Sowell: Everyone’s Rich – But Just for a Day

Now Greg Mankiw endorses silliness from Thomas Sowell. Now I’m willing to concede that some of the observed variability in current income is from transitional income, which implies that the variability of permanent income is a bit less. Sowell goes further by arguing that most of the variability in current income comes from transitional income. Let’s take a look at his impressive analytical skills that combines anecdotes and cherry picked statistics.

Virtually anyone who owns a home in San Francisco, no matter how modest that person's income may be, can join the top one percent instantly just by selling their house.

Really? The selling price must be the same thing as my investment income for that year? Let’s say I purchased a house in 2005 for $3 million that was financed by $2.7 million in debt where I paid interest only. If I sold this house today, I’d be lucky to cover the mortgage. Sure – some folks recently made good income by selling their houses, but something tells me that this does not fully explain the observed variability of income. Sowell continues:

This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.

Gee – the Irvine Housing Blog has another explanation for this one. Finally, let’s check this out:

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Falling out of the top one-hundredth of one percent for household income basically means I went from being number 9999 to number 10,001. Such a person is not exactly on the street.

Addendum: As I returned to correct one typo, I also have wonder what Sowell really means when he says most Americans do not remain permanently in the top one percent. Could it be that most Americans never get to be in the top one percent in the first place?

A note from a careful observer of US financial conditions

569: "I fancy that the great New York (banking) institutions have more skeletons in their cupboards than anyone yet knows about for certain, and that their concealed anxieties cramp their action more than is admitted."

Keynes. 1930. "A Note on Economic Conditions in the United States: A Memorandum for the Economic Advisory Council." CW 20, pp. 561-94.

Dollar Devaluation and Next Exports on Black Friday

Jenn Abelson reports on all the Europeans shopping at Wrentham Village Premium Outlets:

Kinsella is one of a record 1,000 international tourists who scheduled organized shopping trips yesterday to Wrentham Village Premium Outlets - more than double the number last year. Hundreds more were expected to come on their own, according to Beth Winbourne, the outlet's general manager ... But now American wares are even more of a bargain as the slowing US economy has weakened the dollar. Further, as the Federal Reserve has cut interest rates to boost the economy, the dollar has lost even more value, and global investors have realized they won't earn as much when they park their cash in greenbacks. As a result, the euro has shot up by 33 percent compared with the dollar since 2002, so Europeans who exchange 1,000 euros now get close to 1,500 US dollars. And the Canadian dollar is worth as much as the US dollar for the first time in three decades.

But some are worried that the boost in sales will not be that great, while others have turned to advertising:

The Retailers Association of Massachusetts, for instance, predicts a mere 2.2 percent increase in holiday retail sales this year over the same period last year, about half the sales growth forecast by the National Retail Federation. And the federation's prediction of a 4 percent increase in sales to $475 billion would make this holiday the slowest for sales growth since 2002, when sales rose 1.3 percent. "The holiday sales season of 2007 will create competitive and profitability challenges for local retailers," said Jon B. Hurst, president of the state retail group. "There's no question that European and Canadian shoppers have been key targets of late." In fact, officials at Simon Property Group and General Growth Properties, two of the country's largest mall operators, said they have increased international advertising to promote shopping excursions for foreign travelers. And the weak dollar, coupled with promotions, seems to be working.

Whiskey is for drinking; water is for fighting

Brenda Rosser, in her comment today, brought up the importance of water, prompting this posting.

Mark Twain was ahead of this time in writing “Whiskey is for drinking …”, but in Californian open warfare for water seemed to be immanent. The threat of water war is far more pressing today.

Below is a frank statement from Ariel Sharon about the importance of control of water for Israel. Maybe some of you can find a map I once saw on the web that showed how much of the water supply in the region is found in the West Bank. Gaza seems to have less water, so is expendable.



Sharon, Ariel with David Chanoff. 1989. Warrior: The Autobiography of Ariel Sharon (NY: Simon and Schuster).

