov. Buller and Deputy Gov. John Baker Richards, along with every member of the Court of the Bank of England who was in London, were assembled to meet John Smith and Henry Thornton.

Marianne Thornton picks up the story: "John Smith began by saying that the failure of [Pole, Thornton] would occasion so much ruin that he should really regard it as a national misfortune," and he also praised Henry Thornton beyond all reason, saying "what he had seen of the conduct of one of the partners ... had convinced him that could [the bank] be saved for the moment," the crisis would pass. Smith "then turned to Henry and said, 'I think you give your word the House is solvent?' Henry said he could ... [and] had brought the books.

“'Well then', said the governor and the deputy governor of the Bank, 'you shall have 400,000 pounds by 8 tomorrow morning, which will I think float you'. Henry said he could scarcely believe what he had heard.”

I can scarcely believe it myself, even now. Blowing that number up to account for the difference between the British economy then and the British economy now, that's a $4 billion commitment secured on the word of a 25-year-old. Amazing—although there was a joke making the rounds last April that JPMorgan Chase CEO Jamie Dimond could have borrowed an extra $2 billion from the Federal Reserve if he had been willing to pledge his dog as collateral.

Monday morning, in the pre-dawn dark, Henry Thornton was at the Bank of England with Gov. Buller and Deputy Gov. Richards. For security reasons, they were alone. Buller and Richards counted out 400,000 pounds in bank notes. "I hope this won't overset you, my young man," Marianne Thornton claims one of the two said to Henry, “to see the governor and deputy governor of the Bank [of England] acting as your two clerks."

Henry Thornton arrived at his own bank before opening with 400,000 pounds in cash. The run on bank funds then recommenced. But "rumors that the Bank of England had taken them under its wing soon spread, and people brought back money [on Monday] as fast as they had taken it out on Saturday."

This was the birth of central banking as we know it.

The Bank of England had accepted the role of maintaining orderly markets and financial stability in a crisis. Why? Because the prices of financial assets are too important to be left to the market when it is panicked and when letting prices reach market levels will mean unemployment for hundreds of thousands in 1825, or tens of millions today.

Ben Bernanke's Public Private Investment Partnerships—the vehicles for purchasing banks’ toxic assets—are a natural development, even a Burkean development, of policy that has been pursued for 184 years now.

When politicians wash their hands of a financial system in crisis and fail to intervene on a large scale, things do not turn out well. The most notable example was 1929–1933, when, at least according to Herbert Hoover, Treasury Secretary Andrew Mellon persuaded Hoover that "even a panic is not altogether a bad thing” because "it will purge the rottenness out of the system.”

Did 1825 turn out better? We think so. George IV was not executed on Tower Green. Lord Liverpool's head was not carried about London on a pike. The spinning of cotton into thread in Britain in 1826 was 11 percent lower than in 1825—the first serious industrial recession—but it bounced back and grew 30 percent from 1826 to 1827.

And the bank of Pole, Thornton? Alas, Henry Thornton was irrationally exuberant when he swore that the bank was solvent. The bank was eventually closed. The partners lost their capital shares. The Bank of England had to wait years before getting its emergency loan back. (They did not care much; they were too big to fail, and Lord Liverpool thought they had done well.) Henry’s career prospered thereafter. Even though the financial ship that he had seized command of as a junior partner foundered, the consensus was that he had displayed great energy, good judgment, a cool head, and a facility with figures that made him worth backing in the future.

Three Possible Financial Narratives for the Obama Administration

"So we are settled," said the convenor of the meeting. "Our story is: the truth!"

"At least it is easy to remember," someone muttered under their breath as we gathered up our papers.

It seems to me that the Obama administration can go with any of three different truths as it tries to explain its banking programs to the world:

  1. The banks have us by the plums: Keeping the economy near full employment requires pushing asset prices back up to values at which businesses selling stocks and bonds can obtain financing that makes it profitable for them to expand. But pushing asset prices back up enriches the bankers whose overleverage got us into this mess, and prevents them from suffering their just punishment. There is no way out of this dilemma, but the Obama administration is trying as hard as it can given the limited authority congress has granted it to maximize the gain to employment and minimize the support provided to financial princes.

  2. The government has a chance to make a fortune: Just as in 1999 and 2005 financial markets were ruled by irrational exuberance, now they are ruled by irrational pessimism. Because of this irrational pessimism, businesses selling stocks and bonds cannot obtain financing that makes it profitable for them to expand--and so unemployment is high. But the government is not irrationally pessimistic, and is "patient capital": the government can buy up financial assets and so raise their price, boost employment, and then hold the assets until maturity and very likely make a fortune. It can do good for the economy and the country and do well by its own finances at the same time. It is true that financiers who ride-alongside, front-run, and manage the government's portfolio are very likely to make fortunes too, but much smaller fortunes than the government.

  3. We have to play out the hand before we ask for a New Deal: Perhaps the situation can be cured with relatively minor support for the banks. Perhaps the situation will require full-fledged bank nationalization. Bank nationalization could not pass the Senate now. Come this fall, it may be needed--but it will only be clear that it is needed if the Obama administration has done its best to rescue the banking situation with the powers it has at its current disposal. You cannot ask for a New Deal until you have played out your hand.

