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September 2009

George W. Bush on Sarah Palin and John McCain

Matt Latimer http://men.style.com/gq/features/full?id=content_10957&pageNum=7:

On Sarah Palin:

[T]he president [George W. Bush], ever the skilled politician, had concerns about the choice of Palin, which he called “interesting.” That was the equivalent of calling a fireworks display “satisfactory.” “I’m trying to remember if I’ve met her before. I’m sure I must have.” His eyes twinkled, then he asked, “What is she, the governor of Guam?” Everyone in the room seemed to look at him in horror, their mouths agape. When Ed told him that conservatives were greeting the choice enthusiastically, he replied, “Look, I’m a team player, I’m on board.” He thought about it for a minute. “She’s interesting,” he said again. “You know, just wait a few days until the bloom is off the rose.” Then he made a very smart assessment. “This woman is being put into a position she is not even remotely prepared for,” he said. “She hasn’t spent one day on the national level. Neither has her family. Let’s wait and see how she looks five days out.” It was a rare dose of reality in a White House that liked to believe every decision was great, every Republican was a genius, and McCain was the hope of the world because, well, because he chose to be a member of our party...

On John McCain:

I was once in the Oval Office when the president was told a campaign event in Phoenix he was to attend with McCain suddenly had to be closed to the press. The president didn’t understand why when the whole purpose of holding the event had been to show Bush and McCain together so the press would stop asking why the two wouldn’t be seen together. If the event was closed to the press, the whole thing didn’t make sense. “If he doesn’t want me to go, fine,” the president said. “I’ve got better things to do.” Eventually, someone informed the president that the reason the event was closed was that McCain was having trouble getting a crowd. Bush was incredulous—and to the point. “He can’t get 500 people to show up for an event in his hometown?” he asked. No one said anything, and we went on to another topic. But the president couldn’t let the matter drop. “He couldn’t get 500 people? I could get that many people to turn out in Crawford.” He shook his head. “This is a five-spiral crash, boys.” We tried to move on to something else. But the president wouldn’t let go. He was stuck on the Phoenix event. At one point, he looked off into space and said to no one in particular, “What is this--a cruel hoax?”


Hoisted from Comments: Sash on Richard Posner's Morals

I had written:

Posner is a lawyer: lawyers are used to and see nothing ethically wrong with making strong assertions [1] in the interest of whoever they take to be their clients about matters of which they are ignorant...

Sash replies:

The Chicago School's Intellectual Collapse Continued: Richard Posner Is Uranus...:

This is going too far. There is no doubt there are unethical and deceitful lawyer. But as your post suggest, there are also unethical and deceitful economist. There are unethical and deceitful people in walks of life.

As a practicing attorney with over 20 years of experience, I can tell you that my colleagues and I hold in low regard unethical and deceitful lawyers. It no more stands for me to accuse academics of being uninterested in the truth, but just career advancement or identity politics or academic politics or what have you than it stands for you to accuse the legal profession of disregarding the truth. The case of the criminal John Yoo, who is both a lawyer and a member of the faculty of UC Berkley, should give us both pause.

Lest you think its o.k. for lawyers play fast and lose with the truth, rule 4.1 of Model Rules of Professional Conduct provides:

In the course of representing a client a lawyer shall not knowingly:

(a) make a false statement of material fact or law to a third person; or

(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by [the rule governing client confidences]. http://www.abanet.org/cpr/mrpc/rule_4_1.html

Although the rule does give lawyers some leeway in not disclosing untruths, it categorically proscribes the making of false statements. Interestingly, there is no comparable provision regarding truth telling in the Federal Code of Judicial Conduct, the code governing Judge Posner’s conduct, that I could find. However, commentary to that code provides, “A judge should avoid lending the prestige of judicial office to advance the private interests of the judge or others.” My guess is that Posner, if pressed, would take the view that his carrying water for the Republicans is not done to advance a private interest.

I am not naïve. The sad truth is that many lawyers and others view lawyers as mere hired guns. Remarkably, I have encountered acceptance of this role for lawyers more frequently among professors at elite law schools than among fellow practioners.

Look: Richard Posner has no idea whether any of the $40 billion in stimulus tax cuts that the Office of the Treasury's Fiscal Assistant Secretary reported to Christy Romer had been spent were calculated on an accrual rather than a cashflow basis. He has not lifted a finger to try to find out. Yet he is happy to assume that all are accrued liabilities rather than changes in cash flows and to carry out his analysis as if that assumption is a fact.

Richard Posner calls this zealous advocacy for someone--the Republican Party--whom he regards as the equivalent of a client.

I call this misleading.

I leave it to you whether this is a violation of rule 4.1 of Model Rules of Professional Conduct. (I don't think it is.)

Are you suggesting that Posner does have evidence that the $40 billion in stimulus tax cuts that the Office of the Treasury's Fiscal Assistant Secretary reported to Christy Romer had been spent were calculated on an accrual rather than a cashflow basis?


[1] UPDATE: And, indeed, U.S. Treasury staff report that Richard Posner's claim that the $40 billion number they gave Christy Romer is some sort of accrual number is simply false. It is a cash flow number.


The Chicago School's Intellectual Collapse Continued: Richard Posner Is Uranus...

When I was a child, one of my favorite stories was that of the discovery of the planet Neptune on September 23, 1846 by Johann Galle, Heinrich D'Arrest, and Urbain Le Verrier. The astronomers of the nineteenth century found an anomaly in the orbit of Uranus: it was not going where Newton's law of gravitation said that it ought to be going

I wasn't going to revisit this, but I finally had enough time to think about Menzie Chinn's and Justin Wolfers's very useful attempts to strike a blow in the long twilight struggle for rational economic analysis of the stimulus package, and it struck me that here Richard Posner really is Uranus.

Let me explain what I mean. Richard Posner writes, apropos of his comments on CEA Chair Christy Romer's DC Economics Club speech:

[Romer's] figure of $60 billion... is too high... the number for the second quarter is undoubtedly significantly lower. This makes the $40 billion in tax relief all the more important.... [N]ot all that $40 billion in tax relief is stimulus money; not all, and, at a guess, not most, put money in people's pockets before the second quarter ended [1]...

to which Menzie Chinn answers that Posner is wrong in his claim that $60 bilion was not spent by the end of the second quarter:

Econbrowser: I Am Even More Confused Now...: by Richard Posner's math.... There's a moving window on the Recovery.com, so I can't see the cumulative $60 billion figure for end-June, but I do recall it. Better yet, Donald Marron recalls it. No one else [besides Posner] has disputed the $60 billion figure....

And wrong in his claim that most of the $40 billion in tax reductions is not properly counted in the second quarter:

Mr. Posner has given up on accusing Dr. Romer of deliberately lying about the $40 billion figure, and has moved on to redefining those funds.... Specifically, he is saying that the $40 billion is partly decreased withholding, or shifting around of tax liabilities, and not entirely rebates. Mr. Posner does not provide any source for this assertion, and the language in Dr. Romer's speech (and footnote 4) seems to indicate otherwise...

Footnote 4 states that the tax reduction estimate comes from "internal calculations from the Department of Treasury through June 24, 2009." It is possible that the Office of the Fiscal Assistant Secretary of the Treasury has used accrual accounting rather than cash-flow accounting, but it is extremely unlikely: keeping accurate track of the government's cash on hand and liabilities is their principal business.

Had I been in Posner's place, I would not have dared assert without good, hard evidence that the Office of the Fiscal Assistant Secretary was using the wrong accounting method without good evidence that it was so: I would almost surely be wrong, and I would look--I would be--extremely stupid.

Had I been Posner's place, I would also not have dared assert without good, hard evidence that Romer's Summers's, Bernanke's, Orszag's, Elmendorf's, and a host of others' judgments that the Obama fiscal stimulus is somewhat effective reflect not their view of the world but rather their corruption. When you accuse people not of having looked at the issue too hastily or having started from the wrong assumptions or of having a different view of the evidence but rather of explicit corruption, you raise the stakes to a high level

And had I been in Posner's shoes, once it had become clear that I simply did not understand the arithmetic--had I gotten my principal calculation wrong by a factor of sixteen--I would have apologized and said that I regretted the error, rather than saying "Look! There's Halley's comet!" and resuming the attack from another direction. Ethical considerations aside, Posner ought to have recognized that continuing along the line he had chosen could only harm his credibility and reputation.

Now some of the deviation of Posner's motion from the normal laws of human behavior we understand. Posner is one of a relatively small but still distressingly large number partisan enough to have sought and continue to seek to go aggressively on the record as approving of Rehnquist, Scalia, Thomas, and company's prostitution of their high offices through their installation George W. Bush as president. Posner is a lawyer: lawyers are used to and see nothing ethically wrong with making strong assertions in the interest of whoever they take to be their clients about matters of which they are ignorant.