166: “While the border disputes between Syria and ourselves were of great significance, the matter of water diversion was a stark issue of life and death. A dry country with a critical water shortage, Israel enjoys only a brief winter of rainy weather. Other than that, the three principal sources of water are the Jordan River, various brooks and streams alone the coastal plain, and large aquifer that runs under the coastal plain and extends into Samaria and Judiah. Before 1967 a third of the entire water supply came from Jordan.”

167: “People generally regard June 5, 1967, as the day the Six-Day War began. That is the official date. But, in reality, the Six Day War started two and a half years earlier, on the day Israel decided to act against the diversion of the Jordan. From then on the Syrian border was tense.

What follows is another article that generalizes the water problem , but also refers back to Israel.Postel, Sandra L. 2006. “For Our Thirsty World, Efficiency or Else; review of Fred Pearce. When the Rivers Run Dry: Water — The Defining Crisis of the Twenty-First Century (Boston: Beacon Press).” Science, 313 (25 August): pp. 1046-7.

1046: “Irrigation accounts for the lion’s share of the world’s water consumption, 70 percent globally and 90 percent in many Asian countries, where nature doles out long dry seasons. One-fifth of China’s wheat and one-seventh of its corn are produced, in good years, in the coastal province of Shandong, which is last in line to receive the flow of the Yellow River. Farmers have already abandoned millions of acres of cropland in the water-stressed Yellow River basin, and in the summer of 2000 a mini-water war broke out in Shandong as thousands of farmers tried to siphon water slated for cities from a reservoir.”

1046: “As major rivers dwindle to a trickle, farmers and cities alike pump more water from underground. Globally as much as one-tenth of the world’s food may be produced with water drawn from declining aquifers. In India, at least a quarter of the farmers are overtapping aquifers, withdrawing water faster than those underground sources are recharging, and setting the stage for a “colossal anarchy” as more wells and fields are abandoned.”

1046: “Today each Palestinian in the occupied West Bank uses less than a quarter as much water as a neighboring Israeli. Palestinian families around Nablus spend between 20 and 40 percent of their incomes to buy water, while Israeli settlers enjoy green lawns and swimming pools. Pearce calls the 1967 Six Day War “the first modern water war.”

1046: “Before that war, less than a tenth of the Jordan River watershed was within Israel’s borders; by the war’s end, Israel controlled the vast majority of it, including Syria’s Golan Heights and key aquifers under the West Bank.”

Rational Expectations and the Housing Bubble

"More than 70% of U.S. consumers believe a national housing bubble will burst and home prices will collapse within the next year, although 56% believe it's unlikely to happen in the area where they live, according a new survey."




Morrissey, Janet. 2006. "Consumers Expect Housing Bubble to Burst." Wall Street Journal (20 April): p. D 3.

The Fiscal Policy Debate Circa 1996 and Today’s Gotcha Questions

Paul Krugman laments the current political discourse:

Faced with a major public issue, such as the future of Social Security, one might think that the crucial thing would be to ascertain the facts. If I say “there is no crisis,” and you think there is, well, produce the evidence that shows that my arithmetic is wrong - not something I once said that you think proves that I’ve changed my mind. Making this a game of gotcha is just childish. But here’s the thing: this childishness infects a lot of political discourse.

As I say AMEN, let me also back up from the food fight that Brad DeLong noted in the comments as well as extend on something I started to say about something Paul wrote back in October 1996. Fairness dictates we take the time machine back to October 1996.



Yes – our graph shows total Federal debt (TFD) and the debt held by the public (DHP) both as percentages of GDP from October 1980 to October 1996. What we knew in the fall of 1996 is that we had gone through 16 years of General Fund deficits that we so large that TFD grew as a percent of GDP from around 33% to around 67%. It is true that the growth in the DHP to GDP ratio has stopped after the 1993 tax increase – the one every Republican voted against. But that only says that the Trust Fund surpluses were mostly offsetting (not completely in absolute terms even after adjusting for inflation) the General Fund deficits.

