Are those NSA contract spooks REALLY still using bulky CRT monitors?

In January 2003, Gene Healy of the Cato Institute wrote:

John Poindexter, head of the Pentagon’s Office of Information Awareness, is developing a vast surveillance database to track terror suspects. The Total Information Awareness (TIA) system will, according to Poindexter, “break down the stovepipes” that separate commercial and government databases, allowing OIA access to citizens’ credit card purchases, travel itineraries, telephone calling records, email, medical histories and financial information. It would give government the power to generate a comprehensive data profile on any U.S. citizen.

TIA was subsequently supposedly "defunded" by Congress while funding for its programs was continued under different names. See The Total Information Awareness Project Lives On, MIT Technology Review, April 26, 2006:

Washington’s lawmakers ostensibly killed the TIA project in Section 8131 of the Department of Defense Appropriations Act for fiscal 2004. But legislators wrote a classified annex to that document which preserved funding for TIA’s component technologies, if they were transferred to other government agencies, say sources who have seen the document, according to reports first published in The National Journal. Congress did stipulate that those technologies should only be used for military or foreign intelligence purposes against non-U.S. citizens. Still, while those component projects’ names were changed, their funding remained intact, sometimes under the same contracts.

Does the name "John Poindexter" ring a bell? Iran-Contra? Lying to Congress? See below (see also "Robert Gates" under non-prosecutions, the CIA):

Summary of Prosecutions (from "Understanding the Iran-Contra Affairs")

The National Security Staff

Name	Charges	Outcomes	Sentencing
Robert McFarlane (national security adviser)	Charged with 4 misdemeanor counts of withholding information from Congress.	Pleaded guilty to all 4 counts. Then cooperated with the investigation.	2 years’ probation, $20,000 in fines and 200 hours community service. Pardoned.
Oliver North (NSC staff)	Indicted on 12 counts, including conspiracy and making false statements.	Convicted of 3 charges: accepting a gratuity, aiding in the obstruction of Congress, and destroying documents. Given a suspended 3-year prison term, 2 years’ probation, $150,000 in fines, and 1,200 hours of community service.	A court of appeals vacated his conviction for further proceedings to determine whether his immunized testimony influenced witnesses. The judge dismissed the case based on evidence that it had.
John Poindexter (national security adviser)	Indicted on 7 felony charges; stood trial on 5 of them.	Found guilty of 2 counts of false statements, 2 of obstructing Congress, and conspiracy. Given 6 months in prison for each count, to be served concurrently.	A court of appeals vacated his conviction since his immunized testimony may have influenced witnesses. The case was dismissed.

The Private Operatives

Name	Charges	Outcomes	Sentencing
Richard Secord (Head of the Enterprise)	Indicted on 9 counts relating to his gifts to an official, secret foreign accounts, and obstruction of investigations.	He pleaded guilty to 1 felony count of false statements to Congress.	2 years’ probation.
Albert Hakim (Head of the Enterprise)	Charged with supplementing an official’s salary.	Pleaded guilty to giving money to North.	2 years’ probation and a $5,000 fine.
Thomas Clines (Businessman in the Enterprise)	Indicted on 4 felony counts of falsely reporting his earnings to the IRS in 1985 and 1986.	Found guilty for both underreporting earnings and for stating on tax returns that he had no foreign accounts.	16 months in prison and $40,000 in fines. He was ordered to pay the cost of the prosecution.
Carl Channell (fundraiser)	Charged with conspiracy to defraud the U.S.	Pleaded guilty.	2 years’ probation.
Richard Miller (fundraiser)	Charged with conspiracy to defraud the U.S.	Pleaded guilty.	2 years’ probation and 120 hours of community service.

The Central Intelligence Agency

Name	Charges	Outcomes	Sentencing
Clair George (deputy director for operations)	In his first trial, which ended in a mistrial, he was indicted on 10 counts of perjury, false statements, and obstruction.	In a second trial, he was found guilty of 2 out of 7 counts: making false statements and perjury before Congress.	Pardoned before sentencing.
Duane Clarridge (European Division, chief)	Indicted on 7 counts of perjury and false statements about a shipment of U.S. missiles to Iran.	No trial took place.	Preemptively pardoned.
Alan Fiers, Jr. (Central American Task Force, chief)	Indicted on 2 counts of withholding information from Congress about aid to the Contras.	Pleaded guilty.	1 year of probation and 100 hours of community service. Pardoned.
Joseph Fernandez (CIA station chief in San Jose, Costa Rica)	Indicted on 5 counts of conspiracy to defraud the U.S., obstruction of the Tower Commission, and making false statements.	The case was dismissed in D.C. As a result, a 4-count indictment was issued in Virginia (the conspiracy change was dropped.)	The case was dismissed after the attorney general refused to mandate the disclosure of information relevant to the defense.

The Department of State

Name	Charges	Outcomes	Sentencing
Elliott Abrams (assistant secretary for inter-American affairs)	Indicted on 2 counts of withholding information from Congress about secret efforts to support the Contras.	Pleaded guilty.	Sentenced to 2 years’ probation and 100 hours of community service. Pardoned.

The Department of Defense

Name	Charges	Outcomes	Sentencing
Caspar Weinberger (secretary of defense)	Indicted on 5 counts of perjury, making false statements, and obstruction.	No trial took place.	Preemptively pardoned.

Summary of Non-Prosecutions

The Independent Counsel investigated a number of government officials that he decided not to prosecute for a variety of reasons. Here you can find information about those investigations and the reasons that Walsh chose not to bring charges.

The National Security Council Staff

Name	Reasons for Investigating	Reasons for Not Prosecuting
Paul Thompson (NSC general counsel)	His false assertions that he did not know of a certain presidential Finding or about the destruction of documents seriously obstructed the investigation.	The passage of time since the events, Thompson's peripheral role overall, and the development of strong cases against more central government officials.
Fawn Hall (Oliver North's secretary)	Knew about North’s activities, but not the details. Helped him shred and alter documents that showed he had violated the Boland Amendments.	Hall was given immunity in exchange for testimony about North’s activities.
Robert Earl (Subordinate to North)	Helped North calculate the marked-up prices of the arms sold to Iran, knowing that the profits would go to the Contras.	Earl was given immunity in exchange for testimony about North’s activities.

