Sunday, September 30, 2007

Military Contractors for Peace

Adam Smith argued that greed generates positive outcomes. According the New York Times, contractors' greed undermined the military's effort to militarize space.
"President Ronald Reagan issued a call on March 23, 1983, to make enemy missiles “impotent and obsolete.” His research effort, scorned by critics as “Star Wars,” after the movie, cost taxpayers more than $100 billion. John D. G. Rather, a laser expert who was an official at a military contractor during that era, said corporate greed undermined the effort from the start. “It became a tug of war,” he recalled, “where everybody and their brother wanted a piece of the action".”
Broad, William J. 2007. "From the Start, the Space Race Was an Arms Race." New York Times (25 September): p. D 1.

Intellectual Property vs. Medical Progress

Here is a Wall Street Journal article that describes how an important medical treatment for brain injuries got no support, in part because it depended on a naturally occurring chemical rather than a potentially patented blockbuster drug.
Burton, Thomas M. 2007. "One Doctor's Lonely Quest to Heal Brain Injury: After 40 Years, Skeptics Back Hormone Therapy." Wall Street Journal (26 September): p. A 1."Decades of research -- often conducted in his spare time and with piecemeal funding -- led him to a surprising hypothesis: that progesterone, a natural female hormone that protects fetuses in the womb, may actually protect and heal injured brains. His work slowly helped overturn medical orthodoxy that states that brain tissue, once injured, stays that way. Now he and colleagues plan a large-scale human trial over the next several years. While the outcome is far from assured, the effort could produce a new treatment for the estimated 10 million people world-wide who suffer traumatic brain injuries each year."
"Dr. Stein's journey shows just how difficult it is to challenge the medical establishment, which often begrudges ideas outside the mainstream. It also underscores how difficult it is for a lone researcher to persevere without drug-company or other major financial support: For many years, Dr. Stein held administrative jobs and had to moonlight to continue his research. Drug companies tend to focus more on blockbuster drugs they design than on naturally occurring ones with minimal profit potential."
After decades of neglect, his work was finally subjected to experimental trials. Here is what happened:
"Over the next three years, the study focused on 100 head-injured patients who had been brought into the emergency room at Grady Memorial Hospital in downtown Atlanta. Some patients received standard treatment to control bleeding and fevers along with state-of-the-art head-injury treatment. Others were also given intravenous progesterone, at triple the highest natural levels at the end of pregnancy. One Saturday morning in 2005, Dr. Stein was driving north of Atlanta on a shopping trip with his wife when a stern-sounding Dr. Kellermann called him. Dr. Kellermann said he had just learned the study's findings, adding, "Pull over to the side of the road."
"Dr. Stein froze, fearing that decades of research with animals would prove useless, that progesterone might have turned out to raise the death rate in humans for some unforeseen reason. His heart was thumping as Dr. Kellermann told him the results: Patients on progesterone had a death rate of just 13% from their head injuries, less than half the 30% death rate of those on standard treatment. And progesterone showed no negative side effects. The 100-subject study was too small to prove that progesterone caused the lowered death rate, but the findings were consistent with animal research. Don Stein was so elated that he had to ask his wife to take over the driving.""In the respected journal "Annals of Emergency Medicine" this past April, Dr. Stein and his researchers summarized the study: "Moderate traumatic brain injury survivors who received progesterone were more likely to have a moderate to good outcome than those randomized to placebo."

Friday, September 28, 2007

The SCHIP Debate

Greg Mankiw weighs in on this controversy with the following exam question:

With medical costs skyrocketing, the middle class struggling, and heartless Republicans running the government, what has happened to the percentage of children without health insurance over the past seven years?

He then asks us to look at figure 1 from this source, which shows that this percentage has declined over the past decade. Greg then suggests to his readers:

Feel free to suggest your hypotheses to explain these data in the comments section.

Greg got some good answers including one from Marshall Derks, which simply said: “Simple answer, SCHIP was created in 97”. A longer answer came from Mike: “Partisan hackery at its worst, Dr. Mankiw. Shame. As bob put it, the correct question is what will happen in the two scenarios going forward”. These replies only go to show you what happens when you don’t drink the White House Kool Aid.

Shut up and Listen!

The Political Economy of War

The Washington Post reports that Saddam Hussain was willing to go into exile just before the invasion for a mere $1 billion. Assume that Lawrence Lindsey's $100 billion estimate reflected the administration's optimistic best guess of the cost of war. What do you think the administration thought might have been worth more than the $99 billion difference?


So, Juan Cole has provided a reputed transcript from a Spanish newspaper of a meeting on February 22, 2003 between Bush, Rice, and Spanish PM, Aznar at the Crawford ranch. Two claims from this are that Bush declared that he would invade Iraq even if the UN refused to approve it, and, more significantly, there was an offer on the table from Saddam Hussein to leave Iraq, being negotiated by the Egyptians. Price was one billion dollars plus Saddam taking out some documents on WMD (Cole speculating these were ones showing previous US funding and support for chemical weapons development, which the US did when Saddam was fighting Iran in the 80s with Rumsfeld famously shaking his hand back then).

So, Bush has gotten us a million dead and a trillion dollars spent, when he could have spent one billion. This is way beyond being impeachable and well into war crimes territory. (The only blog I have seen mentioning this besides Cole, so far, is marginal revolution, where Tyler Cowen made a comment about the Coase Theorem, and most of the commenters somehow thought that this was all evidence that the "skeptics" on Iraqi WMD were wrong and should now be embarrassed. Ack!)

Thursday, September 27, 2007

Apologies to John Dingell

Doug Henwood tells me that Charles Komanoff and
the folks at the Carbon Tax Center report that
Rep. Dingell's carbon tax bill is both good and,
in their words, "terrific." Here is a link for the bill.

Wednesday, September 26, 2007

Unexpected Roads Happily Traveled

Robert C. Merton, winner of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1997 (sometimes incorrectly known as the Nobel Prize in Economics wrote with what in retrospect might have an ironic ring:
"It was deliciously intense and exciting to have been a part of creating LTCM (Long-Term Capital Management). For making it possible, I will never be able to adequately express my indebtedness to my extraordinarily talented LTCM colleagues. The distinctive LTCM experience from the beginning to the present characterizes the theme of the productive interaction of finance theory and finance practice. Indeed, in a twist on the more familiar version of that theme, the major investment magazine, Institutional Investor characterized the remarkable collection of people at LTCM as "The best finance faculty in the world." In long retrospect, unexpected roads happily traveled"."

Economists vs. Politicians

Peter recently posted something about Mankiw's New York Time piece supporting carbon taxes.

It isn't often that we can find examples of the economics profession behaving well, but the Wall Street Journal has chimed in reporting that economists as a whole agree that carbon taxes are the way to limit global warming, yet politicians are just as adamant in supporting the cap and trade. Nobody wants to get blamed for raising taxes. Rep. John Dingell (Dem, GM; i.e. General Motors) is still supposed to introduce a carbon just to prove how unpopular such a tax might be. Here is the link for the article:

Health Care: Are Greg Mankiw and Dick Morris Trying to Help Senator Clinton?

Better question – why is Greg relying on Dick Morris for economic policy discussions? I refuse to suggest that Mr. Morris is going to bother to truthfully inform us on any issue preferring to quote Greg:

His one-third figures seem a bit high to me, but he is right that 47 million substantially overestimates the magnitude of the problem. A serious estimate would take out both illegal immigrants and those who are eligible for Medicaid but have not applied. Those eligible for Medicaid can always enroll once they need significant medical care. In addition, I would exclude those who were offered employer-provided health insurance but declined coverage, and those that are healthy and making more than, say, $50,000 a year. These two groups are choosing to roll the dice. According to estimates I have seen, they make up more than a quarter of the uninsured.

Let’s think this through – if the problem of uninsured is not as large as what Senator Clinton has suggested, then the budgetary costs of addressing this problem wouldn’t be as large either. The usual rightwing criticism of Clinton’s proposal is that it would raise taxes a lot. I guess Dick Morris was trying to help the Senator out by deflating this rightwing argument. Thanks Dick! Thanks Greg!