But I do not believe that those factors alone can account for Posner's peculiar orbit.

I have a guess as to what is going on. I think that the body that is playing Neptune to Posner's Uranus is Nobel Memorial Prize in Economic Science winner Robert Lucas. My guess is that Posner thinks his line of attack is OK because he is only following in the footsteps of Lucas, and Lucas is an economist and is supposed to know what he is talking about. For at the end of last March Lucas said of Christy Romer--and implicitly of Larry Summers, Ben Bernanke, Peter Orszag, Doug Elmendorf, Larry Meyer, Joel Prakken, Mark Zandi, Doug Holtz-Eakin, and all the other economists who believe that the evidence indicates that fiscal policy has a role to play in stabilization policy when short-term nominal safe interest rates are so low that Treasury bonds and bank reserves are nearly perfect substitutes--that they were simply corrupt:

The Moody's model that Christina Romer -- here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of -- I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons...

Note what Lucas does not say: He does not say that Christy Romer has a different reading of the empirical evidence than he has. He does not say that Christy Romer has a different assessment of policy risks than he has. He does not say that Christy Romer has a different tolerance of policy risks than he has. What he does say that she is providing a "very naked rationalization" for economic policies that Obama decided upon for completely non-technocratic political reasons. What he does say is complete garbage. Christy Romer does have a very different view--she would call her view an evidence-based view--of what fiscal policy does in conditions of extremely low interest rates than Robert Lucas does.

Unfortunately for all of our possibilities for rational discourse, Lucas is not a fringe figure.

Why Lucas chose to say this is unclear. On the theoretical side, the case for believing that expansionary fiscal policy can be at least somewhat effective is clear. Consider the monetarist framework of the quantity theory of money--Lucas believes that the "applicability of the quantity theory of money is not limited to currency reforms and magical thought experiments... [but it] applies, with remarkable success, to co-movements in money and prices generated in complicated, real-world circumstances. Indeed, how many specific economic theories can claim [such] empirical success...?" In the monetarist framework, the channels are straightforward. When the government increases its deficit it sells a lot of Treasury bonds, thus pushing down the price of such bonds and pushing up their interest rates. The quantity theory of money tells us that the velocity of money--the pace at which people spend their cash--depends on the opportunity cost of holding money balances. The opportunity cost of holding money balances is the short-term safe nominal interest rate. Boost the goverment deficit and you boost the supply of bonds, lower their price, raise the opportunity cost of holding money, raise the velocity of money, and so boost the flow of spending. The monetarist framework thus provides theoretical reasons for believing (a) that expansionary fiscal policy can be effective, and (b) that it would usually be easier and more straightforward to try to boost spending by simply raising the quantity of money. (And, indeed, it is only the fear that right now is a special circumstance in which normal monetary expansion loses its force that has led the Obama administration to resort to fiscal expansion.)

On the empirical side, the case for believing that expanding government purchases can boost the flow of spending is even stronger. The belief is, as Christy Romer says, best characterized not as the Keynesian view or the monetarist view but simply as the evidence-based view. Shocks to spending boost nominal demand: whenever any significant group decides to boost their spending nominal demand rises, whether that group is new businesses seeking to profit from technological progress in high-tech in the 1990s, construction companies tht find they can obtain cheap financing via derivatives in 2004, or the U.S. government in 2009. The government's money is as good as anyone's. And the correlation between the rise in output and the rise in government purchases in World War II under circumstances when fiscal policy would have been expected to be relatively ineffective has always served as the capstone to the empirical argument.

There's an argument to be made that given our long-term deficit problems the bang-for-buck from short-term government spending as a stabilization policy is too low for it to be worth doing. But there is no argument to be made that those designing and pushing for such policies are engaging in naked rationalizations for policies decided on for other reasons. No argument at all.


[1] UPDATE: And, indeed, U.S. Treasury staff report that Richard Posner's claim that the $40 billion number they gave Christy Romer is some sort of accrual number is simply false. It is a cash flow number.


links for 2009-09-15


Doug Irwin Tells Me to Calm Down

Doug Irwin:

Five questions for Douglas Irwin: Regardless of party, every president, at some point, and often for political reasons, has imposed restrictions on imports. George Bush did, Bill Clinton did, Ronald Reagan did (a lot), Jimmy Carter did, and so forth...you get the drift. With some exceptions, most of these restrictions were not too costly or too important: they usually involved small industries, and the restrictions eventually expired. So on the broad canvas of presidential trade policy, Obama’s decision is unexceptional. Of course, the timing of the administration’s action, coming off the economic crisis and increasing fears of protectionism, makes it a bit riskier than most. And China’s response could make a bad situation worse; let us hope that it is posturing for its domestic audience. Still, the disruption to world trade is significantly less than Bush’s steel safeguard action early in his term. And the administration could more than redeem itself by helping U.S. Trade Representative Ron Kirk bring the Doha Round to a successful conclusion.


Not a Story I Ever Expect to Read, Somehow...

Speed, bonnie boat, like a bird on the wing,
Onward! the sailors cry;
Carry the lad that's born to be King
Over the sea to Mandalay,
Where the flyin'-fishes play,
An' the dawn comes up like thunder outer China 'crost the Bay!!!!

Jo Walton writes:

Weddings more dangerous than battles: It’s as if the Young Pretender had gone off in 1749 and conquered Burma. It’s an interesting story, but...

Now that is a story that it would be fun to read...


New York Times Crashed-and-Burned-and-Smoking Watch (Ross Douthat "Thousand Points of Light" Edition)

Glenn Greenwald sends us to Ross Douthat:

The Ghosts of 1994: The health care push has opened up arguments about abortion, euthanasia and illegal immigration that the Democrats would rather avoid. At the same time, it’s become the vessel for a year’s worth of anxieties about bailouts, deficits and Beltway incompetence. This August’s town-hall fury... the anti-Obama protests... were about... middle-income Americans’ “playing by the rules,” as Luntz puts it, “and having someone else benefit.”...

The bad news for Democrats is that actually passing a health care bill could further enflame these anxieties. Clinton’s crime bill passed Congress by substantial margins, when all was said and done. But the anger that the debate had summoned up didn’t go away — and Gingrich’s Republicans were there to reap the benefits....

And he talks about how:

the crime bill became a lightning rod for populist outrage. The price tag made it seem fiscally irresponsible. (Back then, $30 billion was real money.) The billions it lavished on crime prevention — like the infamous funding of “midnight basketball” — looked liked ineffective welfare spending...

Somehow, he never manages to tell his readers that midnight basketball was one of George H.W. Bush's original "Thousand Points of Light".

I wonder why not?

It wouldn't hurt you, Ross, to tell it straight.

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


George H.W. Bush:

George Bush Presidential Library and Museum: Remarks on Signing the Points of Light National Celebration of Community Service Proclamation in Glenarden, Maryland: April 12, 1991:

Thank you, Van -- Mr. Standifer. And may I salute the sponsors and the parents and the city and county officials that are with us today. Single out the players, some of whom I just met with. And also say to the mayor, Marvin Wilson, and to the county executive, Mr. Glendening, Parris Glendening, that I'm just delighted to be here. And I saw earlier Marty Madden and John Morgan, the State delegates, and we're glad to have been greeted by them. All of us should thank the business leaders in the front row and other sponsors who made this day possible.

And I'm glad to be here; I really mean that. You know, when I told Barbara that I'd be visiting a great institution dedicated to keeping guys off the street and out of trouble, she said, "George, you spoke to Congress last month." [Laughter]

And then I told her, "No, as Commander in Chief I want to see firsthand some real American air power: dazzling nighttime shooting, skilled tactical wizardry, and the courageous airborne maneuvers Americans have become world-famous for." And she said, "Oh, you mean Midnight Basketball." [Laughter] And here we are...

But as long as the Republican Party is defined by its most juvenile ideologues (think Joe Wilson) and its most transparent panderers (think Michael Steele), it’s hard to see the party capitalizing on this angry centrism the way the Gingrich revolutionaries did...


The Bipartisan Center Looks on the Republican Party with Dismay...

Andrew Samwick:

Tea Parties: A First Step to What?: I have not been part of the "Tea Party" movement that has emerged this year.  I don't feel like that movement provides the basis for a way forward in governing this country until it comes to grips with its recent past; namely, its nonexistent or muted protests to the fiscal policies of the Bush administration when taxes were cut ahead of any concrete plans for spending reductions to maintain budget balance.  As I quoted in the spring, referring to the passage of Medicare Part D in 2003, "Where were the Medicare tea parties?" 