The Central Intelligence Agency

Name	Reasons for Investigating	Reasons for Not Prosecuting
William Casey  (CIA director)	Allegations of wrongdoing made about him by others, most prominently North.	Hospitalized before IC was appointed. Died in 1987.
Robert Gates (acting director of central intelligence)	Testified falsely about when he first learned about the Diversion (received a report on it during the summer of 1986 from CIA official Richard Kerr). Also helped prepare Casey’s false testimony.	Gates claimed that he did not recall the meeting. IC was not confident in Kerr's testimony. Also, Gates may not have known Casey’s speech was false.

The Department of State

Name	Reasons for Investigating	Reasons for Not Prosecuting
George Shultz (secretary of state)	Shultz had known significantly more about arms shipments to Iran than his testimony reflected.	IC could not prove that his testimony was deliberately false when given.
M. Charles Hill (Shultz’s executive assistant)	Hill withheld notes and helped prepare inaccurate testimony regarding Shultz's knowledge of arms transfers to Iran.	IC believed it would not be appropriate to prosecute Hill, since Shultz was not the subject of prosecution.
Nicholas Platt (State executive secretary)	Like Hill, Platt failed to produce a large quantity of relevant handwritten notes to Iran-Contra investigators.	Platt's notes were far more fragmentary in general. He also prepared no testimony.
Edwin Corr (ambassador to El Salvador)	Gave false testimony and also withheld documents. Under a grant of immunity he provided hundreds of documents, but continued to give false testimony about meeting with Secord and North.	The witnesses against him recanted their testimony. IC believed that investigating Caspar Weinberger and other State officials was more worthwhile.

The Department of Defense

Name	Reasons for Investigating	Reasons for Not Prosecuting
Richard Armitage(assistant secretary of defense for international security affairs)	Falsely testified that he did not learn of a number of missile shipments to Iran until CIA Director William Casey’s testimony in 1986.	The evidence against Armitage was substantial, but not enough to prove beyond a reasonable doubt.

The White House

Name	Reasons for Investigating	Reasons for Not Prosecuting
Ronald Reagan(president)	Set the stage for the illegal activities of others by encouraging support for the Contras during the October 1984 to October 1986 period when the Boland Amendments banned such aid.	There was no proof Reagan authorized or was aware of the Diversion or that he had knowledge of the extent of North's control over the Contra-resupply network.
George Bush (vice president)	Contrary to his public pronouncements, he was aware of the arms sales to Iran.	No evidence proved that he violated laws or that he was aware of the Diversion.
Edwin Meese III(attorney general)	His “inquiry” was a damage-control exercise, not an effort to find the facts. Even after learning of the Diversion, Meese failed to secure records in NSC staff offices or protect evidence. In reporting to Reagan and his senior advisers, Meese lied about what he had been told by stating that Reagan did not know about the 1985 shipments, which Meese said might have been illegal.	Statute of limitations had run out on his 1986 activities. In 1992, Meese denied recollection of the statements attributed to him by both Weinberger’s and Regan’s notes. Enough time has passed to raise doubt about the deliberate falsity of his denials.
Donald Gregg(National security adviser to George Bush)	Investigated for possible false testimony regarding his knowledge of Felix Rodriguez's involvement in North's Contra operation.	Despite conflicts between documentary evidence and witness testimony, IC could not prove a criminal case against Gregg beyond a reasonable doubt.
Donald Regan (White House chief of staff)	Attended Reagan’s national security briefings each morning and was present during the most significant meetings among Iran-Contra principals. May have participated in the November 1986 cover-up of Reagan’s knowledge and approval of the November 1985 HAWK missile shipment	Evidence of the apparent cover-up was only found in 1992. When asked about these events, he was honest and helpful. When his notes were subpoenaed in late 1991, he cooperated then as well.

Does FEMA Threaten National Security?

Those of us who think President Eisenhower was right about warning about the “military industrial complex” and who still care about personal liberty have at least a little admiration for Ron Paul and his son Rand. And trust me – I’m no fan of Peter King and Chris Christie. Which is why I’m saddened by this story:

“They’re precisely the same people who are unwilling to cut the spending, and their ‘Gimme, gimme, gimme — give me all my Sandy money now.’” Paul said, referring to federal funding after the hurricane last year. “Those are the people who are bankrupting the government and not letting enough money be left over for national defense.”

I get Senator Paul’s desire for a smaller government but how much we spend on FEMA is peanuts compared to the amount of pure pork in the defense budget. And alas, this silly statement gives the high ground to hacks like Peter King:

King in a phone interview late Sunday called Paul’s criticism of Sandy aid “indefensible.”“This was absolutely life or death money that was essential to New York and New Jersey,” King said.

Meanwhile Governor Christie is getting a lot of taxpayer funded political ads with that “Stronger Than the Storm” commercials. It is odd that the same President who appointed “heck of a job Brownie” to head FEMA also give Christie his first patronage break given how the New Jersey Governor is bragging he somehow got President Obama to make FEMA do what it is supposed to do.. And yet Senator Paul criticizes FEMA’s efforts after Sandy? Does he really believe the response to Katrina was more appropriate?

Obstfeld on Fiscal Space

Today’s beach reading has been Maurice Obstfeld’s keynote talk to a Bank of Japan conference last month.  Here’s the precis in his own words:

My  main point today will be that a precautionary approach to fiscal policy, leading to moderate  levels of public debt in relation to GDP, is essential for the credibility of government promises to  support the financial system, as well as the broader economy. Clearly defined rules that limit  fiscal exposure must also inform the endgame of winding down insolvent financial institutions.

The slightly longer version of his argument runs like this: finance has become ever bigger in relation to the size of national economies, and more concentrated too.  Regulation can’t keep up with innovation, and future crises are predictable.  Central banks can do only so much before they run the risk of igniting inflation, so it falls on treasuries to provide the ultimate backstop.  But full-bore treasury support can push up against the limits of fiscal space.  Knowing all this in advance, governments are advised to run smaller fiscal deficits than they would otherwise in order to maintain an extra fiscal space buffer.