Moral hazard fundamentalism

Thoma and Delong both linked to Summers' FT column with this title yesterday. Summers has in mind the trade-off between stability and moral hazard that a lender of last resortmust negotiate. Fundamentalists look at the moral hazard costs of such policies (people take inefficiently high risks, knowing that they will be bailed out) and ignore the benefits of insuring that solvent debtors are not brought down in a panic: they see no trade-off at all. It's as if, he says, we argued that because the presence of a fire-house down the street makes us somewhat more likely to smoke in bed, that therefore there should be no firehouses!

This fundamentalism is indeed pervasive. Here is another example: State policies that compress the income distribution - progressive taxes, safety nets, etc- clearly increase moral hazard and lead to less effort- the incentive to take actions that increase pre-tax income is dulled to some extent. That's enough to condemn such policies for the fundamentalists. But this is to ignore the huge benefits that such policies create by spreading risk more efficiently. Due to adverse selection, generalized income insurance is not a paying proposition for private insurers. Social welfare states, by making everyone join the pool, substitute for this missing market. There is a trade-off here, as in the LLR case, and it is a tradeoff not (or not just) between efficiency and equity, but between two sources of efficiency: lower moral hazard and more risk-spreading both increase "certainty-equivalent" income. Policies that increase income security are not wimply interferences with efficiency: they are part and parcel of what efficiency requires. The thorough-going "ownership society" - the end-point of moral hazard fundamentalism in this context,-by failing to see the trade-off involved, is an inefficent society, where certainty-equivalent income is lower than it could be. It's no different form the society that foregoes fire-houses due to the moral hazard of increased smoking in bed.

Tuesday, September 25, 2007

Not Sure I’d Let This “Economist” Cook for Me

Mark Thoma emails me a gift calling Economics For Dummies the “economics of a dummy”. Ralph R. Reiland (the 3 R’s) says he is an associate professor of economics at Robert Morris University and a local restaurateur. I have no clue what the quality of instruction is at Robert Morris University but I sure hope the cooks at his restaurant are better at the culinary arts than Mr. Reiland is at understanding macroeconomics. He confused the aggregate demand effects of the 1964 tax cut supported by easy monetary policy with the supply-side insanity of Jude Wanniski and Arthur Laffer. He also wrote this old chestnut:

Additionally, inflation fell from double digits in 1980 to 1.9 percent in 1986, federal revenues increased by nearly half a trillion dollars over their 1980 levels by the end of Reagan's second term, the federal budget deficit fell from 6.3 percent of GDP in 1983 to 2.9 percent in 1989, and unemployment dropped from 7.1 percent in 1980 to 5.3 percent in 1989.

I would hope his students know that part of the reason inflation fell was that massive 1982 recession brought on by the Federal Reserve’s zeal to offset the aggregate demand effects from the 1981 tax cut. I would also hope his students are aware that real per capita Federal income taxes were barely higher in 1992 than they were in 1980. Can I suggest to Robert Morris that they not let such foolish ideas come before their students?

Monday, September 24, 2007

Using Markets to Fight Global Warming

Here is a remarkable step forward in fighting global warming here on the Left Coast. "The State energy commissioners on Thursday unanimously adopted a proposal that would financially reward or punish California's largest utilities for their performance on energy-efficiency programs. Members of the California Public Utilities Commission voted to award up to $450 million over three years to Pacific Gas and Electric Co., Southern California Edison, San Diego Gas & Electric and Southern California Gas Co. if they meet specific goals to trim energy consumption. While the money would come from approved rate increases, said Commissioner Dian Grueneich, who co-wrote the proposal, the increases would be more than offset by up to $4 billion in reduced energy costs for consumers." Follow the dancing money.

Sunday, September 23, 2007

How to Do Chicago Economics

Here are two discussions about how Chicago teaches economists to do economics. Both Reder and McCloskey say that when the evidence contradicts ideology, stick with the ideology.

McCloskey, Donald N. 1985. The Rhetoric of Economics (Madison: The University of Wisconsin Press).

140: "In seminars in economics it is common for the speaker to present a statistical result, apparently irrefutable by the rules of positive economics, yet to be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point."


Reder, Melvin W. 1982. "Chicago Economics: Permanence and Change." Journal of Economic Literature, 20: 1 (March): pp. 1-38.

13: "Any apparent inconsistency of empirical findings with implications of the theory, or report of behavior not implied by the theory, is interpreted as anomalous and requiring one of the following actions: (i) re-examination of the data to reverse the anomalous finding; (ii) redefinition and/or augmentation of the variables in the model...; (iii) alteration of the theory to accommodate behavior inconsistent with the postulates of rationality... (iv) placing the finding on the research agenda as a researchability anomaly." Chicago tends to shun iii.

13: It is customary to confront theory with evidence. By contrast, "Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research by consistent with the implications of standard price theory."

18: The major objective is to convert non economists to their way of thinking.

19: "However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training."

20: ""Explanation" means either a demonstration that the phenomenon is compatible with the underlying theory, or the provision of such extensions of the theory as may be required."

25: Friedman combined economic research with advocacy of specific proposals. All involved an increased use of price system instead of public production .... This is a normative stance. Friedman said to advocate regardless of political practicality. Stigler thought that once could convince a beneficent government to adopt reforms with sufficient political support. He eliminates the normative.


As editor of an economics journal, I regularly hear authors complain about long lags for referee reports. I am very sympathetic with these complaints and frustrated myself. What is especially frustrating is that I know that these lags are much shorter in many other disciplines, especially the hard sciences. Physicists and others are simply shocked at the lags in economics refereeing and publishing, and this has led to much of the recently emerged econophysics literature being published in physics journals like Physica A and European Physical Journal B, which are not indexed in the Journal of Economic Literature, and hence not read and not even known about by most economists.

Ofer Azar has argued in a paper in Economic Inquiry this year ("The slowdown in first response times of economics journals: can it be beneficial?" 45(1), 179-187) that indeed the increasing lag of authors hearing back from journals could be a good thing, maybe even optimal. This is because people need to pay a cost for sending papers to journals that are too far above them and in which they have no chance of publishing. Hence, they will get the signal if they have to wait a long time and just get rejected and send their papers to appropriate outlets. Azar argues (in a paper forthcoming in JEBO, which I edit) that the shorter response times in physics reflect that their papers are shorter on average than those in economics. This latter point is correct, but I think that what has happened is that a bad social norm has evolved in economics where referees simply assume that they can sit on papers from economics journals for a long time and just put them aside, fearing that if they get their reports back quickly, they will simply be punished by having more papers sent to them to referee, given that the average response times are so long. I dislike this social norm, but it is very hard to overcome (and the Berkeley Electronic Press's effort to shorten refereeing times has so far resulted in published articles that barely get cited in other papers).

Hapy Birthday

John Coltrane, born September 23,1926. Go listen to "Alabama" - and think about Louisiana.

Saturday, September 22, 2007

Does the Washington Post Think the U.S. Exports Oil?

Dean Baker has some fun with an article written by Steven Mufson on the supposed effect of Federal Reserve policy on oil prices:

Let's try to write this so even a reporter can understand it. Oil is bought and sold in a huge market. The unit of account happens to be the dollar. This means that if the value of oil against all other commodities remains fixed, and the value of the dollar falls against other currencies, then the price of oil will be higher measured in dollars, and essentially unchanged in other currencies (there are some secondary effects - if oil is more expensive in dollars, people in the U.S. will buy less, which can make the price of oil somewhat cheaper measured in other currencies). The same would be true if oil were priced in euros, yen, bushels of corn, or gallons of peanut butter. There is no special importance to the fact that oil happens to be priced in dollars. So, let's get the story straight and stop confusing readers.
Dean Baker’s point is that currency of denomination is not the issue. But let’s take a look at what Mr. Mufson wrote:

Federal Reserve Chairman Ben S. Bernanke may have cooled off the credit crisis by cutting interest rates, but he may also have heated up oil prices this week. For seven consecutive business days, crude oil prices have hit new highs. Even after dropping slightly yesterday, crude oil on the New York Mercantile Exchange finished the week at $81.62 a barrel, up a third since Jan. 1 and not far short of the inflation-adjusted peak set in January 1981 … Lower interest rates have also undercut an already weakened dollar, which reached $1.41 against the euro. Since crude oil is priced in dollars, a weak dollar makes oil cheaper abroad and high prices in dollars more sustainable.