If the Obama administration were selling any of these three lines of narrative--or were selling all of them--it seems likely to me that it would be having more success is building support for its strategy. But I do not think that it is selling any of these narrative lines to make sense of its policies. Indeed, I do not know what the narrative story it wants to tell about the current situation is.

Hoisted from the Archives: A Non-Socratic Dialogue on Social Welfare Functions

Glaukon: "Professor!"

Agathon: "Professor! Good to see you. Getting coffee?"

Glaukon: "Yes. I'm teaching. I find that teaching is always and everywhere a caffeine phenomenon."

Agathon: "I tend to find that teaching is usually a bagel phenomenon myself. What are you going to teach them?"

Glaukon: "Social welfare. Utilitarianism. Condorcet. Arrow. Aggregation of preferences. Preference-revealing mechanisms."

Agathon: "Sounds like a full class."

Glaukon: "You have no idea."

Agathon: "Be sure to teach them about the market's social welfare function."

Glaukon: "The market has a social welfare function?"

Agathon: "Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market's decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function."

Glaukon: "Yes, of course."

Agathon: "Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is."

Glaukon: "I resent the tone in which you are talking down to me."

Agathon: "You do not. This part of this conversation never took place in even approximate form in the real world. It is interpolated in order to bring readers of this weblog up to speed. Since I never said my last speech to you, you could not have resented it."

Glaukon: "And I want readers of this weblog to know that I am considerably smarter and more clued-in than he is letting me appear to be."

Agathon: "Are you quite finished?"

Glaukon: "Plato at least worked harder to make his information dumps fit more gracefully into the conversation. I want a better author.

Agathon: "Are you quite finished?"

Glaukon: "Yes."

Agathon: "As I was saying, the market system chooses an allocation. That allocation can only be justified under the assumption that moves along the Pareto frontier in every direction--moves that transfer wealth from one member of society to another--are of no benefit to social welfare, while moves toward the Pareto frontier do benefit social welfare. If we restrict ourselves to social welfare functions that are weighted sums of individual utilities, that means that the market system's social welfare function gives each individual a weight inversely proportional to his or her marginal utility of wealth."

Glaukon: "Didn't somebody say about society that there was no such..."

Agathon: "Hush! If you want to quote Margaret Thatcher, you must introduce her as a speaking character in this dialogue and grant her some of her time..."

Glaukon: "I? You're the authorial stand-in in this dialogue, not me..."

Agathon: "That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you."

Glaukon: "That's sick."

Agathon: "And it gives Bill Gates a weight about 400,000,000 times as big a weight as it gives you."

Glaukon: "That's sicker."

Agathon: "But it gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system's concern as Bill Gates has. Will you teach that?"

Glaukon: "They'll call me a Communist!"

Agathon: "But it's true!"

Glaukon: "That I'm a Communist?"

Agathon: "No. That that's what the market system does!"

Glaukon: "We are value neutral economists! We don't care about distribution! We care about efficiency!"

Agathon: "But claiming that you don't care about distribution is implicitly saying that shifts in distribution are of no account--which can be true only if the social welfare function gives everybody a weight inversely proportional to their marginal utility of wealth."

Glaukon: "You're introducing politics into a value-neutral technocratic social science."

Agathon: "Politics?! Moi? I'm simply evaluating the derivatives of a social welfare function under the assumption that the market allocation is its ArgMax. What could be more technocratic than that? I'm just trying to attain a little clarity of thought."

Thrasymachus: "But where rule rests not--as somebody or other said at one of Old Joseph de Maistre's little soirees in St. Petersburg--on the hangman, but on misdirection and confusion, to strip away the veils of alienation and false consciousness that keep humans from perceiving their species-being, the act of unveiling is itself a powerfully political act."

Agathon: "Are you Thrasymachus or Karl Marx?"

Thrasymachus: "Ah. Marx thought unveiling was a good thing. I think it is neither good nor bad, for 'good' like 'justice' is really just another word for the interest of the stronger party."

Glaukon: "And we gave you tenure here at Berkeley?"

Thrasymachus: "Shhh! The humanities departments still think relativism is sexy. They haven't yet figured out that to assume a position of relativism--like the claim to be neutral on issues of distribution--is really a statement that you are on the side of the powerful."

Agathon: "And are you?"

Thrasymachus: "It is the just and the good--or, rather, the 'just' and the 'good'--thing to do.

Republicans: The Really, Really, Really Stupid Party

John Stuart Mill did not know the half of it.

Publius, of Obsidian Wings:

Obsidian Wings: The Regulatory Origins of the Internet: Patrick Ruffini argues that Obama's alleged regulatory overreaching could (or at least should) move Silicon Valley back into the Republican camp.  I'm not really diving into that, but I wanted to quibble with this statement:

The irony here is that many of the entreprenuers who succeeded in the most unregulated environment possible -- the Internet -- are at once hyper-capitalist and socially-liberal Obama voters. (Good luck creating Twitter or Facebook in any industry as tightly regulated as the auto or banking sectors in the Age of Obama.)

This really can't be repeated enough -- the Internet was regulated.  Regulation is what made it work.  Indeed, the Internet's phenomenal success stemmed directly from the underlying common carrier regulation that made it possible. There was no immaculate conception.  The Internet came about because of sustained federal funding for research and development.  Originally, the data services that ultimately evolved into what we now call "the Internet" depended entirely on access to the underlying phone networks. And so when these data services got going, the federal government faced a choice.  A crossroads, if you will.  The government could ensure that Internet/data services had nondiscriminatory access to the underlying phone networks on which they "rode."  Or, it could have allowed the phone companies (i.e., AT&T) to dictate the terms of access.  (This is basically how most wireless service in America works -- it's the "walled garden" approach.  And don't you loves it?).