At first, I was pleased that the GOP nominee to challenge President Clinton was Senator Robert Dole as Dole had historically been a fiscal hawk. Could it be that the 1996 Presidential race would avoid the free lunch crap we had heard from the tax-and-borrow Republicans and the do-more-for-you Democrats (yes the latter is a slap at how Al Gore campaigned in 2000). But then Dole picked Jack Kemp as his running mate and promised tax cuts. It was then that I decided I could not cross party lines and vote for the free lunch party.

With this back drop, could we take a real look at what Paul said on October 2, 1996:

In this silly season politicians are once again promising that we can have it all - that we can cut taxes, spare every popular spending program from even the smallest cut and still balance the budget. Nobody really believes them; if the public is willing to indulge such fantasies, it is because it does not, when all is said and done, really take the budget deficit seriously.

That captured my concern with the Dole-Kemp tax proposal. It is also consistent with what Paul was saying in 2000 about both Bush’s tax cut with promises of more spending as well as my concern with Gore’s do-more-for-you and a tax cut too. Something had changed between 1996 and 2000 – it seems that inflation-adjusted total Federal debt had flat lined during Clinton’s second term so the debt to GDP ratio had started to fall. But Paul argued in 2000 that the bit of goods news was not enough for tax cuts and more spending. He was right.

So why does everyone think he changed his mind about Social Security. They often point to this:

Where is the crisis? Just over the horizon, that's where. Through a kind of sound-bite numerology, the political debate over deficits became fixated last year on the seven-year prospect; each party insists that its economic program will balance the budget in the year 2002. Neither will, but that is beside the point. Responsible adults are supposed to plan more than seven years ahead. Yet if you think even briefly about what the Federal budget will look like in 20 years, you immediately realize that we are drifting inexorably toward crisis; if you think 30 years ahead, you wonder whether the Republic can be saved.

OK back in 1996, we may have thought that the Trust Fund reserves would eventually be depleted by some year such as 2032. The only real significance of this expected depletion date is that this is the date that DHP equals TFD. And Paul’s point was that if we kept running huge Federal deficits, that the debt to GDP ratio (however measured) might be much higher than 67%. Guess what, TFD is currently near 67% despite the good years in the late 1990’s. But that’s because of Bush43’s fiscal fiasco that Paul was warning about over seven years ago. OK, the date of Trust Fund depletion has now been pushed back to 2046. This is the big inconsistency that folks are hammering Paul about? I’m sorry, but the hammering is both stupid and childish at the same time – with all due respect to my kids who are much smarter than this.

Why recession is a good thing (not!)

The following article by Paul B. Farrell of MarketWatch is one of many these days that applies what I call “19th century thinking” to the current cusp (and possible recession). My comments in brackets

17 reasons America needs a recession
Think positive, this 'slow motion train wreck' is good for the U.S.
By Paul B. Farrell, MarketWatch
Last Update: 6:53 PM ET Nov 19, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth." But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.

To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."

He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."

Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."

However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.

Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."

Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?

Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.

Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.

Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.

Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.

[!!??!! -- hyperinflation is not currently in the cards. It also seems unlikely, unless the US government falls apart. As I’ve argued elsewhere, hyperinflation is a symptom a state’s collapse.]

And yet, recessions are a no-no that drives politicians, economists and investors ballistic.

Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:

1. Purge the excesses of the housing boom

No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis. It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.

[This author should quote Andrew Mellon, Treasury secretary during the 1920s: "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." His whole idea is that a recession would purge the imbalances from the US economy -- i.e., those factors that are screwing up financial and real-world markets. This is a very 19th century way of looking at things. For example, Marx saw the bankruptcy of thousands and the destruction of a lot of capital as the result of a recession ("crisis") and also as allowing a new recovery. The “Austrian school” of economics (von Hayek, von Mises, Rothbard, etc., but not Schumpeter, despite his ethnicity) also believe in this binge-purge theory of the business cycle: the recession (purge) is the punishment for having an excessive boom (binge), while the purge allows recovery.

Of course, neither Mellon nor Marx nor the Austrians anticipated that a cyclical recession could cause the US economy to jump the rails, going from a normal business cycle to a serious depression, as during the 1930s. Okay, Marx had some ideas along these lines. In some Marxian interpretations, in fact, a serious recession would encourage revolution.

