Economist's View

"We're Going to Get Serious"

Remember Social Security reform? There are people who haven't forgotten and are unlikely to forget anytime soon. This is from an interview with House Majority Leader John Boehner (R-OH) appearing in the Washington Times:

'It's my job to ensure that our members get a good bill', Washington Times:

Q: Where does Social Security reform stand?

A: I just met with Congressman [Frank R. Wolf, Virginia Republican], a few minutes ago with his SAFE Commission [formed to fix the entitlement programs]. ... I talked to the president about it because I threw cold water on his commission idea. You know, typically, when politicians don't want to deal with something, they create commissions. I have had serious conversations with the Senate about a joint select committee -- made up of the chairs and subcommittee chairs and maybe a few other interested -- members to deal with this. ... If I'm around in a leadership role come January, we're going to get serious about this.

Q: But by not running on the issue in the current election, aren't you repeating the mistake of 2004 where President Bush didn't run on it and after the election Democrats said Republicans didn't have a mandate to do anything?

A: I think voters give us credit when we have the courage to do what's right. They may not like it. But at the end of the day, they give us credit for standing up and dealing with something. When you start talking about a problem this big I've seen the numbers, but people in America don't see the numbers considerable time is gonna have to be spent laying out the problem. Politicians always start by talking about solution to a problem that most people don't know is a problem. That's what got the president in trouble on Social Security. More time should have been spent laying out the problem. But running a big campaign to make the kind of changes that are necessary to these entitlement programs has to also be looked at over a longer time frame. This pension bill I've worked on for six years. You've got to look at solving the problem over a longer time frame.

People "may not like it," but they don't understand so we're going to do it anyway. After all, we know what's best.

Oh boy.

Here are more statements collected by Think Progress (where I first noticed the interview above):

Boehner Pledges To Privatize Social Security: ‘We’re Going to Get Serious About This’, by Nico, Think Progress:  In an interview with the Washington Times published yesterday, House Majority Leader John Boehner (R-OH) promised to privatize Social Security:

… If I’m around in a leadership role come January, we’re going to get serious about this.

...Boehner is just the latest prominent conservative to reaffirm his commitment to privatize Social Security in the months and years to come.

President Bush, 6/27/06:

Now is the time for the Congress and the President to work together to reform Medicare and reform Social Security so we can leave behind a solvent balance sheet for our next generation of Americans. … If we can’t get it done this year, I’m going to try next year. And if we can’t get it done next year, I’m going to try the year after that, because it is the right thing to do.

White House Chief of Staff Josh Bolten, 6/17/06:

Looking ahead to next year, he is trying to lay the groundwork for a renewed effort to reform Social Security and Medicare, the federal health-care program for seniors. He suggests Mr. Bush and his aides may have learned from their failed attempt to push through Social Security reform in 2005.

House Ways and Means Social Security Subcommittee Chairman Jim McCrery (R-LA), 6/6/06:

Congress should make Social Security overhaul its top priority next year, while a rewrite of the tax code and revamping the nation’s healthcare system probably will wait until at least 2009, House Ways and Means Social Security Subcommittee Chairman Jim McCrery, R-La., said today.

What a bunch of chickens. If you're planning to do it, run on it. Don't hide behind the idea that people don't understand and it's too hard to explain. I think they do understand and they aren't convinced by the argument. But even if they don't, if you can't explain it to people, then you really don't understand it yourselves.

Update: Hank Paulson getting serious on Social Security:

Paulson in attack on anti-trade rhetoric, Financial Times: Mr Paulson also made a strong call for a renewed bipartisan effort to overhaul America’s social security system and other entitlement programmes... Mr Paulson said on Tuesday that he had Mr Bush’s full backing to put entitlement reform – including an overhaul of Medicare and Medicaid – firmly back on the agenda.

That's No Straw Man

In the comments to Paul Krugman's latest column, there is a statement along with a quote from the column saying that Krugman is making things up and creating a straw man:

[T]heir belief that if the United States used its military might to “hit someone” in the Arab world, never mind exactly who, it would shock and awe Islamic radicals into giving up terrorism — was, all too obviously, a childish fantasy.

I think that here Krugman is making things up, and creating a fairly disingenuous straw man.

I've heard this claim more broadly, so let's deal with it. Is Krugman "making things up, and creating a fairly disingenuous straw man" by saying pundits and government officials wanted to hit someone, anyone, to create 'shock and awe'? Let's roll the tape and see. This is Jonah Goldberg writing in the National Review Online on October 20, 2003:

The Case for War Why did we target Iraq?, by Jonah Goldberg, NRO:

Q: If you're a new sheriff in a really bad town, what's one of the smartest things you can do?

A: Smack the stuffing out of the nearest, biggest bad guy you can.

Q: If you're a new inmate in a rough prison, what's one of the smartest things you can do?

A: Pick a fight with the biggest, meanest cat you can — but make sure you can win.

Q: If you're a kid and you've had enough of the school bullies pantsing you in the cafeteria, what's one of the smartest things you can do?

A: Punch one of them in the nose as hard as you can and then stand your ground.

Q: If you're the leader of a peaceful and prosperous nation which serves as the last best hope of humanity and the backbone of international stability and a bunch of fanatics murder thousands of your people on your own soil, what's one of the smartest thing you can do?

A: Knock the crap out of Iraq.

Why Iraq? Well, there are two answers to that question.

The first answer is "Why not?" (If it helps, think of Bluto burping "Why not?" in Animal House.)

The second answer: Iraq deserved it. ...

Now, the war with Iraq was obviously less cut and dry than 2+2. But it still always added up to the right decision in my book. But, since everyone's looking for a single persuasive equation, I should say the kicker for me was simple: We needed to kick someone's butt (other than Afghanistan) and Iraq was by far the best candidate. Indeed, nearly a full year before the war — in April of 2002 — I wrote: "The United States needs to go to war with Iraq because it needs to go to war with someone in the region and Iraq makes the most sense."

I got grief about that from all quarters, but that was cool with me. Interestingly, for a long time I was the only person I knew of to make that case explicitly until ten months later — and a couple months after the war — when Thomas Friedman of the New York Times came out and said the same thing: "The 'real reason' for this war, which was never stated," he wrote on June 4, 2003, "was that after 9/11 America needed to hit someone in the Arab-Muslim world...Smashing Saudi Arabia or Syria would have been fine. But we hit Saddam for one simple reason: because we could, and because he deserved it and because he was right in the heart of that world."

Which brings me back to where I started. Sometimes the smartest thing you can do is to beat the tar out of a bad guy — even if that bad guy was "innocent" of the specific offense that ticked you off. ... I doubt Saddam had anything to do with planning 9/11 and frankly I don't give a damn. ... And if the resultant harsh light of day is unpleasant or inconvenient to you, too frick'n bad. The United States is taking care of business and we've got nothing to apologize for.

Straw man? Jonah Goldberg is surely full of something, but it's not straw.

What Should the Fed Do? What Will the Fed Do?

What should the Fed do? I think the Fed should pause at its meeting next week, let past tightening catch up, and reassess the situation at September's meeting. That will reduce the chances of overshooting.

The question "What will the Fed do?" is harder to answer. David Altig at macroblog looks at the chances the Fed will raise rates at its next two FOMC meetings:

All Systems Stop, by David Altig: At midweek, Tim Duy wrote this at Economist's View:

Futures markets appear to have no clear conviction on the outcome of the next FOMC meeting. The message is that market participants are looking for one more rate hike, either in August or September. Moreover, they doubt the Fed’s position that “pause does not mean done.”

That was indeed the case then, but this is now.  ...[H]ere is what the probabilities estimated from options on federal funds futures look like as the week of before the next meeting of the Federal Open Market Committee begins:

"By the Time this Election is Over, Willie Horton Will be a Household Name"

Wow. Dan Gross wonders what planet Christopher Caldwell is on:

Silly Season, by Dan Gross: I think the FT op-ed page needs some new editorial talent, if only to save the usually intelligent Christopher Caldwell from himself. On Saturday, in a column on African-Americans and the Republican party Caldwell wrote the following ($ required):

Polls show that black Americans are more conservative than their fellow citizens on such matters as gay marriage, school vouchers and religious involvement in public life – but far less inclined to support conservative Republicans. So there have always been Republican strategists who think the party could profit from courting them. Bill Brock, the Republican National Committee chairman in the late 1970s, tried to get the party to focus on the safety of urban neighbourhoods. Lee Atwater, the blues-playing RNC chairman under Bush père, held similar views. Their successor at the RNC, Ken Mehlman, has been travelling the country, speaking to dozens of black groups. He has even apologised for the way his party made use of whites’ fears in the first decades of racial desegregation. This autumn, Republicans will run black candidates for high-profile offices including the Ohio and Pennsylvania governorships.

So Lee Atwater thought the Republican party could profit by appealing to black voters? It's difficult to square that with, um, the truth and the historical record. In fact, Atwater was a highly successful race-baiter. There's this gem from a Bob Herbert column last year:

Out of the Labor Force

More and more men are dropping out:

Men Not Working, and Not Wanting Just Any Job, by Louis Uchitelle And David Leonhardt, NY Times: Alan Beggerow has stopped looking for work. Laid off as a steelworker at 48, he taught math for a while at a community college. But when that ended, he could not find a job that, in his view, was neither demeaning nor underpaid.

So instead of heading to work, Mr. Beggerow, now 53, fills his days with diversions... He often stays up late and sleeps until 11 a.m. “I have come to realize that my free time is worth a lot to me,” he said. To make ends meet, he has tapped the equity in his home..., and he is drawing down the family’s savings, at the rate of $7,500 a year. ... His wife’s income helps them scrape by. “If things really get tight,” Mr. Beggerow said, “I might have to take a low-wage job, but I don’t want to do that.”

Millions of men like Mr. Beggerow — men in the prime of their lives, between 30 and 55 — have dropped out of regular work. They are turning down jobs they think beneath them or are unable to find work for which they are qualified, even as an expanding economy offers opportunities to work.

About 13 percent of American men in this age group are not working, up from 5 percent in the late 1960’s. The difference represents 4 million men who would be working today if the employment rate had remained where it was in the 1950’s and 60’s. Most of these missing men are, like Mr. Beggerow, former blue-collar workers with no more than a high school education. But their ranks are growing at all education and income levels. ...

Many of these men could find work if they had to, but with lower pay and fewer benefits than they once earned, and they have decided they prefer the alternative. It is a significant cultural shift from three decades ago, when men almost invariably went back into the work force after losing a job and were more often able to find a new one that met their needs.

“To be honest, I’m kind of looking for the home run,” said Christopher Priga, who is 54 and has not had steady work since he lost a job with a six-figure income as an electrical engineer at Xerox in 2002. “There’s no point in hitting for base hits,” he explained. “I’ve been down the road where I did all the things I was supposed to do, and the end result of that is nil.”

Instead, Mr. Priga supports himself by borrowing against the rising value of his Los Angeles home. Other men fall back on wives or family members. But the fastest growing source of help is a patchwork system of government support, the main one being federal disability insurance... The disability stipends range up to $1,000 a month and, after the first two years, Medicare kicks in, giving access to health insurance that for many missing men no longer comes with the low-wage jobs available to them.

No federal entitlement program is growing as quickly, with more than 6.5 million men and women now receiving monthly disability payments, up from 3 million in 1990. About 25 percent of the missing men are collecting this insurance.

The ailments that qualify them are usually real, like back pain, heart trouble or mental illness. But in some cases, the illnesses are not so serious that they would prevent people from working if a well-paying job with benefits were an option. The disability program, in turn, is an obstacle to working again. Taking a job holds the risk of demonstrating that one can earn a living and is thus no longer entitled to the monthly payments...

As a rule, out-of-work men are less educated than the population as a whole. Their numbers have grown sharply among black men and men who live in hard-hit industrial areas like Michigan, West Virginia and upstate New York, as well as those who live in rural states like Mississippi and Oklahoma.

The missing men are also more likely to live alone. Nearly 60 percent are divorced, separated, widowed or never married, up from 50 percent a decade earlier... Sometimes women who are working throw out men who are not, says Kathryn Edin, a sociologist at the University of Pennsylvania. In any case, without a household to support, there is less pressure to work, and for men who fall behind on support payments, an incentive exists to work off the books — hiding employment — so that wages cannot be garnisheed.

“What happens to a lot of guys who become unmoored from family life, they become unmoored from everything,” Ms. Edin said. “They are just living without attachments and by the time they are 40 or 50 years old, the things that kept these men from falling away — family and community life — are gone.” ...

At the low end of the spectrum, men emerging from prison with felony records are not easily absorbed into steady employment. Hundreds of thousands of young men were jailed in the 1980’s and 1990’s, in a surge of convictions for drug-related crimes. As prisoners, they were not counted in the employment data; as ex-prisoners they are. They are now being freed in their 30’s and 40’s and are struggling to be hired. Roughly two million men in this group have prison records, according to a calculation by Richard Freeman and Harry J. Holzer, labor economists at Harvard and the Urban Institute, respectively. Many of these men do not find work because of their records. ...

Indeed, a larger share of working-age men are not working today than at almost any point in the last half-century, which raises the question of how they will get by as they age. They may be forced back to work after years of absence, they may fall into poverty, or they may be rescued by the government. ...

[T]he great majority of the missing men are out of the work force for months or years at a time rather than drifting in and out of jobs. There appears to have been no rise since the 1960’s in the percentage of men out of work for short periods, according to research by Chinhui Juhn, a University of Houston professor, and other economists. ...

Men ... neither working nor looking for a job, also have become more common in the popular culture, making the phenomenon more acceptable. On the television show “Seinfeld,” Cosmo Kramer, who did not work, and George Costanza, who regularly lost jobs, were beloved figures. ...

“Men don’t feel a need to be in a career, not as much as they once did,” said Ruth Milkman, a sociologist at the University of California at Los Angeles. “Nor do men have the incentive they once had to pursue a career, not when employers are no longer committed to them.” ...

John Kerry: Health Care Reform

Here's one of those ideas that, supposedly, Democrats don't have. This is John Kerry's plan for health care reform from an editorial in today's Boston Globe. There's also a plan to pay for it:

Getting moving on healthcare, by John F. Kerry, Commentary, Boston Globe: People say nothing is happening in Washington on healthcare. They say the only thing that has happened is that the crisis has gotten worse. They're right. But while Washington waits, Wall Street has acted. Too many big businesses are deciding that to compete and win in the global economy, many jobs no longer will come with healthcare.

While companies such as General Motors struggle under enormous healthcare obligations, companies such as Wal-Mart are opting out of employers' traditional healthcare responsibilities. Wal-Mart currently insures fewer than half of its employees ... It's not right, but it shouldn't be a surprise. Good corporate citizens are coping with a competitive disadvantage in the global marketplace. ...

We're stuck with a 20th- century healthcare system that just doesn't work for a 21st- century economy. The traditional employer-based healthcare system can no longer meet all our needs. Costs are too high, and businesses overseas are operating on a whole different playing field.

Healthcare for a family of four now costs more than a minimum-wage worker earns in a year. ... This affects all of us. It matters if the kid down the block isn't immunized. It matters to your tax burden when simple, treatable illnesses turn into expensive emergency room visits -- often the only option for those without insurance. And it matters if we care about our moral obligation to others.

We need to cut healthcare costs. And we need a healthcare system that ensures quality, affordable healthcare for every American man, woman, and child. ... Right now the most expensive 0.4 percent of insurance claims account for 20 percent of all healthcare costs. We need to lower costs to businesses with a new federal reinsurance plan for catastrophic care -- those with the most serious, and expensive, illnesses. Reinsurance is a simple concept: It's insurance for insurers; a way for health plans to manage their risks and lower your costs.

Second, no child in America should lack health insurance. Leaving 11 million American children uninsured is wrong and, from the administration that brought us "No Child Left Behind," it is breathtakingly hypocritical. Most single moms raising two kids on $36,000 a year don't qualify for any help. My ... plan would change that, covering all children up to three times the poverty level.

Finally, it is untenable for 35 million adults to go without insurance. We need to use every weapon in our arsenal until everyone is covered ... with targeted tax credits for small businesses, middle-class families, and people between jobs. ... All of this and more could be paid for by simply repealing President Bush's cripplingly expensive tax cuts for those making more than $200,000 a year...

I understand the politics won't allow it, at least not yet, but an even larger restructuring to achieve universal coverage and a single payer system would be my preference. However, here's Paul Krugman's reaction to the Kerry plan from a column written before the 2004 election and as he points out, the plan has attractive features:

Health Versus Wealth, Paul Krugman, Commentary, NY Times, July 9, 2004: Will actual policy issues play any role in this election? Not if the White House can help it. But if some policy substance does manage to be heard over the clanging of conveniently timed terror alerts, voters will realize that they face some stark choices. Here's one of them: tax cuts for the very well-off versus health insurance.

John Kerry has proposed an ambitious health care plan that would extend coverage to tens of millions of uninsured Americans, while reducing premiums for the insured. To pay for that plan, Mr. Kerry wants to rescind recent tax cuts for the roughly 3 percent of the population with incomes above $200,000. George Bush regards those tax cuts as sacrosanct. ...

Mr. Kerry's health plan has received remarkably little attention. So let me talk about two of its key elements. First, the Kerry plan raises the maximum incomes under which both children and parents are eligible to receive benefits... This would extend coverage to many working-class families, who often fall into a painful gap: they earn too much money to qualify for government help, but not enough to pay for health insurance. As a result, the Kerry plan would probably end a national scandal, the large number of uninsured American children.

Second, the Kerry plan would provide "reinsurance" for private health plans, picking up 75 percent of the medical bills exceeding $50,000 a year. Although catastrophic medical expenses strike only a tiny fraction of Americans each year, they account for a sizeable fraction of health care costs. By relieving insurance companies and H.M.O.'s of this risk, the government would drive down premiums by 10 percent or more.

This is a truly good idea. Our society tries to protect its members from the consequences of random misfortune; that's why we aid the victims of hurricanes, earthquakes and terrorist attacks. Catastrophic health expenses, which can easily drive a family into bankruptcy, fall into the same category. Yet private insurers try hard, and often successfully, to avoid covering such expenses. (That's not a moral condemnation; they are, after all, in business.)