Wisely, in the Computer Inquiries proceedings, the FCC opted for open, nondiscriminatory access.  The Twitters of yesteryear didn't need permission from AT&T to start their business.  The nondiscriminatory access that made the Internet successful didn't happen because AT&T was full of benevolent, far-seeing souls.  It was because of government regulation.  (On an aside, that's why the fight over net neutrality is actually a battle to maintain a ridiculously successful status quo).

Given that the Internet is probably the single greatest advance of mankind since the printing press, you could plausibly argue that the Internet is regulation's crown jewel.

What Americans Like!

Duncan Black:

Eschaton: Don't Tell The Villagers: Our most excellent pundits are generally very quick to buy into the idea that everybody hates Yurp, that "real Americans" detest San Francisco. I'm not sure how much reality is going to change for them to catch up, but so glad they imagine themselves to be stand-ins for the "reglar folks."

From Kos:

Daily Kos: Poll: Americans love France, San Francisco, Europe, and NYC: All of them feature the same dynamic as San Francisco -- Republicans have solidly favorable ratings (as do every other demographic tested), but head down South, and it's a whole different world, dramatically out of step with the rest of America. What's this mean? It means that all that France and Europe demonizing, and all that talk of "San Francisco liberals" and "San Francisco values", and all that New York bashing (like Rush leaving Manhattan), plays to a very small core of people, and specifically to the conservative's Southern base.

This is clear evidence that the GOP has become a rump regional party. Because everyone else in America is just scratching their head at all that hatred directed at these places. They like San Francisco a lot. They love France. They think Europe is fantastic. And not even the New York Yankees can get people to hate on the Big Apple. And the more the Rushes and Becks bash those places, the more out of step with the Real America conservatives appear. They might as well be bashing puppies, apple pie, and moms.

The irony? Even Southerners have a net positive favorability for San Francisco (+6), New York City (+2), and Europe (+2). In other words, even in their regional stronghold, they're just speaking to a minority.

Obama and the Pirates

Joe Klein:

Obama and the Pirates :: Swampland - It's better to be lucky than good. It's even better to be lucky and good. One can easily imagine all the different ways the rescue of Captain Phillips might have been screwed up--and the political firestorm that would have resulted. But President Obama appears to have been crisp and decisive throughout...and what can one say about the SEAL sharpshooters--firing from a bobbing ship at a bobbing dinghy and recording three headshots?

But it could easily have gone wrong, through no fault of the President and the SEALs--a gust of wind, whatever...and then the Administration would have had to waste all sorts of energy on damage control, fending off the second-guessers--Republicans and, all too often, people like me--and perhaps overreacting to the pirate "threat" as a result. Presidencies are, sadly, built or crippled on such quirks of fate.

As it stands, our socialist, pacifist, crypto-Muslim President has bagged three terrorist in the most dramatic fashion and saved a Captain. Congratulations to all concerned--and let's hope that the good luck continues to roll.

Update: Commenter Sgwhiteinfla points out that Newt Gingrich had a busy twitter weekend backseat-driving the situation and he's right. Here's a sample:

newtgingrich President obama is making a major mistake in not forcefully oulining the rules of civilization for dealing with pirates We look weak 9:55 AM Apr 11th from TwitterBerry

newtgingrich The correct answer to piracy is to destroy it not negotiate with it Seals can retake the lifeboat Track every boat leaving somalia 9:35 AM Apr 10th from TwitterBerry

Oh well. Nevermind. I might point out that if we hadn't been negotiating with the pirates they wouldn't have been under tow by the US Navy and therefore accessible to the SEALs. But this has been another chapter in the saga: Republicans Making Fools of Themselves. What a sorry run.

Why Is Paul Krugman the Only Person Writing for the New York Times Who Is Telling It Like It Is?

I had hoped that once the Bushies were out of power and could no longer threaten to deprive reporters of access that journalists would tell things like they are. Silly me. Paul Krugman:

Tea Parties Forever: Republicans have become embarrassing to watch. And it doesn’t feel right to make fun of crazy people. Better, perhaps, to focus on the real policy debates, which are all among Democrats. But here’s the thing: the G.O.P. looked as crazy 10 or 15 years ago as it does now. That didn’t stop Republicans from taking control of both Congress and the White House. And they could return to power if the Democrats stumble. So it behooves us to look closely at the state of what is, after all, one of our nation’s two great political parties.

One way to get a good sense of the current state of the G.O.P., and also to see how little has really changed, is to look at the “tea parties”... antitaxation demonstrations that are supposed to evoke the memory of the Boston Tea Party and the American Revolution — have been the subject of considerable mockery, and rightly so. But everything that critics mock about these parties has long been standard practice within the Republican Party. Thus, President Obama is being called a “socialist” who seeks to destroy capitalism. Why? Because he wants to raise the tax rate on the highest-income Americans back to, um, about 10 percentage points less than it was for most of the Reagan administration. Bizarre.