The Austrian school, on the other hand, who Farrell channels via Schumpeter, have no idea about the economy’s potential to spin off into depression. Their concern is instead with a business cycle where (somehow) full employment is maintained.]

2. U.S. dollar wake-up call

Reverse the dollar's free fall and revive our [i.e., US capitalist] global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.

[I don't see why a recession would do this. If the US recession "goes global," it won't just be US imports that fall, helping the US$. It will also be foreign exports (US imports) that fall, which would hurt the value of the US$.

By the way, any effort to prop up the dollar, i.e., to prevent or slow its further fall, would involve raising U.S. interest rates relative to those in Europe, Japan, the U.K., etc. This encourages recession in the U.S., all else equal.

This kind of contractionary monetary policy in the face of recession was one factor that helped make the Depression so Great. Of course, the U.S. and world economies were already ready to fall, but that’s another story…]

3. Write-offs

Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!

[again, purge, purge! Let's be the capitalist Stalin, purging them all!

I don't see how this is the result of a recession, however. What’s needed instead is serious financial regulation -- imposed by the government, not by a recession.]

4. Budgeting

Force fiscal restraint back into government. America [by which he means the government sector] has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.

[This is the "starve the beast" theory in a new form. It doesn't force fiscal conservatism, however. In fact, a recession would make the governments' deficit that much larger. It could cause a bunch of state and local governments to go broke, as in the 1930s. Given the current balance of political power, it likely would cause a much greater cut-back in public services than we've already suffered. Rich people like Farrell won't suffer, but most others will.]

5. Overconfidence

A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.

[A recession could also cause a 1930s-type funk to dominate the financial mind-set. That may encourage rational long-term strategies. But even more important is having serious and intelligent financial regulation of the sort that kept the US financial system "sane" during the 1950s and 1960s. How about the idea of bringing back sanity-making regulations without having a recession? Perhaps that’s too easy for Farrell.

Also, note that a recession could impose such a deep funk that it could cause an even more serious credit shortage than seen recently. This could deepen the recession further, rather than forcing “investors” to clean up their collective act.]

6. Ratings

Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors [i.e., stock-holders, bond-holders, speculators, etc.], but favor Corporate America, which pays for the reports. Shake them up.

[but at what cost? why not use financial regulation instead?]

7. China

Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.

[A Chinese recession would mean a big fall in US exports. The US doesn't just import from China, you know.

It’s quite possible for there to be an international multiplier effect: a US recession depresses China, which in turn depresses the US, which in turn depresses China, etc. With the Chinese currency fixed to the dollar, this is quite possible, since exchange-rate changes can moderate the international multiplier effect.]

8. Oil

Force the energy and auto industries to get serious about emission standards and reducing oil dependency.

[I don't get this one at all: it's government regulation and/or high oil prices which encourage reducing oil dependency. It's government regulation which forces better emission standards. A recession could simply drive a lot of companies up against the wall, making them even more resistant to the necessary regulations.

One thing that a recession could do is to cause oil prices to fall drastically. That sounds good, but it could undermine any “market forces” encouraging companies and individuals to economize on oil. And then oil prices could rise again when the recession ends.]

9. Inflation

Expose the "core inflation" farce Washington uses to sugarcoat reality.

[This is total crap. He's saying that "Washington" under-measures inflation, using the core inflation rate (which leaves out energy & food inflation). But it's only fools like Farrell who read it this way.

Instead, the core inflation rate is an effort to get a handle on what part of inflation is persistent rather than being a flash in the pan. (Energy and food prices often go up, but then end up falling soon thereafter.)

Farrell may be right that inflation is under-measured (given the Boskin commission changes in the measurement of the CPI), but a recession wouldn't expose anything about that. This stuff about core inflation is just Farrell's hobby horse.]

10. Moral hazard

Slow the Fed from cutting interest rates to bail out speculators.

[This guy doesn't really understand the world: a recession would create -- nay, intensify --political pressure pushing the Fed to cut rates. Having the Fed not bail out speculators is instead necessary to causing a recession. He's got the causation backward.]