In other words, in order to enjoy the magical economic gains made possible by financial hypertrophy, we need to forego some of the fiscal flexibility we enjoyed in the past.  Less investment in education and infrastructure, I guess, to be ready to bail out finance when it chokes again.  It’s a bizarre form of hostage syndrome.

The road not taken in 2008 was not backstopping the financial system, but replacing it with a smaller, publicly managed substitute.  That road is still there, although it is now overgrown with weeds and harder to get at.  We should remind ourselves of this from time to time, when demands are made on other aspects of economic policy—countercyclical policy, labor markets, social insurance—to accommodate the needs of finance in its current form.

The Fed Is Not Like The Treasury Or The White House

Ezra Klein reiterates that while most of the econoblogosphere favors Janet Yellen over Larry Summers for Fed Chair, the in-crowd around Obama in his bubble is all for Summers, http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/25/larry-summers-isnt-popular-in-the-blogosphere-but-hes-got-friends-in-high-places/?wprss=rss_ezra-klein .  Much of the argument boils down to that while he has this bad image from messing up publicly in various place such as Harvard and the World Bank, those who worked with him at the Treasury and the White House, particularly his in-crowd of Rubin-related Goldman Sachs-related folks who are very much in the Obama administration liked working with him, and that most important of all, Obama liked working with him and remains close to him.

One item in Ezra's piece that sticks out is that a particularly important player may be Gene Sperling, part of the old Rubin-Summers mafia, who is currently filling the same role as NEC Chair that he did in the last years of the Clinton administration.  At that time, Janet Yellen was CEA Chair, and apparently they had turf struggles, which Sperling tended to get the upper hand in.  It is California Girls (Tyson, Romer, Yellen) against the Rubin Boys. So, it would appear that perhaps Sperling has a special grudge against Yellen and is poisoning the well for her by bad mouthing her and upping Summers to Obama.

In any case, all this talk about how great Summers was at Treasury and the WH, which may be true, does not prove he would be great at the Fed.  Some in the WH are mumbling that the Fed might need a strong hand, but that is not how that place works.  The Treasury and WH are very hierarchical places with just a few people at the top.  But the Fed has a much larger decisionmaking body, the FOMC plus the regional Fed prezzes who attend the meetings and provide input.  Many of these people are very smart and academically high-powered with large egos, such as Plosser and Bullard and Kotcherlakota, just to name three.   Summers will not be able to push these people around, and coming on like an egomaniac who lies to smart people like he did as president of Harvard with the faculty there will not cut it.  One needs to be more collegial, and this is a quality Yellen has in spades.

Barkley Rosser

Race and Upward Mobility: The Return of Marx?

I have to admit I never took much of shine to the orthodox Marxian theory of racism, that it was promoted by the capitalist elites to drive a wedge between white and black workers.  It’s reasonable to suppose, however, that racism, by undermining collective action across white and black workers, can reduce the economic possibilities available to both groups.  Does anyone out there remember Racial Inequality: A Political-Economic Analysis by Michael Reich?

And now here we have it, evidence for the collective action hypothesis from the new Chetty-Hendrin-Kline-Saez study of intergenerational mobility, as parsed by the New York Times’ David Leonhardt.  Geographic areas with the worst mobility, for both low income whites and blacks, have the highest proportions of black residents.  In these places racial politics dominate other concerns, and funding for transportation and other infrastructure (schools?) lag.  Is it the same old, same old?

Obama’s Higher Ed Shakeup

Brad DeLong cites Jonathan Chait citing Jonathan Rees on Obama’s promise to shake up higher education.  Rees doesn’t like MOOCs.  Chait thinks they can play a role and that education policy should be for students, not faculty.  DeLong thinks that lots of professors are student-oriented and will side with Chait.  I think the whole MOOC thing is a distraction.

Yes, MOOCs loom large on the horizon.  If they can be made to work they will play a significant role in the higher ed ecosystem of the future.  But what we see today are crude prototypes, and they are far from delivering the goods.  It’s a dirty secret of online education technologies as they currently exist that they are as costly as the old-fashioned face-to-face methods, if not more so.  MOOCs are a glorious future and they will remain that way for years to come.

If you want to know what Obama has up his sleeve, take a look at this recent piece in the Chronicle of Higher Education about the agenda of the Gates/Lumina/Kresge foundations.  It’s about tying financial support for colleges and universities to completion data and pushing “competency-based” criteria to replace credit hours.  Both of these, I can assure you, will piss off lots of professors because, in the end, they remove control over curriculum from faculty and install a lower common denominator for standards in the name of access and efficiency.  I won’t get into a longer discussion of them here, but at least we should be clear about what’s on the table.

As for the rising cost of tuition, two points.  First, the biggest single driver by far for public institutions is the decline in public funding.  This is only partly a result of the fiscal squeeze on the states; it is also what the policy gurus are calling for.  In their view education is primarily a private good, as reflected in wage differentials between grads and non-grads.  Fairness and economic efficiency, they argue, both require that this good be priced according to its return.  In their world the only acceptable basis for reducing tuition is cost-cutting in degree production, not cost-shifting back to the public sector.

Second, you should look at tuition in an international context—after all, the technologies and salary structures in higher ed are not that different across the developed countries.  I’m writing this from Germany, where the trend is to eliminate the very small tuition charges introduced in the past decade, a victory for the principle that education at all levels should be free.  Incidentally, German universities also pay for the cost of textbooks, and for the same reason.  Germany, of course, is currently doing pretty well economically, but its GDP per capita remains below that of the US: it’s not that they can afford to subsidize higher ed while the US can’t.  The difference is one of principle and, to a considerable extent, economic strategy.  Germany intends to remain a surplus country on the basis of a well-educated workforce and tight integration between research and production.  Correspondingly, the US intends to remain a deficit country on the basis of debt-financed consumption, including consumption of education.  Let’s see how well that’s going to work.