But the charge of socialism is being thrown around only because “liberal” doesn’t seem to carry the punch it used to. And if you go back just a few years, you find top Republican figures making equally bizarre claims about what liberals were up to. Remember when Karl Rove declared that liberals wanted to offer “therapy and understanding” to the 9/11 terrorists? Then there are the claims made at some recent tea-party events that Mr. Obama wasn’t born in America, which follow on earlier claims that he is a secret Muslim. Crazy stuff — but nowhere near as crazy as the claims, during the last Democratic administration, that the Clintons were murderers, claims that were supported by a campaign of innuendo on the part of big-league conservative media outlets and figures, especially Rush Limbaugh....

[Tom] DeLay, a fierce opponent of the theory of evolution — he famously suggested that the teaching of evolution led to the Columbine school massacre — also foreshadowed the denunciations of evolution that have emerged at some of the parties. Last but not least: it turns out that the tea parties don’t represent a spontaneous outpouring of public sentiment. They’re AstroTurf (fake grass roots) events, manufactured by the usual suspects.... So what’s the implication of the fact that Republicans are refusing to grow up, the fact that they are still behaving the same way they did when history seemed to be on their side? I’d say that it’s good for Democrats, at least in the short run — but it’s bad for the country. For now, the Obama administration gains a substantial advantage from the fact that it has no credible opposition, especially on economic policy, where the Republicans seem particularly clueless.

But... and events could still put that party back in power. We can only hope that Republicans have moved on by the time that happens.


Scott Sumner writes:

The Money Illusion:More Reverse Causation: I have to confess that I don’t understand the IS-LM model very well, as I never us it in teaching...

Hmmm... My first reaction is "what's to understand?" If you use the quantity theory of money--well, that is the LM curve. Even if you deny that money demand is interest elastic, well, that is still the LM curve--it is merely a vertical LM curve. If you use the real flow-of-funds balance through financial markets or the income-expenditure framework with exports and investment depending on the real interest rate--well, that's the IS curve. You then have to stitch them together, which requires a model of (a) expected inflation, (b) term premia, (c) default premia, (d) information premia, and (e) risk premia. But I have not yet seen a theory of nominal spending or real output determination that does not have an IS-LM representation...

Washington Post Crashed-and-Burned Watch (Paul Kane Stenography Edition)

Jamison Foser:

Stenography v. Journalism: Reporters tend to bristle when media critics refer to them as "stenographers." But Paul Kane of the Washington Post provides a pretty clear illustration of where that criticism comes from. Here's something Kane said during an online discussion Kane participated in today (the discussion carries tomorrow's date, but tomorrow hasn't occurred yet, so please believe me when I say it took place today):

Paul Kane:  We reported what Olympia Snowe said. That's what she said. That's what Republicans are saying. I really don't know what you want of us.

Got that? Olympia Snowe said something, Paul Kane wrote it down, and he doesn't know what more anyone could want from him. Well, it isn't very complicated: Context. That's what people want. Like the fact that Olympia Snowe had previously voted to do exactly what Kane quotes her criticizing -- that's useful context. And that's the difference between "journalism" and "stenography."

Here's the full question-and-answer:

New York, N.Y.: Paul, do you care to defend yourself against this criticism from Media Matters? "In an April 9 article about Democrats' legislative priorities, The Washington Post wrote, 'Democrats are sure to incite Republicans if they adopt a shortcut that would allow them to pass major health-care and education bills with just 51 votes in the Senate, where Democrats are two seats shy of the filibuster-proof margin of 60 seats. The rule, known as 'reconciliation,' would fuel GOP charges that (President) Obama has ditched bipartisanship.' The article, by Paul Kane and Shailagh Murray, then quoted Sen. Olympia Snowe (R-ME) saying, 'If they exercise that tool, it's going to be infinitely more difficult to bridge the partisan divide.' However, Kane and Murray did not mention that congressional Republicans -- including Snowe herself -- voted to allow the use of the budget reconciliation process to pass major Bush administration initiatives. Indeed, Murray herself noted in an April 1 article that '(a)dvocates defend reconciliation as a legitimate tool used more often by Republicans in recent years, most notably to pass President George W. Bush's tax cuts.' "

Paul Kane: I'm sorry, what's to defend? Someone tell Media Matters to get over themselves and their overblown ego of righteousness. We reported what Olympia Snowe said. That's what she said. That's what Republicans are saying. I really don't know what you want of us. We are not opinion writers whose job is to play some sorta gotcha game with lawmakers. That's what columns and blogs are for. Look, Republcians will take reconciliation as a serious poison pill to Obama's so-called bipartisan/post-partisan era. The Republicans did this, in the most direct correlation, with welfare in the mid-90s. And Democrats took it as a vicious partisan maneuver. That's what is happening, that's what we reported.

The Economist Pleads "Not Guilty" on Behalf of Finance--and Swears that Finance Will Never Ever Again Do What It Is Not Guilty of

The bill of indictment:

The rich under attack: The first charge is that the rich created a new form of heads-I-win-tails-you-lose capitalism. Traders and fund managers got huge rewards for speculating with other people’s money, but when they failed the parent company, the client and ultimately the taxpayer had to pay the bill....

The second charge is that the bankers and fund managers were not doing anything useful. Unlike the “deserving” rich entrepreneurs who set up Microsoft and Google, the “undeserving” traders and brokers just shuffled money around the system to nobody’s profit but their own.... At its peak it contributed 41% of domestic American corporate profits, more than double the rate two decades ago.... Far from epitomising capitalism, the undeserving rich undermined it: it was socialism for the wealthy....