11. War costs

Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.

[This doesn't work at all. Since when does a recession cause honesty? Financial panics do expose lies, but desperation often encourages more crime. When the savings & loans were collapsing, it encouraged some people -- such as Charles Keating -- to figure out how to fleece people as a way to save their S&L's bacon.]

12. CEO pay

Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.

[see comment under #11.]

13. Privatization

Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.

[Why wouldn't a recession -- which cuts tax revenues -- be used as an excuse for further privatizations?]

14. Entitlements

Force Congress to get serious about the coming Social Security/Medicare disaster. With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.

[Like most jerks and Beltway insiders (I'm sorry to repeat myself), Farrell mixes Social Security with Medicare, falsely equating their problems. As serious students of the issues know, Social Security is not a big problem at all.

On the other hand, Medicare is a serious problem. This is not due to the demographic issues as much as the medical-care inflation that's hitting the private sector. It's true that a recession would slow medical-care inflation, but it would also encourage firms to dump what's left of their employees' health insurance.]

15. Consumers

Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.

[The problem, of course, is that a recession means a fall in consumer incomes, which makes saving more difficult. To the extent that people do save more, the extra decline in consumer spending encourages recession. The exception is where fixed investment (or exports or government purchases) rises to take consumer spending’s place in providing demand and keeps from the economy from falling. But falling consumer spending, all else equal, causes fixed investment to fall.]

16. Regulation

Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.

[Maybe Farrell is thinking that a recession would stimulate a mass movement or three, as during the 1930s. This might force the government to bring back New Deal-style reforms that make capitalism work in a saner way than it does these days. Interesting theory: it goes back to the ultra-left "the worse, the better" theory, in which recessions encourage political reform or even revolution.]

17. Sacrifice

"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.

Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.

[are rich folks like Farrell going to make sacrifices too?

More importantly, there's a strange contrast within Farrell's diatribe. On the one hand, it's like a rant by Travis Bickle, the psycho cabbie in the movie Taxi Driver: "Someday a real rain [recession] will come and wash all the scum off the streets." His hope is that it will all work out for the best for the people (or that is what he implies).

On the other hand, his goal involves nothing but sacrifice by the many. It's one big Austerity Plan. As a result of recession, there will be a mass movement to impose reform and sacrifice.

I hate to use the “f word,” but a mass movement imposing austerity sounds a lot like it.]

Jim Devine

Strip and Flip or Strip and Slip

The business press suggests potential internecine warfare between private equity and bond holders. For example:

Thornton, Emily. 2007. "Perform or Perish." Business Week (5 November): pp. 38-45.
Box p. 43: "50% of the U.S. companies that defaulted on their debt this year, half were owned by private equity companies."
And then:
Cimilluca, Dana. 2007. "Buyout Firms: Refined Rulers?" Wall Street Journal (20 November): p. C 3.

"Bondholders, after all, are natural enemies of private-equity firms, because the value of a company's bonds tends to plunge when a private-equity firm wants to buy it."

Social Security: Ruth Marcus v. Paul Krugman

The Washington Post hits a new low:

In liberal Democratic circles, the debate over Social Security has taken a dangerous "don't worry, be happy" turn. The argument has two equally dishonest components. The first is to deny that Social Security faces a daunting financing problem - one that will be much easier to fix (and less onerous for the low-income retirees that the head-in-the-sanders purport to care about) sooner rather than later. The second is to mischaracterize the arguments of those who advocate responsible action, accusing them of hyping the system's woes. One prominent practitioner of this misguided approach is New York Times columnist Paul Krugman. "Inside the Beltway, doomsaying about Social Security -- declaring that the program as we know it can't survive the onslaught of retiring baby boomers -- is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are," Krugman wrote last week. "In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided." Somebody should introduce Paul Krugman to . . . Paul Krugman.

So much to say. So little time.