Mufson has the charts to demonstrate oil prices have risen and cites several factors that led to the increase in the market price besides the reduction in the Federal Funds rate. He then notes:

"In spite of the high [gasoline] prices, we have still seen growth in the United States," said Rob Routs, executive director of downstream at Royal Dutch Shell. He said that the United States has been importing about 1 million barrels a day of refined products

I guess Mr. Mufson knew we were a net importer of oil and not a net exporter. And I thought a dollar devaluation was supposed to increase world demand for our exports as it discouraged our demand for imports. The devaluation does matter as it impacts relative prices – but I think Mr. Mufson has his story a wee bit backwards.

Greg Mankiw Asks the Democrats a Good Question on Fiscal Policy

I think Greg Mankiw has a point here:

Okay, you want to raise taxes on the rich. I get that. But what do you want to do with the money? At different times, it seems, you want to: (1) Fund universal health care: (2) Give a tax cut to the middle class; (3) Reduce the long-term fiscal gap. Which is it? … No one really thinks you can achieve all three of the above goals in any significant degree and pay for them with only tax hikes on the rich. When it comes down to choosing among the three goals, which one would you pick?

Fair enough but when is Greg going to ask Mitt Romney the same type of questions. Mitt is acting a lot like Rudy Giuliani:

But eliminating the AMT would be extremely expensive, costing $100 billion in 2010 alone. Giuliani told the 700-member audience of the Northern Virginia Technology Council that he wants to cap the tax, and perhaps eventually eliminate it altogether. "Over time we can figure out how to eliminate it. ... If we were going to eliminate it, though, we'd have to balance it with additional tax cuts," Giuliani said, leaving confused expressions on his audience. "That might be by making the Bush tax cuts permanent."

Kevin Drum calls Rudy a buffoon:

Even a local Democrat who heard the speech was willing to give Rudy the benefit of the doubt on this: "I do think he may have misspoke," said Gerry Connolly, the chairman of Fairfax County's Board of Supervisors. Please. Just for once, can we hold this guy responsible for what he says? Sure, he misspoke, but he misspoke because he doesn't have a clue what he's talking about and blurted out the first thing that came to mind: namely that reducing taxes is the answer to every question. Nobody with even the vaguest idea of what it meant to eliminate the AMT would say that it had to be balanced by reducing other taxes.

Kevin is right. But he’s no less of a buffoon than Mitt Romney. It’s fine for Greg to ask his question to Democrats but when is he going to do the same to the candidate he seems to support?

Friday, September 21, 2007


There is a useful piece by Floyd Norris in this morning’s NY Times about the Fed’s response to the housing bubble. It echoes the larger debate, which has flared up again with his PR blitz, over whether Greenspan was fiddling while Roman property values went through the roof.

Let’s step back for a moment and consider the larger context. The US has been running a very large current account deficit. Here are the quarterly data since 1990 courtesy of the BEA:

US Current Account Balance as a Percent of GDP

If this were the total story, the US economy would have been moribund since the late 1990s when the deficit really took off. This fraction represents income that leaves the country rather than making purchases that would support domestic employment.

But this is only half the picture. The other half is the return of this money via the capital account, in the form of purchases of debt, like treasury bonds, and assets. This return flow not only finances the current account deficit, propping up the dollar, but also makes possible continued US economic growth. For instance, the willingness of foreign central banks to accumulate treasuries means that the Bush crowd can borrow freely to finance the federal government deficit without fear of pressure on interest rates. (This is not to say that the fiscal deficit is too high in any general sense, which it isn’t.) The infusion of foreign finance also sustains asset prices, like stock values, above what they would otherwise be. This generates capital gains for those who have positions in these markets and also encourages borrowing against paper wealth.

The housing bubble could be seen as a bit of both of these. Foreign purchases of mortgage-backed securities injected large amounts of money into the housing market, so that the demand for loans, no matter how outlandish, never exceeded the supply. This in turn fueled a bubble in the existing housing stock. Now that the bubble is bursting, there are fears of a general financial crunch.

Perhaps, but there is still one more river to cross. If the central banks and oil funds that currently finance the US external deficit continue their willingness to hold dollar assets, the money will simply have to go somewhere else. It can finance government and corporate debt, driving down interest rates. It can go into purchases of US companies, goosing the stock market. As long is it has to go somewhere it will.

The risk, of course, is that at some point the sovereign entities on the receiving end of the massive dollar flow will decide that enough is enough. Perhaps the extent of losses they will suffer due to the mortgage meltdown will force them to pull back. Maybe a private sector stampede, sparked by further bad news about defaults, will overwhelm the ability of CBs to stem the tide and sustain US financial markets.

The larger story, however, is that, as long as the US economy chugs along in a temporary equilibrium of massive external borrowing, bubbles of one sort or another are inevitable. That’s why it’s an equilibrium and also why it’s temporary.

I Bet Lou Dobbs Is Not Happy With Mattel

Thomas A. Debrowski is Mattel's executive vice president for worldwide operations. After a meeting with Chinese product safety chief Li Changjiang, Mr. Debrowski decided his company should take a lot of the responsibility for the recent product recalls:

"Our reputation has been damaged lately by these recalls," Debrowski told Li in
a meeting at Li's office at which reporters were allowed to be present. " And Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys," Debrowski said … The recalls have prompted complaints from China that manufacturers were being blamed for design faults introduced by Mattel. On Friday, Debrowski acknowledged that "vast majority of those products that were recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in China's manufacturers." Lead-tainted toys accounted for only a small percentage of all toys recalled, he said, adding that: "We understand and appreciate deeply the issues that this has caused for the reputation of Chinese manufacturers." In a statement issued by the company, Mattel said its lead-related recalls were "overly inclusive, including toys that may not have had lead in paint in excess of the U.S. standards. "The follow-up inspections also confirmed that part of the recalled toys complied with the U.S. standards," the statement said. Li reminded Debrowski that "a large part of your annual profit... comes from your factories in China. "This shows that our cooperation is in the interests of Mattel, and both parties should value our cooperation. I really hope that Mattel can learn lessons and gain experience from these incidents," Li said, adding that Mattel should "improve their control measures."

I mention Lou Dobbs as his show has been on a tirade of China bashing as if we should stop importing goods from this trading partner. The reality is that most of the toys purchased by American households are made in China. During 2006, we imported $22.2 billion worth of toys from China according to this source. Mattel sales were $5.65 billion during 2006 and its operating margin was just shy of 13 percent. Mattel’s 10-K filing notes:

The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia, Thailand, Malaysia and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent in 2002, following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization (“WTO”), which occurred in 2001. Membership in the WTO substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry. All US duties on toys were completely eliminated upon implementation of the Uruguay Round WTO agreement in 1995. The European Union, Japan and Canada eliminated their tariffs on most toy categories through staged reductions that were completed by January 1, 2004. The primary toy tariffs still maintained by these countries are European Union and Japanese tariffs on dolls of 4.7% and 3.9%, respectively, and a Canadian tariff of 8.0% on children’s wheeled vehicles.

I realize that the Lou Dobbs crowd is pushing hard for higher tariffs on imports from China, but such tariffs are not exactly the right incentive structure to promote better quality control in terms of toy production. Mattel and the Chinese government both have incentives not to wreck the flow of Mattel profits and Chinese jobs that would come American parents not trusting the products they produce. Sure – there are incentives to cut production costs and maybe the lower cost of lead paints may have been part of the problem here – as argued by this Angrybear. But as Mr. Debrowski notes, one can overemphasize this one aspect of the incentive structure.