All this does is pass the buck: in the end, the Americans who can't afford to pay huge medical bills usually get treatment anyway, through a mixture of private and public charity. But this happens only after treatments are delayed, families are driven into bankruptcy and insurers spend billions trying not to provide care.

By directly assuming much of the risk of catastrophic illness, the government can avoid all of this waste, and it can eliminate a lot of suffering while actually reducing the amount that the nation spends on health care.

Still, the Kerry plan will require increased federal spending. Kenneth Thorpe of Emory University, an independent health care expert ... puts the net cost of the plan to the federal government at $653 billion over the next decade. Is that a lot of money? Not compared with the Bush tax cuts...

The Kerry campaign contends that it can pay for its health care plan by rolling back only the cuts for taxpayers with incomes above $200,000. The nonpartisan Tax Policy Center, which has become the best source for tax analysis now that the Treasury Department's Office of Tax Policy has become a propaganda agency, more or less agrees: it estimates the revenue gain from the Kerry tax plan at $631 billion over the next decade.

What are the objections to the Kerry plan? One is that it falls far short of the comprehensive overhaul our health care system really needs. ...

Paul Krugman: Shock and Awe

Paul Krugman wonders why Israel is heading down the same disastrous path followed by the US as it went to war with Iraq:

Shock and Awe, by Paul Krugman, COmmentary, NY Times: For Americans who care deeply about Israel, one of the truly nightmarish things about the war in Lebanon has been watching Israel repeat the same mistakes the United States made in Iraq...

Yes, I know that there are big differences in the origins of the two wars. There’s no question of this war having been sold on false pretenses; ... Israel is clearly acting in self-defense. But ... [i]t’s a terrible mistake to start a major military operation, regardless of the moral justification, unless you have very good reason to believe that the action will improve matters.

The most compelling argument against an invasion of Iraq wasn’t the suspicion ... that the ... case for war was fraudulent. It was the fact that the real reason government officials and many pundits wanted a war — their belief that if the United States used its military might to “hit someone” in the Arab world, never mind exactly who, it would shock and awe Islamic radicals into giving up terrorism — was, all too obviously, a childish fantasy.

And the results of going to war on the basis of that fantasy were predictably disastrous: ... Iraq has ended up demonstrating the limits of U.S. power, strengthening radical Islam — especially radical Shiites allied with Iran, a group that includes Hezbollah — and losing America the moral high ground.

What I never expected was that Israel — a nation that has unfortunately had plenty of experience with both war and insurgency — would be susceptible to similar fantasies. ...

There is a case for a full-scale Israeli ground offensive against Hezbollah. It may yet come to that... There is also a case for restraint — limited counterstrikes combined with diplomacy, an effort to get other players to rein Hezbollah in, with the option of that full-scale offensive always in the background.

But the actual course Israel has chosen — a bombing campaign that clearly isn’t crippling Hezbollah, but is destroying Lebanon’s infrastructure and killing lots of civilians — achieves the worst of both worlds. Presumably ... people in the Israeli government ... assured the political leadership that a rain of smart bombs would ... intimidate Hezbollah into submission. Those people should be fired.

Israel’s decision to rely on shock and awe ..., like the U.S. decision ...[in] Iraq ..., is having the opposite of its intended effect. Hezbollah has acquired heroic status, while Israel has both damaged its reputation as a regional superpower and made itself a villain in the eyes of the world. ...

What Israel needs now is a way out of the quagmire. And since Israel doesn’t appear ready to reoccupy southern Lebanon, that means doing what it should have done from the beginning: try restraint and diplomacy. And Israel will negotiate from a far weaker position than seemed possible just three weeks ago. ...

[T]he United States... response has been both hapless and malign. ...U.S. policy seems to be to stall ... a cease-fire as long as possible so as to give Israel a chance to dig its hole even deeper. Also, we aren’t talking to Syria, which might hold the key to resolving the crisis, because President Bush doesn’t believe in talking to bad people, and anyway that’s the kind of thing Bill Clinton did. Did I mention that these people are childish?

Again, Israel has the right to protect itself. If all-out war with Hezbollah becomes impossible to avoid, so be it. But bombing Lebanon isn’t making Israel more secure. ... The hard truth is that Israel needs, for its own sake, to stop a bombing campaign that is making its enemies stronger, not weaker.

_________________________
Previous (7/28) column: Paul Krugman: Reign of Error
Next (8/4) column: Paul Krugman: Centrism Is for Suckers

Oh What a Tangled Web

Robert Reich looks around the world and sees a great big interconnected mess:

The Mess, by Robert Reich: Watch or listen to the news and you'd think the world were divided into isolated little packets of facts (Israel, Lebanon, and Hezbollah or China and North Korea or American consumers pulling back from the malls, or the US stock market rallying) but look more closely and just about anything of any significance is related to everything else.

The Middle East has become an even hotter tinderbox now. Bush and Rice want to let Israel continue its bombing for some time more, to soften up Hezbollah before any cease fire and peace talks. But that strategy is a miniature version of the wrong-headedness of the administration's attack on Iraq. It has made it even less possible to be a moderate in the Arab world, pushing more Muslim Arabs into the radical camp, and under the sway of radical fundamentalist clergy who want to eliminate Israel, punish the infidel America, and abolish all remnants of modernity from their lands. Igniting radical Muslim rage is the necessary and inevitable result of the US-led strategy in the Middle East, and this rage seriously threatens the moderate Arab regimes across the region, including Saudi Arabia.

One sure-fire consequence is mounting fear and uncertainty about future oil supplies. (Iran itself controls about a quarter of the world's oil.) This, in turn, is pushing up oil futures and, inevitably, all energy prices. China and India are desperately short of their energy needs even now. Both are scrambling to establish more secure sources. China is being pushed closer and closer to Russia, its old nemesis, into a marriage of convenience between Russia's energy assets and China's needs. America's bungled foreign policy is also fomenting a new kind of anti-Americanism across Latin America, boosting Hugo Chavez (Venezuela supplied 11.8 percent of US oil last year), who's now threatening that any American action against his country will result in a cut-off of oil to the US and talking up his friendship with Iran.

Oil is over $75 ... already. Expect further hikes. Even before Hezbollah, Lebanon, and Israel, higher energy prices were spreading throughout the US economy, causing prices to rise even though the real median wage is still stuck in the mud. US consumers are nervous about rising prices and a slowing economy. The Fed is nervous about inflation. It may well increase short-term rates again August 8th, which will slow the US economy further. We haven't seen this combination of inflation and slowing growth since the bad days of stagflation.

US foreign policy is a total mess. But so is the US economy. And the latter makes voters mad. Republican politicians up for reelection this November 7th (any House member facing any serious opposition at all, a third of the Senate) are trying to distance themselves from Bush. Bush is in Florida today trying to talk up the economy today but most Americans know he's full of sh%#. Unlike foreign policy, it's impossible to tell Americans lies when they can see for themselves the depth and breadth of the lie all around them in the economy they live inside.

The economy leads back to foreign policy. Lieberman and any other Dem who supported Bush's insane Iraqi policy is under pressure. When Iraq returns to the front pages, even Hillary may have to recant her initial vote of support and call for a pull-out starting before the end of the year.

Everything is related to everything else. Foreign policy, global economics, home economics, and domestic politics cannot be disentangled. It's all a mess.

"Comparative Advantage, Comparative Advantage, Wherefore Art Thou, Oh Comparative Advantage?"

An email suggested looking at this paper by Richard Freeman on globalization and trends in U.S. and worldwide labor markets. It was a good suggestion. This is longer than usual even though I cut quite a bit, but well worth the time it takes to read it:

Labor Market Imbalances: Shortages, or Surpluses, or Fish Stories?, by Richard B. Freeman, Boston Federal Reserve Economic Conference: There are two competing narratives about the how the labor market in the US will develop over the next decade or two.

The Impending Shortage narrative, which has attracted attention from business and policy groups, is that the retirement of baby boomers will create a great labor shortage. Slower growth of new entrants from colleges and universities, an increased proportion of young workers from minority groups, and inadequate training in science and math will produce a shortage of the skills the country needs to maintain itself as the leading economy in the world. The message to policy makers is to forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, and fears of job loss from off shoring or low wage imports. Instead policy should focus on helping business find workers in the coming shortage.

Shortage claims have focused on science and engineering. Many leaders of the scientific establishment and high tech firms have complained that the US faces a shortfall of scientists and engineers and have asked for governmental policies to address this problem. ... The heads of Intel, Microsoft, and other high tech firms have spoken out on this issue as well. ...

But the shortage claim goes beyond science and engineering. Demographic projections of the US labor supply that show a sharp reduction in the growth of the work force through 2050 (see table 1) have aroused concern in the business and policy community. Reporting the consensus from the Aspen Institute’s Domestic Strategy Group, David Ellwood stated that: "CEOs, labor leaders, community leaders, all came to the unanimous conclusion that we will have a worker gap that is a very serious one.“ ... A 2003 Fortune Magazine headline declared “Believe It or Not, a Labor Shortage Is Coming” for virtually all workers (Fisher, 2003).

Believers in the impending shortage story generally favor increased immigration, particularly of highly skilled workers through H1B and other visas; increased spending on education and technological innovation; and guest worker programs to keep a sizable flow of less skilled but legal immigrants coming to the country. They regard many of these immigrants as complements rather than substitutes for US workers. They also advocate greater education and training of US citizens, particularly of disadvantaged minorities.

The Globalization Surplus narrative, which has attracted attention as part of discussions of the current mode of globalization, takes the opposite tack. It holds that the spread of global capitalism around the world, particularly to China and India, has generated a labor surplus that threatens wages in advanced and higher wage developing countries. Trade, off-shoring, global sourcing of jobs, and flows of capital to the low wage giants combine to reduce the demand for workers in manufacturing and tradable services in advanced countries and in moderate income developing countries.

At first, the advent of huge numbers of workers from India and China into the global capitalist system seemed to offer a boon to most workers in advanced countries. The labor force is less skilled in the global giants than in the advanced economies. According to the Heckscher-Ohlin model, skilled workers in the advanced countries would benefit from the new trading opportunities while only the relatively small number of unskilled workers would lose. If all workers in the North were sufficiently educated, they would avoid competing with low paid labor overseas and benefit from the low priced products produced there. Competition from low wage workers in China and India might create problems for apparel workers in Central and Latin America or for South Africa, but not for ... the advanced North. Similarly, the “North-South” trade model that analyzes how technology affects trade between advanced and developing countries implied that trade would benefit workers in the North, who had exclusive access to the most modern technology. More low wage workers in the developing world would lead to greater production of the goods in which the South specialized, driving down their prices.

Tell it to Lou Dobbs! The off shoring of computer jobs, the US’s trade deficits even in high technology sectors, and the global sourcing strategies of major firms have challenged this sanguine view. The advent of China, India, and the ex-Soviet Union shifted the global capital-labor ratio massively against workers. Expansion of higher education in developing countries has increased the supply of highly educated workers and allowed the emerging giants to compete with the advanced countries even in the leading edge sectors that the North-South model assigned to the North as its birthright.

Which narrative better fits the labor market? ... In this paper I assess the two competing visions and the demographic and economic projections on which they are based. I reject the notion that the retirement of baby boomers and slow growth of the US work force will create a future labor shortage in favor of the argument that the increased supplies of skilled labor in low-wage countries will squeeze highly skilled as well as less skilled US workers. I examine the problem of attracting native US talent in science and engineering in the face of increasing supplies of highly qualified students and workers from lower wage countries. Going beyond the US, I argue that the expansion of global capitalism to China, India, and the former Soviet bloc has initiated a critical transition period for workers around the world. Pressures of low wage competition from the new giants will battle with the growth of world productivity and the lower prices from those countries to determine the well being of workers in higher income economies as the low-income countries catch up with the advanced countries. While US wages will not be “set in Beijing” how workers fare in China and India and other rapidly developing low wage countries will become critical to the position of labor worldwide.

Gentrification

Telling the homeless to find a new home:

The Downside of Upscale, by Tom Slater, Commentary, LA Times: The steam cleaning of the streets of skid row a few weeks ago — when homeless people were literally swept and hosed out of their makeshift encampments in downtown Los Angeles by employees of the local "business improvement district" — was a troubling moment in the battle over the neighborhood's future. But it was hardly a unique one.

In fact, the trend toward gentrification has created similar moments in cities all around the world for many years, pitting the poor and the homeless against real estate developers, the police and upscale residents returning to "reclaim" the inner city. As long as there have been low-income neighborhoods, there have been those who want to remove them — and those who have, as a result, been left with no place to go. ...

The term "gentrification" is of ... recent vintage. It hails from Britain, and was coined by the late Ruth Glass, a London sociologist, in 1964. She was worried about an emerging pattern she had identified in working-class neighborhoods of inner London: They were being "invaded," to use her words, by members of the middle classes, who were taking over "shabby, modest mews and cottages" and upgrading large Victorian lodging houses, resulting in the displacement of the original working-class occupiers.

In the years that followed, gentrification was observed in other large Western cities, and researched extensively. It is now so firmly established in American cities that it is hard to find neighborhoods in central city areas ... that have not experienced it. ... And gentrification is an increasingly global process...

Many policymakers, "business improvement" strategists, real estate agents, middle-class professionals and more conservative academics have treated gentrification as a purely positive trend, as a remedy for the human, environmental and tax-base calamity of "blighted" urban neighborhoods. But as the Central City East Assn.'s efforts to sweep and hose the streets of skid row showed, gentrifying a neighborhood often means displacing those who are already there, and displacement does not usually happen without a fight...

When it was first identified by Glass, gentrification fascinated urban planners because it contradicted the conventional mid-20th century wisdom that the middle classes would continue indefinitely to flee the cities and settle exclusively in the suburbs. The realization that some were, in fact, remaining in — or returning to — central city areas and rejecting suburbia came as a shock.

Explanations of gentrification have usually split into two camps. On one hand, some scholars emphasize the economic elements: the workings of urban land and housing markets...

Other scholars have taken more of a "cultural studies" tack, asking: "Who are the gentrifiers and why do they want to live in central city neighborhoods?" They've focused on the emergence and expansion of the "new middle classes," their consumption practices, the ways in which (in reaction to the perceived blandness of suburbia) they imprint their identities on neighborhoods once considered off-limits.

For many years, there was considerable hostility between the two camps, sustained by political and ideological squabbles. Those who peddled the economic explanations tended to focus on the injustices of the process, whereas the cultural explainers sometimes ended up empathizing with the middle-class desire to seek out a more "urbane" existence. Today, most researchers agree that to understand and explain gentrification, the arguments must be complementary rather than competing.

Although gentrification is an increasingly global process, the most tense and violent struggles have taken place in the U.S., where the market offers limited, if any, protection to vulnerable tenants (unlike, say, Europe, where greater state intervention and regulation of rental housing tends to limit displacement). ... What's more, because gentrifiers in the U.S. are so often white, and those affected are so often members of minority groups, another layer of complexity was added to the process.

The most famous battle over gentrification took place on the Lower East Side of New York City in 1988, when a riot erupted after the police closed Tompkins Square Park in order to drive out its increasing homeless population, most of whom had been displaced because of rising rents as artists followed by young professionals moved into the neighborhood.

There, as in many cases, a major role was played by both by municipal government and real estate agents, who had taken to calling the area the "East Village" in order to break associations with the poor immigrants who had dominated the Lower East Side for over a century, and thus appeal to a new wave of "urban pioneers." It appears that a similar strategy is underway in downtown L.A., where "Central City East" is the name intended for skid row as part of the neighborhood's "revitalization."

The terms used in these debates are rarely innocent. "Revitalization," for instance, suggests that right now there is nothing vital in the area. The term "urban pioneer," so commonly given to gentrifiers, suggests no one worthy of notice is currently living there.

On the surface, gentrification can be appealing. But alfresco dining, funky clothing outlets and "historic preservation" can be deceptive. Gentrification is a serious issue when housing laws fail to protect tenants, when affordable housing is nonexistent and when no new public housing is being built because of widespread fears of re-creating the unacceptable conditions of L.A.'s existing housing projects, like Imperial Courts in Watts.

Even if people are not made homeless, the conversion of dilapidated hotels into swanky apartments means there that are fewer housing options for poorer citizens, and if this happens on a large scale, it puts massive pressure on already stretched voluntary organizations, charities and social assistance providers.

People living on the streets and in the single-room-occupancy hotels of downtown L.A. have enough to cope with already without being hosed out of the way for iPod-wearing, latte-drinking professionals strolling to work in Bunker Hill. If urgently needed change in downtown L.A. is to improve life at all for those who live there now, some provision must be made for adequate, affordable housing. ...

If the debate about skid row is to be productive, we need to reject the characterizations of its dwellers as unfortunate failures and instead evaluate the ways in which a booming housing market can do damage — economic, social and psychological — to those who live in poor, underserved neighborhoods.

Krugman talks about the process underway in New York city in "The New York Paradox." In this case, it is the middle class that is being driven out as the cost of living in the city rises.

Two Democrats for Two Americas

Senator Schumer of New York gave his views on the future of the Democratic Party here yesterday. Here's another voice from within the Democratic Party, John Edwards, with a different perspective on where the Party should be headed:

National Press Club Policy Address, Senator John Edwards Washington, June 22, 2006: ...The focus of my speech will be on poverty. But we cannot address an issue like poverty without answering a few basic questions...

First, what kind of leadership should America be providing in the world? We live in a moment of dramatic change and huge global challenges. Our military power is fortunately strong, and we must keep it that way. But our economic power will be challenged by new forces, and our most important asset, our international moral authority, is not what it ought to be. Far from it. What kind of leadership can address all these fronts and serve us at home as well?

Second, what kind of America do we want, not just today, but twenty years from now, and how do we think we can get there from here? The founders of this country created the country we have today because they dreamed large. ... We will never get what we don’t reach for. So in 2006 and the decades to come, for what should we reach?

And last, on a more partisan note, what and for whom do we want our Democratic Party to stand for and fight for?