Stiglitz and Minsky: No Need to Choose

Paul Krugman makes the distinction between two explanations for the debt buildup that preceded the 2008 financial crisis.  One gets the Stiglitz label: rising inequality induced households whose incomes were stagnating to take on more debt than they should have.  The other gets Minsky’s: financial institutions became less cautious and government regulation waned.  He distances himself from Obama, who signed onto the inequality story.

But surely it’s not either/or, and this is not a matter of slicing the (debt) pie either.  These stories are about two different sectors of the economy.  Household debt certainly accumulated unsustainably during the 1990s and 2000s.  The current desire on the part of households to deleverage or refrain from the borrowing habits of earlier times has played an important role in the stubbornness of slow growth and high unemployment.  But the financial panic itself was a recoil from a stupendous excess of leverage in the financial sector.  Deregulation itself was leveraged via clever engineering and finely-tuned incentive structures to propagate enormous systemic risk in order to secure a maximum of private yield.  And the explosion of top incomes in finance played a big role in the rise of inequality among the 1%.

Of course, the two sectors were not ensconced in isolated universes, uncontaminated by one another.  The mortgage frenzy was made possible by the musical chairs game being played by finance, where risk was always being offloaded to someone else.  (That “always” is impossible, of course.)  Conversely, household debt was raw material for the production of opaque financial instruments, which could be priced to yield bonuses for their creators.

And finally there’s the structural dimension.  This is always difficult for economists to cope with since, along the structure-agency continuum, economics is nearly all agency.  But still: all major deficit countries experienced a massive debt buildup, while surplus countries did not.  Causation is messy, to say the least.  Certainly a big chunk of it goes from private behavior to public outcomes; without all that household borrowing the huge current account deficit of the US, and the smaller deficits of the European peripherals, could not have materialized.  But causation also goes the other way.  Trade deficits mean lost jobs.  Consumption never falls pari passu with income.  Meanwhile, the political economy of deficit countries pushes government to tolerate more debt, either the private sector’s or its own, to avoid contraction.  As far as the US was concerned, the economic pain of trade deficits was not distributed evenly; it was concentrated in particular industries, regions and occupations, which contributed to the Stiglitz—inequality—factor.

If I were Obama’s speechwriter, I would say something like this: America’s economic pre-eminence and its key currency status has enabled it to become an unsustainable deficit country.  This has fed the inequality that has made our society so much coarser and unjust.  And this inequality, the ability of an economic elite to prosper while the rest of us languish, has undermined the political will to make the changes that need to be made if America is to prosper again.

And if I wrote that, I wouldn’t be Obama’s speechwriter much longer.

Obama And Harvard Games: Summers Vs Yellen

Let me begin by noting that I was among the first to call for Janet Yellen to be appointed Chair of the Fed nearly four years ago, http://econospeak.blogspot.com/2009/07/janet-yellen-for-fed-chair.html , a post that was sharply criticized in its 30 comments on many grounds then, although, ironically, the leading candidates were Bernanke, who of course got it, and, ahem, Larry Summers, whom I dissed sharply.along with Yellen as a dark horse third place candidate, also supported by Bill McBride then at Calculated Risk, who has reiterated his support recently, http://www.calculatedriskblog.com/2013/07/janet-yellen-for-fed-chair.html .  The arguments I made then about her competence and Summers's lack thereof regarding the Fed are even more true today than they were then, and I stand fully by them. 

But, of course, with Bernanke apparently preparing to step aside, whether willingly or not, the battle is on full between Summers and Yellen, with the disturbing news arriving from Ezra Klein that in the last few days, Summers has gained a strong lead in the White House for the nod (link is to Mark Thoma's "WTF?" with link to Klein's post): http://economistsview.typepad.com/economistsview/2013/07/larry-summers-is-the-front-runner-wtf.html .  Klein lists three main arguments why supposedly Summers has the edge:

1) Obama likes Summers, having worked with him closely, and does not know Yellen.  Summers has visited the White House 14 times in the past year, and she has visited once, and never worked with or for Obama, although he did appoint her Vice Chair.

2) Somehow, Obama thinks that Summers is more able to handle a crisis than Yellen, an argument I shall consider in more detail further below, although will note here now may also be linked to another Ezra Klein post, linkable through his latest post, about the sexist whispering campaign against Yellen along the lines that she "lacks gravitas" and such stuff.  I shall not further address that nonsense.

3) Obama thinks the markets will trust Summers more than Yellen, atlhough I suspect that a) this is not true, and b) the only evidence for this is probably the whisperings of the Goldman Sachs gang in Obama's ears, with Treasury Secretary Jack Lew probablhy the most important such voice, channeling Rubin, Geithner, and others.

Let me first deal with this matter of how supposedly Summers would handle a crisis better.  Presumably this comes from Obama's experience with him at the WH, particularly in regards to the fiscal stimulus.  However, there are many who argue that Summers mishandled that badly, and that he was wrong to dismiss the arguments of Christina Romer to push for a larger stimulus.  It may well be that in the end, what was proposed was the maximum that could be passed, but it is far from clear that pushing for a larger one would have somehow ended up with a smaller one or none at all.

What is more serious is that there is lots of evidence that in fact Janet Yellen has been far more prescient than Summers in terms of recognizing and identifying real threats to the economy.  McBride in the post linked to above lays this out in terms of statements made by Janet Yellen in 2005 and 2006 warning of the dangers of the housing bubble and in late 2007, when virtually all other top Fed people thought things were hunky-dory, where she worried about the fragility of the financial markets.  She was completely correct and farsighted, arguably more than Bernanke or anybody else in the Fed.  And certainly more than Summers, who said nothing or nothing intelligent about any of this at the appropriate time.  Indeed, in 2005 he dismissed and ridiculed a paper by Raghuran Rajan that raised questions about financial stability of the system.  The hard fact is that Janet Yellen is simply head and shoulders the superior in terms of diagnosing the state of the economy than is Summers.  Argument #2 is just garbage, quite aside from the fact that the documented lack of collegiality of Summrs and his lack of knowledge of the Fed compared to Yellen does not bode at all well for him managing the Fed in a time of crisis, particularly one he would fail to foresse.