I say this because Mattel and other companies that design and distribute toys with production outsourced to third party Chinese manufacturers have established the type of Hong Kong sourcing companies that I discussed here. OK, my Angrybear post from over a one ago was complaining that the IRS allows too much transfer pricing manipulation. But as one digs into the facts about these sourcing companies, one sees that these subsidiaries of companies like Mattel hire a lot a quality control personal. Are they spending enough on quality control? Perhaps not, but let’s see if the toy industry learns a valuable economic lesson from these product recalls.

Thursday, September 20, 2007

Men at Work

As you can see we're trying to improve the template of this blog. Mistakes will be made. Please bear with us.

Go ahead, attack me for the colors I've picked. I can take it.

This is the rest of yourpost you'll see when following the "Read more" link. Continue the restof your very long post here. Blah, blah and blah.


So, it is not just that the US dollar has hit an all time low against the euro, but it has hit parity against the long-derided Canadian dollar (aka "looney") for the first time in over 30 years, and much more significantly, for the first time in 50 years, the Saudis are considering unpegging their riyal from the US dollar, frustrated at the inflationary pressure arising from the rising cost of imported food as their currency declines with the dollar. The upshot is a very real danger of a full-blown plunge of the dollar internationally, in the wake of the interest rate cuts by the Fed, in their efforts to stem the tide of housing price declines and failures in the sub-prime mortgate industry that have been filtering out into the global financial markets. But, with the unprecedented and humongous net international indebtedness of the US, combined with ongoing and large-scale current account deficits, this is indeed a very dangerous situation (especially for someone like me about to travel to Europe, :-)).

Delong Smacks Lucas Down!

Check it out. I went to grad school during the heyday of Lucas/Sargent/Wallace/Barro "policy-ineffectiveness" theology. The picture of how the macroeconomy works that this gang flacked has turned out to be utterly, utterly wrong. The idea that the business cycle is caused by "unanticipated money" shocks - so that an economy where the Fed acted in predictable ways would be cycle-free: this is, and was, intellectual rubbish! Why have these people paid no price for being so wrong, I wonder? Like the liberal war-bloggers, their eminence is undiminished.

A Comment on Senator Obama’s Tax Proposal from a Bear Inflicted by Deficit Dementia

While I have been a big fan of what Max Sawicky started in Blogland a few years back, he and this ProGrowthLiberal (if you are thinking another Gene Sperling type – you are close) did not entirely agree 100% on how to express our views on things like fiscal policy. After all, someone who has been signing onto the Angrybear blog (before our cave got too crowded with all sorts of Bears – some of which I worry have been visiting Dick Cheney’s cave) as PGL, it is fair criticism that I’m in the Rubinomics camp at least when it comes to trying to restore national savings. I can try to defend my DeLong-ish deficit hawk view on things by appealing to the Solow growth model and all, but I know this crowd will rightfully fire back with things like the benefits of public investment, the importance of distributional equity, and even the need to stay close to full employment. No argument here, so let me get to my first politically framed post with an economist twist by pointing to a recent Angrybear post:

I see the Republicans topping the modest tax cuts that Senator Obama is proposing by promsing larger tax cuts for everyone. But that’s the problem. The GOP is all about Spend&Spend and Borrow&Borrow, which simply means deferring the tax bite. I don’t want Democrats promising voters that money grows on trees.

OK, you may say this Bear really has Deficit Dementia so badly that he has no clue as to how to play the DC games with the reprehensible GOP types. Fair enough but as I try to distance myself just a bit from Kevin Drum, I do need to step back and realize that Kevin is also afflicted with both Deficit Dementia and a desire to be slightly right of MoveOn. But that should not stop either one of us for calling on the next President for insisting on a more progressive tax code.

Which leads me to where I think Senator Obama must have been reading MaxSpeak, You Listen. Over at Angrybear, I had two habits: (1) complaining a lot about how multinationals manipulated transfer pricing and got away with it; and (2) stealing choice phrases from Max. These were not mutually exclusive activities as Max has some of the best commentaries on how transfer pricing manipulations would cheat the US Treasury.

So my first post is less on the issue of fiscal policy and more a promise to say more on this issue of how the next President – be that Senator Obama or one of the other good choices from the Democratic side (please don’t get me started on Rudy McRomney) – can gather at least a few morsels from effectively enforcing section 482, which should be the domain of economists even if we let the tax attorneys trample all over us.

Of course, if one of these responsible GOP types dusts off Social Security deform, expect this Bear to reject the notion that prefunding is jive. But I don’t want to go down that road just yet as I remain thankful that Max has given me the right to post here.

Update: Did I predict that the Republicans would up the ante on tax cuts? Ramesh Ponnunu proves me right! He wants everyone to get a tax cut. And I thought Ramesh was the sole smart one at the National Review. For why this is another nitwit rant, see Mark Thoma. Shall we just call the GOP, the “money grows on trees” party?

Wednesday, September 19, 2007

Prices as Intellectual Property

The magic of the marketplace that Hayek proposed works because prices covey the information necessary to make efficient decisions. I never believed Hayek, but I never supported intellectual property either. Here we have Harvard's bookstore acting as if its retail prices were intellectual property to prevent students from buying "efficiently."

"The Coop, Harvard's Barnes-and-Noble-run bookstore, has begun to throw out students who "take a lot of notes" about book pricing, stating that their prices are "intellectual property." Apparently, no one with a Harvard Law degree is involved in formulating this notion, as factual matters (such as pricing) are not copyrightable."

"Coop President Jerry P. Murphy '73 said that while there is no Coop policy against individual students copying down book information, "we discourage people who are taking down a lot of notes." The apparent new policy could be a response to efforts by -- an online database that allows students to find the books they need for each course at discounted prices from several online booksellers -- from writing down the ISBN identification numbers for books at the Coop and then using that information for their Web site. Murphy said the Coop considers that information the Coop's intellectual property."

Greenspan on the futility of Economic Forecasting

Dufour, Jeff and Patrick Gavin. 2007. "Alan Greenspan's a Pessimist on Economists." Yeas & Nays (11 September).

When you gather together three Nobel prize winners, four former members of the White House's Council of Economic Advisers, a Congressional Budget Office head and a former treasury secretary, you sure don't expect them to be told that, well, their life's work has all been for naught. But, at a private dinner Friday held at the Washington Club to honor Brookings Institution economist George Perry and Yale's Bill Brainard (both the retiring editors of the renowned Brookings Panel on Economic Activity), former Federal Reserve Chairman Alan Greenspan told the audience that economists don't really know anything.

"The one thing that struck me is that, despite the extraordinary sets of articles, insights and analysis by the people in this room and the other colleagues in BPEA, our ability to forecast the business cycle has not improved one iota," Greenspan said. "The best models don't work all that well."


But don't cry just yet, wonks: Greenspan was actually asked by BPEA to discuss the inherent difficulties in economic forecasts (economists are gluttons for punishment, don't you know) and Greenspan -- in the type of English only he can employ -- said the uselessness of their jobs actually creates usefulness!

"It doesn't, however, induce us to then conclude that, if the model doesn't forecast -- which implies that it has not captured the appropriate structure -- we nonetheless tend to use the structure of the model to do analysis and draw significant conclusions about how the inner workings of relationships occur even though the coefficients which we're employing clearly don't forecast anything worthwhile."

Exactly. What he said.

Thanks to Doug Henwood who posted this to the LBO mailing list.

Tuesday, September 18, 2007

more on Liberals vs. Conservatives

This one makes more sense to me than the one about conservatives being "rigid" and liberals being "flexible," which seemed tautological. Whereas that article really couldn't say anything about non-liberal, non-conservative people like Marxists (who I guess would be both rigid and flexible simultaneously), this one might: Marxists might be saying that the five different moral principles that Haidt posits have been ripped apart by the rise of modern capitalist society and that this alienation needs to end, to find harmony among them. -- Jim

from the Science section of the NY TIMES, 9/18/07: >>“Imagine visiting a town,” Dr. Haidt writes, “where people wear no clothes, never bathe, have sex ‘doggie style’ in public, and eat raw meat by biting off pieces directly from the carcass.”