Those are the questions. I’d like to start with direct answers to these questions.

How Would You Solve the Deficit Problem?

This is an exercise by a group of "ordinary" people to see what measures they would take to cut the deficit. They are surprisingly open to tax increases. In an attempt to find lessons for both political parties, the result that tax-increases are widely endorsed by the group is mentioned along with the observation that the group was open to change in Social Security and Medicare programs, but I read the support for tax increases as much stronger than the support for big changes in social programs:

Public’s Deficit Fix May Stun Politicians, by Edmund L. Andrews, Economic View, NY Times: ...Could three dozen ordinary American adults who had never met before — a group that included fresh college graduates, retired schoolteachers and a self-employed business owner — reach agreement on how to prevent a fiscal train wreck? Could they do any better than their elected leaders in Washington, and were they willing to make any sacrifices? ...

The effort, conducted two weeks ago, was sponsored by ... the Brookings Institution, home to many centrist Democrats; the Heritage Foundation, a conservative stronghold...; and the Concord Coalition, a bipartisan group that advocates fiscal discipline but is essentially neutral on whether it should come from higher taxes or lower spending...

The researchers are still analyzing the results, to be published later this summer. But the session in Philadelphia left some strong impressions on a reporter permitted to observe it. Among them:

• The participants didn’t hate taxes nearly as much as many Republicans think.

• They seemed to treasure Social Security and Medicare in their current forms, but were more open to change than many Democrats think.

• None of the participants pushed for less defense spending, even if the war in Iraq were to wind down.

• Nobody could agree on a single government program that ought to be cut or eliminated altogether.

The good news was that people here appeared less polarized and more open to sharing burdens than do their elected leaders in Washington. The bad news was that the ... group thought the best solutions were to tax other people (smokers, drinkers, S.U.V. buyers, the rich) or to somehow “spend smarter.”

In that sense, participants were much like their elected representatives. The difference was that people were willing to contemplate higher taxes or other measures considered taboo in one party or the other.

Virtually no one needed to be persuaded that the federal budget is on an unsustainable path. ... Participants were given four strategies for tackling the problem. The first was do nothing, but wait and hope that economic growth eliminated the need for big changes.

The second approach put a priority on “keeping our promises to the elderly” while raising taxes and cutting spending in other areas.

The third was to “increase personal responsibility and choice,” shifting Medicare and Social Security from government financing to individual investment-type accounts.

The last strategy was to “invest in the future,” putting more money into education and economic development, but raising taxes and trimming old-age programs. ...

[N]o one endorsed “wait and hope,” the de facto strategy in Washington. More surprising, virtually all the participants agreed on the need for higher taxes. Many supported a repeal of Mr. Bush’s tax cuts of 2001.

That contrasted sharply with the adamant opposition to tax increases among Republican leaders, especially President Bush. But the openness to at least talking about higher taxes appeared unanimous among those in the Philadelphia group, including those who described themselves as supporters of Mr. Bush.

“I was surprised that so many people were in favor of higher taxes, but I think it’s a good thing,” said Anthony Condo, a construction contractor in his 50’s and a strong Bush supporter. “If taxes went up to lower the deficit, and I knew they were being used for that, I would be in favor of it.”

This isn’t to say that tax increases amount to a winning election issue. “Focus groups and polls create a kind of laboratory with conditions that don’t always exist in the real world,” said Geoffrey D. Garin, president of ... a polling company that does work for many Democratic candidates (and was not involved in the ... exercise). ...

When the subject shifted to reducing government spending, the group seemed less successful. Few if any people thought military spending was too high — even if the United States withdrew from Iraq. Nor was there agreement on other programs to cut. Most wanted more money for education, and many wanted more money for prescription drugs. Budget cuts, such as they were, involved “smarter” spending and a crackdown on waste, fraud and abuse...

Still, people seemed willing to accept change. Despite intense support for Social Security, for example, many said that workers should be encouraged to postpone retirement. And despite support for Medicare, there was approval for reducing “heroic” high-technology measures that might keep very old and very ill people alive for a few weeks or months.

So if there was a message, it was not that people wanted to dodge tough choices. It was that they wanted good ideas from their leaders.

Quick note: I have been resistant to the idea of raising the retirement age, more so than most, because I wanted to be convinced that the health of older workers had increased enough to justify such a change. This gives me reason to reconsider, but only as part of a more comprehensive (and reality-based) reform plan.

McCloskey: "The Bourgeois Virtues"

This is the first chapter of The Bourgeois Virtues by Deirdre N. McCloskey offering a defense of capitalism as a virtuous economic system rather than a system that produces "alienated, rootless, angst-ridden, superficial, materialistic" members of society within an immoral and uncaring marketplace. Pure capitalism won't satisfy every definition of equity, and as practiced it isn't perfect. We should, of course, continue to try and improve it's performance and to address equity concerns. But I agree with the main theme of this chapter: Capitalism has made the vast majority of people much better off.

[Here is the NY Times review of the book which describes McCloskey as "a distinguished professor of economics, history, English and communication at the University of Illinois, Chicago, ...[and] a ... new-Christian, postmodern, minimal-government conservative. She is also, by her own avowal, "a tough urban girl who can take it as well as dish it out.""]:

First Chapter:The Bourgeois Virtues, By Deirdre N. McCloskey: If we had gained a better material world, two cars in the garage and Chicago-style, deep-dish, stuffed-spinach pizza on the table, but had thereby lost our souls, I personally would have no enthusiasm for the achievement. I urge you to adopt the same attitude. A good name is rather to be chosen than great riches. For what is a man profited, if he shall gain the whole world, and lose his own soul?

I do not want to rest the case for capitalism, as some of my fellow economists feel professionally obligated to do, on the material achievement alone. My apology attests to the bourgeois virtues. I want you to come to believe with me that they have been the causes and consequences of modern economic growth and of modern political freedom.

True, any well-wisher of humankind will count the relief of poverty over large parts of the world as desirable, at least if she could be sure that no excess corruption of souls was involved. No good person delights in the misery of others. Even many people skeptical of a Washington consensus of neoliberal capitalism agree that globalization has been desirable materially. It has, as one of the skeptics, Joseph Stiglitz, wrote in 2002, "helped hundreds of millions of people attain higher standards of living, beyond what they, or most economists, thought imaginable but a short while ago."

He means bringing the 1.3 billion people - 70 percent of them women - now living on a dollar a day to two dollars, and then to four, and then to eight, not merely the further enrichment of the West, which neither he nor I regard as especially important. "The capitalist achievement," wrote Joseph Schumpeter in 1942, "does not typically consist in providing more silk stockings for queens." That can be achieved merely by redirecting aristocratic plundering to silk factories. The achievement consists "in bringing [silk stockings] within the reach of factory girls in return for steadily diminishing amounts of effort."

To halt such a good thing, as some of the Seattle-style opponents think they wish, would be according to Stiglitz "a tragedy for all of us, and especially for the billions who might otherwise have benefited." The economist Charles Calomiris, who supports globalization on egalitarian grounds, as I do, argues that "if well-intentioned protestors could be convinced that reversing globalization would harm the world's poorest residents (as it surely would) some (perhaps many) of the protestors would change their minds." One would hope so.

But fattening up the people, or providing them with inexpensive silk stockings, I will try to persuade you, is not the only virtue of our bourgeois life. The triple revolutions of the past two centuries in politics, population, and prosperity are connected. They have had a cause and a consequence, I claim, in ethically better people. I said "better." Capitalism has not corrupted our souls. It has improved them. ...

On the political left it has been commonplace for the past century and a half to charge that modern, industrial people, whether fat or lean, are alienated, rootless, angst-ridden, superficial, materialistic; and that it is precisely participation in markets which has made them so. Gradually, I have noted, the right and the middle have come to accept the charge. Some sociologists, both progressive and conservative, embrace it, lamenting the decline of organic solidarity. By the early twenty-first century some on the right have schooled themselves to reply to the charge with a sneering cynicism, "Yeah, sure. Markets have no morals. So what? Greed is good. Bring on the pizza."

The truth I claim is closer to the opposite. In his recent book on the intellectual history of modern capitalism Jerry Muller notes that "the market was most frequently attacked by those who viewed its intrinsic purposelessness as leading to an intrinsic purposelessness..., and who sought radical alternatives on the left and right." That is indeed what the left and right believed, and still believe. They believe in the cultural critique of capitalism, a critique which once justified the Arts and Crafts movement and socialist realism on the left and the architecture and poetry of fascism on the right, and justifies now sneering at red states by blue.

I say that the cultural critique is mistaken. ... It is not obvious that consuming in Midtown Manhattan is less purposeful than consuming in an anticapitalist North Korea or in an antibourgeois hippie commune. ... The grim single-mindedness of getting and spending in a collectivist village is not obviously superior to the numberless levels, varieties, and capacities of Paris or Chicago. Vulgar devotion to consumption alone is more characteristic of pre- and anticapitalist than of late-capitalist societies.

I claim that actually existing capitalism, not the collectivisms of the left or of the right, has reached beyond mere consumption, producing the best art and the best people. People have purposes. A capitalist economy gives them scope to try them out. Go to an American Kennel Club show, or an antique show, or a square-dancing convention, or to a gathering of the many millions of American birdwatchers, and you'll find people of no social pretensions passionately engaged. Yes, some people watch more than four hours of TV a day. Yes, some people engage in corrupting purchases. But they are no worse than their ancestors, and on average better.

Their ancestors, like yours and mine, were wretchedly poor, engaged with getting a bare sufficiency. ... In 1807 Coleridge quoted an economist of the time, Patrick Colquhoun, asserting that "poverty is ... a most necessary ... ingredient in society, without which nations ... would not exist in a state of civilization.... Without poverty there would be no labor, and without labor no riches, no refinement." This was a standard argument against the relief of poverty, joining eight other ancient arguments against doing something about poverty...

Coleridge sharply disagreed with Colquhoun's pessimism. A man is poor, he wrote, "whose bare wants cannot be supplied without such unceasing bodily labor from the hour of waking to that of sleeping, as precludes all improvement of mind-and makes the intellectual faculties to the majority of mankind as useless as pictures to the blind." ...

In 1807 the debate was still unsettled. Is a class of exploited people necessary for high civilization, as Colquhoun, or Nietzsche, claimed? Or is the disappearance of such a class as a result of material progress exactly how we get a mass high civilization, as Coleridge, or Adam Smith, claimed?

The results are now in. Modern economic growth has led to more, not less, refinement, for hundreds of millions who would otherwise have been poor and ignorant-as were, for example, most of your ancestors and mine. Here are you and I, learnedly discussing the merits and demerits of capitalism. Which of your or my ancestors in 1800 would have had the leisure or education of a Colquhoun or a Coleridge to do that? As the economic historian Robert Fogel noted in 2004, "Today ordinary people have time to enjoy those amenities of life that only the rich could afford in abundance a century ago. These amenities broaden the mind, enrich the soul, and relieve the monotony of much earnwork [Fogel's term for paid employment].... Today people are increasingly concerned with the meaning of their lives." He points out that in 1880 the average American spent 80 percent of her income on food, housing, and clothing. Now she spends less than a third. That's a rise from a residual 20 percent of a very low income spendable on "improvements of mind" to about 70 percent of a much larger income. All right: a lot of it is spent on rap music rather than Mozart, alas; and on silly toys rather than economics courses, unfortunately. But also on book clubs and birdwatching. ...

The Gospel According to Bill and Warren

Robert Shiller for Project Syndicate on "The Gospel of Wealth":

Gospel according to Gates urges spending on the needy, by Robert J Shiller, Project Syndicate: Bill Gates and Warren Buffett, the richest and second-richest persons in America, and perhaps the world, are often described as admirers of Andrew Carnegie's famous 1889 essay, "The Gospel of Wealth." Carnegie's treatise, an American classic, provides a moral justification for the concentration of wealth by arguing that immense wealth leads to well-spent charitable contributions and support of the arts and sciences.

"The Gospel of Wealth" is based on the premise that business competition results in "survival of the fittest" - the fittest being those endowed with the most "talent for organization." Carnegie argued that those who thrive in business and acquire huge personal fortunes are better at judging how the world really works, and thus are better qualified to judge where resources should be directed.

Carnegie also advocated an inheritance tax as an incentive, arguing that it would "induce the rich man to attend to the administration of wealth during his life." Encouraging the rich to spend their fortunes on good causes while still alive, Carnegie maintained, is far better than leaving the disposition of their wealth to the care of their (probably untalented) children.

Last month, Bill Gates announced that he would do what Carnegie recommended: In two years, he will ... devote his life to spending his huge fortune on philanthropy. Warren Buffett, by contrast, is 76, so he has missed his chance to apply his talents to running a charitable foundation. But, by leaving the bulk of his fortune, about US$31 billion, to the Gates Foundation, he will have done the next best thing. ...

[W]hereas Carnegie's theory makes some sense (which is why his essay is remembered so well more than a century later), it isn't obvious that he was right to believe that successful business people are the best administrators of charitable foundations.

Useful traits in business, like aggressiveness or political savvy, might be poorly suited to philanthropy. Likewise, running a foundation may well require studying social problems or the arts and sciences - activities that may not accord with former capitalists' inclinations and talents.

The deeper flaw in Carnegie's theory may be that it is just too difficult psychologically for business people to make the mid-life career transition to philanthropy. Having accumulated great wealth as "survivors" of the business world, will they really turn their talents to the task of giving it away? ...

The public-spirited justification of the concentration of wealth offered in "The Gospel of Wealth" has more support in the United States than elsewhere, which reflects Americans' relatively greater admiration of business people.

But Carnegie's argument never became received doctrine even in America, because most people reject the view that rich business people are smarter and morally superior. Certainly, Gates and Buffett claim nothing of the sort. ...

And yet there is more charitable giving in the United States than in other countries, reflecting a greater sense in America that private benevolence is an obligation. ... Excluding donations to churches, such contributions amount to 1 percent of GDP in the United States, which is six times higher than in Germany or Japan... However, 1 percent of GDP is still not a very big number, and the Gates Foundation, with about US$60 billion after Buffett's bequest, now accounts for a substantial share of the total.

Of course, Gates and Buffett deserve praise, and we should certainly wish them well. But we should not yet consider their example a vindication of "The Gospel of Wealth."

Extending this logic, we should identify the richest person in the kingdom, concentrate all wealth in their hands, and let him or her function as our benevolent dictator since that person would be, more than anyone else, "better at judging how the world really works, and thus ... better qualified to judge where resources should be directed." Sounds a bit like the Gates Foundation in two years.

The question is whether the concentration of wealth is justified. If it is, the wealthy can spend the money as they wish, on the Gates Foundation or whatever, though giving back is certainly honorable. But I don't buy "The Gospel of Wealth" as a reason to concentrate wealth, or as necessarily the best way to allocate charitable contributions.

When the Boss's Son Takes Over

When an heir takes over a business, it reduces performance:

Meet My Son, Your New CEO, by Joel Waldfogel, Slate: When the boss's son takes the helm at work, it's bad news for employees who were vying for the big promotion. But is it bad for the company? Economic intuition offers two plausible and opposing answers. On the one hand, a scion CEO probably has a large ownership share and therefore huge incentives to run the company well. He also knows a lot about the firm and faces the scorn of his extended family, as well as more distant critics, if he fails. On the other hand, ...[t]he best candidate among the boss's relatives may not be as good as the best available. A new study resolves this tension against the heirs-apparent, showing that if the new CEO is related to his or her predecessor, the firm's performance will suffer.

The question of how installing the boss's kid as CEO affects firms' performance is actually quite hard to answer.  ... The ... decision to hand over the reins within the family is not random. Firms may choose scion CEOs when calm seas are expected and a highly qualified outsider when storms are on the horizon. ... The authors of the new study, Morten Bennedsen and Kasper M. Nielsen of the Copenhagen Business School, Francisco Pérez-González of Columbia University, and Daniel Wolfenzon of New York University, came up with a way to measure the effects of scion succession that solves this... They hypothesize that firms whose male CEOs have male firstborns are more likely to hand over the reins within the family—in other words, they want to pass down control but are sexist.

The researchers get to test their thesis by taking advantage of Denmark's relaxed attitude toward data disclosure. ... The authors' hunch about CEO sexism turns out to be right. When the outgoing CEO's firstborn was male, succession passed within the family 40 percent of the time; when the firstborn was female, the in-family succession rate was only 30 percent. The sexism of the CEO dads produces conditions tantamount to the experiment we'd want to design. A random event—a firstborn boy—raises the probability of within-family succession from 30 percent to 40 percent. And here's the juicy result:

Firms in which the CEO dad had a male firstborn, a factor that by itself should have no effect on the firm's subsequent operating performance, experience a $10,000 larger deterioration in income per million dollars in assets after a succession. ... Intuitively, this means that if the choice between a relative or nonrelative CEO were made by the flip of a coin, the choice of a scion CEO would reduce performance by about 10 times as much, or about $100,000 in operating income per million in assets. The authors conclude that professional management at the top—drawn from a large outside talent pool—is "extremely valuable." ...

"New Deal Democracy is Dead"

Charles Schumer on New Deal politics and other issues. This is part of a much longer discussion at American Prospect:

What Would Joe and Eileen Do?, by The Editors, American Prospect: ... Charles Schumer: ...I want to talk about the future of the Democratic Party and where we’re going, and why we don’t [have] an issues template, a values template. I mean, to sum it up in a nutshell, we all knock George Bush but he won the election on eight words: war in Iraq, cut taxes, no gay marriage. Frankly, those things -- I don’t agree with them -- but they’re what politics is supposed to be. Specific issues that he took flak on and was willing to make some waves over that were related to a system of values. So that when a voter heard “war in Iraq,” he knew “tough foreign policy, “ “cut taxes” -- “cut government,” “no gay marriage” -- “traditional values.” Well, we Democrats don’t have eight words, we don’t even have 80 words. Ask any voter what were John Kerry’s eight or 80 words in the 2004 election and he wouldn’t know. And I don’t blame him for that. That’s just where we’re at. ...