I could say the Social Security does not face a daunting problem and the very long-run shortfall can be readily fixed, but Brad DeLong has already said that:

Is America's Social Security system now in a long-run funding crisis? The answer to this question is "no." It's more likely than not that Social Security revenues will have to be raised a bit or benefits cut a bit relative to current law or both in the next fifty years, and almost certain that one or the other or both will have to be done in the next century. But it is a long-run problem, not a crisis. And it is - relative to the scale of other things that have gone wrong--not a large long-run problem.

Brad discussion of the real fiscal crisis continues, but I want to get to this oft heard nation that Krugman is being dishonest so let me turn the microphone over to Mark Thoma who has links to some very good discussions from various smart folks including Paul:

Ruth Marcus uses quotes from Paul Krugman dated 2001 or earlier to try to show he has been inconsistent on the Social Security financing issue. The subtext is, or course, that he is being dishonest. But had Ruth Marcus included this quote from Paul Krugman's 2005 piece in her editorial (or quotes from other pieces of the vast amount Krugman has written about Social Security after 2001), it would have changed the interpretation of the quotes she includes in her article.

Mark is suggesting that Ruth Marcus is the dishonest one here. Brad seems to think she does not understand this issue at all. Brad often asks whether some really awful op-ed was example of Stupidity or Mendacity? It would seem that with the Washington Post, it’s both. But we have seen this movie before. Paul Krugman offers up some compelling discussion on an issue that offends the rightwing agenda of this Administration – and certain rag publications (e.g., National Review, Weekly Standard) twist both his words and the facts to slam Dr. Krugman as being both dumb and dishonest. It is sad to see that the Washington Post has lowered itself to be just another rightwing rag.

The Real Trickledown

The Wall Street Journal reports on the scandal about tainted Chinese ginger that found its way into U.S. stores. In part, the story reads " The path of this batch of ginger, some 8,000 miles around the world, shows how global supply chains have grown so long that some U.S. companies can't be sure where the products they're buying are made or grown -- and without knowing the source of the product, it's difficult to solve the problem."

The story here sounds strangely familiar, like the financial assets concocted from the subprime mortgage system. In fact, the whole capitalist system seems to be set up to avoid responsibility. Subcontractors, shell companies, and legal ruses allow people with power to avoid responsibility. This is the real trickle down.



The Wall Street Journal reports on the scandal about tainted Chinese ginger that found its way into U.S. stores. In part, the story reads " The path of this batch of ginger, some 8,000 miles around the world, shows how global supply chains have grown so long that some U.S. companies can't be sure where the products they're buying are made or grown -- and without knowing the source of the product, it's difficult to solve the problem."

The story here sounds strangely familiar, like the financial assets concocted from the subprime mortgage system. In fact, the whole capitalist system seems to be set up to avoid responsibility. Subcontractors, shell companies, and legal ruses allow people with power to avoid responsibility. This is the real trickle down.

Paul Samuelson on the New Financial Instruments and Monetary Policy

Paul Samuelson has a must read in the International Herald Tribune:

Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis. As one of the economists who helped create today's newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging. Why should non-economist readers care about these technicalities?

Dr. Samuelson’s explanation of the implications for monetary policy after the jump.

Because the policy tools that served so well for Alan Greenspan's Federal Reserve and for the Bank of England now have to be changed. It used to be enough for a central bank to "lean against the wind." That means lower interest rates when unemployment is too high and when deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year. Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low. This is surprising, but true. The safest bond interest rates are indeed low. But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory.

I can recall my macroeconomic professors complaining about the shorthand of “the interest rate”, but this seemed like a quibble in the real world of policy making until we hit the Bush41 recession. Of course, President George H. W. Bush was trying to end the S&L crisis and raise tax rates at the same time, which likely made the FED’s job more difficult during his Administration. I don’t pity the task the FED is tasked with now either. Dr. Samuelson rightfully advocates a little more regulation of lending practices. But couldn’t more regulation of financial markets have a similar impact to the S&L reforms during Bush41’s era? Dr. Samuelson has a little more advice for our policymakers:

Watch developments closely. If America's Christmas retail sales fail badly - as they could when high energy prices and high mortgage costs pinch consumers' pocket books - then be prepared to accelerate credit infusions by central banks on the three main continents ... What the world does not need now is tolerance for any persistent weakness in global Main Street growth. It is better when physicians worry too much about a patient's health than when they worry too little.