Finally, this weekend, we had protests in Washington against the expansion of government participation in health care markets.  As I have argued, we should more plainly describe the so-called "public option" as a buy-in to Medicare for all.  And it would be ridiculous for people who envision a smaller government than we currently have to think that the so-called public option is anything other than the first step toward a new health care entitlement.  There is just too clear a history of growth in entitlement programs after their inception and to little specificity in the President's speech about reforms like the risk adjustment mechanism for exchange-participating plans that are essential to preventing the public option from being the only option once it is established.  If that is the motivation for the protests, then count me in.  That the train is six years late in leaving the station is no reason not to get on board now that it is heading in the right direction.  Health care reform ought to be proceeding at a more deliberate pace with a better case being made by its proponents.

But that train... only stops the other side from making things worse.  It does nothing to build the foundations of good governance beyond the first election where it may be exhibited next year.  Andrew Sullivan says it very well in response to his "Dissent of the Day" post:

Sure, Obama isn't ideal. I'd like a carbon tax rather than cap and trade, drastic 1986-style tax reform, and an end to the government subsidizing employer-based insurance plans. I'd also like marriage equality in every state and a flat tax and an immediate end to the military's gay ban. But unlike so many of these tea-partiers, I also realize that in real politics, you have to construct a solid coalition for all this and make arguments for it consistently (as Reagan did for decades) and have some credibility. But the GOP has been doing he opposite, fighting wars - cultural and military - instead of attending to basic fiscal responsibility and limited government. You cannot just pivot on a dime without some accounting of the recent past. Well, you can, but you look so partisan and so two-faced you'll only persuade people by ratcheting up fear and hysteria to drown out the actual issues.

His whole post is worth a read.  See also this post from Diane Lim Rogers at EconomistMom, "What Exactly Are They Protesting?"

Diane Lim Rogers:

What Exactly Are They Protesting?: On Saturday the “Tea Party” movement’s “Taxpayer March on Washington” was held.  According to the Washington Post....

Saturday’s throng appeared to number in the many tens of thousands. A sea of people surrounded the Capitol reflecting pool, spilling across Third Street and along the Mall. The sound system did not reach far enough for people at the edges of the rally to hear the speakers onstage. “You will not spend the money of our children and our grandchildren to feed an overstuffed government,” Rep. Tom Price (R-Ga.) said of the Obama administration, drawing raucous applause. “Our history is decorated by those who endured the burden of defending freedom,” Price said. “Now a new generation of patriots has emerged. You are those patriots.”

The group’s sponsors included FreedomWorks, a Washington-based group headed by former House majority leader Richard Armey (R-Tex.), and the groups Tea Party Patriots and ResistNet. They and others involved in the rally comprise a loose coalition of conservative groups that helped organize the health-care and anti-tax demonstrations in the spring and summer…

Which leads me to wonder if most of these protesters really understand what they’re protesting.  I doubt these folks would object to expanded health care coverage if they didn’t have to pay higher taxes (which the Obama Administration is proposing as at least part of the way they’ll accomplish deficit-neutral health-care reform).  And if these protesters are not willing to pay higher taxes and yet don’t want their existing health benefits cut, then how can they possibly argue that they’re the “fiscal conservatives” and that it’s the other side who is spending “the money of our children and our grandchildren”?... What’s really troubling to me is that these protesters seem especially delusional when it comes to what their “no new taxes” and (yet) “no cutting my (government) benefits” position means for the burden that’s passed on to future generations.  And when you use a child as a “prop” to argue the anti-tax position that’s exactly the mentality that jeopardizes that child’s economic future–well, I think that probably qualifies as child abuse.


More Musings on the Intellectual Train Wreck that is Today's Chicago School...

Paul Krugman writes:

Freshwater Rage: I’m still on the road, with only sporadic internet access. So I’ve missed out on much of the outpouring of rage over my magazine article. I gather, though, that the usual suspects are utterly outraged at my suggestion that freshwater macro has spent several decades heading down the wrong path. They’re smart! They work hard, using hard math! How dare I say such a thing? And all of this, of course, without a hint of irony.... When freshwater macro came in, there was an active purge of competing views: students were not exposed, at all, to any alternatives. People like Prescott boasted that Keynes was never mentioned in their graduate programs. And what has become clear in the recent debate — for example, in the assertion that Ricardian equivalence rules out any effect from government spending changes, which is just wrong — is that the freshwater side not only turned Keynes into an unperson, but systematically ignored the work being done in the New Keynesian vein. Nobody who had read, say, Obstfeld and Rogoff would have been as clueless about the logic of temporary fiscal expansion as these guys have been...

I would put it slightly differently. I do object to the fact that Chicago macro has not read Obstfeld and Rogoff. But what I object to much more is that they have not read anything at all.

For example, consider:

Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.”[1] He’s not that clear on what the “beauty” is that we all fell in love with, and why one should shun it. And for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make plans to consume more, invest more, and pay more taxes with the same income...

It is not just Keynesian economics that concludes that there are times when people in aggregate make plans to spend more than their incomes.

It is Milton Friedman's monetarist economics too.

It is Knut Wicksell's Swedish school.

It is Irving Fisher's quantity theory of money.

Indeed, it is David Hume writing the first article in economic theory ever--"On the Balance of Trade." In it, he supposes "all the money of Great Britain were multiplied fivefold in a night." The immediate consequence is that planned expenditure rises high above income as people try to shed their excess money balances. Planned expenditure continues to run ahead of income until the flow of nominal spending has risen fivefold.

Yet we are told that that chain of events violates "simple logical consistency."

There is nothing illogical or inconsistent about the economy being in a state in which aggregate planned expenditure is greater or less than income. Today's Chicago school would know this, had it not forgotten all of monetary economics from David Hume on.

But if you have never understood David Hume, and if you try to think about the issues on the fly, you are bound to make large, embarrassing, and elementary mistakes. Even this is not necessarily a bad thing. As Nick Rowe says: "we need to encourage finance people to do macro, and macro people to do finance, and part of the price of doing that is we will make mistakes."

But it becomes a bad thing when you think you have something to say about policy--for then you say pointless and destructive things.


[1] I actually don't mind that people spend their time developing real business cycle models or investigating the consequences of the efficient market hypothesis. I do, however, wish that they wouldn't write things like:

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is sharply lower in bad economic times. As Gene Fama pointed out in 1972, these are observationally equivalent explanations at the superficial level of staring at prices and writing magazine articles and opeds...

because such things are simply not true.

They are not observationally equivalent.

When major rises in stock prices--like that of 1995-2000--are due to increases in market risk tolerance or decreases in risk, then at their end investors and commentators tend to think that future returns are likely to be low by historical benchmarks, but that stocks are nevertheless worth holding because (a) their risks are small or (b) we have lowered the covariance between stock returns and our consumption. When major rises in stock prices are due to a wave of optimism, then at their end we find that investors and commentators are thinking that future returns are likely to be high by historical standards--Dow 36000 anyone?--but that risks are not especially low.

And to that I object, because they would be better finance economists if they did not write things that weren't true.


Why I Think There Is Unlikely to Be a Washington Post in Four Years...

Because people like Michael Shear don't do any work at all.

My guess is that there are at least 50,000 people in Washington DC who could have written a story that did more to inform readers if you had (a) sent them to Lawrence Summers's press briefing Friday afternoon, (b) given them copies of Cantor's press release and the Romer, Goolsbee, and Rice [ARRA Report](My guess is that there are at least 50,000 people in Washington DC who could have written a story that was more interesting, contained more meat, and did more to inform readers if you had (a) sent them to Summers's press briefing Friday afternoon, (b) given them copies of Cantor's press release and the Romer, Goolsbee, and Rice ARRA Report, and (c) given them a computer, a telephone, and two hours to write.

Yet somehow it is Michael Shear who gets the assignment, and whom the readers of the Washington Post get to read. Phrases like "he said-she said," "opinions of shape of earth differ," and "stenography" somehow seem inadequate: stenographers are trained professionals who get a lot of information down reliably in a very short time under tight pressure...

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

Michael Shear: Obama Team to Take Credit for Signs of Recovery: A top economic adviser to President Obama began a concerted White House effort on Friday to claim credit for the improving economy, declaring that the turnaround is "not, in our judgment, an accident." Previewing a speech that Obama will give on Wall Street Monday, Lawrence H. Summers compared the government's actions to a successful but evolving response to a natural disaster. "We are making a clear transition from rescue as the priority of public policy to sustained recovery," he told reporters in a briefing Friday afternoon. "We have moved back from the brink of financial catastrophe."

Summers said the Obama administration can "take real satisfaction" from what he said is movement toward recovery but quickly added that the White House recognizes the depth of economic hardship that remains a legacy of last year's collapse. "The level of unemployment is unacceptably high," he said. "We will not make the mistake of prematurely declaring victory or prematurely withdrawing public support for the flow of credit.... It is a mistake that we must not make today."