But we Democrats are putting together our system, our little what-do-we-stand-for. Frankly, I think the 2006 election will be 80 percent, 75 percent a referendum on George Bush, and only 20 percent, 25 percent a referendum on what Democrats stand for. It will flip in 2008, where there will be no incumbent and everything will be up for grabs... But in 2006, it’s mainly George Bush... But we do have to stand for things, show people if we get in what we’re going to do. It’s very hard to do that in a major, groundbreaking way when you try to do it by consensus. ...

So let me tell you where we’re at politically, in a broad sense. I think New Deal democracy, which is still the basis for the Democratic Party, is gone. ... not in certain deep-values senses, but in this sense. New Deal democracy, as it evolved, became a conglomeration of groups, and Franklin Roosevelt patched together a coalition that was diverse in many ways, but he did things ... that each of the groups wanted. And as we went past Franklin Roosevelt, it became more ... that way. And so the Democratic Party said, “you’re an environmentalist? I’ll do this for you.” “You’re a civil libertarian? I’ll do this for you.” “You’re a labor-union member? I’ll do this for you.” Technology has changed everything. And one thing technology has done is homogenize all of us. The person who lives in rural Nebraska and the person who lives in south Brooklyn buy the same products, see the same things on TV… They’re far closer today than they were in 1932 or 1962. And so appealing to groups doesn’t quite work. And I think in certain ways it hurts us. On each issue we sort of let the group decide what we want to do, and the group tends to be far over to the left side and it pulls us away from talking to average Americans.

So New Deal democracy just doesn’t work anymore, all right? And that’s one of the reasons we can’t come up with eight words. We can come up with eight words for the environmentalists, and eight words for the ACLU, and eight words for … but it just doesn’t carry the day. OK, so New Deal democracy is over; it’s been over for a while. I think it’s fundamentally one of the reasons we’ve been the minority party since 1980, because we still cling to the notion. ... But here’s the more important point: Reagan Republicanism is also dead. Why? I would say that technology has so dramatically changed our world that it’s created a whole different world from the world that existed in 1980.

1980 -- Ronald Reagan came in saying government was fat, tired, and out of control. It was. ... Reagan came in; we deserved to lose. We stopped being democrats -- small “d” -- talking to average people about what affects their lives, and instead had these ideologies. OK, Reagan comes in and basically accomplishes a lot of things that he wanted to accomplish...

But technology has changed all that. The average person, who in 1980 said get government out of my way, feels anxiety. Now, we have to understand something -- the average person… I have fictional people in my head. They’re Joe and Eileen O’Reilly. They live in Massapequa. They’re registered independents. He’s an insurance salesman who makes 50,000 bucks a year; she works part-time in the schools, makes 20,000 bucks a year. .... And before I do anything, I talk to Joe and Eileen. ... I don’t agree with Joe and Eileen … Joe and Eileen don’t agree with my view on gay marriage, but when I talk about gay marriage, I talk to them. I don’t talk to the New York Times editorial board, with all due respect. I talk to Joe and Eileen. And Joe and Eileen O’Reilly are happy with their lives. That’s an important thing to understand. When Democrats condescend to them, they hate it. “Oh, you poor person, we will help you.” You know what Joe and Eileen’s reaction is when you say that to them? [gesture] “I built my life. I’m proud of that. Don’t you tell me that you can help me that way.” With Joe and Eileen, things have changed. Technology has changed, and Joe and Eileen understand in their belly that there are some big forces out there that they need some help dealing with, which they didn’t feel in 1980. Terror. They feel terror. And technology has allowed small groups of bad people to strike in our heartland and do things we have never experienced before. They understand that. World economy, broadband, has allowed there to be a one-world labor market where Joe -- not Joe, his job is pretty secure as an insurance salesman -- but their kids are going to have to compete with people in China and India and everywhere else, and they know that. Technology has made people live longer. ... Technology’s allowed their kids to have access to pornography. Joe would go the candy store and maybe take a quick glance at the dirty magazine section, now his kids can get everything.

Technology has changed the world. And Reagan Republicanism is dead because this idea that government’s your enemy -- and you have to cut its hand off every time it moves -- is over. And the good news for us Democrats is we sort of know New Deal democracy is dead. They have no idea that Reagan Republicanism is over, but it’s over. It’s gone. ... And the fundamental thing about Reagan Republicanism, I would say … I mean we got to deal with the security issue, which is a little different … but the fundamental domestic issue -- government should shrink, let everybody do just what they want, get government out of my way -- is over. And that’s the opening for the Democratic Party because basically the thing that unites us, from the more liberal to the more conservative, is we believe government should be an active force for good. And so we have to define that. ...

[O]ne of the most astounding times I went through was in the late ’60s at Harvard, and it influenced me dramatically. I was against the war; I cut my teeth in the McCarthy campaign, but when the radicals came in, I was appalled. I kept saying to them, “You know, if the war is wrong, why can’t we convince other people?” You know, they had all these theories and Marcuse and al that, the public’s been brainwashed by the media. I had more faith in the average citizen. You know, they’d go over to police officers, right up to their nose and go PIG, so they would hit him … provoke the police officer. And I would go to them, I would say, “What are you doing? That guy’s trying to earn a living.” Those were the people I grew up with, and I lived through a mobocracy. I lived in a mini-French Revolution and it was of the left and it was of well-to-do people, but it influenced me profoundly. The point I’m making, I thought that underneath it all, what was trying to happen then was shifting from a society of self-interest to a society of the greater good, and it didn’t work. And the people I met at Harvard in the late ’60s were the most unhappy people I ever met, and some of them are still my friends and they haven’t been able to put their lives back together. Harvard screwed them up, particularly the guys and gals who came from small towns in the Midwest and South. They couldn’t go home but they didn’t feel comfortable there. So I’m not sure if this eleemosynary Let’s All Work Together for the Common Good can carry a political philosophy and appeal to enough voters to create a majority. ...

[T]he hard left has a moral elitism that is obnoxious. ...[I]t’s a small number of very vocal people … I think if you analyze who emails us from MoveOn, it’s basically the same group. I’m glad they’re active. I like them. We get pushed around too much. We don’t think of Joe and Eileen. The reason I think of Joe and Eileen is I need a pushback. When you’re in the Washington world you need a pushback. ...

But I would say this. ... Technology has allowed wealth to agglomerate to the top. The No. 1 reason that wealth is agglomerating to the top is not the Bush tax cuts -- they’ve exacerbated it -- but it’s the change, the fundamental change in society. Why? We’re an idea society. When an idea can create so much added value, it doesn’t spread around. Here’s what I mean: When Henry Ford had his great idea, it took a million people to carry that idea forward. You needed people to build the car. You needed people to transport the car. You needed people to sell the car. And Henry Ford, if the value of this thing was $1 billion, probably he had to give away $950 million of that to other people to effectuate his idea. When Bill Gates came up with his great idea, which was more of an idea per se than a thing, much more of an abstract thing than a concrete thing, he only needed about 5,000 or 10,000 people to carry out his idea. So instead of creating a whole bunch of middle class … So instead of creating a million middle-class people, which Henry Ford did, he created 5,000 low-level millionaires. And this is a real problem. ...

I'm not much of a fan of Schumer's - I think his imaginary friends have led him astray on some key issues - but I thought his views were worth presenting since he will be trying to push the Democratic Party in this direction.

They Were Against It Before They Weren't Really for It

From PGL at Angry Bear:

GOP Ties Minimum Wage Hike to Tax Cuts: AP reports:

Republican leaders are willing to allow the first minimum wage increase in a decade but only if it's coupled with a cut in future inheritance taxes on multimillion-dollar estates, congressional aides said Friday. A package GOP leaders planned to bring to a vote Friday or Saturday in the House also would renew several popular tax breaks, including a research and development credit for businesses, and deductions for college tuition and state sales taxes, said a spokesman for House Majority Leader John Boehner. The wage would increase from $5.15 to $7.25 per hour, phased in over the next three years, said Kevin Madden, the aide to Boehner, an Ohio Republican. The maneuver is aimed at defusing the wage hike as a campaign issue for Democrats while using its popularity to spur enactment of the Republican Party's long-sought goal of permanently cutting taxes on millionaires' estates.

Let’s be clear about two things. First, all this proposal would do as far as the minimum wage would be to restore it to something barely above 1997 levels in real terms (see Dean Baker) and far below the 1968 level. Secondly, these “tax cuts’ are nothing more than tax shifts. Someone at some point will have to pay down all these deferred tax liabilities.

We won't raise your wages unless you agree to cut taxes on the wealthiest Americans, a strong signal of support for families struggling to survive at the minimum wage. I guess this means if they'd gotten their way earlier and cut the estate tax, they wouldn't even need to bother with the poor. Their only use to the GOP is as a vehicle to cut estate and other taxes.

Unchecked and Unbalanced

Paul Krugman follows up today's column in "Unchecked and Unbalanced" from Money Talks:

Markus Hofmann, Los Angeles: The health of a democracy is dependent upon an educated and accurately informed citizenry. It is the responsibility of citizens to inform and educate themselves about the issues that affect their community, their government and their personal interests. To the extent that they fail to fulfill this responsibility, they undermine the integrity of this form of government. The Bush administration has had a willing partner ready to consume its propaganda campaign: the naive, ill-informed citizenry of this nation. In a democracy people get the government they deserve.

Paul Krugman: I really don't think that's fair — or maybe the point is that it demands an unattainable standard. Most people have lives to live, jobs to do, children to raise. They don't have time to do careful news analysis.

This gets to a pet gripe of mine about a lot of news reports these days. All too often, pieces seem to be written in a kind of code: if you read them very, very carefully, they're devastating critiques of current policy, so that reporters and editors can claim that they kept the public informed, but readers who don't approach the stories with a magnifying glass never even realize that the critique is there.

Right now we're getting a crop of tell-all books by reporters who were in Iraq during the first year of the occupation about what they saw there — books like Tom Ricks's "Fiasco" and Rajiv Chandrasekaran's "Imperial Life in the Emerald City.” (Chandrasekaran's book isn't out yet, but I have an advance copy.) These books show that the crucial first year in Iraq was marked by incredible corruption and incompetence — I'm as cynical as they come, yet the stories in "Imperial Life" show that I haven't been cynical enough. But where was the reporting on all that when it was actually happening — and when an accurate picture of the shambles in Iraq might, say, have dented Bush's reputation as an effective leader before the 2004 election? Well, it was delicately hinted at in the reporting, but no more.

"We Come From France"

Ezra Klein on "The Conehead Economy":

In the past, I've called this "The Conehead Economy" -- plenty of growth in the economic body, but all of it happening in the top percent. Were that to happen to a person, you'd see six inches of growth in their forehead and doctors everywhere would be puzzling over how to correct the deformity. As it is, the media trumpets the growth, the politicians backslap over the roaring economy, and everyone wonders why the average American seems so unhappy.

Price Discrimination Cell Discovered

Marginal Revolution reports on price discrimination:

Price Discrimination Thermometer, by Alex Tabarrok on Economics: When customers call Cingular threatening to switch to another firm or asking for discounts operators see a handy thermometer that tells them the life time value (LTV) of the customer to the company.  The higher the meter reading the more discounts the operator is allowed to offer the customer.   The Consumerist has the details including excerpts from company documents explaining the system.

Dynamic Scoring Undermines the Arguments of Tax-Cut Advocates

It's getting repetitious repeating the same thing again and again, that tax cuts do not pay for themselves, etc., but Paul Krugman's column today makes me realize that we need to keep rebutting the claims of tax-cut advocates for as long as the "propaganda machine" is up and running, and it doesn't run out of gas easily.

In this article from the Center on Budget and Policy Priorities, Jason Furman makes the same point in the box below that I made here about changes in the level of output versus changes in economic growth (see David Altig also). If anyone tries to tell you that tax cuts change the long-run growth of output per capita, call them on it. They don't.

The CBPP report is followed by an article from American Prospect on inconsistencies in the "starve the beast" and "tax cuts pay for themselves" dogma espoused by tax-cut advocates:

Treasury Department Dynamic Scoring Analysis Refutes Claims by Supporters of Tax Cuts, by Jason Furman: On July 25, the Treasury Department released a study entitled “A Dynamic Analysis of Permanent Extension of the President’s Tax Relief.” This study refutes many of the exaggerated claims about the tax cuts that have been made by the President and other senior Administration officials, the Wall Street Journal editorial page, and various other tax-cut advocates. Contrary to the claim that the tax cuts will have huge impacts on the economy, the Treasury study finds that even under favorable assumptions, making the tax cuts permanent would have a barely perceptible impact on the economy. Under more realistic assumptions, the Treasury study finds that the tax cuts could even hurt the economy.

In addition, the study casts doubt on claims that the tax cuts are responsible for much of the recent growth in investment and jobs. It finds that making the tax cuts permanent would lead initially to lower levels of investment, and would result over the longer term in lower levels of employment (i.e., in fewer jobs).

Misunderstanding of the Treasury Study Mars Some News Accounts Some of the reporting on the Treasury analysis has made a basic mistake. The Treasury study found that making the tax cuts permanent would increase the size of the economy over the long run — i.e., after many years — by 0.7 percent, if the tax cuts are paid for by unspecified cuts in government programs. This is a very small effect. If it took 20 years for the 0.7 percent increase to fully manifest itself (Treasury officials have indicated it would take significantly more than ten years but have not been more specific than that), this would mean an increase in the average annual growth rate for 20 years of four-one-hundredths of one percent — such as 3.04 percent instead of 3.0 percent — an effect so small as to be barely noticeable. Moreover, after the 20 years or whatever length of time it would take for the 0.7 percent increase to show up, annual growth rates would return to their normal level — that is, they would be no higher than if the tax cuts were allowed to expire. Several news reports, however, mistakenly said that the Treasury found that making the tax cuts permanent would lead to a 0.7 percentage point increase in the annual growth rate. If true, that would be an enormous economic benefit; it would increase the size of the economy by 40 percent after fifty years. It would be more than fifty times larger than the 0.7 percent increase in the size of the economy over several decades that the Treasury study actually found.

The Treasury also study decisively refutes the President’s claim that “The economic growth fueled by tax relief has helped send our tax revenues soaring,” — in essence, that the tax cuts have more than paid for themselves. Instead, under the study’s more favorable scenario, the modest economic impact of the tax cuts would offset less than 10 percent of the cost of making the tax cuts permanent.

Finally, the conclusions in the Treasury study are based on the assumption that the tax cuts will be paid for by deep and unspecified cuts in government programs starting in 2017. The Treasury study is consistent with other research on dynamic scoring in finding that in the absence of such budget cuts — i.e., if the tax cuts continue to be deficit financed indefinitely — the tax cuts would end up weakening the economy over the long run.

The following are four key findings from the report.

Finding #1: At best, making the tax cuts permanent would have a barely perceptible effect on the economy. ...Moreover, the Treasury study acknowledges that the long-run growth rate would not rise at all... 

Finding #2: The tax cuts would pay for less than 10 percent of themselves in the long run. ...This finding shreds claims that the tax cuts are paying for themselves or even offsetting a sizable fraction of their costs...

Finding #3: Tax cuts will benefit the economy modestly only if they are paid for by large and unspecified cuts in government programs. The featured results in the Treasury study are based on the assumption that government programs are cut sharply starting in 2017 in order to pay for the tax cuts. ... That would be equivalent to cutting domestic discretionary spending in half...

Finding #4: The Treasury study confirms that it is more prudent to raise taxes by a small amount today than to raise them by a larger amount in the future. ... The Treasury study ... finds that cutting taxes today and raising them by even more in the future to make up for the lost revenue and the larger deficits would ultimately reduce the size of the economy (real GNP) by 0.9 percent. ...

Here's another piece along the same lines from The American Prospect. This is Robert S. McIntyre, director of Citizens for Tax Justice:

Report Retort, by Robert S. McIntyre, American Prospect: For decades, most Republican politicians have treated as an article of faith that tax cuts, especially tax cuts for the rich, will “pay for themselves” through improved economic growth and resulting higher revenues. Critics deride this implausible belief as “voodoo economics” or “the free-lunch theory.” Its adherents prefer to call it “supply-side economics.”

Oddly, the same GOP politicians who think tax cuts augment revenues also fervently hold exactly the opposite position, which they call “starve the beast.” They insist that big tax cuts will so sharply reduce revenues that they will force steep cuts in government programs.

The apostle of these conflicting dogmas was President Ronald Reagan, back in the 1980s. On the one hand, Reagan claimed that the way to stop Congress from providing what he saw as excessive public services was to “cut off their allowance.” On the other hand, he also promised that he would pay for his huge increase in defense spending “with the revenues generated by the [even huger] tax cuts” he pushed through Congress in 1981. As it happened, of course, neither theory panned out.

Despite the sorry historical record, our current president, George W. Bush, and most of his fellow Republicans in Congress are ardent disciples of Reagan’s contradictory belief system. In their ongoing and increasingly desperate search for proof of their faith -- at least the part that holds that tax cuts are a blessing for the economy and the federal budget -- Bush and Congress recently asked the Treasury Department to undertake a “dynamic analysis” of the economic and budgetary effects of making the Bush tax cuts permanent...

On July 25, the Treasury Department released its report. Despite the fact that Treasury is managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies, the results offer no comfort to supply-side true believers.

Instead, Treasury’s study found that extending Bush’s tax cuts would have essentially no beneficial effect on the U.S. economy at all. But, the report casually implies, it could have grave consequences for the ability of our government to deliver the public services that Americans depend on. ...

I think it's also worth recall in Menzie Chinn's excellent point that this is not a welfare analysis. For example, in the analysis no benefit is derived from what the government does with the taxes it collects. If the government builds schools, water systems, roads, keeps the elderly healthy and out of poverty, and so on, the study does not include any benefit from such spending.

Update: David Altig clarifies in comments:

Mark -- I think the statment "If anyone tries to tell you that tax cuts change the long-run growth of output per capita, call them on it. They don't." is too strong.  It is true that they don't in the class of exogenous growth models that the Treasury group seems to employ.  However, such effects are clearly possible in some variants of endogenous growth models. Cheers -- da

Thanks David. I should have made it clear, as I hope it was in the original discussion when I quoted from the report, that I was talking in the context of the model used by Treasury that had generated all the buzz. Better wording would have been, "If anyone tries to tell you ... using the evidence in the report ..."