I hope Chairman Ben will follow Dr. Samuelson’s advice.

Minimum Wage Debate: Should We Always Assume Perfect Competition?

Milton Friedman certainly did not like the minimum wage but in this oft noted discussion, Dr. Friedman does not assume that labor markets are perfectly competitive:

You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed.

Dr. Friedman did not consider market power on the other side of the employment equation in this discussion and Amit Varma must have never heard of monopsony power.




Amit and Don Boudreaux heart something that Congressman Bill Sali said in opposition to raising the minimum wage:

Mr. Speaker, a number of my colleagues have pointed out the problems with raising the minimum wage; that it is an unfunded mandate on small business, will likely result in the loss of over 1 million jobs for low wage earners, that it will eliminate entry level jobs and actually hurt the poor more than it helps them. The negative impacts will result naturally from the rules and principles of the free market. In my college courses, I learned that the rules and principles of free markets are the rules and principles that every business and worker are subject to in every transaction, every negotiation and every new idea. That is, those negative effects of this bill are unavoidable with its passage. In spite of the negative effects, this bill does seem destined to pass.

The Congressman from Idaho offers no empirical evidence that increases in the minimum wage leads to massive employment losses. Many labor economists would argue that it does not reduce employment by nearly that much. Most labor economists also recognize the possibility that there may be sectors where monopsony power does not exist. I would hope Don Boudreaux would one day catch up with what most labor economists have known for years.

Social Security: Don Boudreaux Should Read Dean Baker More Often

Don is unhappy with Paul Krugman:

The only evidence that Krugman presents to support his case against the proposition that Social Security is headed for insolvency (unless it undergoes big changes) is simply that Medicare and Medicaid are headed for insolvency that's even worse.

Oh good grief – try reading the excellent coverage of this issue presented by Dean Baker . Don really put his foot in his mouth with this analogy:

So Krugman's case that Social Security presents no real problems to worry about is like, say, a lawyer advising client Jones that the grand-larceny charges against Jones are really nothing to worry about because client Smith is facing the more serious charge of murder.

Don should check this out if he’s curious why I’m laughing at his analogy.

Capital Punishment: More Con from Econometrics

Mark Thoma and I are both opposed to capital punishment. Mark points to some new ”evidence” that capital punishment deters murder:

According to roughly a dozen recent studies, executions save lives. For each inmate put to death, the studies say, 3 to 18 murders are prevented.

To paraphrase John Edwards, we’ve seen this movie before.



Jeffrey Fagan of Columbia Law School offered some interesting testimony a couple of years ago:

Recent studies claiming that executions reduce murders have fueled the revival of deterrence as a rationale to expand the use of capital punishment. Such strong claims are not unusual in either the social or natural sciences, but like nearly all claims of strong causal effects from any social or legal intervention, the claims of a “new deterrence” fall apart under close scrutiny. These new studies are fraught with technical and conceptual errors: inappropriate methods of statistical analysis, failures to consider all the relevant factors that drive murder rates, missing data on key variables in key states, the tyranny of a few outlier states and years, and the absence of any direct test of deterrence. These studies fail to reach the demanding standards of social science to make such strong claims, standards such as replication and basic comparisons with other scenarios. Some simple examples and contrasts, including a careful analysis of the experience in New York State compared to others, lead to a rejection of the idea that either death sentences or executions deter murder … In 1975, Professor Isaac Ehrlich published an influential article saying that during the 1950s and 1960s, each execution averted eight murders. Although Ehrlich’s research was a highly technical article prepared for an audience of economists, its influence went well beyond the economics profession … Over the next two decades, economists and other social scientists attempted (mostly without success) to replicate Ehrlich's results using different data, alternative statistical methods, and other twists that tried to address glaring errors in Ehrlich’s techniques and data. The accumulated scientific evidence from these later studies also weighed heavily against the claim that executions deter murders.