Even as Obama ratchets up the fight over health care, administration officials are eager to keep the country's focus on the modest improvements in the economy: The stock market is up more than 15 percent since the beginning of the year, interest rates have fallen and banks are at less risk of default. On Thursday, the White House credited its $787 billion stimulus package with saving or creating more than 1 million jobs since its passage in February.

Republicans have increased their rhetorical attacks on the administration as the unemployment rate has continued to rise and the promise of economic growth has failed to materialize. House Republican Whip Eric Cantor (R-Va.) issued a statement on Thursday criticizing the president and his aides for offering happy-talk about the economy while many people still suffer. "The American people don't understand why the Administration continues to praise itself while workers keep losing their jobs," Cantor said. "Since President Obama took office, over 3 million Americans have lost their jobs, including 2.5 million people since the President signed his stimulus bill"...


In Which Nick Rowe Says John Cochrane Commits "Small But important" Errors...

Nick Rowe writes:

Worthwhile Canadian Initiative: [T]here is one part where John Cochrane is definitely wrong.[1] It's small, but important...

But if analyzing a financial crisis as if we were in a barter economy,[2] is a little mistake, what would a big mistake be?

The mind boggles.

I suspect some dry Canadian humor at work here. At least I laughed louder than I have so far this month.

Nick Rowe:

John Cochrane is saying (unless I have totally misunderstood him) that Keynesian economics [and monetarist economics from Fisher to Friedman as well] is logically inconsistent in requiring that people make plans that violate their budget constraints.... This criticism would be correct in a barter economy; it is not correct in a monetary exchange economy....

Can people plan to spend more than their (planned/expected) income? In a barter economy: no. In a barter economy, an offer to buy is an offer to sell. "Wanna swap 5 of your bananas for 10 of my apples?". I plan to earn 10 apple's worth of income and spend it on 5 bananas, but we cannot distinguish the act of earning income from the act of spending it. And anybody who planned to buy goods of a greater or lesser exchange value than those he planned to sell has made some sort of arithmetic mistake.

But in a monetary exchange economy... I can plan to buy goods of greater exchange value than the goods I plan to sell if I plan on reducing my stock of money. And if everyone plans to do the same, and if they realise those planned expenditures, they will be surprised to find their incomes rising by the same amount. There is no logical inconsistency in people planning to spend more with the same income in a monetary exchange economy. General gluts are always and everywhere a monetary (medium of exchange) phenomenon. The very distinction between Aggregate Demand and Aggregate Supply is a monetary (medium of exchange) phenomenon.

What's wrong with macroeconomics? The same thing that's wrong with Finance, apparently. We need to integrate Finance into monetary theory. We need to integrate monetary theory into Finance.

UPDATE: Jason in comments calls Nick on his "small":

Doesn't sound like a small deal to me. If a guy cannot even distinguish between a monetary economy and a barter economy, then what business does he have in doing macroeconomics?

A very good question indeed. These issues were settled by the time of Fisher and Wicksell, after all. And it really is embarrassing to have tenured professors at major universities making eighty-year-old mistakes--it would be as if we had physicists who said that quantum theory is absurd because an electron must be either a wave or a particle and not both/neither.

Nick responds:

Yes, it's important. But we need to encourage Finance people to do macro, and macro people to do Finance, and part of the price of doing that is we will make mistakes.


[1] Nick actually means "two parts". He adds an Addendum:

[W]hat [Cochrane] says about Ricardian Equivalence is not necessarily wrong; it just depends on what you assume about the substitutability between government and private spending (which he forgot to mention).

But if you are assuming that government purchases are perfect substitutes for private consumption, you say that. It's not something you "forget to mention"--at least not if you know what you are talking about.

[2] I would put it slightly differently. I think Cochrane cannot do otherwise but think in a model in which there is a rigid cash-in-advance constraint and a technological governor on velocity--which is much the same thing as a barter economy for all relevant questions.


links for 2009-09-14


Misplaced Charity Department

Matthew Yglesias begs the other alumni of our alma mater, Harvard:

Matthew Yglesias: America’s Mad Obsession With Giving Money to Already-Rich Universities: If you can’t think of a charitable institution that could use your money more than the already-richest university in the world—one that overwhelming educates the children of prosperous people—then you’re obviously not thinking very hard. If you want to support worthwhile education endeavors, find a charter school or an obscure local college that’s doing a good job with kids from underprivileged backgrounds. Or give money to improve public health in the third world, or to an effective politics/advocacy organization working to improve American public policy. Anything, really. Just not an outfit that’s already got way more money than every other nonprofit in the country.


Worst Republican Governor Ever: Tim Pawlenty

Todd Gitlin:

Nullification (complete with bonus Wilson-Thurmond update): Michael Tomasky nails it: Minnesota Gov. Tim Pawlenty's latest excursus into the Republican Dixie suck-up, as he "urged fellow governors on Thursday to more frequently assert state sovereignty over the federal government and suggested that the country may increasingly see states suing the federal government," has a fabulous lineage--the nullification movement of 1832, led (surprise!) by South Carolina, which set forth the doctrine that the states had the right to nullify Federal law. In the run-up to South Carolina's declaration that it was not bound by Federal tariffs, the state had in 1822 passed a Negro Seamen Act, requiring that sheriffs arrest all free black seamen while their ships were docked, lest they join slave rebellions.

This is the proud tradition that today's moderate, nonfanatical northern Republicans embrace...

Ah. The Carolina nullification crisis: wshen Andrew Jackson threatened to hang his own vice president on the South Lawn of the White House if he did what Tim Pawlenty is advocating...


The State of Economics: One of These Things Is Not Like the Other Ones...

John Maggs:

What do you think of Paul Krugman's lengthy and provocative argument "How Did Economists Get it So Wrong?" in Sunday's New York Times Magazine? Is his taxonomy of competing schools of macroeconomics a fair one? And his account of which failed and how? Krugman says the crisis points to a muddy future for economic theory and a greater legitimacy for behavioral economics, among other conclusions. Is he right?

The replies:

From the left: James K. Galbraith, Professor of Economics, University of Texas:

“Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.” Paul Krugman, New York Times Magazine, September 6, 2009 Amen. In two sentences, Professor Paul Krugman, Nobel Laureate in Economics for 2008, has summed up the failure of an entire era in economic thought, practice and policy discussion. And yet, there is something odd about the role of this short paragraph in an essay of over 6,500 words. It’s a throwaway. It leads nowhere. Apart from one other half-sentence, and three passing mentions, it’s the only discussion of those economists who got it right. Only one is mentioned by name. Their work is not cited. Despite having been right on the greatest economic questions of a generation, they are unpersons in his ta...

From the sensible bipartisan center: Martin Baily, Senior fellow, Brookings Institution:

I agree with Krugman that academic macroeconomics went haywire some years ago.  Many economists got out of academic macroeconomics because there seemed to be no way to fight the emerging and mistaken consensus. One place that fought the good fight for sensible macroeconomics was Brookings, where the Brookings Papers on Economic Activity remained true to sensible macroeconomics at the price of losing credibility with the academic profession. What is less clear is whether actual macroeconomic policymaking in Washington was greatly influenced by the papers in the economics journals.  My experience in the Clinton Administration in the 1990s, including the interactions with the Federal Reserve, suggested that actual stabilization policy was governed by a pragmatic view of the economy that combined the important lesson from Keynes about the potential instability of the economy together with what we learned subsequently in the postwar period, including the substantial power of monetary policy—something that Keynes downplayed. The pragmatic consensu...

Also from the sensible bipartisan center: Isabel Sawhill, Senior fellow, Brookings Institution

Krugman is right that economics is now more about the elegance or beauty of ideas and their mathematical exposition than about shedding light on real world problems.  As he notes, even the pragmatists among us (“the saltwater economists”)  have not found a way to reconcile Keynesian theories with our continuing belief in the ability of individual markets to equilibrate supply and demand.  Behavioral economics has helped to wean a new generation of economists from the earlier fixation on perfect rationality along with full and unbiased information, equally available to both buyer and seller in a market, but the microeconomic foundations of macroeconomics still need shoring up. In the meantime, those of us who work in Washington in policy-advising or policy-making positions quickly learn that theoretical answers are nowhere near as useful as empirically-generated answers based on common sense conceptual frameworks.  The sad thing, in my view, is the resources that are wasted teaching the best and the brightest in today’s graduate s.....

Also from the sensible bipartisan center: Rob Atkinson, President, Information Technology and Innovation Foundation In thinking about the causes of the financial collapse I have been puzzled as to how so many knowledgeable people in Washington and on Wall Street did not realize that the long history of housing prices, at least since WWII, has followed a pretty steady trend and that the dramatic increase above trend that began in the early part of this decade simply could not be sustainable and had to revert to the mean – either gradually, or as we have seen, dramatically. Krugman provides the answer: the dominant neo-classical economics doctrine equates value with price.   If value equals price, then the price of housing – or any other commodity – is always priced appropriately. And if this is the case, then normal rules of lending and other financial tools generally will work. When it’s not, they don’t as we saw. As such, Krugman is right to call for bringing the reality of human irrationality, institutions, culture, and technology, back into economics, as they once were before the mathemetization of economcs drove them out.    But...