Real GDP Growth Falls

Brad DeLong reports:

Disappointing Real GDP Number for the Second Quarter The GDP growth release:

Real gross domestic product (GDP) grew at an annual rate of 2.5% in the second quarter of 2006, according to today's advance estimate. This follows a 5.6% growth rate in the first quarter.

I had hoped it would be higher.

The Financial Times adds:

One of the main drags on growth was consumer spending, which slowed from the previous quarter’s 4.8 per cent to 2.5 per cent as households cut back on buying durable goods such as cars. ... The contribution of business investment was also a cause for disappointment, with spending on equipment and software falling 1 per cent against a 15.6 per cent increase the previous quarter.

Bloomberg weighs in as well:

A separate report from the Labor Department showed U.S. labor costs rose 0.9 percent last quarter, more than expected, led by the biggest increase in wages in three years. The rise followed a 0.6 percent gain in the previous three months.

The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 4.1 percent after a 2.0 percent rise in the first quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.9 percent annual rate after a 2.1 percent rise the previous quarter.

Here are actual and average real GDP growth rates by quarter (more details, averages over the 1947:Q2 to 2006:Q1 time period):

Is this economy average, or booming as the administration claims?

Paul Krugman: Reign of Error

Paul Krugman has depressing news about the success of the Republican disinformation machine:

Reign of Error, by Paul Krugman, Commentary, NY Times: Amid everything else that’s going wrong in the world, here’s one more piece of depressing news: a ... Harris Poll reported that 50 percent of Americans now believe that Iraq had weapons of mass destruction when we invaded, up from 36 percent in February 2005. Meanwhile, 64 percent still believe that Saddam had strong links with Al Qaeda.

At one level, this shouldn’t be all that surprising. The people now running America never accept inconvenient truths. Long after facts they don’t like have been established, whether it’s the absence of any wrongdoing by the Clintons in the Whitewater affair or the absence of W.M.D. in Iraq, the propaganda machine ... is still at work, seeking to flush those facts down the memory hole.

But it’s dismaying to realize that the machine remains so effective. Here’s how the process works.

First, if the facts fail to support the administration position on an issue — stem cells, global warming, tax cuts, income inequality, Iraq — officials refuse to acknowledge the facts. ... “The tax cuts have made the tax code more progressive and reduced income inequality,” Edward Lazear, the chairman of the Council of Economic Advisers, declared...

Condoleezza Rice..., when pressed to explain why the administration always links the Iraq war to 9/11.., admitted that Saddam, “as far as we know, did not order Sept. 11, may not have even known of Sept. 11.” (Notice how her statement, while literally true, nonetheless seems to imply both that it’s still possible that Saddam ordered 9/11, and that he probably did know about it.)...

Meanwhile, apparatchiks in the media spread disinformation. ...[I]magine what the world looks like to the large number of Americans who get their news by watching Fox and listening to Rush Limbaugh... I get a pretty good sense from my mailbag.

Many of my correspondents are [convinced]... the economy is better than it ever was under Bill Clinton, newly released documents show that Saddam really was in cahoots with Osama, and the discovery of some decayed 1980’s-vintage chemical munitions vindicates everything the administration said about Iraq’s weapons of mass destruction. ...

And what about the perceptions of those who get their news from sources that aren’t de facto branches of the Republican National Committee?

The climate of media intimidation that prevailed for several years after 9/11, which made news organizations very cautious about reporting facts that put the administration in a bad light, has abated. But it’s not entirely gone. ... And the conventions of he-said-she-said reporting, under which lies and truth get equal billing, continue to work in the administration’s favor.

Whatever the reason, the fact is that the Bush administration continues to be remarkably successful at rewriting history. For example, Mr. Bush has repeatedly suggested that the United States had to invade Iraq because Saddam wouldn’t let U.N. inspectors in. His most recent statement to that effect was only a few weeks ago. ... If there have been reports by major news organizations pointing out that that’s not at all what happened, I’ve missed them.

It’s all very Orwellian, of course. But when Orwell wrote of “a nightmare world in which the Leader, or some ruling clique, controls not only the future but the past,” he was thinking of totalitarian states. Who would have imagined that history would prove so easy to rewrite in a democratic nation with a free press?

_________________________
Previous (7/24) column: Paul Krugman: Black and Blue
Next (7/31) column: Paul Krugman: Shock and Awe

For an example of the disinformation campaign about global warming, see "Cold, Hard Facts. For an even more blatant example, see "Mustn't-See TV."

Free Market Shock and Awe

Part of what went wrong in Iraq, "ideology trumping commonsense":

Bush's Iraq: A Bloodbath Economy, by Joshua Holland, AlterNet: Iraqis have been brutalized not only by bombs and bullets; they've also been the victims of economic violence in the form of the free market "shock therapy" cooked up by a firm in Virginia on a $250 million no-bid contract before the U.S. invasion. Transforming Iraq's economy overnight was a matter of ideology trumping commonsense, and it's killed thousands of innocent Iraqis and shattered a way of life for hundreds of thousands more.

That the radical restructuring of Iraq's political economy has received so little critical attention -- even as Iraq's nascent government threatens to crash and burn -- is a testament to how deeply indoctrinated we are --especially our media -- in the narrative of what "American-style" capitalism is. It was taken as a given that after knocking off Saddam, we'd rapidly privatize huge swaths of Iraq's national companies, get rid of hundreds of thousands of civil servants, completely restructure the country's tax and finance laws and throw Iraq's economy wide open for foreign multinationals. File it under bringing "democracy and capitalism" to the poor, backward Arabs.

The reality is that the economic policies we imposed on Iraq were not some generic form of "capitalism"; they included the most radical business-state rules imaginable -- policies that developing countries have vehemently resisted for over a decade. ... And while "democratization" and "free markets" supposedly go hand-in-hand, the truth is that Iraq's economic transformation was mutually exclusive with the goal of forming a legitimate government, and the Bush administration knew it well in advance of the occupation.

That's because it's universally accepted -- even among the most vocal proponents of the very model of corporate globalization that inspired Iraq's new economy -- that in the short-term those policies create economic pain, displacement, anger and civil unrest, as well as a lack of faith in government. That's no way to win hearts and minds.

Even the man who implemented the shock therapy, coalition boss L. Paul Bremer, understood this quite well. Before his installation as "the dictator of Iraq" ... Bremer was a risk management consultant. In 2002, he wrote in a report to his corporate clients: "The painful consequences of globalization are felt long before its benefits are clear… Restructuring inefficient state enterprises requires laying off workers. And opening markets to foreign trade puts enormous pressure on traditional retailers and trade monopolies." Bremer noted that corporate globalization is "good for the economy and society in the long run, [but has] immediate negative consequences for many people," and concluded that those consequences cause "political and social tensions."

Pushing those policies in a country like Iraq was a matter of ideological preference and greed, not necessity. A good example is Iraq's new flat-tax, established by Order #37 (now Law #37). As the Washington Post reported: "It took L. Paul Bremer, the U.S. administrator in Baghdad, no more than a stroke of the pen … to accomplish what eluded [Republicans] over the course of a decade and two presidential campaigns."

Former Reagan and Bush 41 official Bruce Bartlett said with no small amount of envy that an occupation government doesn't have to "worry about all the political and transition problems that have made adoption of fundamental tax reform here so difficult" ...

Putting "free-markets" before what are recognized as "best practices" in post-conflict reconstruction had an immediate relationship with Iraq's insurgency. Consider the impact of two of Bremer's 100 Orders. Order #1 was the "De-Ba`athification of Iraqi Society." It laid off 120,000 senior civil servants (and a half million Iraqi soldiers and officers), ostensibly to clean out the government of holdovers from Saddam's Ba'ath party. But you had to be a Ba'athist to get those civil service jobs in the first place. Antonia Juhasz, author of The Bush Agenda, told me in a recent interview that "it wasn't an indication that they were a party to Saddam Hussein's crimes ... they were fired because they could have stood in the way of the economic transformation."

When I say "civil servants," don't think about the pasty men and women down at the Social Security office. Think about mostly Sunni civil servants -- men accustomed to influence -- fresh out of a job, with few prospects and facing a new order of Shi'ite rule, and remember that they all had compulsory military training and a collection of automatic weapons.

Now look at Order #1 in relation to Order #39, which made it a violation of Iraqi law for the government to favor local Iraqi businesses or Iraqi workers for reconstruction work, meaning that all those pissed off, heavily-armed and newly unemployed men could not be put to work rebuilding their country.

That killed the State Department's own exhaustively prepared plans for post-war Iraq -- plans that the administration had announced they'd follow prior to the invasion. According to a report by the Center for Strategic and International Studies (PDF):

The Administration … announced plans to employ the bulk of Iraq's regular army to rebuild Iraq's critical infrastructure, such as roads and bridges, after a conflict. The United States would pay the salaries of Iraqi soldiers to perform this work, thereby ensuring - at least in the immediate term - against their return to civilian life without any gainful employment.

We'll never know how differently things might have turned out if the administration had listened to its own experts instead of the Chamber of Commerce's lobbyists.

That's not to say these policies caused the insurgency -- it's not that direct -- but they created circumstances in which it could flourish and guaranteed it would have some popular support. This was, after all, an economic order that had led people living in much better circumstances in places like Seattle, Geneva and Montreal to riot. ... Michael O'Hanlon of the Brookings Institution was right when he called post-conflict Iraq "a debacle that was foreseeable and indeed foreseen by most experts in the field."

Much of this policy mix also violated international and U.S. law. It's no small irony given that one of the reasons given for the invasion was to confront a "rogue" regime that scoffed at international law.

Article 43 of the Hague Convention says that an occupying power must "take all the measures in his power to restore, and ensure, as far as possible, public order and safety, while respecting, unless absolutely prevented, the laws in force in the country." The only law that the American forces left standing was Saddam Hussein's ban on public-sector unions.

Article 55 says an occupying force can only serve as the "administrator" of "public buildings, real estate, forests, and agricultural estates." As the Guardian pointed out, those rules also "apply to structural changes to a public resource or service." Naomi Klein asked: "what could more substantially alter 'the substance' of a public asset than to turn it into a private one?"

The questionable legality of the policy was also well understood. Just a week after the bombs started falling on Baghdad, Britain's Attorney General Lord Peter Goldsmith sent a memo to Tony Blair (PDF) warning that "the imposition of major structural economic reforms would not be authorized by international law."...

The Bush administration -- dominated by Big Business ideologues -- went ahead with the plan nonetheless, and the consequences have been wholly predictable. After all, we've seen them before, in the former Soviet states after the USSR's collapse.

The administration actually cited Russia's economic transition as a model for Iraq. But the University of North Carolina's Jonathan Weiler, an expert on Russia and author of Human Rights in Russia: A Darker Side of Reform told me that ... "Russia's transition to a market-based economy was anything but smooth, and Weiler says "it's certainly not a model that's compatible with trying to create a broadly legitimate government in a country that's been torn up by war and years of dictatorship. ...[W]hen you look at Russian human rights since 1991, you see that the victims have changed--to the socially disadvantaged rather than the politically suspect--but the realities of life for many vulnerable Russians have in fact become worse."

None of this is to suggest that Iraq's economy didn't have serious inefficiencies or wasn't in need of deep structural reform. But what economists call "inefficiencies" are most commonly someone's job, or a farmer's subsidy -- people's livelihoods. The reforms could have been phased in over a long period, or, better yet, started after an Iraqi government was established.

Common sense should have dictated that, after the destruction of its infrastructure and the dismantling of its (brutal but stable) government, Iraq didn't need to become a laboratory for neoliberal economics. It needed jobs and basics like electricity, water and sewage systems, and it needed them quickly.

That meant local firms, local workers and small, local projects -- which make less juicy targets for saboteurs -- to rebuild the country's public infrastructure. Development experts call that "local ownership," and consider it crucially important for good outcomes.

But commonsense has always been in short supply in the Bush administration, and they chose to make the country into a trough full of slop for the big multinationals. Make no mistake about it, Iraq's economic transformation is an example of war profiteering by other means, and the disastrous results are plain to see.

"They Make Me Sound Like a Damned Liberal the Way They Act"

Republicans say they are the party of ideas. Too bad they've been such bad ideas, one right after the other. It's also too bad so little has been done to help struggling workers and their families. For example, this is David Broder describing a conversation with "one of the founders of the postwar Republican Party in the South":

He went on: "How the hell long can they refuse to raise the minimum wage?" He was furious, he said, with the Republican leaders of Congress who keep blocking bills to raise the minimum wage, which has been stuck at $5.15 an hour for years. "I'm a conservative," he said, "but they make me sound like a damned liberal the way they act. They spend like fools, they run up the deficits and they refuse to give a raise to the working people who are struggling. How the hell are you supposed to live on $5.15 an hour these days?" "If it wasn't for Pelosi," he said, "I'd just as soon the Democrats take over this fall. Get some checks and balances and teach these guys a lesson."

The Economist looks attempts by Democrats to let voters know that Democrats have ideas to address their concerns, and that they understand ''It's the American dream, stupid":

Hillary's American dream, The Economist: ...Why ... did Hillary Clinton bother to reveal this week that she is for “performance-based governing, not photo-ops; hope and fairness, not fear and favouritism”? Because she is a politician, obviously. But also because the Democrats have been trying to sound constructive this week, giving Bush-bashing a rest and floating a fleet of new policy ideas. ...

But the speech had substance, too. The DLC recently produced a book on security policy, arguing, roughly speaking, that Islamist terrorism is as big a threat as George Bush says it is, but needs to be fought more intelligently. This week came the domestic-policy sequel: “The American Dream Initiative”. The promise of America, said Mrs Clinton, is that if you work hard, you and your children can succeed. But the middle class is squeezed between sluggish pay rises and the soaring costs of health care, college and petrol.

Globalisation, although it makes the world richer, causes economic insecurity. Workers worldwide are worried that someone, somewhere can do their job for less. Americans, despite low unemployment, are especially nervous because losing their job can mean losing their family's health insurance. This is one reason why the Democratic Party's core supporters are reflexively hostile to free trade.

Mrs Clinton and the DLC represent the party's centrist wing: tough on national defence, liberal (in the European sense) on trade and distrusted by the left. “The American Dream Initiative” is an attempt to make globalisation sound less scary by supplying cushions and ladders. The cushions include more tax breaks for home-ownership, a free $500 bond for all new babies (an idea copied from Britain) and a subsidy for retirement savings. Small employers burdened with health-care costs would be able to use a nationwide “purchasing pool” for insurance. The ladders include more subsidies for college and a proposal for longer school hours.

All this will cost money. Mrs Clinton promised to find savings by curbing tax-breaks for rich businesses and axing 100,000 unnecessary consultants, though she wisely refrained from naming any potential victims besides Halliburton. At the same time, she promised to restore the fiscal discipline that has slipped so dangerously under Mr Bush. Democrats, she said, would restore the “pay-as-you-go” budget rules that, until 2002, obliged Congress to match any spending increase with a cut elsewhere or a tax rise.

The next day, in Washington, DC, another group of centrist Democrats called the Hamilton Project offered a complementary set of proposals. One gem: a young wonk named Austan Goolsbee suggested that 40% of American taxpayers should be exempted from filling in their own tax returns because the Internal Revenue Service already knows what they earn, having demanded records from their employers and banks. This, he said, would save $44 billion in compliance costs over ten years. It would be good for family values, he argued, since people would be able to spend 225m more hours with their loved ones instead of wrestling with incomprehensible forms.

I'm not a big Hillary fan, but I'll give her credit for getting out in front of the policy issues this early (that's not saying I agree with all of them). I haven't heard anyone else talking with this degree of specificty about proposals to help the middle class. The mention of Hilary Clinton reminds me of today's post from Robert Reich:

Rules for a Sane Vacation, by Robert Reich: I'm sitting on the beach last week trying to relax into an abbreaviated summer vacation when someone I barely know comes up to me with a scowl. "Did you read that dumb-f#&% middle-class agenda Hillary just put out? If that's all the Dems have to offer to deal with widening inequality, we're screwed," he says, and walks off. I feel my spine tingle, my shoulders begin to ache. To distract myself I pick up the paper and skim the headlines -- Hezbollah and Hamas attacking Israel, Israel bombing Lebanon, Iraq tumbling into civil war, more chaos. Bird flu deaths rising in Indonesia, Iran and North Korea closer to having nuclear weapons. Famine in sub-Sahara Africa. Genocide continuing in Darfur.

By now I'm feeling nauseous. My cell phone rings. It's my good friend John, a welcome distraction. "How'dja like to go to a movie tonight?" he asks... Great, I say, eager for any escape. "Fine, he says, I just got tickets to Al Gore's film on global warming."

As a general rule I don't believe in escapism. I think citizens ought to get involved, be engaged in the world. Don't put your head in the sand. But in order to be engaged most of the time, you have to disengage a bit of the time or you'll go nuts. Before instant communications, before we knew everything going on everywhere, all the time, vacations were about taking a break. Even during the Great Depression and World War II my grandparents once a year trundled off to some remote spot to get away from it all for a week or two. At least they looked happy in the photos.

So how is it possible today to have a real vacation, to get away from it all when it all comes to us and when so much of it is so awful? For the last day (the last day I'm here) I've followed three simple rules, and frankly I feel much better. First, don't read anything. Second, don't watch anything. Third, don't talk with anyone.

Big Trees

Or is it big-a-tree? The essay suggests bigotry is not the problem - we like trees - and wonders why we treat trees so poorly if we like them so much:

The Ungreening of the World, by Joan Maloof, Project Syndicate: Everyone I meet claims to love trees -- I mean really love trees -- yet collectively the human race behaves as if it abhors green things. If you take a step back from whatever biome you are in at the moment and look at the entire Earth and its forests through recorded history, you will see that the relationship between humans and trees looks Strangely Like War (the title of a recent book on forests by Derrick Jensen and George Draffan).