The plea:

[T]he second [charge] has much less justification.... [T]here is nothing inherently undeserving about finance... more liquid markets have brought huge benefits.... The lower cost of capital has made it easier for industry to invest, innovate and protect itself against interest and exchange-rate risk....

The heads-I-win charge is not entirely proven, either: some of the people who ran banks did lose when they went bust. Yet... the basic capitalist bargain, under which genuine risktakers are allowed to garner huge rewards, seems a poor one if taxpayers are landed with a huge bill....

[T]he system is already beginning to correct itself.... [T]he rich are not as rich as they were.... Inequality will decline.... Having discovered how volatile markets can be, banks will be less keen on trading in the future.... Higher taxes will eventually be inevitable, since so many governments have lurched heavily into deficit.... [G]overnments... should first get rid of deductions and reverse unmeritocratic measures (such as George Bush’s repeal of America’s death tax)....

As for heads-I-win capitalism, the problem of asymmetric risk should shrink, because the rule changes needed to make the financial system safer will also remove unwarranted profits.... Curbing the excesses of wealth... will be a side effect of regulations designed to make capitalism work better. Such measures... are going to be better than going after the wealthy. The rich are an easy target. But when you try to bash them, you usually end up punching yourself in the nose.

I find the plea on the first charge--that it is "not entirely proven"--unconvincing. Guilty. The sentence is steep progressive income taxes on the superwealthy.

I find the plea on the second charge unconvincing too. The rise in profits from 20% to 40% would have been justified had finance produced (a) better corporate governnance and thus better management, or (b) more successful diversification and thus a lowered risk-adjusted cost of and a higher risk-adjusted return to capital. There is no evidence that a sector that could not provide good corporate governance to itself was successful at providing good corporate governance to its clients. And the claim that modern financial markets provided successful diversification is to laugh: if it had we would not be here now, would we? Guilty as well.

I think the sources of finance's outsized payrolls are to be found: (a) in the naivete of investors who are not able to calculate what they are paying people who are essentially gambling with their chips in the casino--investor who should be entrusting their money to Vanguard and PIMCO but cannot figure that out--(b) in the naivete of corporate CFOs who overpay for financial products so that they can tell their CEOs "yes, we are hedged"; and (c) in the naivete of the stockholders of financial services corporations who did not insist that the traders they hired keep all their money in the firm in order to give everybody an incentive not to take equity-destroying risks. And none of these three are reasons to believe that the payrolls ever corresponded to the effect of their actions on social welfare.

The sentence should be (a) Silicon Valley compensation structures for Wall Street, (b) government oversight of tax-preferred savings vehicles, with (c) the government hiring Vanguard and PIMCO to run low-fee index funds as the default investments for such vehicles.

The Economist should find a better client.

This Week in Journamalism: Slate Crashed-and-Burned-and-Smoking

UPDATE: As so often these days, Matthew Yglesias nails it:

David Samuels Says Bombing Iran Will Lead to a Palestinian State: [Samuels] illustrates how pathological the practice of journalism can get when editors [like Slate's Jacob Weisberg] decide to privilege the idea of running “interesting,” “provocative,” or “counterintuitive” pieces over accurate ones that make a contribution to people’s understanding of the world.... Samuels... [claims] it is an unprovoked unilateral Israeli military assault on Iran that—through magic—leads to the creation of a Palestinian state.... [T]he reality Samuels describes... is a world in which an Israeli attack on Iran is likely to be highly effective at curbing Iran’s nuclear program... in which such an attack would be secretly welcomed by the leaders of all the regimes in the region... in which Bibi Netanyahu is secretly harboring a desire to strike a major deal with the Palestinian leadership and is just waiting for a moment of strength--such as would result from a successful bombing raid on Iran—to launch it. In the real world, though, just about none of this is true.

While the gates of heaven are still shut, I will add that there is a special place for people who publish falsehoods constructed to increase the likelihood of war. It is not a happy place.

After David Samuels's truly bizarre love-letter to Condi Rice[1] in the June 2007 Atlantic (and Katha Pollitt reminds me of his equally bizarre take on Michelle Obama[2]), all editors who wanted to avoid shredding their organization's integrity knew that Samuels was someone to avoid.

But apparently, not Jacob Weisberg David Plotz of Slate:

The rational argument for an Israeli attack on Iran. - By David Samuels - Slate Magazine: [A]n attack on Iran lines up quite well with Israel's rational interests as a superpower client.... [T]he more you consider the rationality of an Israeli attack on Iran in the context of Israel's relationship with its superpower patron, the more likely an attack appears.... The key fact of the American-Israeli alliance that most commentators seem eager to elide is that Israel is America's leading ally in the Middle East because it is the most powerful country in the Middle East.... Israel earned its role as an American client with a series of daring military victories.... Israel traded its freedom to engage in high-risk, high-payoff exploits like the Suez Canal adventure or the Six Day War for the comfort of a military and diplomatic guarantee from the wealthiest and most powerful nation in the world. As a regional American client, Israel would draw on the military and diplomatic power of its distant patron in exchange for allowing America to use its control over Israel as leverage with neighboring Arab states.