Dr.Fagan calls this research junk science but where have I heard of Ehrlich's results. Could it be when Ed Leamer was presenting his Let’s Take the Con Out of Econometrics? Mark says:

This is easy for me. It doesn't matter whether the research on the issue is valid or not. I'm against the death penalty.

Dr. Fagan would likely add that this new research is likely no more valid that the rest of the junk science we have seen.

Maybe Obama Isn’t a Sucker But Fred Thompson Endorses Grand Larceny

It seems that our gracious administrator fears I’ve gone to the Dark Side favoring some LMS plan over a more liberal plan to make sure Social Security is solvent for a long, long time. Maybe I was too harsh on Senator Obama as it’s possible that he’s not a sucker. When I need a little help expressing what my real concern is, Dean Baker often provides the light.

Senator Thompson's plan provides for cuts in benefits that increase through time. Twenty years after it is implemented, benefits would be 20 percent below currently scheduled levels, after forty years benefits would be 35 percent lower, and after 60 years they would be 48 percent lower. While these cuts in benefits would be far more than enough to put the program in surplus over its seventy five year planning horizon, the Post still isn't happy. It complains "but he neglects to make clear that fully half of that solution would come from transferring general revenue funds to the Social Security system." Mr. Thompson probably "neglects" to make this point clear because it isn't true. We can see this with simple arithmetic. The SS shortfall is equal to 1.9 percent of projected payroll according to the SS trustees. The non-partisan Congressional Budget Office puts the shortfall somewhat lower. If we add this to the 12.4 percent payroll tax, this implies a shortfall that averages 13.3 percent of benefits (1.9 percent divided by 14.3 percent). The Thompson plan achieves this level of benefit reduction after 14 years, with the cuts growing further over the 75-year planning horizon. (Thompson's cuts apply to new beneficiaries, but I have ignored the $2 trillion accumulated surplus in the trust fund and the revenue from taxing SS benefits in this calculation.)

Where does the WaPo and Dean diverge on their math? Dean takes the current Trust Fund reserves and the surpluses that will continue BIG TIME over the next several years to be part of – well the Trust Fund. WaPo and Fred Thompson, however, would rather count those payroll “contributions” that we’ve paid for the last 25 years and will pay for the next decade plus as really employment taxes to fund things like the Iraq War, the Prescription Drug Benefit, and Bush’s tax cuts on capital income.

Let’s be real. Raising employment taxes to cut capital income taxes has been the GOP agenda for sometime and their means is accounting fraud with the Federal budget. Paul Krugman, Dean Baker, and I make this silly assumption that those Trust Fund surpluses are in some hypothetical “lock box” with a clear accounting for the dedicated payroll tax as Paul likes to call it. But the GOP is working with another accounting standard called the unified budget. It is sort of like when Dick Cheney asked some Andersen accounting partner to alter the books for Halliburton but forgot to tell his shareholders. Maybe silly old Fred Thompson just slipped up and let the world know about this accounting fraud.

Now if Senator Obama is smart enough not to be fooled with the GOP accounting fraud, let me be the first to applaud him. Maybe there are a few Republicans who as honest and Andrew Samwick about this issue, but again – let’s be real and recognize that the honest Republicans are not the ones in political leadership roles. Senator Obama appears to be willing to work with honest Republicans on this issue. But outside of Ron Paul – can you name me one Republican candidate who is being honest on this particular issue and does not wish to convert our past payroll contributions to employment taxes to bail out the General Fund fiasco? I certainly cannot.

As far as the long-run solvency of the Social Security system, I’m willing to wait until we have a Democrat in the White House as there is no urgency on this issue. Our gracious administrator correctly states that Clinton has not made any proposal. I sense he doesn’t trust her on this one and I have no reason to do so either. My only point – which I think she is taking – is that we should debate the Republican thieves on more urgent issues such as this insane war and the General Fund fiasco. Doing what is right on these issues can be political winners. The first order of business is getting a real President in the White House. Early 2009 will be soon enough to have the great Social Security debate.