The exact extent of the damage is difficult to discern, because for many years records were not kept, but the estimates are that 75% of the world’s original forests have been logged or burned by humans. Some of them have grown back of course, or have been replanted, but it is thought that we now have only half of the amount of forest land we once had on this planet.

In some places, particularly the drier places of the globe, the deforestation was so severe, and was followed by such intense grazing, that forests have not been able to grow back. The landscape has been permanently altered.

When you imagine Greece, Italy, and Iraq, it is likely that you imagine a dry landscape with open views, the way they look today. Historical records indicate, however, that these places were once covered by dense forests. The forests fell as civilizations flourished, so the earlier a place became “civilized” the sooner it became deforested.

This march of so-called progress resulting in the loss of forests was documented by John Perlin in his 1989 book A Forest Journey.

So today we sit on a planet with only 50% of its forest cover remaining. And here’s the part that should bring tears to your eyes: we continue to lose more forest cover every year. ...

According to the most recent report, between 2000 and 2005, we lost forest acreage equivalent to the land mass of Panama -- more than 77 thousand square kilometers of forest gone, some of it never to return.

The next report is due to be released in 2010. I will not be surprised when it is released and I read that the global forest area has continued to shrink. ...

In the United States, deforestation began as soon as the colonies were settled. Before long, the colonies were exporting wood to the many nations that no longer had the timber they needed for ships, casks, shingles, and other construction materials. Trees were also cut to clear cropland, provide heat, and the fledgling nation was using up its forests to build its own ironworks and railroads as well.

By 1920, more than three-quarters of the US’s original forests had been cut. Similar to the global figures, today the US has only half the forest cover that it had in 1600. And we continue to destroy forest land. ...

The UN recognizes that “forests are essential to economic development and all forms of life.” But the UN Charter also reads: “states have the sovereign right to exploit their own resources.” And so we do. ...

Apologies for the pun. If I can find the time, and I may not, I'll try to dig out some economics papers on this topic.

Roubini: Chance of a Recession Large and Rising

Nouriel Roubini says the chance of a recession is now as high as 50%:

It is hard to predict with certainty whether the U.S. and global economy will suffer of serious stagflation or even a recession (my bearish views are fleshed out in my recent blogs here and here). I have been arguing that those risks are large and rising; and I have recently argued that the probability of a US recession in 2007 is as high as 50%. In brief, the Three Bears of high oil prices, rising inflation leading to higher policy rates, and a slumping housing markets will derail the Goldilocks (of high growth and low inflation) and trigger a sharp U.S. slowdown in 2006, that may turn into a recession in 2007.

One potential barometer of such recession concerns - with all the appropriate caveats - is how many news articles are citing terms such as stagflation, U.S. recession, or recession in general. Here is a brief news-mood summary taken from a brief search on Google News today:

• News Citations of Stagflation: 655
• News Citations of US Recession: 2,870
• News Citations of Recession: 4,850

And it is not just obscure publications that are worrying about stagflation and recession. Recent detailed discussions of such risks were recently front page on the WSJ  and on Bloomberg. And the number of private sector folks, experts and academics talking about such risks is rising. The authoritative Mike Mussa, former Chief Economist at the IMF, now puts the odds of a US recession at 25-30% while the Fed's own internal yield curve model now predicts that the probability of a U.S. recession in 2007 is almost 40%. As the proverb says, talk is cheap (if so sweet) but in this case the evidence that many folks and leading media publications are increasingly and systematically talking about recession and stagflation to the tune of  1000s of recent articles and commentaries should be at least a signal, to policy makers and market folks, that these risks may be rising (and the talk is no sweet).

Fed Chairman Bernanke is downplaying the risks of a recessions but many out there are starting to worry about it a lot. The Fed may also want to learn from its previous serious forecasting mistakes. In 2000, it took six months for the U.S. to go from overheating into outright recession: in Q2 of 2000 the economy was growing at an annualized rate of over 5% and it slowed down to close to 0% by Q4 and entered into an outright recession by Q1 of 2001. As late as September 2000, Fed discussions - see their Minutes - were showing the FOMC being mostly clueless about the upcoming recession and still worrying more about the alleged rising inflation (with their view of the balance of risks stressing rising inflation rather than slowing growth). It then took a surprising and lousy Christmas season of sales and a crashing Nasdaq at the beginning of the new year session on January 2nd 2001 to get the Fed into reality check, panic mode and start reducing the Fed Funds rate at an exceptional inter-FOMC meeting point.

TKO for WTO?

This argues that "the larger meaning of the Doha collapse is the growing rejection of the WTO itself as a trustworthy governing institution for the global system":

Whither the WTO, by William Greider, The Nation: The announcement from Geneva that the "Doha Round" negotiations for another global trade agreement is in "collapse" ... is very good news for peoples of the world, though you won't see the story played that way in the American press.

In round-about fashion, the WTO's failure represents belated vindication for the blue-green movement that arose in Seattle six years ago and the Global Social Forum launched later from Porto Alegre, Brazil. These bottom-up political mobilizations offered an alternative vision for globalization ... dominated by the desires and dictates of ... popular sovereignty and common human aspirations that are shared by people in vastly different trading nations. That promising movement was eclipsed by the drama of 9/11 and war in Iraq, but it was never really sidetracked. Many individual countries have already revolted against the "Washington Consensus" and even establishment experts are beginning to acknowledge its failures. Defeat for them in Geneva is an important marker of progress...

That assembly includes especially the poorer nations of the world... This time, the impoverished countries stood their ground. They did not take the bait and swallow the empty promises, though they were coaxed and bullied by the major industrial players, led by the US. That reflects both their courage and growing maturity.

The essential deal offered the poor was, if they would accept the expanded domination of the WTO..., the rich nations would slash their lush subsidies for global agribusiness, leaving more market space for agricultural producers in developing nations. Many gullible editorial writers bought the logic, but not the poorer nations themselves. To believe that promise, you had to believe George W. Bush was going to sell out Texas cotton and Florida sugar and Midwestern grain or that Paris intended to dump the prosperous farmers of Normandy.

The larger meaning of the Doha collapse is the growing rejection of the WTO itself as a trustworthy governing institution for the global system. It was created ten years ago and it's been down hill ever since, both for rich and poor nations. The activists of Global Trade Watch, arm in arm with other groups around the world, make this case persuasively in a new briefing paper. The demise of Doha, they argue, should restart the worldwide debate on new and more fundamental terms – more promising for people and less deferential to global capital. ...

In blunt summary, the new approach means the following: Scale back the powers of the WTO so that human rights, environmental, labor and other public-interest standards can be adopted "as a floor of conduct for corporations seeking the benefits of global trade rules." In other words, bring other international organizations into the process, with power to enforce standards on everything from toxics to food security to worker rights.

The system, meanwhile, must loosen its grip on individual nations and governments so they can develop their own domestic priorities on non-trade issues. "Countries must be free to prioritize other values and goals above what are sometimes countervailing demands of multinational corporations," the briefing paper asserts.

This is an immense challenge and obviously difficult for brain-dead politicians to grasp and embrace. But it's also an exciting and promising new opening. Imagine that the collapse of the old order has occurred, though not yet acknowledged by its sponsors. "Another world is possible," as the activists like to say, and it has just become a bit more possible.

A retreat from the global marketplace is not in our best long-run interest.

Please Stop Stepping on My Toes

An unreal discussion based upon The Global Interest Rate Dance, With Bernanke Leading, by Hal R. Varian, Economic Scene, NY Times:

Hal Varian, what do you do for fun?

Now that the World Cup and the Tour de France are behind us, the most exciting global spectator sport is watching Ben S. Bernanke.

Yeah, we have a pool going at work on the outcome of the next meeting. We're all pretty excited. What questions are you most interested in?

Will he raise interest rates in August or not? And what does his decision mean for world financial markets?

Good questions. We've heard a lot about the domestic consequences of tighter policy, but not as much about the effects on the dollar and trade flows. Suppose the Fed does raise rates, what happens?

When the Fed raises interest rates, global investors find dollar-denominated investments more attractive. This increased demand for American assets tends to raise the value of the dollar.

But the higher the value of the dollar, the more expensive American goods become for foreigners and the cheaper foreign goods become for Americans, worsening the balance of trade. Eventually, a highly valued dollar can lead to a drop in production in industries that are sensitive to imports or depend on exports...

If the dollar continues to strengthen this summer, we could see weaker demand for exports and increased demand for imports by next spring and summer, worsening the balance of trade.

So, higher interest rates would cause a deterioration in the trade balance and a drop in production? I may have to change my bet in the pool.

But that’s not the whole story. The demand for dollars depends not just on interest rates in the United States, but also on interest rates on assets in other currencies, and they are moving up as well.

On July 14, the Bank of Japan raised overnight interest to 0.25 percent... Euro interest rates are also rising... These higher interest rates on euro and yen assets will tend to reduce the demand for American assets, counteracting the effects of the higher interest rates in the United States.

So a coordinated rise in interest rates internationally will save the day?

The international financial system is like a 19th-century ballroom dance. The central bankers lead with an interest rate adjustment. Their partners, the global investors, watch them closely, trying to anticipate their every move. ...

But how will the dance end? It looks as if the United States interest rate increases will soon stop, if not in August then in September. The euro and yen rates will probably continue to rise for several months after that.

Given the direction of foreign rates, it is also possible that the dollar will become relatively less attractive to foreign investors over the next several months. A weaker dollar would stimulate demand for American exports, which would partly counteract the impact of the higher interest rates here. At least that’s the rosy outlook.

That sounds better. I don't think I'll change my bet after all.

But there are lots of things that could happen between now and then.

Such as? Now I'm starting to worry again.

Disruption in the Middle East could push oil prices even higher, setting off a ripple effect on employment. Central bankers would probably pause or reverse their rate increases to cushion such a blow. Another worry is a natural or man-made disaster: a hurricane or a major terrorist attack could rattle the markets.

China is a wild card as well. It might change its exchange rate policy, allowing the yuan to appreciate more against the dollar to cool its own economy. Or it might change its investment policy to favor euro-denominated bonds rather than investing primarily in United States Treasury bonds. Neither of these things is necessarily bad for the United States, but such changes may have a big impact on exchange rates and global markets.

I don't think I should be betting on these things, there's too much uncertainty. I suppose you're going to tell me there's even more to worry about?

There is a palpable sense of anxiety in financial markets these days, as investors contemplate these and other possibilities. Low interest rates lulled financial markets into complacency. As rates move up, volatility in stock prices has returned with a vengeance.

This is all taking place against the backdrop of continued deficit spending by households and the federal government. If we can’t balance our private and public budgets, we will have to continue to borrow from the rest of the world to make up the difference. But will they continue to lend?

The current interest rate increases are an attempt to slow the economy to avoid inflation. But over the next decade, we may be forced to raise interest rates simply to attract foreign lending to finance our budget deficit.

Such high rates would damp economic growth, putting more pressure on the Fed to return to the low-interest, easy-money policy we have seen in the past few years.

And if they succumb to the pressure?

Such a policy runs the risk of stimulating inflation. The easy-money policies in the past few years have had a surprisingly small impact on wages, in part because of the threat of jobs moving to countries with lower labor costs. But if the dollar fell far enough, foreign labor would no longer be a bargain, giving domestic workers more leverage in wage negotiations.

In this chain of events, an inflationary spiral would become a real possibility, making the cost of a stumble on policy higher. Let us hope central bankers can keep dancing in step as they move interest rates back to normal levels.

I shouldn't have bet so much.

Fed Watch: Still Watching the Data

Tim Duy with a Fed Watch:

Still Watching the Data, by Tim Duy: Futures markets appear to have no clear conviction on the outcome of the next FOMC meeting. The message is that market participants are looking for one more rate hike, either in August or September. Moreover, they doubt the Fed’s position that “pause does not mean done.” That’s one of the messages from Jim Hamilton’s exposition on the yield curve. In fact, not only do market participants expect the next hike to be the last, they anticipate that the Fed will soon be rolling back the rate hikes.

The argument for another rate hike in August is straightforward – sure the economy is slowing, but is it slowing enough given that it is already bumping up against resource constraints? Moreover, with core-CPI posting four consecutive 0.3% readings, policymakers will appear to be accommodating higher inflation by failing to match it with higher interest rates, and thus will be setting the stage to fuel expectations of higher inflation. This essentially forms the backbone of my sense last week that the Fed was more likely than not to hike rates in August before pausing. The most recent employment, CPI, and industrial production reports, in my opinion are supportive of that position.

The counter-argument is that with the economy showing visible signs of slowing, particularly the combined housing/consumer sector, we are at an inflection point that calls for additional caution on the part of the Fed. Indeed, the composition of growth appears to be shifting in line with former Fed Chairman Alan Greenspan’s expectations. Consumer spending is easing, but investment spending is holding up while the external sector looks poised to contribute positively to GDP growth. The durable goods and GDP reports will help confirm or deny these trends.

Ultimately, the decision will rest on the forecast for inflation. And here, as many have pointed out, the housing story appears to cut both ways. Will the Fed be concerned about slowing housing activity, or the resulting inflationary impact via measurement issues?

I am not particularly sympathetic to the notion that the BLS consistently underestimates inflation by the use of owner occupied rent (OER) as a measure of housing costs. This would be an error if consumers thought of their homes as purely “shelter,” but they do not. If they did, they would not be so willing to pay a premium for owner-occupied housing relative to the rental alternatives. Instead, consumers view their homes as part shelter and part investment. It is perfectly reasonable for an index of consumer prices to simply focus on the shelter part of the consumer’s decision.

Of course, there is a reasonable position that argues that central banks should have a broader definition of price stability, one that includes asset prices as well as consumer prices. This would be the proper place to address the issue of house prices and monetary policy. In other words, the debate is not whether the BLS is accurately estimating inflation. The debate is really about what measure of prices the central bank should monitor, a narrowly defined consumer measure (that excludes food and energy) or a broad measure that includes asset prices.

I am also not particularly sympathetic to the latter position – I tend to believe it provides the central bank with too much influence in directing capital allocation decisions. Still, I recognize the opinions of those who believe that capital was essentially wasted during the internet bubble or, more recently, by excessive investment in residential housing. Note that the “waste” was likely greater in the former due to the more rapid depreciation of technology.

In any event, it appears clear that dynamics in the housing market helped depress measured consumer inflation until recently and now those same forces are working against the data. If the Fed were to be consistent, then they would not discount the inflationary impulse of rising OER. Indeed, they seemed perfectly happy with the inflation figures that were depressed by low OER growth. According to John Berry, however, consistency is not the order of the day:

Even if rents aren't the only issue, the causes of why they are rising so much mean that Fed officials do regard them somewhat separately from the other inflationary pressures at work. Essentially, the surge in rents is seen as a transitory phenomenon that will ease gradually.

This will appear to many to be gross cherry picking of the data, while others will be content to know that the Fed is carefully considering the data rather than reacting in a knee-jerk reaction to the inflation numbers. In any event, it would answer another question that had been posed to me: Why does the Fed expect core inflation to eventually moderate when growth is only expected to slow to potential, not below potential? They do see at least one component as separate from cyclical forces, and thus are more sympathetic to a pause in August then one would think given the recent run in the inflation figures. Still, I am not sure how far to carry this line of thought – as Berry noted, Fed Chairman Ben Bernanke clearly said that OER is not the only factor driving the rise in core inflation.

Also, John Berry describes the Fed’s thoughts about as “…probably their greatest single worry about growth right now.” I find this comforting, and would represent a clear shift in thinking at the Fed since this spring, when I noted:

From MarketWatch: “Poole said the financial press puts to much focus on "highly visible" sectors like the housing sector, even though it only amounts to a small fraction of overall GDP growth.”

In other words, I felt the Fed was discounting the housing slowdown, threatening to reveal that little had been learned from the Nasdaq meltdown. Clear evidence of a shift in consumer spending that coincides with a growing housing slowdown may be prompting a fresh look at the importance of the housing market on Constitution Ave. – another reason to look for a pause.

Likewise, on balance, I would have to place the most recent Beige Book in the “pause” column. Indeed, the collection of anecdotal evidence almost mirrors exactly the soft landing scenario: In general, economic activity is slowing on the back of weakening consumer spending and housing activity, but manufacturing activity remains solid, particularly for durable goods:

Among products, demand was especially vigorous for various durable goods. Substantial sales gains were reported for makers of electrical equipment and information technology products such as semiconductors, along with further increases in orders and activity for makers of commercial aircraft and products used for national defense. The reports also pointed to a further rise in demand for makers of heavy equipment, machine tools, and steel, offset in part by reduced demand for smaller equipment that is oriented towards residential construction activity.

In addition, intense competition and, in Dallas weaker demand, is holding back inflationary pressures. More “hawkish” FOMC members may seize upon “scattered indications of faster growth for some workers,” but their concerns will be tempered by more “dovish” members pointing out high productivity (meaning low unit labor cost growth).

Bottom line: The outcome of the August meeting still looks like a tossup, with current inflation data in competition with the magnitude of the slowdown. After being shocked by the forcefulness of the Fed’s inflation rhetoric in early June, I have been hesitant to move back to the “growth slowdown argues for a pause” story. Of course, that may be what exactly what Fed officials wanted to accomplish: To firmly establish their inflation fighting credibility before they take the long awaited pause.

Pulling on Liberal Heartstrings

Here's a new tactic in the quest for privatization of Social Security and reducing government spending generally. If we don't take care of the mounting fiscal problems, we won't be able to effectively wage the war on poverty. This is from Jim Kolbe, "the Republican chairman of the House Appropriations Subcommittee on Foreign Operations, which is responsible for US foreign aid":

Baby-boomers threaten the war on global poverty, by Jim Kolbe, Financial Times: Opponents of global poverty have reason to celebrate. The recent approval by the US Food and Drug Administration of a new, once-a-day pill against Aids could revolutionise health in developing countries. The news follows approval earlier this year of a cervical cancer vaccine, which may save more than 200,000 lives each year in poor nations.

In the US, these breakthroughs have coincided with unprecedented political support for the funding that pays for such medicines. Last year the House of Representatives passed its foreign aid bill with 393 votes, the highest tally in more than two decades. Over the past six years, the US has increased six-fold the money it spends to fight scourges such as Aids and tuberculosis abroad.