I think there is another game going on here that has not been spoken of, let us call it the Harvard Game, although I think it is also linked to the sexism whispering campaign stuff.  It is that Obama is a Harvard Man, so he takes the place seriously.  While Summers was one of the youngest (if not the actual youngest) person ever to be named a full professor at Harvard, and also served as President of that institution, even if he was thrown out on his ear after he lied to the faculty about his covering up for and helping out Andrei Shleifer, Yellen was turned down for tenure there in the mid-1970s, her first job after she earned her PhD from Yale.

So, it must be admitted that she was a bit of a slow starter out of the gate, and I think also did not have much help.  She published a number of respectable papers on budget deficits and labor economics in some top journals, most single authored, but not quite enough to get tenure at Harvard, while Summers published a string of attention-getting (and good) papers with a large number of well-known coauthors early in his career that put him ahead of the game.  However, over time the quality of his academic output has declined, with no really important paper published since the early 1990s, whereas especially after Yellen married eventual Nobelist George Akerlof, the quality of her papers rose over a long period of time, including those not coauthored with Akerlof, with many of those very important and even influential on Fed policy, with particularly her papers with Akerlof laying out the fundamentals of the behavioral economics approach to macroeconomics, which arguably strongly influences Fed policy.

This brings up an issue that nobody has mentioned, and some might think should not be mentioned, but which I am going to mention here and now.  Just as when Bill Clinton was elected president, we got Hillary as an advising First Lady (and some others who arguably helped their husbands perform better), getting Janet Yellen as Fed Chair, whom I think is superior even without this on grounds of knowledge, personality, and experience to Summers, we would get George Akerlof as "Fed First Gentleman."  It is certainly true that Summers did better at Harvard than Yellen as an Assistant Professor, and he might have a higher IQ than she does, but Akerlof is smarter than Summers.  He has a Nobel, and a really solid one unlike quite a few other recipients I could name, while Summer does not and never will.  While we are not supposed to talk about it, Yellen will be able to closely access the brilliance of her husband George Akerlof.

Let me close this with an example of when this might already have happened, although it remains not well known and was barely noticed at the time, and even now few note the link with the work of Akerlof.  This is the fact that Janet Yellen was responsible for the fact that now almost all central banks that target inflation target a 2% inflation rate.  McBride in the link above notes that it was Yellen who convinced Greenspan in 1996 that a 2% target was superior to a 0% target.  The Fed meeting minutes where the crucial exchange happened can be found at http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf .  She cited work of Perry (recorded as "Parry" in the minutes) to support the argument, but it in fact drew on work by her and Akerlof, with the crucial Brookings paper being by Akerlof, Dickens, and Perry.  The behavioral econ foundation was the downward stickiness of nominal wages about which she and George had written extensively.  In the face of this stylized real fact, to have micro labor market efficiency with changes in real relative wages, one must have some positive inflation to allow for some nominal wages to rise faster than others.  This was and remains the argument, and once she convinced Greenspan, this argument spread across the world of central banking.

As it is, this will be one of the most important decisions Obama will make.  If he chooses Summers, it will be a very serious mistake, one of the worst decisions of his presidency.  I hope that the econoblogosphere can break through his bubble to convince him to appoint Janet Yellen instead.

Barkley Rosser

[Later Addition:  While the last two links work fine, the first two do not.  I am mystified regarding this as these are indeed accurate urls.  If you write out these urls specifically you will  reach the posts as advertised.  Why linking them from my post they do not go there, I have no explanation.  I apologize for this.]

Laffer Wants to Raise At Least One Tax

Art Laffer along with Donna Arduin released some fantasy called Pro-Growth Tax Reform and E-Fairness that claims that if we would tax Internet sales then we could have a huge increase in output and employment by 2022 if we used the extra sales taxes to reduce income taxes:

Gross domestic product would grow by more than $563 billion, creating 1.5 million jobs nationwide.

I just read what Laffer and Donna Arduin wrote and there really isn’t much there to support this conclusion. They note that after 1999, real GDP growth fell far short of the 3.5% per annum growth rates we enjoyed for much of the latter half of the 20th century. Then again – didn’t we try lower tax rates starting in 2001? How did that work out? A lot of conservatives seem to love this idea and why not. Sales taxes tend to be regressive while income taxes tend to be progressive. A switch from income taxation to sales taxation fits the bill if one wants a more regressive tax system. But to claim that this would lead to some magical surge in economic growth rates is a real Laugher.

Will Economics Be Revolutionized By Being Evolutionized?

Mark Thoma at economists view http://economistsview.typepad.com/economistsview/2013/07/revolutionizing-economics-by-evolutionizing-it.html , has linked to a post by Jag Bhalla at Scientific American, who in turn links to the Evolution Institute, http://evolution-institute.org/node/144 , where one finds a link to a special issue of the Journal of Economic Behavior and Organization (JEBO) that I have coedited with David Sloan Wilson and John M. Gowdy.  The special issue makes a play for increasing the use of evolutionary theory in economics.  Bhalla argues that this involves arguing that economics should not necessarily involve assuming people rationally maximize utility or that equilibrium analysis should be the focus of analysis.  Mark is unhappy about this characterization and disses the argument pretty hard.  Of course, he is welcome to his view.

Furthermore, he invokes Paul Krugman, quoting in full a speech that PK gave in 1996 to the European Society for Evolutionary Political Economy (while I am into such things, I know nothing of this group).  One can directly access PK's speech at http://www.pkarchive.org/evolute.html , if one does not want to go through Mark's link.  It may well be that Krugman would now disavow parts of this speech, or at least pull his punches a bit, but it is a place where he puts on his neoclassical hat full force and defends orthodox economics full bore.  This may well not be inconsistent with his current stance as the critic of new neoclassical synthesis views, given that one can view him to some degree as an advocate of the old MIT-Samuelson "neoclassical synthesis" that adopted a neo-Keynesian ISLM approach to macro while essentially maintaining a position of full orthodoxy in microeconomics.  Let us grant that this orthodoxy includes emphasizing agents who are fully rational and maximize their well-defined utility that interacts with other economic agents to lead reasonably quickly to equilibrium, with this being the appropriate focus of analysis.