Also from the sensible bipartisan center: Ted Truman, Senior Fellow, Peterson Institute for International Economics:

Paul Krugman is broadly correct. Too many academic economists have been looking for truth under the lamppost rather than tackling the really difficult problems that do not lend themselves to elegant, mathematical solutions.  Of course, as an economist and in order to be clear, Krugman had to simplify his own argument, and some will say oversimplify.  The distinction between fresh water and salt water is broadly correct except that here on the Potomac the waters mix. I am sure that Krugman will offend many because some of the corrective trends, for example with respect to behavioral economics are already underway, but he has stirred up a good debate...

Also from the sensible bipartisan center: Jeffrey Frankel, Professor of Capital Formation and Growth, Harvard University:

The question “how did economists get it so wrong?” is a difficult one to answer, but Paul Krugman has it exactly right. In this case I would only add that he is modest in skipping over a point:  during Japan’s lost decade of growth in the 1990s he  forcefully made the inference that a severe economic breakdown was possible in a modern industrialized economy – a breakdown that was both reminiscent of the Great Depression and was outside the ken of modern macroeconomic theory.   But macroeconomics went on as before. 

From the right: Charles Calomiris, Professor of Financial Institutions, Columbia University:

Professor Krugman's article, like much of his journalism, was hastily drafted and factually incorrect. He presents a caricature of the finance and economics professions and shows little knowlege of what actually went wrong with the markets and how much the sources of the crisis had been causes of concern by economists prior to the crisis.   One of the most humorous aspects of the article was its view that the efficient markets hypothesis was at the heart of the inability to see the bubble coming. If Krugman had bothered to read any of the finance journals for the past two decades he would have noticed a remarkable transformation of the profession away from adherence to the efficient markets hypothesis. Behaviorism is in, as are theories of market imperfections due to asymmetric information, and theories of agency (how money managers make purposeful investment errors because of conflicts between their interests and their clients'). It is hard to combine these ideas into an overarching theory of asset pricing, but in the past decade many scholars are starting to inte...


Barack Obama Does Something Really Stupid: Tire Tariffs

Why oh why can't we have better Democratic presidents?

Barack Obama does something stupid. So does Harold Meyerson, who writes an op-ed on the tire tariff that clouds the issues.

Meyerson:

A Trade Test for Obama: ometime before Sept. 17, President Obama has to make a decision that will tell us a lot about his commitment to American manufacturing. By that date, Obama has to accept, reject or modify a recommendation from the International Trade Commission (ITC) to impose tariffs on the Chinese-made tires that are swamping the U.S. market. The importance of this battle goes well beyond its impact on the tire industry. Much of Americans' skepticism toward free trade comes from their empirically verifiable sense that their government has been reluctant to enforce its own trade laws -- an issue that candidate Obama tackled head-on last year by his repeated pledges to enforce those laws.

Between 2004 and 2008, tire imports from China increased 215 percent, while imports from other nations decreased 5 percent and U.S. tire production declined 27 percent...

Harold: you need to provide people with the right numbers--which are that Chinese tires rose from 6 to 20 percent of U.S. purchases. You don't.

Meyerson goes on:

[T]he ITC's staff analysis forecast an increase of only $3.50 per tire -- not nothing, to be sure, but a cost that has to be measured against the possibility of tens of thousands of job losses in U.S. tire factories (where more than 5,000 jobs already have been lost because of Chinese imports)...

Let's see... 250 million cars in America... need 4 tires per car... need new tires every 2.5 years. 400 million tires a year... $1.4 billion dollars a year... 10,000 worker jobs saved... $140,000 dollars per worker-job per year.

Looks like we could (a) let the Chinese sell us tires, (b) tax each tire by $2.50, (c) pay each tire worker who loses his or her job $100K a year, and we come out ahead: American households have more money to spend on other things, China has more jobs to help what is still a very poor country grow, and tire workers have higher incomes and more leisure as well.

But, you say, it would be stupid to impose a $2 a tire tax and use the money to pay each laid-off tire worker $100K a year.

That's the point: when the policy you are adopting is worse for everybody than a policy you agree is stupid, the policy you are adopting is best characterized as really stupid.

But, Meyerson says, not to impose the tariff would violate the rule of law:

The ITC found this a clear violation of a provision in the Trade Act (Section 421), added with Beijing's consent during the negotiations preceding Congress's 2000 enactment of Permanent Normalized Trade Relations with China...

China isn't doing anything wrong. For Chinese manufactures to sell us tires is not against the law. To say that China has committed a "clear violation" of the law is to badly misstate the case.

What is the case is that:

Section 421... allowed the U.S. government to levy tariffs on surging Chinese imports that were eviscerating an American industry... [and it] was a key argument in persuading Congress to permanently normalize trade relations...

§421 gives the U.S. the right to impose tariffs in response to a surge. It doesn't make the surge a crime, or a violation. And it doesn't require the U.S. to impose tariffs--especially if imposing them would be a really bad idea for U.S. consumers.

But, Meyerson says, we can't do the right thing now because imposing tariffs might be the right thing to do at some pointi in the future:

The implications of Obama's decision go well beyond tires. Section 421 was created to provide some protection for American workers while allowing China entry to our markets. If Obama opts not to enforce it, why would anyone concerned about American jobs believe such provisions in future trade agreements? Why would U.S. manufacturers maintain their domestic production if they know that none of the legal protections they've been promised will ever be invoked?... Endorsing the ITC's recommendation would not only honor his campaign promises and fulfill the mandates of our trade laws, but would also allow him to rescue the very Americans who, rightly or wrongly, have felt left out of his efforts to save the nation's economy.

I have a proposal. The president should, in each case, do the right thing. When there are net benefits to the United States from exercising its §421 rights, it should exercise them. When there are net costs to the United States from exercising its §421 rights, it should not exercise them.

That would be real change we could believe in.


Worst Member of Congress? Joe Wilson of South Carolina

The Curse of Richard Nixon lies very heavily indeed on the Republican Party.

Joe Wilson seems to spend a lot of time calling Black people "liars."

Justin Elliott:

Flashback: Last night, Rep. Joe Wilson (R-SC) issued an apology -- "I let my emotions get the best of me when listening to the President's remarks."... [I]t's not, it turns out, the first time Wilson's emotions got the best of him and he was forced to apologize. Flashback to mid-December 2003, when Essie Mae Washington-Williams came forward with the bombshell that she was the illegitimate daughter of the recently-deceased patriarch of South Carolina politics, Sen. Strom Thurmond.

Rep. Wilson, a former page of Thurmond's, immediately told The State newspaper that he didn't believe Williams. He deemed the revelation "unseemly." And he added that even if she was telling the truth, she should have kept the inconvenient facts to herself:

"It's a smear on the image that [Thurmond] has as a person of high integrity who has been so loyal to the people of South Carolina," Wilson said.

Of course, Williams' story was entirely true -- and never really in doubt.... The State story continued with Wilson wondering aloud how anyone could dare "diminish" one of his personal heroes.... Six days and several furious letters to the editor later, Wilson was forced to apologize. But, amazingly, he maintained that Williams should not have gone public...


Free Exchange Takes a Retrospective Look at the Pressures on Paulson and Bernanke a Year Ago

Pushed to do more--especially more non-standard poicies--to boost the economy by Larry Summers, and pushed to do less by Ken Rogoff in order to avoid enabling future moral hazard:

Free Exchange:

One year ago: LARRY SUMMERS was focused on the real economy:

"I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.

Recall that at that point, he was not a member of a presidential administration. The probability of American default was rising (ah, but soon would begin the flight to safety—Treasuries). And then there was this:

Kenneth Rogoff airs his concerns about the state of central bank balance sheets, particularly the Federal Reserve, Bank of England, and European Central Bank, namely, they seem to be dangerously overexposed to potential financial losses. Rather than continue to put new bank assets on their balance sheets, he suggests they need to let institutions fail and/or facilitate consolidation. I get his point, but if central banks are dangerously overexposed to the financial sector, then surely the need to prevent big losses is heightened rather than reduced, correct? That is, had central banks embraced a tough love approach from the beginning, they might not have faced any risk (though their inaction would have been painful for the rest of the financial world), but now they've basically gone all in, and have to keep doing what they're doing. I'm not sure they can afford to fold.

That's right, on September 8 Kenneth Rogoff wrote that "weak banks must be allowed to fail". This is another reason to doubt Treasury Secretary Hank Paulson's story that nothing could be done about Lehman. The administration was facing a lot of pressure to address moral hazard concerns, and I think some policymakers felt it was time to draw the line. But it was a line they could not afford to hold.