But the heights America has reached in such spending may represent the peak of foreign aid, leaving only a hard fall ahead. As the baby-boomer generation ages and begins to draw on Social Security and Medicare, the healthcare system for the over-65s, the funding needs for those programmes will skyrocket. Something else in the budget will have to make way – and America’s foreign aid programme is one of the likeliest candidates for cuts. ...

As entitlements have grown in the past two decades, the share of America’s economy going to foreign aid has been halved. Even the share devoted to national defence has declined by more than 40 per cent. It may seem strange that entitlement programmes should impede the war against global poverty, even the war against terror. But that is exactly what is happening. The un­sustainable promises that successive governments have made, primarily to older Americans, could hobble US foreign policy for decades. ...

When the US spends money to fight ... suffering it boosts its international stature immeasurably. Nothing provides as much tangible evidence of America’s moral leadership as foreign aid. But that leadership may be jeopardised by a budget increasingly on autopilot, devoted to financing the lifestyles of retired Americans. Political support for the fight against global poverty may never be higher, but the best intentions will amount to little as America’s entitlement programmes consume more and more of US resources.

Other domestic programmes, themselves squeezed by entitlement spending, will also be competing with foreign aid for scarce dollars. Those who care about the world’s poor must ask themselves: will future US congresses cut cancer research while spending more to fight malaria in Africa? Will they deny improvements in veterans’ health care to improve literacy rates in the poorest countries? Not likely. ...

To govern, as the saying goes, is to choose. But with entitlement programmes, we do not choose. These programmes do the choosing for us. They are also making the choices in US foreign policy, determining the nation’s future role as a global leader. The US has had the good sense to make foreign assistance a key priority. Now it needs the courage to keep it there.

George W. Bush, US president, has shown crucial leadership on both entitlement reform and foreign aid, but we need to be more explicit about the links between them. Above all, he has to present Americans with the trade-offs that government is making, year for year. Far more people would confront the need to rein in entitlements if they understood how they are putting our foreign aid budget in a straitjacket.

The writer is the Republican chairman of the House Appropriations Subcommittee on Foreign Operations, which is responsible for US foreign aid.

For a party that has complained so much about spending on foreign aid in the past, this new concern for world poverty is encouraging. However, setting world poverty versus "financing the lifestyles of retired Americans" is a false and misleading tradeoff designed to achieve the political goal of reducing the size of government. I don't have time to deal with this properly, so hopefully comments or other bloggers can put this into it's proper place, but the amount of foreign aid we give relative to the size of the budget, spending on the war, and so on, is miniscule, low among developed countries on a per capita basis (this says 27 billion in 2004). We can handle the current 20 -30 billion we spend on foreign aid going forward.

Update: PGL at Angry Bear has more.
Update: William Polley also has a nice follow-up.

Do You Have an Expert Mind?

Something a bit different. Scientific American looks at the characteristics of expert minds. Summarizing, "The preponderance of psychological evidence indicates that experts are made, not born," i.e. motivation seems tomatter more than talent. I cut quite a bit - the full article is available for free:

The Expert Mind, by Philip E. Ross, Scientific American: A man walks along the inside of a circle of chess tables, glancing at each for two or three seconds before making his move. On the outer rim, dozens of amateurs sit pondering their replies until he completes the circuit. The year is 1909, the man is José Raúl Capablanca of Cuba, and the result is a whitewash: 28 wins in as many games. The exhibition was part of a tour in which Capablanca won 168 games in a row. How did he play so well, so quickly? And how far ahead could he calculate under such constraints? "I see only one move ahead," Capablanca is said to have answered, "but it is always the correct one."

He thus put in a nutshell what a century of psychological research has subsequently established: much of the chess master's advantage over the novice derives from the first few seconds of thought. This rapid, knowledge-guided perception, sometimes called apperception, can be seen in experts in other fields as well...

But how do the experts in these various subjects acquire their extraordinary skills? How much can be credited to innate talent and how much to intensive training? ... The collected results of a century of such research have led to new theories explaining how the mind organizes and retrieves information. What is more, this research may have important implications for educators. Perhaps the same techniques used by chess players to hone their skills could be applied in the classroom to teach reading, writing and arithmetic.

The Drosophila of Cognitive Science ...[W]hen expertise undoubtedly exists--as in, say, teaching or business management--it is often hard to measure, let alone explain. Skill at chess, however, can be measured, broken into components, subjected to laboratory experiments and readily observed in its natural environment, the tournament hall. It is for those reasons that chess has served as  ... the "Drosophila of cognitive science," as it has been called. ...

The feats of chess masters have long been ascribed to nearly magical mental powers. This magic shines brightest in the so-called blindfold games in which the players are not allowed to see the board. In 1894 French psychologist Alfred Binet, the co-inventor of the first intelligence test, asked chess masters to describe how they played such games. He began with the hypothesis that they achieved an almost photographic image of the board, but he soon concluded that the visualization was much more abstract. Rather than seeing the knight's mane or the grain of the wood from which it is made, the master calls up only a general knowledge of where the piece stands in relation to other elements of the position. ...

Let us say he has somehow forgotten the precise position of a pawn. He can find it, as it were, by considering the stereotyped strategy of the opening--a well-studied phase of the game with a relatively limited number of options. Or he can remember the logic behind one of his earlier moves--say, by reasoning: "I could not capture his bishop two moves ago; therefore, that pawn must have been standing in the way...." He does not have to remember every detail at all times, because he can reconstruct any particular detail whenever he wishes by tapping a well-organized system of connections.

Tax Cuts and Changes in Output

One more time, tax cuts do not pay for themselves:

Tax Cuts May Come At a Price, Study Says Treasury: Financing Must Be Found, by Nell Henderson, Washington Post: The federal government will need to either cut spending or raise taxes down the road to pay for extending President Bush's recent tax cuts, the Treasury Department said in a report released yesterday, dismissing the idea popular with many Republicans that such sacrifices can be avoided.

The ... Treasury's view reflects "a recognition the federal government has to finance the tax relief" to avoid a rise in government debt, Robert Carroll, deputy assistant secretary for tax analysis, said in an interview.

The report stressed that the economic effects of extending the tax cuts "depend crucially on whether they are financed by lower spending or higher taxes in the future." ...

If ... tax cuts are extended and matched by comparable reductions in government spending, under the best scenario, the nation's level of economic activity would be increased by about 0.7 percent per year over time, or by $90 billion a year in current dollars, Carroll said.

If the government instead decides to raise taxes later, effectively making the tax cuts temporary, that could lower economic output over time, the report said. ...

The Treasury report released yesterday relieved "a lot of fears that dynamic scoring would lead to the view that cutting taxes raises revenue," said Jason Furman... Rather, the report "pours a huge bucket of cold water on the exaggerated claims that tax cuts transform the economy and pay for themselves." ...

Here's commentary from the WSJ on the same topic posted on Greg Mankiw's blog:

Dynamic Analysis by Robert Carroll and N. Gregory Mankiw, Commentary, WSJ: Does tax relief mean more economic growth? Many people believe the answer is yes, and now they get strong support from the staff of the U.S. Treasury.

Most press reports on the Mid-Session Review of the federal budget, released by the Bush administration a couple of weeks ago, focused on the good news about expanding tax revenues and the shrinking budget deficit. But for tax-policy geeks, the most intriguing part of the report was an easily overlooked box on page 3: "A Dynamic Analysis of Permanent Extension of the President's Tax Relief." Over the past six months, the Treasury Department staff has been studying the dynamic effects of tax cuts on the economy. The results of this analysis, previewed in this box, were released yesterday in more complete form (available at http://www.treas.gov/offices/tax-policy/).

A bit of background: Most official analysis of tax policy is based on what economists call "static assumptions." While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy. This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts. The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

The Treasury report describes what will happen to the economy if the tax relief of the past few years is made permanent, compared to the alternative scenario of reverting back to the tax code as it was in 2000. Specifically, the report analyzes the effects of lower taxes on dividends and capital gains, the effects of lower taxes on ordinary income, and the extension of other tax cuts, including the new 10% bracket, the expanded child credit and marriage-penalty relief. Here are three main lessons.

Lesson No. 1: Lower tax rates lead to a more prosperous economy.

According to the Treasury analysis, a permanent extension of the recent tax cuts leads to a long-run increase in the capital stock of 2.3%, and a long-run increase in GNP of 0.7%. In today's economy, such a GNP expansion would mean an extra $90 billion a year that the nation can spend on consumer goods to raise living standards, or capital goods to maintain prosperity. More than two-thirds of this expansion occurs within 10 years.

Lesson No 2: Not all taxes are created equal for purposes of promoting growth.

Some tax rate reductions have a profound impact on incentives and economic growth, while others have minimal or even adverse effects. The Treasury staff reports particularly large bang-for-the-buck from the reductions in dividends and capital-gains taxes. Even though these tax cuts account for less than 20% of the static revenue loss from permanent tax relief, they produce more than half of the long-run growth.

At the opposite end of the spectrum are the tax reductions from the 10% bracket, child credit and marriage-penalty relief. These tax cuts put money in people's pockets when, during the recent recession, the economy needed a short-run boost to aggregate demand. They also fulfill other objectives, such as making the tax system more progressive. But they illustrate that not all tax cuts promote long-run growth. Treasury estimates that without the tax reductions from the 10% bracket, child credit and marriage-penalty relief, the long-run increase in GNP would be larger -- 1.1% rather than 0.7%.

Lesson No 3: How tax relief is financed is crucial for its economic impact.

Like all of us, the government eventually has to pay its bills. In technical terms, the government faces an intertemporal budget constraint that ties the present value of government spending to the present value of tax revenue. This means that when taxes are cut, other offsetting adjustments are required to make the numbers add up.

The Treasury's main analysis assumes that lower tax revenue will over time be accompanied by reduced spending on government consumption. But the report also shows what happens if spending cuts are not forthcoming. In this alternative scenario, a permanent extension of recent tax relief is assumed to lead to an eventual increase in income taxes.

The results are strikingly different. Instead of increasing by 0.7% in the long run, GNP now falls by 0.9%. Tax relief is good for growth, but only if the tax reductions are financed by spending restraint. One exception: Lower taxes on dividends and capital gains promote growth, even if they require higher income taxes.

These Treasury results are sure to spark debate and further research. While the Treasury report is not the last word on dynamic analysis, it is a big step toward a more realistic view of tax policy.

This says that cutting taxes knowing that you will have to raise them again in the future is unwise because it will result in a lower level of output.

I want to point out that Lesson 1 summarizes the effect of the policy on the level of output, a movement to a new steady state. It is not a change in economic growth. A one-shot increase in the capital stock of 2.3% increases the level of output, in this case by .7% if (infeasible) cuts in spending are used to cover the tax cuts, but there is no change at all in the growth rate of output. Quoting from the report, "In the steady state, per-capita growth in the model is equal to a constant rate of technological change." I've missed something somewhere. The commentary is about changes in economic growth, not changes in the level of output, so it would be helpful to see the connection between tax cuts and the (constant) rate of technological change explained further since an increase in the rate of technological change is needed to increase the growth rate of per capita output.

Finally, the acknowledgement that this is not that last word, and that further research is needed, says not to take the actual numbers the model produces too seriously -- they are subject to a great deal of uncertainty.

Update: Menzie Chinn at econbrowser also comments on the Treasury report.

Update: David Altig at macroblog follows up with "A Teachable Moment."

The Fed's "Greatest Single Worry"

New Economist and Brad Setser kindly call Tim Duy, who (luckily for me) does Fed Watch here, the "John Berry of the blogosphere." I think that's a nice endorsement of John Berry's work:

Fed Is Showing Concern Over Housing Retrenchment, by John M. Berry, Bloomberg: Nothing has been more important in driving the U.S. economic expansion that began nearly five years ago than housing. It could be just as vital as growth slows.

Federal Reserve officials are watching warily to see whether the housing retrenchment that began late last year will remain modest or turn into a rout that could damage the economy severely.

The Fed raised interest rates 17 consecutive times over the past two years to keep inflation under control, and the officials have understood that at some point that would sting housing.

What has only become evident in recent months is that, perversely, the big decline in housing affordability -- due to the combination of double-digit housing price increases year after year and higher mortgage-interest rates -- would cause a surge in core inflation.

Would-be homeowners -- either priced out of the market or simply fearful that the value of a home purchased now could fall in coming months -- are renting instead. As a result, rents of residences and the so-called owners' equivalent rent components of the consumer price index have shot up this year.

Together, those carry such large weights in the CPI that their increases accounted for almost two-thirds of the full percentage point increase in the core CPI in the first half of this year. From December to June, the core rose at a 3.2 percent annual rate, up from a 2.2 percent rate in the second half of last year.

The National Association of Homebuilders, never a fan of Fed-engineered interest rate increases, complained about this ... in a letter to Senator Paul Sarbanes, the ranking Democrat on the Senate Banking Committee, prior to Fed Chairman Ben S. Bernanke's appearance before the committee on July 19. ... Sarbanes, in questioning Benanke, asked whether the decline in housing might go too far. And of the NAHB argument about rents, he observed, ''That seems to me to have some validity.''

''On your first point about housing, we are watching the housing market very carefully,'' the Fed chairman responded. ''Other parts of the economy are picking up to offset some of the weakness we see in the housing market. But we are watching that very carefully.''

As for the links among rising interest rates, a cooling housing market, increasing rents and the surge in core CPI, Bernanke said that the high weight rents carry in that index is one reason the Fed prefers to focus on the core personal consumption expenditure price index. The PCE index, he said, ''puts a much lower weight'' on rents, he said.

In addition, Bernanke said, ''the increase in inflation we have seen is a much broader phenomenon than that single component. If that single component was the only issue, I would think twice.''

Presumably, the Fed chairman meant that he would think twice about raising the Fed's target for the overnight lending rate if rents were the only issue.

Even if rents aren't the only issue, the causes of why they are rising so much mean that Fed officials do regard them somewhat separately from the other inflationary pressures at work. Essentially, the surge in rents is seen as a transitory phenomenon that will ease gradually. ...

The Commerce Department reported yesterday that sales of existing homes dropped 1.3 percent in June, to a 6.62 million unit annual rate. That's almost 9 percent below the sales rate in June 2005.

The number of unsold homes on the market rose to 3.725 million units, almost 40 percent more than a year earlier. ''This implies that we are only at an early stage of home sale problems,'' economist Ken Mayland of ClearView Economics told his clients. ''At some point along the way, prices could crack big time.''

Fed officials recognize that possibility. It is probably their greatest single worry about growth right now.

David Altig has more on the influence of rent and owner's equivalent rent on inflation measures.

Power, Not Socialism

More on the interaction of politics, economics, and power in China:

Power not socialism is today’s Chinese ideology, by Richard McGregor, Commentary, Financial Times: ...[I]t is a commonly heard refrain among business leaders breezing through Beijing ... that China’s communists are really deal-hungry capitalists in disguise, but just cannot say so. It is not for nothing that the Communist party is only half- jokingly labelled the world’s biggest chamber of commerce.

In China itself, however, ideological debates in various guises are alive and kicking and play a pivotal role in policymaking. Chinese and foreigners ignore them at their peril.

The clearest sign that ideology is back came with the demise of the property law earlier this year, shelved after a campaign against it by a law professor at Peking University. The law aimed to entrench legal protection of private property rights, but Gong Xiantian whipped up a storm by arguing it would only protect the rights of the rich and succeeded in pushing it off the legislative agenda.

That Professor Gong’s argument won the day is astounding. After all, the Chinese who have made the most money from property in the past decade did so by throwing ordinary citizens out of their homes in collusion with local governments. For individuals in China, by contrast, the ability to buy a home has been tremendously empowering. With the protection of the law and independent courts, the property market would enrich both them and the country.

The key to Prof Gong’s victory was that he was able to frame the debate in a code that still packs a punch in Chinese politics. The bill, he said, would undermine China as a socialist state. Or to use the code, the measure was “surnamed capitalist, not surnamed socialist”, a turn of phrase not heard since the early 1990s, when the late Deng Xiaoping was fighting a rearguard action in defence of market reforms.

Deng said it did not matter what a reform was “surnamed”, as long as it worked. For the conservative left, however, to label a measure as “surnamed capitalist” was akin to attaching the mark of death to it. The phrase has been given a new twist in recent months in an intensifying debate about foreign purchases of Chinese companies. The ideologues are applying a new litmus test for such deals – whether an industry is “surnamed Chinese or surnamed foreign”.

The result has been a slew of delays in purchases of local companies in industries as diverse as construction equipment, meat packing and industrial bearings, which have taken on a strategic quality in the hands of the anti-foreign forces. ...

Deng’s clever formulation of “socialism with Chinese characteristics” gave policymakers the fig-leaf they needed two decades ago to introduce market reforms in a single-party state. The economy has flourished ... but, in the meantime, the gap between the fiction of the party’s rhetoric (“China is a socialist country”) and the reality of everyday life has grown ever greater. The party has no choice but to defend the fiction, because it represents the political status quo. ...

The party remains a nimble beast. A few years ago, it noticed the explosive growth of the private sector. So the party began inviting entrepreneurs to officially join its ranks and establishing cells inside private companies to ensure they did not incubate an alternative political force. It is impossible to know how this conflict between single-party rule and growing private interests in China will be resolved. But no one should doubt the resolve of the party to maintain its grip...

Promises, Promises

Dan Gross is unhappy with Ed Lazear:

Lazear Beam, by Dan Gross: It's tough being part of the Bush economic team, in large part because there are so many of chunks of the recent record that are difficult to defend/spin. Indeed, it's been my experience that the academic types who have served in the administration are, as a group, far more intelligent, honest, and engaging as private citizens than they were as public servants. Looks like Ed Lazear, chairman of the Council of Economic Advisors, is going to be in that same mold. Edward Luce and Krishna Guha report in the Financial Times.