In any case, I think that PK's presentation of both evolutionary economics and evolutionary theory are seriously narrow and misleading.  He essentially argues that evolutionary theory is all about maximization and equilibrium and that those who focus on other approaches, including Stephen Jay Gould and Stuart Kauffman, are just peripheral losers within established evolutionary theory, which is represented by the work of Richard Dawkins.  He emphasizes the importance of evolutionary game theory developed by Maynard-Smith and then introduced into economics, where it is now more or less a part of standard economics.  He even notes that Hamilton and others allow for rewards for cooperation.  This is all true, and can even be viewed ironically as a form of microfoundations of macroevolution within evolutionary theory, although it is not the whole story.

One important point is that there are and have been many different branches of evolutionary economics.  Of course, economics influenced evolutionary theory from the beginning, notably through the influence of Malthus on Darwin and Wallace.  Some forms of evolutionary economics have always been completely consistent with fully orthodox neoclassical economics, most notably the arguments regarding firm survival and the pressure to maximize profits due to natural selection pressures within competition, as emphasized in the famous 1950 paper by Armen Alchian, followed up by Milton Friedman in his Essay on Positive Economics. 

Of course, Krugman and probably Thoma probably dismiss the oldest evolutionary school, the old institutionalists, who founded the AEA and once ran it, only to be overcome and replaced by the MIT neoclassical synthesis of Samuelson.  It is easy to dismiss them, but they have made many insights and continue to offer more, most notably through the Journal of Economic Issues.  An irony is that the person who coined the term "neoclassical economics" was none other than Thorstein Veblen, founder of the institutionalist evolutionary school.  I suspect that Krugman and Thoma probably consider many of his ideas to be quite relevant to our current situation.

Another evolutionary economics school, vaguely referred to by Krugman, is the neo-Schumpeterian school whose main leaders have been Nelson and Winter and their followers.  This school continues with many followers and journals such as Journal of Evolutionary Economics and Industrial and Corporate Change.  I do not see anybody seriously questioning that they have had much to offer regarding the study of technological change.

Krugman dismisses Stephen Jay Gould and his punctuated equilibrium view as some sort of evolutionary equivalent of John Kenneth Galbraith, an idea popular among the public, but dismissed within evolutionary theory itself.  I think that Krugman is seriously off on this characterization, and the idea of multiple equilibria and dynamic discontinuities is one that is certainly of great relevance in economics.  Just what is going on when we see major financial crashes?

Finally, there is the new complexity evolutionary theory, which is associated with Kauffman of the Santa Fe Institute, whom Krugman also dismisses.  This approach is deeply linked with what is probably the most serious competitor to the DSGE model in macro analysis, namely agent-based modeling.  Many of those models use genetic algorithms, and evolutionary ideas such as emergence are taken very seriously in this approach.  Indeed, this is an alternative way of doing micro foundations of macro, an issue that Krugman simply does not address at all, which does not necessarily depend on the old orthodoxy of rational agent utility maximization or convergence on equilibria within dynamic evolutionary processes.

Barkley Rosser

Rewriting the Taylor Rule

r = p + 0.5y + 0.5(p – 2) + 2 is the original Taylor rule, where r = the Federal funds rate, p = the inflation rate, and y = the output gap. Jared Bernstein writes in a comment about the Taylor rule and monetary policy:

I used this version: 2+p+(0.5(p-2)+y where p is year-over-year percent change in the PCE inflation index and y is the output gap: 2*(nairu-unemp) where 2 is the Okun coefficient and the nairu is from CBO.

John Taylor had a couple of issues with what Jared wrote. I did too but my take is a little different than John’s. Let’s start with this:

He then goes on to give this definition the Taylor Rule: The federal funds rate should equal ... 2 + p + 0.5(p – 2) + y ... where p is year-over-year percent change in the PCE inflation index and y is the output gap: 2*(nairu-unemp) where 2 is the Okun coefficient and the nairu is from CBO ... But this is not the policy rule I recommended in a 1993 paper using a formula which has come to be called the Taylor Rule.

Actually, Jared omitted a closing parenthesis so it is not clear if he meant the original Taylor rule or what John Taylor thinks Jared used. To be fair, the original 1993 formula should be simplified to: 1 + 1.5(p) + 0.5(y). Let’s make the algebra as simple as possible. John does admit:

I realize that there are differences of opinion about what is the best rule to guide policy and that some at the Fed (including Janet Yellen) now prefer a rule with a higher coefficient.

But then he adds something where I would differ:

There are other important cross-checks on such calculations. Bernstein’s estimate of the output gap uses an Okun’s law coefficient of 2, but if you use 1.5 (the empirical estimate over the past 50 years) rather than 2, the gap is smaller, which also moves the rate up toward positive territory. Similarly, the average of the San Francisco Fed’s most recent survey of output gaps is smaller than what Bernstein uses.

The original Okun’s law coefficient was actually 3, which would imply a 6.6% gap. I realize there have been other estimates such as an estimate where the coefficient was closer to 2.5 (implying a 5.5% gap). And if one uses the CBO’s measure of the output gap, which is mentioned in the SF Fed’s survey, it indicates an output gap equal to 5.8%. Even if the coefficient for the output gap is 0.5 – as in Taylor’s 1993 paper – an output gap of 5.8% and an inflation rate of 1% implies negative interest rates. But I guess John Taylor’s latest excuse for criticizing any expansionary stance from the FED is his belief that we are not that far from full employment. Go figure!

A Zimmerman-Martin Thought Experiment

So suppose it was George Zimmerman, not Trayvon Martin, who was shot to death in Sanford, Florida.  Imagine a simple reversal: Martin was visiting the apartment complex, walking along, and realized he was being followed by an older, larger man.  The man got out of his car and started chasing him.  There was a struggle, Martin feared for his life, so he pulled out the gun and shot Zimmerman.  After a couple of days of uncertainty, Martin was arrested and charged with second-degree murder.

And suppose that all the ambiguities of the incident remained the same.  There were no direct eyewitnesses.  A final scream for help could have come from either of them.  Martin claimed that he was underneath Zimmerman, his head bashed against concrete, but this is only a claim.  All we know is that a visiting black teenager shot to death a white community patrol volunteer, and that his defense is that he was “standing his ground”.