How Big Should the Obama Fiscal Boost Program Have Been/Be?

Free Exchange sends us to itself last September:

Son of stimulus: LARRY SUMMERS has seen enough. The Wall Street Journal reports:

“I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.

He added that given the long range fiscal outlook, the stimulus should not be structured so as to increase deficits beyond a one or two year horizon. The devil is in the details, of course—how much is on the table, and over what period of time will it be spent? And one wonders whether the Congress will be able to pass something before the fall elections, and, if not, whether conditions will look the same in early 2009.

But two things are very clear. Labour markets are saying that the American economy is in recession, and state and local governments are cutting spending on many of the items mentioned by Mr Summers in a typical, pro-cyclical, constrained-budget fashion. Offsetting those cuts at least seems reasonable, though again, it's hard to render judgment without real numbers to examine.

Summers was then very careful not to give a number, or to anchor the size of the stimulus in any way other than to gesture at the magnitude of the likely future demand gap between spending and potential output, which he put at about $900 billion--$300 billion per year for three years.

If you believe that it is appropriate to use deficit spending to close half of that output gap, that would suggest that a $450 billion fiscal boost program was judged appropriate before Lehman, before AIG.


A Rising, and Not a Setting Sun...

Whilst the last members were signing it, Doctr. FRANKLIN looking towards the Presidents Chair, at the back of which a rising sun happened to be painted, observed to a few members near him, that Painters had found it difficult to distinguish in their art a rising from a setting sun. "I have," said he, "often and often in the course of the Session, and the vicisitudes of my hopes and fears as to its issue, looked at that behind the President without being able to tell whether it was rising or setting: But now at length I have the happiness to know that it is a rising and not a setting Sun."


American Colleges

Felix Salmon sends us to:

Felix Salmon » Blog Archive » Chart of the day, College tuition edition | Blogs |

And writes:

Felix Salmon » Blog Archive » Chart of the day, College tuition edition | Blogs |: This chart comes from John Caddell, and it shows the cost of attending Rensselaer Polytechnic Institute as a percentage of US median income. Scary stuff. But not as scary as David Leonhardt’s column today...

David Leonhardt:

U.S. Colleges Are Failing in Getting Students to Graduate: At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission — turning teenagers into educated college graduates — much of the system is simply failing. Only 33 percent of the freshmen who enter the University of Massachusetts, Boston, graduate within six years. Less than 41 percent graduate from the University of Montana, and 44 percent from the University of New Mexico. The economist Mark Schneider refers to colleges with such dropout rates as “failure factories,” and they are the norm.

The United States does a good job enrolling teenagers in college, but only half of students who enroll end up with a bachelor’s degree. Among rich countries, only Italy is worse. That’s a big reason inequality has soared, and productivity growth has slowed....

[H]igh schools still produce many students who have the skills to complete college and yet fail to do so. Turning them into college graduates should be a lot less difficult than fixing all of American education. “We could be doing a lot better with college completion just by working on our colleges,” as Robert Shireman, an Education Department official who has read an early version of the book, says. Congress and the Obama administration... would cancel about $9 billion in annual government subsidies for banks that lend to college students and use much of the money to increase financial aid....

The first problem that Mr. Bowen, Mr. McPherson and the book’s third author, Matthew Chingos, a doctoral candidate, diagnose is something they call under-matching. It refers to students who choose not to attend the best college they can get into. They instead go to a less selective one, perhaps one that’s closer to home or, given the torturous financial aid process, less expensive.... [W]ell-off students — many of whom will graduate no matter where they go — attend the colleges that do the best job of producing graduates. These are the places where many students live on campus (which raises graduation rates) and graduation is the norm. Meanwhile, lower-income students — even when they are better qualified — often go to colleges that excel in producing dropouts. “It’s really a waste,” Mr. Bowen says, “and a big problem for the country.” As the authors point out, the only way to lift the college graduation rate significantly is to lift it among poor and working-class students. Instead, it appears to have fallen somewhat since the 1970s....

In education, the incentives can be truly perverse. Because large lecture classes are cheaper for a college than seminars, freshmen are cheaper than upperclassmen. So a college that allows many of its underclassmen to drop out may be helping its bottom line.... Last year, even in the grip of a recession that has spared no group of workers, the gap between what a college graduate earned and what everyone else earned reached a record. Workers with bachelor’s degrees made 54 percent more on average than those who attended college but didn’t finish, according to the Labor Department. Fifty-four percent — just think about how that adds up over a lifetime. And then think about how many students never cross the college finish line.


Progress in Mainstream Journalism!

Joe Klein:

Let the Calling Out Begin - Swampland - TIME.com: The President said that he would "call out" those who spread misinformation about his speech, but why wait? Let's start by calling out these liars

http://patientsunitednow.com/

who are running ads that say that "Washington" wants to impose a Canadian-style system here. They are scum, scaring the public in an entirely irresponsible way. In the days to come, I will call out other liars in this space.

And, this time, no misleading throat-clearing thwack at a Democrat in the headline to establish his opinions-of-shape-of-earth-differ bona fides!


Henry Farrell Has a Nice Piece on How Clive Crook Is part of Our Problem

It is an interesting problem. A number of people who a couple of decades ago I judged to be smart parts of the bipartisan center--like me--have reacted to the growing insanity of America's Republican Party by pretending that it has not happened, and that America's problem today is "partisanship" understood as equally shrill and unreasonable on both the left (Democratic) and right (Republican) sides.

Clive Crook is perhaps the one who, like Lucifer, has fallen furthest, for reasons that we speculate about sometimes after we have had two beers. But the sight of him last fall attacking Democrats for saying in public things about Sarah Palin that all the reality-based Republicans were saying in private--and that Peggy Noonan was saying when she forgot that the microphone was on--was truly dismaying.

Henry Farrell takes his whack at this problem:

Centrism as tribalism: I’ve been doing my best to resist getting pulled back in by Clive Crook. I really have. I nearly succumbed when I read his Monday FT column, in which otiose self-congratulation dukes it out with utter lack of self-knowledge for seven hundred words but pulled myself back from the brink (self-congratulation wins, but it’s a very close call). But his follow-up blog post has propelled me into the abyss. Mr. Crook has a theory of what is wrong with American politics. It involves partisanship, of the kind not practiced by himself and his friends. From the column:

Increasingly, rage is the dominant mood of US politics – but the feeling is not confined to the far right. Committed partisans on both sides question their opponents’ legitimacy. It is one thing for an adversary to be mistaken, quite another to be a liar or traitor. You do not argue with an opponent like that, or seek an accommodation. You silence him, you shout him down, you impeach.... We floating voters see things differently. We approve of consensual politics, thinking that it delivers better policies. And we believe this for two main reasons. First, good policy involves trade-offs. In the farther reaches of left and right, these are forbidden. For the left, there could never be a reason to lower taxes on the rich. To improve incentives? No, the less you tax the rich, the richer they become and the lazier they can afford to be. … Second, good policy requires stability. Though Democrats apparently find this hard to imagine, they will not always control the White House and both chambers of Congress. Measures that infuriate the other side – remember the Bush tax cuts? – can be reversed.

And when he is criticized for drawing a false equivalence between the left and right, he responds:

I take the point (though I think this way of putting it is pretty generous to Jimmy Carter). I wasn’t trying to equate these views, or compare their merits, only to give examples from each side of attacks that question not the judgment but the legitimacy of the other. Charges of that kind, which seem to be becoming the standard line of attack, are uniquely toxic.

The problem with these claims is not that they are unreasonable on their face. They are contestable – Nancy Rosenblum’s recent book provides an excellent critique of the ‘fIoating voter as exemplar of independent good judgment’ shtick – but they are far from ridiculous. And we will pass quickly over Mr. Crook’s suggestion that leftwingers are constitutionally incapable of understanding that there can ever be any benefits to lowering taxes on rich people can be dismissed as standard right-wing pundit shtick. The more fundamental problem is that Mr. Crook is peculiarly unsuited to lecture anyone about silencing, shouting down, and questioning not only the judgment but the legitimacy of people whom he disagrees with. Perhaps he truly believes that there is some difference between “questioning the legitimacy” of one’s intellectual opponents, and coming out with vicious slurs like

The Democratic party’s civil libertarians seem to believe that several medium-sized US cities would be a reasonable price to pay for insisting on ordinary criminal trials for terrorist suspects.