>> He sees the disgust evoked by such a scene as allied to notions of physical and religious purity. Purity is, in his view, a moral system that promotes the goals of controlling selfish desires and acting in a religiously approved way.

>> Notions of disgust and purity are widespread outside Western cultures. “Educated liberals are the only group to say, ‘I find that disgusting but that doesn’t make it wrong,’ ” Dr. Haidt said.

>> Working with a graduate student, Jesse Graham, Dr. Haidt has detected a striking political dimension to morality. He and Mr. Graham asked people to identify their position on a liberal-conservative spectrum and then complete a questionnaire that assessed the importance attached to each of the five moral systems. (The test, called the moral foundations questionnaire, can be taken online, at

>> They found that people who identified themselves as liberals attached great weight to the two moral systems protective of individuals — those of not harming others and of doing as you would be done by. But liberals assigned much less importance to the three moral systems that protect the group, those of loyalty, respect for authority and purity.

>> Conservatives placed value on all five moral systems but they assigned less weight than liberals to the moralities protective of individuals.

>> Dr. Haidt believes that many political disagreements between liberals and conservatives may reflect the different emphasis each places on the five moral categories.

>> Take attitudes to contemporary art and music. Conservatives fear that subversive art will undermine authority, violate the in-group’s traditions and offend canons of purity and sanctity. Liberals, on the other hand, see contemporary art as protecting equality by assailing the establishment, especially if the art is by oppressed groups.

>> Extreme liberals, Dr. Haidt argues, attach almost no importance to the moral systems that protect the group. Because conservatives do give some weight to individual protections, they often have a better understanding of liberal views than liberals do of conservative attitudes, in his view. [what about the "extreme conservatives"?]

>> Dr. Haidt, who describes himself as a moderate liberal, says that societies need people with both types of personality. “A liberal morality will encourage much greater creativity but will weaken social structure and deplete social capital,” he said. “I am really glad we have New York and San Francisco — most of our creativity comes out of cities like these. But a nation that was just New York and San Francisco could not survive very long. Conservatives give more to charity and tend to be more supportive of essential institutions like the military and law enforcement.”<<


by the Sandwichman

Democracy is unruly. Can't have that.

The jazzy sounds of Alan Greenspan

It's not news that AG spent some time playing clarinet in the Herbert Jerome band. In the memoir, so the grey lady informs me this morning, he recalls, during down-time, band-members clouded in tobacco and marijuana smoke in one room, while he sits alone in the next ensconced in an economics tome, or - I'm imagining,- some of the texts that pre-figure his inauguration into the Rand cult . I picture the standard jazz repertoire filtered through his green-eye-shaded, Objectivist sensibility:

"How High The Prime."
"I'm Growing Sentimental Over Me."
"In A Rationally Exuberant Mood."
"Tea For Two - With Separate Checks, Please."
"I Concentrate On Me."
"I've Got Liquidity - Who Could Ask For Anything More?"
"Concerto For Kooky (For Ayn)."
"In The Wee Smaa Structures Of The Minimal State."

---and that's just the first set!

Monday, September 17, 2007

National Bureau of Economic Research. 3

The third article, continues the downward spiral. There, Alexander Dyck, Adair Morse, and Luigi Zingales in "Who Blows the Whistle on Corporate Fraud?" suggest that government regulators are not very effective in rooting out corporate fraud, and, what is worse, rational expectations of investors are not very active either. The authors recommend giving more incentives to whistleblowers. This recommendation certainly must be wrong. What corporation needs such meddling? The decline in the standards of economics generally upheld by the National Bureau of Economic Research must be reversed.

National Bureau of Economic Research. 2

The second National Bureau of Economic Research article must have slipped in by mistake. There, Pinelopi Koujianou Goldberg and Nina Pavcnik in the article entitled "Distributional Effects of Globalization in Developing Countries." In what must be a horrendous blunder, they come to the conclusion, "the evidence has provided little support for the conventional wisdom that trade openness in developing countries would favor the less fortunate." After all, everyone knows that the purpose of expanding trade is an act of generosity, intended only to help the poor.

National Bureau of Economic Research. 1

I'm just looking over the August NBER digest. It covers five NBER articles, of which three may be mildly interesting. The first has the scary title, Public Insurance Expansions Crowd Out Private Health Insurance by Jonathan Gruber and Kosali Simon. We learn that: For every 100 children who are enrolled in public insurance, 60 children lose private insurance." Thank God that George Bush had the courage to stand up to the radicals and threatened to veto an expansion of child health coverage. Otherwise, they might lose their private insurance.

It's About the Oil Money

The web is ablaze with talk about Iraq, oil and the latest passing comment from Alan Greenspan. Let’s be clear:

The Iraq war is not about controlling oil. There is a global market in the gunk, and if the US or anyone else has difficulty getting it from country A it can always turn to country B. Also, no otherwise poor country would ever, ever refuse to sell oil for any prolonged period of time. It’s the difference between being important and having some leverage, and being a nobody. Quite aside from whatever you think about Hugo Chavez’ policies, where would he be if he stopped pumping and selling oil? So, no, there is no threat that any oil producing country will cause chaos by dismantling its industry or even reshuffling its sales contracts.

It could be about setting OPEC quotas, maybe. The countries the US hates and tries to undermine tend to be OPEC hawks (Iran and Venezuela). But it is not clear that those who set US priorities are so in favor of cheap oil either. There are also less expensive ways to influence OPEC.

Then what’s it about? The oil money. It’s big, one of the primary forces in the global economy. If Everett Dirksen had been a sheik, he might have said, “a few hundred billion here, a few hundred billion there, and soon you’re talking about real money.” Who gets this moolah and what they do with it is what it’s all about.

Washington has two overriding imperatives. First, the money should not be used to fund political movements the US opposes. This includes Chavismo, Islamicism or any other attack on liberal capitalism from the left or right. Second, the money should be recycled to banks with the appropriate dollar and euro portfolios, lest financial imbalances lead to a run on the hegemonic currencies. (OK, maybe there is no alternative if you have to put an unimaginably large sum somewhere, but it remains an imperative.) The blog folk wisdom about “the war was because Saddam wanted to price oil in euros” is technically wrong but gropes after the right answer: those who are allowed to rake in the oil billions must be counted on to send them back to the proper address.

Follow the money.

How to Blunt Competition

In a world with massive overcapacity, firms need to blunt competition. Here is a case in which one company buys out another, just to eliminate a competitor.Hansell, Saul. 2007. "Seagate: Missed the IPod but Selling to Lots of Snoops." New York Times On Line (10 September)."

In 2006, there was a cutthroat battle for market share set off in part by Seagate's acquisition of Maxtor. This year, competition has eased and Seagate's gross margin has expanded to 24 percent. "The industry can't sustain two years of price wars, Mr. Watkins said, referring to rival drive makers. "People decided to stop losing money." When Seagate bought Maxtor in 2005, it kept hardly any of that company's technology or employees. The $1.9 billion deal was simply about removing a competitor. Seagate was No. 1 in the market; then Western Digital followed by Maxtor. While it kept the Maxtor brand, Seagate makes all its drives in what had been Seagate facilities using Seagate's technology. The company figures it lost half of Maxtor's market share. But the other half, plus the benefits of reduced competition, make the deal worth while, Mr. Pope said."

Sunday, September 16, 2007

Mankiw on Carbon Taxes

The drumbeat for carbon taxes has begun in earnest, and if we don’t pay attention we may wake up one morning a year from now and find the issue has been settled and a rare opportunity has been lost.

Mankiw has a piece in today’s New York Times that says the intellectual battles are over, and now it’s time for a grand coalition to put a tax on carbon. He gives these arguments:

1. Carbon taxes use a tried-and-true method for curtailing something we don’t like, in this case pumping carbon into the atmosphere.

2. We can use the revenue to cut other taxes, like the income tax. The taxes we cut have harmful effects on the economy, so we reap a double bonus: less bad stuff (carbon emissions), more good stuff (economic growth).

3. The only alternative to taxes is cap-and-trade. This opens the door to giving away carbon permits (bad), and if we somehow manage to auction them the result is identical to a carbon tax.