With each American-brokered peace move—from Camp David to the Madrid Conference to Oslo and Annapolis—the United States has been able to hold up its leverage over Israel as both a carrot and a stick to the Arab world.... Do what we want, and we will force the Israelis to behave. The client-patron relationship between the United States and Israel that allows Washington to control the politics of the Middle East is founded on two pillars: America's ability to deliver concrete accomplishments, like the return of the Sinai to Egypt and the pledge to create a Palestinian state, along with the suggestion that Washington is manfully restraining wilder, more aggressive Israeli ambitions. The success of the American-Israeli alliance demands that both parties be active partners in a complex dance that involves a lot of play-acting—America pretends to rebuke Israel, just as Israel pretends to be restrained by American intervention from bombing Damascus or seizing the banks of the Euphrates....

An attack on Iran might be risky in dozens of ways, but it would certainly do wonders for restoring Israel's capacity for game-changing military action. The idea that Iran can meaningfully retaliate against Israel through conventional means is more myth than fact.... [A]ny Israeli air raid on Iran is likely to succeed in destroying masses of delicate equipment that the Iranians have spent a decade building.... [A]n Israeli bombing raid would... puncture the myth of inevitability that has come to surround the Iranian nuclear project and that has fueled Iran's rise as a regional hegemon. The idea of a mass public outcry against Israel in the Muslim world is probably also a fiction—given the public backing of the Gulf states and Egypt for Israel's wars against Hezbollah and Hamas. As the only army in the region able to take on Iran and its clients, Israel has effectively become the hired army of the Sunni Arab states tasked by Washington with the job of protecting America's favorite Middle Eastern tipple—oil....

Bombing Iran's nuclear facilities is the surest way for Israel to restore the image of strength and unpredictability that made it valuable to the United States after 1967 while also eliminating Iran as a viable partner for America's favor. The fact that this approach may be the international-relations equivalent of keeping your boyfriend by shooting the other cute girl he likes in the head is an indicator of the difference between high-school romance and alliances between states—and hardly an argument for why it won't work.... Iran would be shown to be a paper tiger—to the not-so-secret delight of America's Sunni Arab allies in the Gulf. Iran's local clients like Syria and Hamas would be likely to distance themselves from an over-leveraged Persian would-be hegemon whose ruined nuclear facilities would be visible on Google Earth.

The only real downside for Israel of an attack on Iran is Washington's likely response to the anger of the Arab street and the European street.... The price of an Israeli attack on Iran is therefore clear to anyone who reads Al Ahram or the Guardian: a Palestinian state.... Desperate to rid themselves of the bad PR and the demographic threat posed by maintaining Israel's hold over the West Bank, Sharon's successors have been unable to find a victory big enough to allow them to retreat.... Destroying a respectable number of Iranian centrifuges will end Iran's march to regional hegemony and eliminate Israel's chief rival for America's affections while also allowing Israel to gain the legal and demographic benefits of a Palestinian state with a minimum of long-term risk.

Israel's version of a nuclear grand bargain that brings peace to the Middle East may be messier and more violent than what the Obama administration imagines can be accomplished through sanctions, blandishments, and the invocation of Barack Obama's magic middle name. But who can really argue with the idea of trading the Iranian nuclear bomb for a Palestinian state? Saudi Arabia would be happy. Egypt would be happy. Bahrain, Kuwait, and the United Arab Emirates would be happy. Jordan would be happy. Iraq would be happy. Two-thirds of the Lebanese would be happy. The Palestinians would go about building their state, and Israel would buy itself another 40 years as the only nuclear-armed country in the Middle East. Iran would not be happy.

[1] David Samuels (2007), "Grand Illusions," The Atlantic:

The Atlantic Online | June 2007 | Grand Illusions | David Samuels: Rice’s obsession with sports makes it easier for her to function in a world of men who may not be immediately comfortable taking direction from a younger black woman, but who will respect anyone who can name the winning quarterback for every Super Bowl off the top of her head. Rice works out regularly with a trainer, has dated NFL All-Pro receivers Rick Upchurch and Gene Washington, is a talented classical pianist, and wears sophisticated clothes that show off her long, athletic legs, facts that may seem trivial, but actually provide valuable clues to an underlying truth about the secretary of state: She is an extreme personality who dresses with a degree of flamboyance that hasn’t been seen in the State Department since the high-collar days of John Hay.

Which is not to say that she doesn’t have a bureaucratic, boring side. Ten years before she became the president’s chief foreign-policy adviser, she was a junior Sovietologist on his father’s National Security Council, and she retains the ability to master briefing books and speak in bullet points that makes a good staff person invaluable. When she talks about big ideas and important moments in history, her expression becomes solemn and fixed, and she leans forward, holding her shoulders back a little as she speaks.

“I think we are just at the beginning of great historical flux, and I think it’s even much more dramatic and much more profound than I thought in 2000,” Rice says, when I mention an article she published that year in Foreign Affairs, laying out her vision of a global democratic future guaranteed by the United States. Most articles about foreign policy are op-ed pieces masquerading as political philosophy, and Rice’s is no exception. But it does describe a coherent view of the world that places a great deal of emphasis on the determined exercise of military and diplomatic power and has little in common with the humble, neo-isolationist platform on which George W. Bush ran for president. The world as Rice understands it is both a welcoming and a dangerous place, in which America plays a special role. The sunny and scary parts of her worldview are woven tightly together.