But me – I’m not quite sure what the precise distinction is between “uniquely toxic” attempts to shout one’s opponents down, and suggestions that people whom one disagrees with view the deaths of several million of their fellow citizens as a “reasonable price to pay” for achieving their political aims. Perhaps that is because of my previously demonstrated “incompetence” and “total lack of good faith.” If so, I look forward to Mr. Crook explaining further the doubtless self-evident (to those who are not chumps like meself) dividing line between the objectionable forms of rhetoric that he dislikes so much, and the presumably non-objectionable forms that he himself spouts so enthusiastically. In the meantime, I have a theory (it’s no more than that) of what is going on here. Mr. Crook clearly considers himself to be an independent mind, floating above the political fray and pronouncing judgments upon it. But given his past form, he is quite obviously wrong. His particular attitude to the online left suggests that his tribal loyalties are every bit as strong as those of the partisans whom he deplores – he is demonstrably happy to engage in rage-filled, irrational and delegitimizing rhetoric when it is aimed against the enemies of the “We” who “approve of consensual politics.” His tribalism is one of the center rather than the partisan left or right, but it is perhaps more pernicious for being completely unselfconscious.

Here’s the more speculative bit, which you can take or leave as you like. Crook’s more loathsome rhetoric over the last year or so has been consistently reserved for those who want to see torturers and enablers of torture prosecuted. In a backhanded class of a way, I think this may possibly reflect well on him. I suspect that at some level he is genuinely conflicted between the standard DC bipartisan line on torture (that it is best to brush it all under the carpet) and the argument that torture is a fundamental and basic abrogation of civil rights. Hence – perhaps – his calumniation of those who put the strong case that we should neither forget nor forgive those who authorized torture – it is much easier to ignore their arguments if one defines them out of existence in advance.

As stated – take this suggestion for what it is worth – I have no sources of special insight into Mr. Crook’s psychology. Regardless, Mr. Crook should steer well clear in future of columns (which he has written more than one of over the last few months) deploring the hateful state of American politics and rhetoric. He is himself, after all, a not-insignificant contributor to this problem.


Health Care Reform and Institutional Dysfunction

Steve Pearlstein has, as usual, smart things to say:

It's Time for Obama to Rise Above the Partisan Health-Care Debate: What makes reform such a difficult puzzle is that the fundamental policy goals of universal coverage and cost containment are inconsistent with the political instincts to assure Americans who already have health insurance that they will be able to keep everything they already have, to assure that nobody will get a tax or cost increase and to assure those in the health-care industry that there will be no reduction in their income....

Deals negotiated with doctors, hospitals, health insurers and drug companies represented a good running start on the path of shared sacrifice, but the president failed to follow through with other key players. From a business community that wants to preserve the employer-based system, he failed to get a commitment that all employers should participate. He kowtowed to organized labor by backing away from a reasonable cap on the favorable tax treatment of health benefits. And he folded like a cheap suit when right-wing attack dogs scared the elderly with talk of euthanasia and death panels rather than aggressively defending the logic of living wills and evidence-based medicine.

By signaling that he was willing to stand up to some interests but not others, Obama gave up the moral and political high ground that would have made the opponents of reform look "small" by contrast.

The president's approach needs to be simple and direct: The health-care system we now have is wasteful and expensive and leaves the United States... the only rich country to ration medical care on the basis of income. Runaway health spending is the main reason the average American worker hasn't gotten a real pay raise in a decade. And it is the big reason the government is looking at huge budget deficits for years to come....

If reform doesn't "bend the cost curve," as the budgeteers like to say, then it's not worth doing. And if it does, then there is no need to scale back the program and compromise on universal coverage just so the annual subsidies can be reduced from $110 billion a year to $70 billion.

An equally silly compromise comes from the Senate's "Gang of Six."... Aside from creating an administrative nightmare, this provision would have the perverse effect of encouraging employers to fire, or not to hire, low-wage workers with children or spouses who are unemployed. Republican Olympia Snowe is said to be particularly enamored of this idea. I'd bet a two-pound lobster and bowl of Maine's best chowder that she can't find a labor economist back home who thinks this is a good policy....

What the president needs from Congress is succinct legislation that guarantees that every American will have a basic health insurance policy and sets reasonable caps on the growth of government health-care spending. The details should be left to the regional exchanges and a new board of independent health experts.... Their recommendations could be subject to an up-or-down vote from Congress, as advocates of entitlement reform have long suggested...

Steve Pearlstein is essentially calling for a Federal Reserve for health care reform, and claiming that congress as we know it is irremediably broken--broken by partisans and by lobbyists. I have a different perspective: in my view it is the Senate that is broken--the House of Representatives is running like a normal legislature.


Washington Post Crashed-and-Burned Watch

Bruce Bartlett:

The Conflicting Goals of Health Reform | Capital Gains and Games: I am tempted to just tell people to read Steve Pearlstein's column in the Washington Post today. Those who read the actual paper may need to dig around a little to find it. For some inexplicable reason, the Post buries its best columnist in what's left of the dying business section instead of putting him on the op-ed page where he belongs...

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


links for 2009-09-09

  • In the midst of the ongoing financial crisis, Congress is now considering a bill that would subject the Federal Reserve to congressional audits. It would be a shame to let that happen. Some functions of government properly belong in the realm of technocracy (for example, drug approvals), and others belong in the realm of politics (for example, same-sex marriage). I first argued in the November/December 1997 issue of Foreign Affairs that the U.S. government was placing too many decisions in the political realm and too few in the technocratic one. In the 12 years since, I have become increasingly convinced of this.
  • From what I can tell, this is an accurate sequence: 6 August 2001: Presidential Daily Briefing (PDB) given to GWB entitled "bin Ladin Determined to Strike in US." 11 September 2001: On the 36th Anniversary of Augusto Pinochet's US-President-ordered, CIA-supported, Coup in Chile, Bin Laden's forces, weel, strike in the US. ca. 26 October 2004: "Van" Jones signs "truth petition" which requests investigation into, among other things, "unanswered questions that suggest that people within the current administration may indeed have deliberately allowed 9/11 to happen." 04 September 2006: Condoleezza Rice admits (1) above publicly at the 9-11 Commission hearings, eliminating the last vestige of plausible* deniability about foreknowledge of the attacks within, and at the highest levels of, the Administration. 06 September 2009: Three years and three days after Ms. Rice admitted that the GWB Administration—in the kindest possible interpretation—allowed 11 Sep 2001 to happen, Van Jones resigns
  • Re-reading these books right now is a mistake. Before I picked up A Game of Thrones (Bantam) again, I had only a calm interest in Jon Snow’s true parentage, I’d forgotten who Jeyne Poole was, and best of all, I only mildly wanted A Dance with Dragons. I sagely nodded when I read that George R.R. Martin is not my bitch. I have every sympathy for this position. All the same, I know that by the time I get to the end of A Feast With Crows I’ll be desperate, desperate, desperate, so desperate for my fix that I’ll be barely able to control myself. I will be A Dance with Dragons-seeky, and is it out? Is it even finished? Like heck it is. And I know I’m not entitled to it but I waaaaaaaaaant it! If I was a sensible person, I’d have waited to re-read until it was ready and I could have had a new installment to go with the old. But now it’s too late. So what is it about these books that makes me talk about them in terms of a two-year-old snatching at sweets in a supermarket?

The Anguish of Brad DeLong

Hoisted from Comments: John Emerson writes:

Daniel Libit and Ramesh Ponnuru, You Are Wrong!: I really feel for Brad, forced by the exigencies of history to associate with the likes of me, instead of with the imaginary "rational conservative" friends he really loves...

John has got it.

I am a member of the sensible, technocratic bipartisan center interested in Policies That Work and Make America BetterTM and uninterested in Postures of Ideological PurityTM

But what happened to my posse?


Daniel Libit and Ramesh Ponnuru, You Are Wrong!

Daniel Libit writes:

“Frum is smart, and the site is young,” says National Review’s Ramesh Ponnuru, a former colleague. “But so far, it has not made much of a splash. He has gotten some attention from journalists, but the site isn’t yet a must-read for anyone”...

Daniel Libit and Ramesh Ponnuru are wrong. David Frum's http://www.newmajority.com/ is a must-read for me and for everyone else who thinks of themselves as exiles from the sensible policy-oriented bipartisan center. It is also a must read for Democrats who recognize that the country is better with a sane rather than an insane opposition party. And it ought to be a must read for Republicans.

Daniel Libit:

Despite setbacks, David Frum beats on - Daniel Libit - POLITICO.com: David Frum thinks “the Palin problem is still with us.”... “Why were conservatives vulnerable to somebody like this?” Frum mused about Palin recently in an interview with POLITICO. “The things that prevented them from seeing her are all still there. And we see them during this health care debate.” It’s been seven months since Frum parted ways with National Review to launch his own website — NewMajority.com — in an effort to rally new voices and cure the Republican Party of its “psychotic episode.” It’s a long-term project that’s fighting against the tide.