4. Each nation can set its own carbon tax, so we don’t have to worry about coordination. A global permit system would enable polluters in the US to buy carbon offsets in China.

In each case Mankiw is wrong, in some a little, in others a lot. It all adds up to a questionable sell job.

1. Yes, putting taxes on things we want to discourage is an old, time-tested idea. (Incidentally, it long predates Pigou. Do you remember a harbor fracas just before the American Revolution?) But so is issuing permits. We have permits for hunting and fishing, also for marriage. (One to a customer.) Neither involves reinventing the wheel.

2. Mankiw makes this argument because he believes that income, corporate profit and other taxes prevent the economy from reaching the free-market bliss it could otherwise attain, He knows government has to raise money, but he thinks it causes wicked distortions when it siphons off some of the earnings stream. This is faith-based economics, however. There is no systematic evidence that the income tax leads people to work less, and even if it did, it may just be the case that many of us should work less. If Mankiw’s travels take him to Cornell, he should have a Frank discussion on this topic.

But relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.

3. Cap-and-trade and cap-and-auction are two entirely different animals. The first gives away the permits to historic polluters, the second asserts the public’s ownership of the commons and charges a price for its use. It is true that the dominance of wealth over our political system often leads to giveaways like cap-and-trade, but that’s a fight we can’t avoid in any case.

The real wonder here is that Mankiw could make such an elementary economics error as to suggest that taxes and cap-and-auction are “effectively” the same. In an uncertain world this is false. From a conventional benefit-cost perspective, Weitzman showed long ago that there were important differences depending on the slope of the marginal benefit and cost functions. Translated into common English, if we are uncertain about the long run relationship between the price of carbon emissions and the amount of emission – and we very much are – and if the risk of allowing too much climate change is greater than the risk of economic indigestion from trying to be too green – which seems pretty clear to me – then permits are the right choice. By controlling the number of permits we control our most important impact on the earth’s carbon budget, but allow prices to wander. By setting a tax we control the price but allow the amount of pollution to wander. That’s a big difference: you might say, given the gravity of what is at stake, that it’s the difference between ecological responsibility and irresponsibility.

4. Both taxes and permits create the same problem. If one country takes stringent action of either sort and another doesn’t, producers in the less-green country get a competitive advantage. If you have a permit system, they don’t have to pay for the permits; if you have a tax system, they don’t have to pay the tax. What to do? There have been mumblings from Europe about a green tariff to offset these differences, which makes sense to me. This is a discussion we need to have no matter what system we put into place.

Mankiw doesn’t seem to have paid attention to the global debate about climate equity. In the long run, there is no defensible argument against allotting each of the planet’s residents the same carbon “space”. In the short run, the rich countries start out with more because they can’t cut back to the sustainable level immediately without causing themselves and everyone else grave harm. But they also have an obligation to take action first and more aggressively since it is the accumulation of carbon in the atmosphere that causes the problem, and us industrialized types have been adding to this accumulation for a hundred years or more. Kyoto was a bumbling attempt to implement this ethical framework; hopefully we will do it better in the future.

The reason we need global action is that it is a global problem. Countries that fail to act free ride off of those that do. This points to the need for a stronger climate treaty, but no such treaty would try to tell countries what methods they should use, only what results they should be held to. So Mankiw’s discussion of taxes vs permits in the global context is confused and, in the end, irrelevant.

Bottom lines: (1) Although we still have (soon to be extinct) dinosaurs blocking the path, there is now a general consensus behind aggressive action to forestall the most extreme climate change. If Mankiw had published this article five years ago I would have welcomed it. Today, however, the question is what to do about the problem, and I would strongly encourage those who put ecological responsibility and social justice first to stick to their guns. We should have permits because they put the planet first, and we should auction them and distribute the revenues on a per capita basis because it is fair and economically sound. (2) It is a mistake to get drawn into a debate over how high to set carbon taxes. No one wants to pay taxes. The result will be a half-hearted effort riddled with safety-valves and loopholes. Perhaps this is why the big money is behind a tax approach: they know they will be let off the hook. When we talk about how many permits to issue, on the other hand, the debate is over how much carbon accumulation, and therefore how large a risk of catastrophic climate change, we are willing to accept. That’s the conversation we need to have.

Saturday, September 15, 2007

A French Lesson

Laissez-faire refers to pro-market policies (though in practice, they help big business and the rich). It is not the same as laisser faire, which means a feckless and unconsidered attitude in the application of any policy. Somehow the George W. Bush administration combined both laissez faire and laisser faire.

Friday, September 14, 2007


by the Sandwichman

Correct me if I'm wrong, but the main purpose of the Iraq "surge" was clearly to place extra U.S. troops in Iraq so when some of those extras were eventually withdrawn it could be hailed as a "troop reduction". This is like a merchant raising the price on an item and then putting it "on sale" for the regular price. Does Bush and his apparatus think the American people are that stupid? Are the American people that stupid?

Thursday, September 13, 2007

A Tale of Two Unions

California has two very active unions -- the Nurses and the Prison Guards -- each uses a different form of politics and a different form of "caring." The nurses have done heroic work in forcing Governor Arnold to allow for sufficient staffing of hospitals. They have won significant political victories.

The prison guards have been very successful in calling for more staffing as well -- often by forcing the state to lock up more people. Those who resist passing such laws are charged as soft on crime. They have also been very successful in blackmailing the state into giving them more money. Here they go again.


by the Sandwichman

In Eros and Civilization, Herbert Marcuse quotes Barbara Lantos, "Play is an aim in itself, work is the agent of self-preservation." He concludes from this that, "it is the purpose and not the content which marks an activity as play or work.... For example, if work were accompanied by a reactivation of pregenital polymorphous eroticism, it would tend to become gratifying in itself without losing its work conent."

The key to such a libidinal work relation, according to Roheim (cited by Marcuse) is a "general maternal attitude as the dominant trend of a culture." "Consequently," Marcuse explains, "it is considered as a feature of primitive societies rather than as a possibility of mature civilization. Margaret Mead's interpretation of the Arapesh culture is enteirly focused on this attitude:
To the Arapesh, the world is a garden that must be tilled, not for one’s self, not in pride and boasting, not for hoarding and usury, but that the yams and the dogs and the pigs and most of all the children may grow. From this whole attitude flow many of the other Arapesh traits, the lack of conflict between the old and the young, the lack of any expectation of jealousy or envy, the emphasis upon co-operation.
Sandwichman conjectures that -- contrary to the assumption of the psychoanaltic literature (according to Marcuse) -- Mead's account of the Arapesh is a feature of her mature civilization. Whether or not it actually depicts Arapesh culture is a matter of luck, personality (Mead's) and perception. In other words, not only is there a possibility, but the general maternal attitude toward the world-as-a-garden is a persistent utopian motif in modern civilization. The pregenital polymorphous eroticism is all around us already. We just have to tune in to it.


For many intelligent and well-informed people I know the answer to this question is an obvious "yes." However, I beg to differ. Certainly oil has been important. At a very high level the answer is "yes," to the extent the Iraq war has been the extension/sequel of the (first) Persian Gulf War. That was clearly all about oil, propaganda to the contrary. If Kuwait did not have the Burgan pool, then the world's second largest, with Saddam's conquest of Kuwait setting him up for an easy run to Saudi Arabia's al Ghawar, the world's largest pool of oil, George H.W. Bush would not have given a hoot about him invading Kuwait. So, if this war is finishing the business of that one, it's ultimate cause is all about oil and keeping it from falling under the control of perceived enemies, although of course after the first war, Saddam was in his box and not going to get those fields. I would also accept that Cheney seems to have long been heavily motivated by the oil factor, even if it is just as petty as feathering his own nest at Halliburton or for cronies like the Hunt brothers, with Bush having some of this from his own past as a Texas oil man, as well as his dad's old interests. And we know that Cheney was in on that report from the late 1990s going on about Iraq as the major possible source of new supply that could be tapped in the 21st century. So, Cheney clearly has been the major voice of the oil interest in all this, despite him also being a front for the broader military-industrial complex, and also having pet peeves about Saddam shooting at the US planes that flew over the no-fly zone, as reported in one of the Woodward books.