“There has been a triumph of the broad institutional consensus about what it takes to be effective and prosperous or successful,” Rice says, pointing to the interest that all states share in obtaining access to markets and ensuring domestic stability. Unlike Donald Rumsfeld’s finger- wagging, Rat Pack–era version of realpolitik, or Dick Cheney’s paranoia about mushroom clouds and sleeper cells, Rice’s views are the kind of optimistic stuff that mothers might wish their children were being taught in school. Threats to the emerging global order of liberal states come from what Rice calls “transnational forces,” “violent extremists,” or sometimes “terrorists,” locutions that share in common a studied avoidance of the word “Islam.”

“When we liberated Mazar-i-Sharif in Afghanistan, we found Nigerians and Chinese and Malay and American people who essentially deny nationality in favor of a philosophy—a violent extremist philosophy to which they are committed,” she says. “It reminds me in some ways of the way that ‘Workers of the world, unite!’—Karl Marx,” she adds helpfully “—was a slogan that meant that an American worker had more in common with a German worker than an American worker would have with the American leadership.” When she is thinking hard about something, she furrows her wide brow and scrunches up her mouth in an unselfconscious way that suggests a schoolgirl determined to ace a test.

Questions about Rice from policy types usually begin with the all-important matter of whether she is an “idealist” or a “realist,” a distinction that she herself regards as academic and meaningless. As she wrote in her Foreign Affairs article, “There are those who would draw a sharp line between power politics and a principled foreign policy based on values. This polarized view—you are either a realist or devoted to norms and values—may be just fine in academic debate, but it is a disaster for American foreign policy. American values are universal.”

A related question is whether Rice is a “neocon,” a term originally coined to describe a tight-knit group of mostly Jewish intellectuals in New York City who split from the doctrinaire left in the 1960s on a series of issues, beginning with whether or not the Soviet Union was a totalitarian state. The current usage of the term, while popular, is quite misleading, because it flattens the distinction between those who believe in the aggressive use of American military force and those who believe that the United States should champion democracy. In doing so, it imposes a retroactive coherence on administration policies that evolved on the fly, as the outcome of battles between opposing bureaucrats, none of whom got exactly what they wanted. In Iraq, some, like Vice President Cheney, appear to have been eager to depose Saddam Hussein without caring much about what system of government might replace him. Others, like former Deputy Secretary of Defense Paul Wolfowitz, cared passionately about bringing democracy to the Middle East. A third group, which includes Condoleezza Rice and George W. Bush, supported the invasion of Iraq on the grounds that Saddam Hussein was a menace, and then, only after that decision was made, supported the idea of building a democracy instead of installing a new dictator and going home.

Rice’s role as national-security adviser during Bush’s first term was ostensibly to referee the clash of opinions among what some White House staff called the “bull elephants”—Rumsfeld, Cheney, and Colin Powell. “I didn’t know that she had any strong views,” says Richard Armitage, Powell’s deputy, who did not think highly of her performance. “I mean, she was an expert in one country that no longer exists.”

And yet, when the dust settled late last year, those who had dismissed Rice as a glorified appointments secretary were in for a surprise. With Powell and Rumsfeld gone, and Cheney’s influence constrained by aggressive legal proceedings against his chief of staff, I. Lewis “Scooter” Libby, the secretary of state has emerged as the foreign-policy linchpin of an administration that is largely staffed and run by colleagues from her days in Brent Scowcroft’s NSC...

[2] Katha Pollitt:

Mad About Michelle: David Samuels writes in New York magazine:

There are clear limits to Michelle's ambition. She went to excellent schools, got decent grades, stayed away from too much intellectual heavy lifting, and held a series of practical, modestly salaried jobs while accommodating her husband's wilder dreams and raising two lovely daughters. In this, she is a more practical role model for young women than Hillary Clinton, blending her calculations about family and career with an expectation of normal personal happiness.

Would you like some manly condescension with that factual misinformation, ladies? By all means, avoid "too much intellectual heavy lifting"! If Samuels regards $273,618--Michelle Obama's salary in her last year as head of community affairs for the University of Chicago Hospitals--as modest, he must be the richest magazine journalist in the world. Michelle Obama, who made almost twice as much as her husband the senator, earned more than 99 percent of the population, and 98 percent of men. Moreover, she did so while raising two small children, often without her husband, who was off legislating in Springfield and Washington...

Douglas Holtz-Eakin, Welcome Back to Reality!

Good to have you back, Doug!

Satyam Khanna:

Think Progress: McCain’s former economic adviser flips on Bush tax cuts: Throughout the presidential campaign, Sen. John McCain’s (R-AZ) top economic adviser and former CBO director, Douglas Holtz Eakin, argued passionately for McCain’s proposal to extend the Bush tax cuts (and cut some more taxes for the wealthy on top of it). Holtz-Eakin, however, has now come out against making the tax cuts permanent, acknowledging that it would explode the deficit:

Though economist Douglas Holtz-Eakin spent the 2008 presidential campaign advising Sen. John McCain to defend the Bush-era tax cuts, he now thinks they should be allowed to expire on Dec. 31, 2010 due to “the prospect of an Argentina-style fiscal meltdown.” Said Holtz-Eakin: “If you ask: ‘Who pays the taxes?’, it’s the first step toward not having the answer be: ‘Our kids’”...