While Frum is aiming to build a moderate-minded Republican audience on the Web, the current political culture is dominated by incendiary language and ever-deeper entrenchments. Republican officeholders, motivated by a half-year of Barack Obama’s presidency and galvanized by three weeks of town hall protests, now tilt even more toward their base....

Some in the conservative cognoscente praise Frum’s intellect and efforts, but that’s where the anointing of the New Majority ends. You can count on a fingerless hand the big-name conservatives who have publicly joined the crusade. So far, Frum’s site has become an intellectual way station of college students, unknown politicos and anonymous scribes. “Frum is smart, and the site is young,” says National Review’s Ramesh Ponnuru, a former colleague. “But so far, it has not made much of a splash. He has gotten some attention from journalists, but the site isn’t yet a must-read for anyone”...


The Sensible Bipartisan Center Has a New Home...

At Capital Gains and Games:

First Bartlett Post...

Bruce Bartlett, I hasten to say, not Josiah Bartlett--although there is considerable confusion between the two, even though Martin Sheen is much the prettier. Reactions vary between: "but he's not real!" "I thought he was a very good president," "he has very good judgment," and "really too bad that his family was kidnapped by terrorists"...


The Ketchup-Holding Tolerance of the Market Is Much too Low and Much too Volatile...

Lawrence H. Summers (1985), "On Economics and Finance," Journal of Finance 40:3:

[Consider] a field of economics which could exist but does not: ketchup economics: There are two groups of researchers concerned with ketchup economics. Some general economists study the market for ketchup as part of the broader economic system. The other group is composed of ketchup economists located in a Department of Ketchup where they receive much higher salaries than do general economists. Each group has a research program.

General economists are concerned with the fundamental determinants of prices and quantities in the ketchup market. They attempt to examine various factors affecting the supply and demand for ketchup such as the cost of tomatoes, wages, the prices of ketchup substitutes, and consumers incomes. They examine a number of different types od data in an effort to explain fluctuations in ketchup prices. The models that are estimated have some successes in explaining price fluctuations but there remain puzzles.

Ketchup economists reject out of hand much of this research on the ketchup market. They believe that the data used is based on almost meaningless accounting information and are quick to point out that concepts such as costs of production vary across firms and are not accurately measurable in any event. they believe that ketchup transactions prices are the only hard data worth studying. Nonetheless ketchup economists have an impressive research program, focusing on the scope for excess opportunities in the ketchup market. They have shown that two quart bottles of ketchup invariably sell for twice as much as one quart bottles of ketchup except for deviations traceable to transaction costs, and that one cannot get a bargain on ketchup by buying and combining ingredients once one takes account of transaction costs. Nor are there gains to be had from storing ketchup, or mixing together different quality ketchups and selling the resulting product. Indeed, most ketchup economists regard the efficiency of the ketchup market as the best established fact in empirical economics.

The parallels should be clear. Financial economists... work only with hard data and are concerned with the interrelationships between the prices of different financial assets. They ignore... the more important question of... the overall level of asset prices. It would surely come as a surprise to a layman to learn that virtually no mainstream research in the field of finance in the past decade has attempted to account for the stock market boom of the 1969s or the spectacular decline in real stock pries during the 1970s.

General economists... may be asking the right questions but they will frequently lack the right data to answer them. Indeed, it may not be possible to construct tractable models that account for... price fluctuations. But this... establish[es]... only the inadequacy of current data, theory, and empirical methods.

Neither... approach... has a unique claim to virtue. Rather they are complementary....

Tremendous controversy has raged over the past several years as to whether or not the stock market is excessively volatile.... Shiller concluded that fluctuations in expected future dividends could account for only a small part of the variance in stock prices. This conclusion has been savagely attacked.... The volatility test controversy is like a scientific debat about whether one can reject the hypothsis tht the earth is flat with a microsoft. Shiller's conclusion that the joint hypothesis of rationaliaty and a constant required real return... can be rejected is exactly the conclusion reached by most modern work... the null hypothesis that the real ex ante rate is constant can be rejected at almost any level of confidence. Ahillr's conclusion is exactly consistent with this result.

Why then has work on volatility testing generated such hostility?... In part because [of]... intrpret[ations of]... rejections... in controversial ways. In part because... [of] interesting and complex methodological issues. But a large part... [is] a deep distrust of work purporting to explore fundamentals valuations.... To what extent do fluctuations in stock prices reflect changes in risk premia, safe rates of return, expected future cash flows, or other factors?... [S]tandard approaches... emphazi[zing]... the determinants of ex ante returns are ill-suited to these important questions.

The increasing disjunction... [is] obviously inefficient.... We can do better.

As I understand things:

  • The lion's share of the fluctuations in the dividend yields of individual stocks are due to changes in not-unreasonably-anticipated future cash flows.
  • The lion's share of the fluctuations in the dividend yield of the market as a whole are due to changes not in safe real interest rates or changes in future growth rates but rather to long-run fluctuations in the overall risk tolerance of the market.
  • On average, the risk tolerance of the market is much too low to make sense.

links for 2009-09-07


Contact Between the Obama Administration and Long Run Budgetary Reality

Diane Rogers:

First Glimmer of the OMB Budget Report: But what’s a nice little surprise for me is this from Peter [Orszag]:

As president, Obama has called for... extend[ing] some of the Bush tax cuts beyond their 2010 expiration date, for example. But in light of the new deficit figures, Orszag hinted that Obama may revisit some of those decisions when he submits his next budget in February. “Whatever their cause, the administration is very concerned about those outyear deficit figures,” Orszag said, “and getting those deficits under control is a top priority of this administration.”


Henry Aaron Writes in in Support and Praise of CBPP

Henry Aaron:

Ezra [Klein] was even more right than he knew about the efficacy of the Center on Budget and Policy Priorities. They are effective in two crucial ways that the media-mentions-per-dollar metric completely misses. (Truth in labeling: I am a CBPP board member; think it is the best organization operating in Washington; and make my largest charitable contributions to them.)

First, they work in advance of the news shaping reporting before the events actually happen. An obvious example, out today, is Jim Horney's piece explaining to everyone how to interpret the budget deficit numbers that will be released next week. You can read it at http://www.cbpp.org/cms/index.cfm?fa=view&id=2894. There are not many people around with the sort of insider expertise to write such a piece. He isn't looking to be cited by the media for this piece, and he won't be, but the piece will influence the questions that get asked of officials and even how they are answered, and it will (or should) influence what gets written....

Second, CBPP staff are in the rooms when bills are drafted and marked up. They are consulted mostly by Democrats, but also, to a striking degree, by Republicans who sometimes take the view that they know that the left will oppose what they are doing but do not want to do needless harm to and may occasionally try to help vulnerable groups. Years ago, a CBPP study extended the reach of the maternal nutrition program by belling the cat on price fixing by formula manufacturers. They designed presumptive eligibility under Medicaid. They have helped to set up state-based watchdog organizations, clones of themselves, in most states of the nation. These organizations have taken the lead in pushing state-based earned income tax credits They are also organizing similar organizations and helping to fund, through regranting, for developing nations around the world.

Finally, they are not only analytically better than virtually any other policy organization around, they are fast. Bob Greenstein, Peter Orszag (then a consultant to CBPP), Jim Horney, Richard Kogan, and others were so fast off the mark during the social security privatization debate that Bush White House operatives became afraid (and so stated) to put out the specious statistical crap; administration people complained that the Center seemed to put our rebuttals as fast as the administration could put out statements. Not one of the organizations among the top ten on the list circulated yesterday (including the one for which I worked) had both the expertise and the will to mobilize it that the Center brought to bear on that issue (and many others).

Sure, media cites is a legitimate indicator. My point was not that it should be ignored in this media-besotted age or that the number of studies languishing on dusty bookshelves is a better metric of impact. My point was that impact is what counts and media cites is poorly correlated with impact. And, oh yes, the Center on Budget is in a class of its own!


Progress!

It is "even the neoconservative New Republic" time, for even the neoconservative New Republic--well let me turn the mike over to:

Glenn Greenwald: ...which long prided itself on safeguarding the Party from nefarious left-wing influences, is now calling for "centrist" Democratic Senators (even including Joe Lieberman) to be thrown out of office by means of primary challenges (I believe that was once called a "purity purge"), even if doing so results in a loss of Democratic seats...

We welcome Jonathan Chait to the ranks of the really, really, really shrill!

Ph'nglui mglw'nafh Jonathan Chait R'lyeh wgah'nagl fhtagn!! Jonathan Chait fhtagn!!! JONATHAN CHAIT FHTAGN!!!!

Greenwald, however, wants a pound of flesh in addition to a total reversal of field:

Even The New Republic now calls for a party purge of corporate-owned "centrists": [W]hat a rapid and total reversal -- one effectuated without the slightest acknowledgment that it even occurred.  But that's just the accountability-free nature of Beltway punditry...