However, I see at least three other things going on in terms of actually initiating the war. One was the faction of Likud-oriented neocons, Wolfowitz, Feith, and Abrams being probably the most important in the making of the war. Their interest was securing Israel from Saddam making nukes or funding Palestinian parents of suicide bombers. Those who claim that the US backing Israel is somehow linked to the US wanting to control oil in the Persian Gulf are out of touch with history and the long struggle in the State Department between the pro-Israeli faction and the old oil-oriented "Arabists." Of course this group of neocons clearly made an alliance of convenience with the Cheney oil faction, but their interests were not fundamentally identical, except in both supporting war in Iraq. Then there is the faction that wanted a nice excuse for big funding for the military-industrial complex. Rumsfeld was a leader of this group. Then we get to arguments more tied to Bush himself, the crucial "Decider" here after all, despite all of Cheney's influence and machinations. One motive for him was political. Having a war in Iraq after the escape of bin Laden at Tora Bora allowed for distracting from disagreements over domestic policy and provided a way for demonizing the Dems, which worked in the 2002 elections and even again in 2004 (as long as a majority of the US population continued to believe the lie that Saddam was linked to 9/11), although this game finally fell apart in 2006. And finally there was all that psychological garbage with his dad, showing he was the real man who could "finish the job" and all that, and wanting to "get" Saddam after he tried to assassinate the old man, although clearly Cheney played to that particular aspect.

There is one other element of this that is rarely addressed by those who say "it is all about oil." That is, what were they going to do with the oil if they got it (which, of course, the war has failed to do so far anyway, even if the Oil Ministry building in Baghdad was secured right away)? Now if it was crude money in Cheney's pockets through Halliburtoon, that is one thing. But from Bush's perspective it is more difficult. His motive presumably was to get re-elected more than just making money from the oil industry. For that he needed presumably to increase oil production from the Gulf, thereby keeping oil prices down and pleasing the SUV-driving voters. However, the oil companies presumably preferred reduced prodcution, which increases their profits (and is what has happened, although I do not think that is what Bush either planned or hoped for). There was always this contradiction that is never resolved or explained in this explanation: would control lead to more or less production? So, bottom line: oil was important, but it was not everything in the war in Iraq.

Public Employees for Privatization

The Sacramento Bee reports the giant California Public Employees' Retirement System is planning to use some of its money to invest in infrastructure, which is, of course, privatized infrastructure.

I wish that I could savor the irony of public employees financing privatization, but I guess I should learn to expect that sort of thing.

Wednesday, September 12, 2007

Martin Feldstein

Martin Feldstein just resigned as head of the National Bureau of Economic Research a couple of weeks before the release of my new book, The Confiscation of American Prosperity.

I devote a large part of one of my later chapters to exploring the history of the Bureau and the career of Martin Feldstein.


Another item covered in Ben Lando's that has been almost completely unnoticed in the MSM is that on August 6, the Kurdistan Regional Government (KRG) passed an oil law, in sharp contrast with the central Iraqi government, which has so far failed to do so. In the wake of its passage, the KRG is apparently making a deal with Hunt Oil Company of Dallas, which the Oil Minister of Iraq, Ali Shahristani, is threatening to declare illegal because it does not apparently contain a provision for sharing revenues with the central government, although the KRG has issued a statement saying that it is in principle willing to do so, especially if no oil deals are allowed in the Kirkuk region, containing the second biggest pool of oil in Iraq, and which the KRG is hoping a referendum will hand over to the KRG.

Actually, the KRG has since May 2006 cut deals with five oil companies, most of them wildcatter operations not from the US, with the first (and the first to start production) being DNO from Norway, with the others from Canada and Turkey. The early prospects have been favorable, with "gushers" reported coming in from parts of Iraqi Kurdistan in the fields operated by DNO, and the KRG apparently hoping to have 200,000 barrels per day (bpd) going by the end of this year and 2 million bpd in five years, out their own pipeline through Turkey (assuming that taking Kirkuk does not anger the Turks too much, who are worried about the Turkmen population there). Reportedly the DNO contract gives the company 10-30% of the revenues as profits, with the rest going to the KRG, and none to the central Iraqi government.

So, this may be the economic beginning of the "ground-up" partition of Iraq that seems to be going on more widely. The SIIC in the south is pushing for a separate entity there, which region has the largest oil pool. And the tribal Sunni sheiks in al-Anbar are getting armed by the US (which arming could have been done without the surge). Today they fight al-Qaeda in Iraq (which Juan Cole has long claimed would have happened sooner if US troops had completely withdrawn sometime ago, and their move to do so predated the surge), but tomorrow they will be able to fight an increasingly Shi'i-dominated central government, especially if the other regions take all the oil revenues for themselves. leaving nothing for the Sunni Arabs in the center, who remain alienated by the ongoing de-Baathification Commission, led by Chalabi.

Tuesday, September 11, 2007

Left vs. Right Brains: a new twist

[from Jim]

[Does this study say that the reason why some people become more
conservative with age is brain rot? that hardly explains quick changes, such as that of David Horowitz.

[what do such studies say about Marxist brains?]

From the Los Angeles Times

Study finds left-wing brain, right-wing brain

Even in humdrum nonpolitical decisions, liberals and conservatives
literally think differently, researchers show.

By Denise Gellene
Los Angeles Times Staff Writer

September 10, 2007

Exploring the neurobiology of politics, scientists have found that
liberals tolerate ambiguity and conflict better than conservatives
because of how their brains work.

In a simple experiment reported today in the journal Nature
Neuroscience, scientists at New York University and UCLA show that
political orientation is related to differences in how the brain
processes information.

Previous psychological studies have found that conservatives tend to
be more structured and persistent in their judgments whereas liberals
are more open to new experiences. The latest study found those traits
are not confined to political situations but also influence everyday

The results show "there are two cognitive styles -- a liberal style
and a conservative style," said UCLA neurologist Dr. Marco Iacoboni,
who was not connected to the latest research.

Participants were college students whose politics ranged from "very
liberal" to "very conservative." They were instructed to tap a
keyboard when an M appeared on a computer monitor and to refrain from
tapping when they saw a W.

M appeared four times more frequently than W, conditioning
participants to press a key in knee-jerk fashion whenever they saw a

Each participant was wired to an electroencephalograph that recorded
activity in the anterior cingulate cortex, the part of the brain that
detects conflicts between a habitual tendency (pressing a key) and a
more appropriate response (not pressing the key). Liberals had more
brain activity and made fewer mistakes than conservatives when they
saw a W, researchers said. Liberals and conservatives were equally
accurate in recognizing M.

Researchers got the same results when they repeated the experiment in
reverse, asking another set of participants to tap when a W appeared.

Copyright 2007 Los Angeles Times

Latest Trade Data

Much has been made of the continuing strength of US exports and the decline in the so-called "non-oil" trade deficit, but Brad Setser, as usual, hits the nail squarely:

"The same forces propelling Chinese export growth – the weak dollar and still-strong global economy – are also propelling US export growth. Those same forces are also a key reason why oil is high. Take away strong global growth and both US export growth and the price of oil would be lower."

Incidentally, OPEC is puzzling over the effect that financial turmoil will have on the demand for oil, but the oil funds themselves play an important role in propping up the markets. Not that anyone knows the real numbers, of course.

conspiracy theorists cross the line

[This kind of stuff is banned on pen-l, the progressive economists' discussion list, but I think it's important.]

Sept. 11, 2007 / New York Times.

A Sept. 11 Photo Brings Out the Conspiracy Theorists

SHANKSVILLE, Pa., Sept. 7 — Valencia M. McClatchey thought she was doing the right thing when she gave the F.B.I. a copy of her photo of the mushroom-shaped cloud that rose over the hill outside her home after United Flight 93 crashed in a field here on Sept. 11, 2001.