IIRC, however, that is still only two of five top Republican economic advisers. I think that former Bush CEA chairs Glenn Hubbard, Greg Mankiw, and Eddie Lazear are still on record in favor of extending Bush's tax cuts for the rich--only Ben Bernanke, I think, has joined Holtz-Eakin and is opposed.

Dan Froomkin on "State Secrets"

This is very worrisome indeed.

Dan Froomkin:

White House Watch - Obama's State Secrets Overreach: There are two things you really need to know about the "state secrets" privilege.

The first is that the government lied in the 1953 Supreme Court case that established the government's right not to disclose to the judicial branch information that would compromise national security. The widows of three civilian engineers who died in a military airplane crash sued the government for negligence. The government refused to turn over records, citing national security. But some 50 years later, when the records in question were made public, there were no national security secrets in them, just embarrassing information establishing the government's negligence. (More about the case here.)

The second thing is that the way the state secrets privilege has typically worked since then is that the government can refuse to publicly disclose a specific item of information if it explains why to the judge. The idea is not that government officials get to tell a judge to dismiss an entire case because they don't want to answer any questions at all. But it is precisely such a sweeping assertion that the Justice Department -- the Obama Justice Department -- is making in three cases that relate to torture and warrantless wiretapping. There is something utterly un-American about saying that the executive branch can simply tell the judicial branch to butt out of a matter for national security reasons -- and there's no recourse. And as for these cases, even if the government is worried about legitimate national security concerns -- rather than just afraid of embarrassment -- there is so much in the public domain already about the related issues that government officials should at least be able to talk about what they can't talk about. People who put a lot of faith in President Obama's pledges of restoring transparency to the government are having a hard time rationalizing his Justice Department's actions on the three cases in question...

Snowecare and Collinscare

If a health care bill passes this year, it will be because Olympia Snowe and Susan Collins like it a lot.

First-dollar coverage for lumberjacking industries? Super-cobra for workers laid off from their seasonal jobs tapping maple trees?

The Washington Monthly: If Democrats are going to need some Republican votes to pass a major health care reform initiative, it looks like they should start with Sen. Olympia Snowe (R) of Maine. Snowe hosted a "listening session" on health care reform this week and made it clear that she wants to support significant changes to the status quo. (thanks to reader A.F. for the tip)

Speaking to the members of the group before taking their testimony, Snowe, a senior member of the Senate Finance Committee, said the committee is determined to draft legislation by June and to have it ready for debate on the Senate floor by July. The last attempt to overhaul the nation's health care system was proposed in 1993 and dissolved in "polarization and partisanship," she noted. "I believe the climate in Washington is different now," Snowe said. Recognition is widespread that the nation's health care system is unsustainable, ineffective and inequitable, she said, and the current economic crisis is only making things worse. "This is precisely the right time" for national reform, Snowe said.

Snowe added that she expects to see a vote in the Senate before the end of this year.

"We have a totally dysfunctional system now," she said. While like most Republicans she would prefer to see the private sector collaborate on an effective change, a government-run health care system may be the only way to get the job done, she said. [emphasis added]

Now, that's obviously a paraphrase, not a direct quote. But if Snowe really said this -- the Bangor Daily News, which ran this report, has not run a correction -- it seems like a pretty encouraging development.

Mr. Keynes and the 'Classics'

When John Hicks wrote down his IS-LM model in 1937, he meant it as a halfway house between Keynes and what Keynes called "classical economics." And, indeed, it is. You can think of it in any of three ways:

  1. That the LM curve (plus the inflation rate and the risk premium) tells you more-or-less what the real interest rate is, and then the Keynesian income-expenditure function does the real work of determining output, employment, and the shape of the business cycle.

  2. That the IS curve (in its flow-of-funds through financial markets form) tells you more-or-less what the nominal interest rate is and thus what the velocity of money is, and then the quantity theory does the real work of determining output, employment, and the shape of the business cycle.

  3. That the two sets of factors are symmetric, and that whether it is more like a Keynesian or more like a classical theory depends where on the LM curve you are--and on what the local slope of the LM curve is.

Hicks clearly thought of it as (3), Alex Tabarrok and Tyler Cowen think of it as (2), and it seems as though everybody else thinks of it as (1).


Really Existing Socialism

Since 1989 American conservatives have been saying that European countries like France, Germany, Sweden, Britain, and Spain are "socialist." They are pretty nice places: lots of parks, lots of museums, good public transportation, no worries about being unable to pay for health care, good food, wine that approaches that of California, et cetera.

As a result, when you ask the young about "socialism" they think of wetern Europe--quite a change from the days when really existing socialism was East Germany or the Soviet Union.

Matthew Yglesias:

Matthew Yglesias » The Declining Unpopularity of Socialism: Steve Benen observes that one problem with attacking Barack Obama as a “socialist” is that opposition to socialism isn’t as popular as it used to be:

Only 53% of American adults believe capitalism is better than socialism. The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better. Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided.

The generational change here is interesting. I think it reflects the fact that on a basic level “socialism” is good branding. The whole idea is that we should put society first rather than capital, or money. That sounds good! But in the United States we never had a Socialist Party so “socialism” was primarily associated with the Union of Soviet Socialist Republics which was not at all good. But to people under 30, there’s less of that old resonance. And saying that Obama, who’s popular, is a “socialist” may simply tend to make people have warmer feelings toward the word “socialism.”