How do you think the jury would have decided it?

Carbon Money: A Data Point from Down Under

One of the long running disputes about policies to reduce the risk of catastrophic climate change is what to do about carbon revenues.  Whether you have a carbon tax or auction permits, businesses that get hit by them will pass along their costs to consumers.  That’s a feature, not a bug, since the point is to change the behavior of the entire society, and prices are a better way to do this than a plethora of regulatory directives and a mammoth enforcement machine.

Meanwhile, the taxes or permit fees generate a flow of revenue to the government.  What should you do with it?

Many environmental groups say that it should be spent on environmental programs and energy conservation.  Everyone loves these programs, they say, and they will be so happy about their expansion that they won’t mind the extra cost of paying for them.

Then there are doubters (me among them) who think that this is not a politically viable strategy.  No, outside environmentalist circles most people are not in love with environmental programs and will worry more about their own financial well-being.  Moreover, carbon revenues, like all sales taxes, are regressive: lower income groups will pay a higher percentage of their income, which is a lousy way to fund government programs.  The approach we advocate is giving the money back—having the government rebate carbon revenues on a per capita basis to the public.  This would shield most people from financial losses and turn a regressive system into a progressive one.

This has mostly been a shouting match, since there is little evidence about political sustainability one way or the other.  Nevertheless, we have just had a data point from Australia.  In the wake of an internal Labor Party coup, in which former PM Kevin Rudd ousted Julia Gillard to reclaim his old post, that country’s carbon tax was revoked and replaced with a watered-down cap-and-trade system, expected to slash carbon prices by about 75%.  That’s a pretty good predictor of how much the effectiveness of the program will go down.  (In the current range of carbon prices the elasticity of demand, whatever it is, is probably stable.)  Under the Australian system, carbon revenues were used to fund environmental programs, so these will be slashed as well.  The account of the backsliding published in this morning’s New York Times makes it clear that the motivation was strictly political: a general election looms in September, and public opposition to the tax was crippling the Labor Party’s campaign.

Out of the corner of my ear I hear some greens saying, “But the public was brainwashed!  Right wing interests in Australia spent gobs of money running ads denouncing the carbon tax and making all sorts of false claims!  It isn’t a fair test!”  No, it’s terribly unfair, but in what country do you think business interests will roll over and not fight tooth and nail against aggressive carbon policy?  Have you followed the politics of the European Trading System recently?  And do you think that the Koch brothers will just haul out the white flags the moment the US congress passes a meaningful climate bill (if that moment ever comes)?  The point of having a political strategy is to overcome opposition, not embrace martyrdom.

To be fair, this is only half a data point.  It shows the vulnerability of programs to raise prices and increase environmental spending, at least in the current economic environment, but it doesn’t tell us whether the rebate approach would have worked better.  Maybe they’re both doomed.  Maybe we’re all doomed, and climate catastrophe is unstoppable.  But half a data point is better than none, and I’d like to see more tough-minded thinking from greens about how they want to reconcile the price impacts of carbon policy with political realism.

ephemera

Testimony before Congress of Defense Secretary Georg Wilhelm Friedrich "Chuck" Hegel.

Q: Mr. Secretary, can you tell us how you think the sequester will affect your department?

A: Well, the Owl of Minerva flys only at dusk, if you catch my drift, so I won't be able to say much about that until later.

Q: Mr. Secretary, you've been called an  Idealist. Are you?

A: Absolutely, absolutely.

Q: (Senator Sanders): To follow up, Mr. Secretary: you seem to be standing on your head - Would you mind if I turned you right-side up?

A: Sorry?

Q: Never mind. Could you tell us what your broad strategy for US defense policy will be?

 A: Well, I thought I'd just let Spirit Actualize itself  and go from there.

Q: How much will that cost?

A: I hate to bring the old Owl up again, but I'll get back to you.

Q: Thank you, Mr. Secretary.

A. Thank you. It's been Real, It's been Rational.

The Political Economy of Central Bank Activism

Yet another call for limiting central bank intervention in order to keep up the pressure for “structural reform” in the Eurozone has me thinking about the larger context.

Item 1: This morning I am reading a piece by two Dutch economists arguing for restrictions on the ECB’s promise to support sovereign debt markets (OMT) on the grounds that significant costs in financing fiscal deficits are needed to push reluctant governments to make necessary structural reforms.

Item 2: There have been never-ending demands for the Fed to relent on QE.  The justifications keep changing but the demands remain the same.

I agree with Noah Smith’s hypothesis that the true motivation, or at least one of them, is to not let a crisis go to waste, and to use economic pain as leverage to achieve other goals—a smaller state, less regulation, etc.  This is a strategy that dare not speak its name.  Proponents don’t say “let’s hold governments and populations hostage through austerity in order to force them to pursue a neoliberal agenda”; that would not go over well.  But this is not to accuse them of deceit.  In their own minds they probably see neoliberal reforms as self-evidently beneficial to the point that there is no need to spell them out or argue for them: everyone they know understands that this has to be the solution.  (It’s communicated through adjectives, like the “bloated” civil service, the “unaffordable” welfare state, “rigid” labor markets, and so on.)

But let’s take a moment to think about the mechanism.  Exactly what sort of pressure is envisioned that would override democratic preferences and force governments to cut the safety net, promote greater inequality and take other unpopular acts?  The answer is the bond market.  Governments that defend redistribution and restrictions on the market are expected to be punished by higher interest rates on their debt.  This empowers the creditors, wealthy individuals and institutions, to impose their presumed preferences on democratic majorities.  The great sin of aggressive bond market intervention by central banks to support sovereign debt is that it blunts this instrument, supplying publicly created liquidity when private wealth is skeptical.

From an analytical point of view, there are several questions to ask.  (1) To what extent do the risk perceptions of private wealth-holders accurately reflect the true long run prospects of national economies and their governments?  (2) Do more generous or more regulatory governments face higher interest rates on sovereign debt in general?  (3) What basis is there for the assumption that the economic costs of welfare programs, regulations and other government policies are systematically undervalued in the political process, such that they have to be defended by bond markets?