And, after it became apparent that hers was the only known picture of that ominous gray cloud — and the first taken after Flight 93 crashed — Mrs. McClatchey thought she was still doing the right thing when she gave copies to people who asked for them, and let newspapers and television stations use it.

But fame for the photo has had an unexpected cost for the photographer.

“Every time I’ve done any stories it goes online and all these conspiracy theorists start up and they call me and harass me,” said Mrs. McClatchey, 51, who runs her own real estate company.

In online postings, critics have ripped apart every element of the photo and Mrs. McClatchey’s life. They accuse her of faking the photo, of profiteering from it and of being part of a conspiracy to cover up that the government shot down Flight 93.

They claim the mushroom cloud is from an ordnance blast, not a jet crashing; the cloud is the wrong color for burning jet fuel; the cloud is too small and in the wrong position.

They have posted her personal e-mail address, phone numbers and street address online. One Canadian “9/11 debunker” surreptitiously taped a phone conversation with her, questioning her about the photo, and then uploaded it to his Web site.

“It’s just gotten so bad, I’m just fed up with it,” Mrs. McClatchey said. “This thing has become too much of a distraction in my life. I have a husband and a new business to deal with, too.”

The photo is considered legitimate by the Federal Bureau of Investigation; the Smithsonian Institution, which used the photo in an exhibition on Sept. 11; and the Flight 93 National Memorial, which has used the photo in pamphlets.

“We have no reason to doubt it,” said Special Agent Bill Crowley, a spokesman for the Pittsburgh F.B.I. office, which oversaw evidence collection in Shanksville.

Along with the rest of the nation, Mrs. McClatchey was watching the coverage of the Sept. 11 attacks in New York and Washington when she was shaken from her couch by a blast just over a mile away. She grabbed her new digital camera and took just one picture from her front porch.

The photo shows a sloping green farm field with a brilliant red barn in the foreground. Hovering above the barn in a brilliant blue sky is an ominous dark gray mushroom cloud. Mrs. McClatchey titled the photo “The End of Serenity.”

Barbara Black, acting site manager for the Flight 93 memorial, said, “What makes the image so powerful is that it’s this serene scene in Pennsylvania, this typical red barn, green trees, and then this terrible cloud above it that changed our life here forever.”

At the temporary memorial site, Flight 93 “ambassadors,” local residents who volunteer to tell visitors what happened here, always start the story by showing people Mrs. McClatchey’s photo.

From the beginning, Mrs. McClatchey said, she tried to use the photograph to help remember the 40 passengers on Flight 93. She sells copies to people and lets them choose whether $18 of the $20 fee goes to the Flight 93 National Memorial or the Heroic Choices organization (formerly the Todd Beamer Foundation).

To ensure that she controlled distribution of the photograph, in January 2002 she copyrighted it. To “protect the integrity of the photo,” Mrs. McClatchey said, she filed suit in 2005 against The Associated Press, saying that it violated her copyright by distributing the photo to its clients as part of an article. The lawsuit is pending.

Mrs. McClatchey’s neighbors here defended her against the accusations of the people they called the “Internet crazies.”

The McClatcheys “are as good neighbors as you could possibly have,” said Robert Musser, who owns the red barn that is so prominent in Mrs. McClatchey’s photo.

To accommodate visitors who will show up on Sept. 11 to recreate the picture, and who eventually find their way to the Mussers’ 94-year-old barn, they have tried to spruce it up this past week, adding a touch of paint. They plan to spend thousands in the near future to shore up the foundation on one side so the barn will endure for years to come.

“Here this barn could fall down, and it’s in the picture that’s so famous,” said Mr. Musser’s wife, Phyllis. “We have to do something.”

M. de Tocqueville,

I recently re-read *Democracy in America* with some political theorists, criminologists, and philosophers. I was struck by the following passage, which I haven't seen anybody make much of in the years since. It is a fascinating turning-of-the tables on the public-choice crowd (anachronistically, I mean):

I have no doubt that the democratic institutions of the United States, joined to the physical constitution of the country, are the cause (not the direct, as is so often asserted, but the indirect cause) of the prodigious commercial activity of the inhabitants. It is not engendered by the laws, but it proceeds from habits acquired through participation in making the laws.


by the Sandwichman

The "problem of leisure"

Eric Gill defined the problem of leisure in the following terms: "In former times, such culture as men attained as the product of their working life. Now culture, if it is to be attained at all, is a product of leisure."

Gill also defined the relationship between work and leisure as a political problem. "It is the problem of freedom and slavery. For the freeman does what he wishes when he is at work -- but the slave, when he is working, does what he is compelled to do. And the slave is only happy when he is not working -- but the freeman, as it says in the Book of Ecclesiastes, 'has joy in his work and this is his portion.'"

Monday, September 10, 2007

A coup in the US future

From today's New York TIMES:

>>September 10, 2007

Americans Feel Military Is Best at Ending the War

Americans trust military commanders far more than the Bush administration or Congress to bring the war in Iraq to a successful end, and while most favor a withdrawal of American troops beginning next year, they suggested they were open to doing so at a measured pace, according to the latest New York Times/CBS News Poll. ...

The poll found that both Congress, whose approval rating now stands at its lowest level since Democrats took control from the Republicans last year, and Mr. Bush enter the debate with little public confidence in their ability to deal with Iraq. Only 5 percent of Americans — a strikingly low number for a sitting president’s handling of such a dominant issue — said they most trusted the Bush administration to resolve the war, the poll found. Asked to choose among the administration, Congress and military commanders, 21 percent said they would most trust Congress and 68 percent expressed most trust in military commanders.<<

COMMENT: if these numbers continue and start to apply to more and more issues in US politics, we should expect a military coup d'etat in the future (in a decade or two?) After all, neoliberalism and especially the Bush 2 version of that disease have messed up the economy and made it almost impossible for the "loyal opposition" (the Dems) to do better. The country's becoming more and more like Latin America, so it may come a time when a golpe del estado is a normal event.

Sunday, September 9, 2007


This is dragging over a thread from the former Maxspeak, where postings about the case of four Kurdish men in Harrisonburg, Virginia who were targeted heavily for technical violations of transferring money to their relatives back in Iraq, helped stimulate local media attention and then public outcry, and then their release with only suspended sentences, an actual favorable outcome due to blogging effort.

Anyway, I attended a picnic this afternoon put on by the Kurdish community of Harrisonburg. The current situation is that the FBI appears to be exacting its subtle revenge on the four men. All four wish to become citizens, but all of their paperwork seems to be stalled at the FBI, even though their offenses were strictly administrative. One needs a green card and is on hold for his app, two have green cards and are on hold for their exam, and one had (and passed) his exam before all the garbage blew up. He was told two days ago that he should have become a citizen in April, 2004, but the FBI refuses to send back his paperwork. Apparently four years is the record for the FBI to sit on somebody's paperwork like this. Some more action may be needed on this matter, and apparently some letters are about to be written in support of these men.

Friday, September 7, 2007

Brad DeLong on productivity

Brad DeLong made an interesting point about my earlier message here about productivity.

He said that the Chinese (using my earlier example) are making the shoes for five dollars because they have not yet developed brands to market them for themselves. When they do, the US GDP will go down accordingly.

This process seems to be already beginning. The idea behind the expectation of the future success of US intellectual property economy was people in the United States would do the high-value work while leaving the country to others.

I'm reminded of an exchange between Boswell and Samuel Johnson:

"Very little business appeared to be going forward in Lichfield. I found however two strange manufactures for so inland a place, sail-cloth and streamers for ships: and I observed them making some saddle-cloths, and dressing sheep skins: but upon the whole, the busy hand of industry seemed to be quite slackened. "Surely, Sir, (said I,) you are an idle set of people."

"Sir (said Johnson) "We are a City of Philosophers: we work with our Heads, and make the Boobies of Birmingham work for us with their hands."

But already, South Korea seems to be making great progress in design work, supposedly the domain of the brilliant people in the United States who honed their minds on the complexities of Paris Hilton and cage fighting.

How long will it be before Chinese brands win a reputation for quality? Some older people may recall when Japanese cars were considered junk.