My guess is that most opponents of central bank activism don’t ask these questions explicitly; they simply assume the answers—that bond markets are rational and make the right calls, that they punish governments that fail to respect the logic of free markets, and that the enemy of “reform” is electoral populism.  You could say that, intellectually, they have simply taken sides.

Burkhardt Shrugged

Montreal Gazette: 

Edward Burkhardt, chief executive officer of Rail World Inc., which owns the MMA, defended the use of a one-person crew during his visit to Lac-Mégantic Wednesday, saying, "We actually think one-man crews are safer than two-man crews because there’s less distraction." .

 One-man crews safer than two-man crews? Dagny Taggart would smile.

"Dagny Taggart Would Smile."

A better way to run a railroad? Altas shrugged:

"The train derailed early Saturday morning, causing explosions and a fire that officials say killed at least 13 people, forced the evacuation of 2,000 residents and destroyed about 30 buildings. In addition, about 50 people remain unaccounted for." -- Globe and Mail

Edward Burkhardt, CEO of Rail World Incorporated, was hailed 15 years ago as an Ayn Randian "achiever" in "A Better Way to Run a Railroad," originally published in the May 1998 issue of the Atlas Society's Navigator magazine:

Inevitably, the success of Wisconsin Central attracted the animosity of those who resent achievement. The vultures were ready to pounce whenever misfortune struck. And they did pounce in the aftermath of a train derailment caused by a broken switch in the small community of Weyauwega, Wisconsin, in March 1996. Thirty-five cars derailed, almost half of them containing liquefied petroleum gas. One car exploded, but the heroic efforts of the train’s conductor minimized the extent of the fire. No one was injured... 

... Over 97 percent of the affected residents and businesses settled with the railroad within months. All but one of the remaining cases were settled out of court.  

But the Wisconsin newspapers climbed all over the railroad, sensationalizing its safety record and operating practices. The politically reflexive Federal Railway Administration picked up the cue, sending a small army of inspectors to the property to examine all aspects of the railroad’s operation. Fines were levied against the railroad, primarily for nit-picking violations of regulations whose impact on safety was questionable. For example, Wisconsin Central had been experimenting with a one-man crew on certain trains, a common practice in New Zealand and Europe. As part of the resulting “agreement” with the FRA, that experiment had to be suspended. Recently, the Wisconsin legislature passed a law prohibiting one-man train crews in the state.

  UPDATE: From the Globe and Mail:

This is not Mr. Burkhardt’s first experience of the disaster of derailment. 

While he was at the helm of Wisconsin Central, a train jumped the tracks at 5:50 a.m. on March 4, 1996, in Weyauwega, Wis., releasing hazardous material that caught fire and consumed rail cars loaded with liquefied petroleum gas and propane. The derailment, according to a U.S. National Transportation Safety Board report, consumed a mill and forced the evacuation of thousands. 

"There were no injuries directly attributable to the derailment, but three persons suffered minor injuries during the evacuation," the NTSB said, blaming the derailment on improper maintenance "because Wisconsin Central management did not ensure that the two employees responsible for inspecting the track structure were properly trained."

Will There Be A Major Chinese Crash?

Maybe. 

We have seen substantial volatility in the past in Chinese financial markets.  In particular the stock markets suffered sharp declines in both 2007 and 2011, with the former large enough to possibly even be called a "crash."  However, neither of these or earlier hiccups and declines slowed the real economy noticeably.  As it is, Chinese real growth has been slowing, which certainly reduces expectations of future income flows from Chinese financial assets.  The stock market has been declining since April, with that decline now more than 20%, the usual cutoff for a bear market.  The question is whether this decline is a period of distress following a peak in a larger scale adjustment that will be followed eventually by a much larger panic and crash that could then feed back on the real economy, slowing it much more dramatically with serious implications for the world economy.

Something that makes the current situation more disturbing is that we are finally seeing this decline  emanating significantly from the financial sector, particularly banking, which has long been known to be riven with corruption and bad loans, with overvalued properties in danger of sharply declining adding to the problems they face.  The peak came in April with a sudden spike of overnight interest rates up to  25%, following a massive surge of broad-based debt.  We know that the Chinese system is different from others and has many powers.  So, they may be able to overcome all this.  But the situation seems much more  dangerous  than previously, with this being beyond the control of the Chinese government authorities.

The depths of  the problems of the financial and particularly banking sector in China is summarized in an amazing sentence from near the end of an article on July 1 in the Financial Times by Robert Chancellor, in a column titled, "China crunch shows financial fragility."  Referring  to how  possible  investors in Chinese bank  stocks might view possible further purchases:

"They may note the  numerous indicators of financial fragility, including excessive credit growth; moral hazard arising from the belief that the state has underwritten all financial risk; related-party lending between state-controlled banks and state-owned enterprises; loan-loss forbearance; de facto financial liberalisation (accompanying the growth of the shadow banking system); extreme asset-liability mismatches created by WMPs [wealth management products] and interbank lending; elevated bank leverage hidden by off-balance sheet exposures; contagion risk posed by undercapitalised credit guarantee networks; and a financial system plaguedby Ponzi finance practices and contaminated with corruption and fraud."

The late Hyman P. Minsky could not have  put it better.

Social Security Stupidity from MoneyWatch

Suppose you wanted to take a couple of months off relying on those funds you accumulated in our savings account? Can you bank tell you that your can’t pay your current bills using the funds in your savings account? Jonelle Marte must think this is right:

“Long-term deficit? We can hardly afford our bills today. … In 2010, the Social Security Administration began collecting less revenue in taxes than it needs to cover benefit payments, forcing the agency to tap its $2.7 trillion trust fund sooner than some had expected. It was the first time since 1983 that expenditures had exceeded noninterest income

With this beginning, you might wonder whether it is worth your time to read the rest of the post. Save your time and don’t bother. I hope Jonelle has saved up funds in a bank that is reasonable as this post was so incredibly dumb – one has to wonder how long she’ll keep her current job. Or am I overestimating the standards at MoneyWatch?