The US is now in its fifth year of growth since the last recession. Yet median weekly earnings ... have fallen by 3.2 per cent in real terms since the start of the recovery in October 2001. Similarly, average hourly earnings for non-managerial workers have fallen by 0.6 per cent since the last quarter of 2001, according to the US Bureau of Labor Statistics. This contrasts with previous US recoveries, in which wage growth started to overtake inflation at a much earlier stage in the cycle...

Senior administration officials believe the public's frequently expressed economic dissatisfaction - more than two-thirds of Americans believe their country is heading in the wrong direction - reflects Washington's inability to get its message across to the US heartlands. There is particular concern about declining support for trade liberalisation.

Ed Lazear, chairman of the president's Council of Economic Advisors, says the growing focus on wage stagnation is misleading for two reasons.

First, there are signs that hourly earnings growth is beginning to accelerate after an unusually long lag. And second, the measure fails to capture broader growth in worker compensation, which includes pensions and healthcare provided by employers.

"Hourly wages have grown more slowly than total compensation," Mr Lazear said in a speech last week. "The relevant measure is total compensation." Mr Shapiro disagrees: "This is not about whether the American public is hearing the right message - it is about what most people are experiencing."

Translation: "We're not pissing on you. It's just raining."

Note the super-hyper conditionality attached to the discussion of wage growth: there are signs that hourly earnings growth is beginning to accelerate.

And regarding overall compensation, he must be kidding. It may be true that wages are growing more slowly than overall compensation due to increased spending on health benefits and pension. In fact, for many people, they're not growing at all. But I'd bet a lot of that growth in benefits spending has to do with inflation in health care, not in a broadening of benefits. ...

Lets say a worker gets no raise, and his employer spends 5 percent more on the worker's health insurance, Lazear would say his compensation has risen 5 percent. But what if the cost of health insurance rose 8 percent last year and the employer isn't willing to pay for it? The employer tells the employee he has to pay higher co-payments and take a higher deductible for the same plan, and the worker does not see any net increase in his total compensation.

And pensions? Lazear has got to be kidding here, too. Is there any evidence that workers who aren't getting wage increases are getting big pension increases? If so, I haven't seen it. ...

Ugh.

[The bold text is from the original.] Update: Here's a bit more from the article on Larry Summers joining Robert Rubin in an attempt to draw more attention to lagging U.S. wages:

Summers and Rubin to highlight lagging US wages, by Edward Luce and Krishna Guha, Financial Times:  Larry Summers, the last Treasury secretary of the Clinton administration, will on Tuesday join Robert Rubin, his immediate predecessor, in a high-profile drive to highlight stagnation in wage growth for the majority of workers in the US economy.

The issue, which is starting to catch fire among a number of prominent US groups, including the prestigious Brookings Institution, ... challenges the administration’s argument that the strong US economy has benefited all Americans. ...

Although senior figures such as Mr Summers and Mr Rubin are associated with the heyday of economic globalisation in the 1990s, the skewing of the gains of US economic growth in the last five years towards the top 10 per cent of earners has prompted a rethink on how the fruits of trade are distributed among Americans.

Adaptive Expectations, Rational Expectations, and Learning in Macroeconomic Models

This commentary says models of expectations in economics are like porridge in the story of Goldilocks, but there is no 'just right' -- agents are either too smart, or too dumb, and he calls for more realistic models somewhere in the middle:

Central banking model for neither gods nor monkeys, by Paul de Grauwe, Commentary, Financial Times: The quest for a scientific foundation for central banking has been going on for a long time. This quest led in the 1960s and 1970s to large-scale econometric models with hundreds of equations describing the economy in much detail. Central banks used them to predict how interest rate movements would affect the economy and to discover the best way to react to shocks like the oil price increases of the 1970s.

It quickly turned out that these large models led to unreliable predictions. ... The diagnosis of this failure was given by Robert Lucas, Nobel Prize winner in economics. The old models considered individual agents (consumers and producers) as passive... Prof Lucas stressed that these agents are human beings endowed with intelligence and a desire to look for the best possible outcome. In such an environment, he argued, the [agents] should be modelled as active ... trying to anticipate what the central bank would do.

This criticism led to the rational expectations revolution in economics. New models were built in which a new assumption was introduced. Individual agents now were assumed to understand the complexity of the world in which they live and to continuously compute the implications of central bank actions for their present and future welfare.

The earlier extreme assumption of complete stupidity of individual agents was replaced by another extreme assumption of supreme understanding of the intricacies of the economy. In the old models, agents were assumed to have the brains of monkeys. In the new “rational expectations models”, agents were given god-like features allowing them to see through the complexities of the world. Milton Friedman reminded us a long time ago that even if the underlying assumptions of a model seem implausible, its power depends on how well it performs in making predictions. ... They failed, so much so that they had to be brought back to the repair shops almost immediately. There, ad-hoc features that had little to do with rational agents were added until the model ran better.

In spite of this empirical failure, many central banks today use versions of this model. The model is inhabited by super-rational agents for whom the complexity of the world has few secrets. They continuously optimise their present and future consumption plans and are capable of calculating with great precision what the effects will be of interest rate changes implemented by the central bank. This is a fairytale world.

It is quite paradoxical that macroeconomics has arrived at such an extreme view now that we start to learn from psychology and brain sciences that the economic paradigm of perfectly informed optimisers may not be the correct way to model individual decision-making. We learn from these other sciences that individuals experience great problems when they try to understand the world in which they live. They find it difficult to collect and to process the complex information with which they are confronted.

Since they cannot see the whole picture, they use simple rules (“rules of thumb”) and partial information to guide their decisions. They are not fools though. They regularly subject these simple rules to profitability tests and only keep those rules that keep their profits at reasonable levels. ... There is a need to move away from extreme assumptions when modelling human behaviour. Human beings are neither the dumb automatons of the old models nor the supreme creatures of knowledge and understanding of the new models.

There is good news though. Increasingly, academic researchers are trying to model the economy assuming that agents with imperfect knowledge are learning and revising their knowledge about the workings of the economy. This approach is still in its infancy but is full of promise for a scientific foundation of central banking. In the meantime, until these new insights mature, central banking will continue to be more art than science.

A colleague just returned from a week long conference at the St. Louis Fed where they went through 60 papers on learning models in economics, and there have been many such conferences in recent years. These papers do exactly what the author calls for, and the Fed is very interested in learning as evidenced by the fact that some of the best researchers in this area have Fed appointments. How the public learns about policy, how the Fed itself learns about economic modeling and policy, how the two interact, and so on, are of primary interest to Fed policymakers. This work has been going on for a long time so I would not characterize this research as "still in its infancy." Here's part of the introduction to Learning and Expectations in Macroeconomics, by George W. Evans, who is just down the hall, and Seppo Honkapohja:

1.1 Expectations in Macroeconomics Modern economic theory recognizes that the central difference between economics and natural sciences lies in the forward-looking decisions made by economic agents. In every segment of macroeconomics expectations play a key role. ...

Contemporary macroeconomics gives due weight to the role of expectations. A central aspect is that expectations influence the time path of the economy, and one might reasonably hypothesize that the time path of the economy influences expectations. The current standard methodology for modeling expectations is to assume rational expectations (RE)... Formally, in dynamic stochastic models, RE is usually defined as the mathematical conditional expectation of the relevant variables. The expectations are conditioned on all of the information available to the decision makers. For reasons that are well known, and which we will later explain, RE implicitly makes some rather strong assumptions.

Rational expectations modeling has been the latest step in a very long line of dynamic theories which have emphasized the role of expectations. The earliest references to economic expectations or forecasts date to the ancient Greek philosophers. In Politics (1259a), Aristotle recounts an anecdote concerning the pre-Socratic philosopher Thales of Miletus (c. 636–c. 546 B . C .). Forecasting one winter that there would be a great olive harvest in the coming year, Thales placed deposits for the use of all the olive presses in Chios and Miletus. He then made a large amount of money letting out the presses at high rates when the harvest time arrived.[1] Stories illustrating the importance of expectations in economic decision making can also be found in the Old Testament. In Genesis 41–47 we are told that Joseph (on behalf of the Pharaoh) took actions to store grain from years of good harvest in advance of years in which he forecasted famine. He was then able to sell the stored grains back during the famine years, eventually trading for livestock when the farmers’ money ran out.[2]

Systematic economic theories or analyses in which expectations play a major role began as early as Henry Thornton’s treatment of paper credit, published in 1802, and Émile Cheysson’s 1887 formulation of a framework which had features of the “cobweb” cycle.[3] There is also some discussion of the role of expectations by the Classical Economists, but while they were interested in dynamic issues such as capital accumulation and growth, their method of analysis was essentially static. The economy was thought to be in a stationary state which can be seen as a sequence of static equilibria. A part of this interpretation was the notion of perfect foresight, so that expectations were equated with actual outcomes. This downplayed the significance of expectations.

Alfred Marshall extended the classical approach to incorporate the distinction between the short and the long run. He did not have a full dynamic theory, but he is credited with the notion of “static expectations” of prices. The first explicit analysis of stability in the cobweb model was made by Ezekiel (1938). Hicks (1939) is considered to be the key systematic exposition of the temporary equilibrium approach, initiated by the Stockholm school, in which expectations of future prices influence demands and supplies in a general equilibrium context.[4] Finally, Muth (1961) was the first to formulate explicitly the notion of rational expectations and did so in the context of the cobweb model.[5]

In macroeconomic contexts the importance of the state of long-term expectations of prospective yields for investment and asset prices was emphasized by Keynes in his General Theory.[6] Keynes emphasized the central role of expectations for the determination of investment, output, and employment. However, he often stressed the subjective basis for the state of confidence and did not provide an explicit model of how expectations are formed.[7] In the 1950s and 1960s expectations were introduced into almost every area of macroeconomics, including consumption, investment, money demand, and inflation. Typically, expectations were mechanically incorporated in macroeconomic modeling using adaptive expectations or related lag schemes. Rational expectations then made the decisive appearance in macroeconomics in the papers of Lucas (1972) and Sargent (1973).[8]

We will now illustrate some of these ways of modeling expectations with the aid of two well-known models. ... These two examples are chosen for their familiarity and simplicity. This book will analyze a large number of macroeconomic models, including linear as well as nonlinear expectations models and univariate as well as multivariate models. Recent developments in modeling expectations have gone beyond rational expectations in specifying learning mechanisms which describe the evolution of expectation rules over time. The aim of this book is to develop systematically this new view of expectations formation and its implications for macroeconomic theory.

---

1 In giving this story, as well as another about a Sicilian who bought up all the iron from the iron mines, Aristotle also emphasized the advantage of creating a monopoly.
2 The forecasting methods used in these stories provide an interesting contrast with those analyzed in this book. Thales is said to have relied on his skill in the stars, and Joseph’s forecasts were based on the divine interpretation of dreams.
3 This is pointed out in Schumpeter (1954, pp. 720 and 842, respectively). Hebert (1973) discusses Cheysson’s formulation. The bibliographical references are Cheysson (1887) and Thornton (1939).
4 Lindahl (1939) is perhaps the clearest discussion of the approach of the Stockholm school. Hicks (1965) has a discussion of the methods of dynamic analysis in the context of capital accumulation and growth. However, Hicks does not consider rational expectations.
5 Sargent (1993) cites Hurwicz (1946) for the first use of the term “rational expectations.”
6 See Keynes (1936, Chapter 12).
7 Some passages, particularly in Keynes (1937), suggest that attempting to forecast very distant future events can almost overwhelm rational calculation. For a forceful presentation of this view, see Loasby (1976, Chapter 9).
8 Most of the early literature on rational expectations is collected in the volumes Lucas and Sargent (1981) and Lucas (1981).

Don't Like the Estate Tax? Don't Enforce It

Maybe the problem with our current leadership is that many of the people in charge, people who grew up with wealth, power, and prestige, are used to getting their own way. They cannot stand or accept being told they can't do what they want to do, so they just find a way to do it anyway. This is from A Taxing Matter:

If you can't cut the estate tax, cut the enforcement team, by Linda M Beale: The New York Times carried an interesting article on a scoop based on internal documents at the IRS. See David Cay Johnston, IRS Will Cut Tax Lawyers Who Audit the Richest: "The IRS plans to cut the jobs of 157 of the agency's 345 estate tax lawyers, plus 17 support personnel, in less than 70 days." The person ordering the cuts, Kevin Brown, said it was done because far fewer people need to pay estate tax under the Bush legislation... But the Times articles notes that "six IRS estate tax lawyers whose jobs are likely to be eliminated said in interviews that the cuts were just the latest moves behind the scenes at the IRS to shield people with political connections and complex tax-avoidance devices from thorough audits." Another called them "a back-door way for the Bush Administration to achieve what it cannot get from Congress, which is repeal of the estate tax."

This decision to cut enforcement personnel makes no sense from ... a collections efficiency standpoint. ... [W]ealthy people are the ones with the most to gain from cheating, and estate tax is one of the ways they can cheat most easily, with fake family partnerships and ridiculously low prefab valuations of their valuable property. As Colleen Kelly states, "If these lawyers are not there to audit the gift and estate tax returns, than a lot of taxes that should be paid will go uncollected..."

The NY Times article also notes that:

Estate tax lawyers are the most productive tax law enforcement personnel at the I.R.S., according to Mr. Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.

I assume that, even with benefits thrown in, the I.R.S. tax lawyers make less than $2,200 per hour. If so, why is Mr. Brown eliminating them?

The Odd Shape of the Yield Curve

David Altig has a reading assignment for you:

A Hat Tip, Nothing More, by David Altig:I really can't add much to Jim Hamilton's wonderfully clear exposition of the yield curve, the expectations hypothesis of the term structure, and what it all might mean in the current economic environment beyond advising you to go read it.  Extra cool points are awarded for the link to the "recession predictor" at Political Calculations, an interactive program based on research by the Federal Reserve Board's Jonathon Wright that allows you to plug in relevant information about the Treasury yield curve and receive, free-of-charge, an estimate of the probability of recession arriving within in a year.  It's been around for awhile, so I somehow missed it the first time around.  To atone, you will henceforth find the path to the recession predictor in the "Useful Links" list of this weblog.

The Case Against Wal-Mart

I have questioned whether criticism of Wal-Mart is merited, not always to a receptive audience. Here's the other side and it relies upon the argument that Wal-Mart is abusing its monopsony power to distort both the marketplace and the political process, an argument that is worthy of consideration. This is part of a much longer article from Harper's available at AlterNet:

The Case for Breaking Up Wal-Mart, by Barry C. Lynn, Harper's: ...Until recently, ... most politicians and economists accepted that freedom within the marketplace had to be limited, at least to some degree, by rules designed to ensure general economic and social outcomes.

From Adam Smith onward, almost all the great preachers of laissez-faire were tempered by a strain of deep realism. Most accepted that ... all economies are characterized by struggles for power and precedence among men and institutions run by men; in other words, that all economies are fundamentally political in nature. And so most accepted the need to use the power of the state -- most dramatically in the form of antitrust law -- to prevent any one man or firm from consolidating so much power as to throw off basic balances. The invisible hand of the marketplace, and all that derives from it, had to be protected by the visible hand of government.

It is now twenty-five years since the Reagan Administration eviscerated America's century-long tradition of antitrust enforcement. For a generation, big firms have enjoyed almost complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it...

Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called "monopsony." Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. ...

Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer's power over America's marketplace. For our purposes, a few facts will suffice -- that one in every five retail sales in America is recorded at Wal-Mart's cash registers; that the firm's revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.

The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of ... Coca-Cola... Recently, ... Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. ...

One of the basic premises of the free-market system is that actors are free to buy from or sell to a variety of other actors... Those who would use the word "free" to describe the market over which Wal-Mart presides should first consult with Coca-Cola's product-design department... These results were decided not within the scrum of the marketplace but by a single firm. Free-market utopians have long decried government industrial policy because it puts into the hands of bureaucrats and politicians the power to determine which firms "win" and which "lose." Wal-Mart picks winners and losers every day, and the losers have no recourse to any court or any political representative anywhere. ...

The effects of this practice are most obvious in Wal-Mart's horizontal competition against other retailers. ...[E]very year, the landscape is littered with that many more dead or half-dead retailers -- including such once-big names as Winn Dixie, Albertsons, K-Mart, Toys R Us, and Sears. ...

We should be most disturbed by the fact that Wal-Mart has gathered the power to dictate content, even to the most powerful of its suppliers. Because no longer is the retailer's attention focused only on firms that produce T-shirts, electrical cords, and breakfast cereal. Every day Wal-Mart expands its share of the U.S. markets for magazines, recorded music, films on DVD, and books. This means that every day its tastes, interests, and peculiarities weigh that much more on decisions made in Hollywood studios, in Manhattan publishing houses, and in the editorial offices of newspapers and network news shows.

Americans who favor abortion have much to worry about these days... But at least these ... decisions are being made by democratically elected representatives. Such was not the case when Wal-Mart recently decided to allow each individual pharmacist in the company to choose whether or not to stock the "morning after" pill. Given the degree to which Wal-Mart has rolled up the pharmaceutical business in many towns and regions across the country, this act amounted, for all intents, to a de facto ban on these pills in many communities. This political decision was made and enforced by a private monopoly. ...

Some of Wal-Mart's more sophisticated boosters will defend the company by defending the exercise of monopsony power itself. Wal-Mart, in their view, should be seen as a firm that aggregates our will and buying power as consumers in much the same way that unions once aggregated the interests of workers. One of the better known versions of the argument was put forth by Jason Furman, ... who last year published a strong defense of Wal-Mart. The huge retailer, Furman wrote, is "a progressive success story" that has brought "huge benefits" to the "American middle class." Sure, this argument goes, Wal-Mart may employ its power ...; but it does so in our name, and the result is to make the production system on which we all rely more efficient. This efficiency is good for all society, and it is especially good for those poor folks who cling to the lower rungs of the economic ladder.

There are two great flaws in such thinking. The first and most obvious is that it ignores the effects of monopoly on our political system -- the consolidation of vision and voice, the de facto merger of private and public spheres, the gathering of power unchecked and unaccountable. It is to view American society through an entirely materialistic prism, to measure "human progress" only in terms of how many calories or blouses can be stuffed into an individual's shopping cart. It is to view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, "Let them eat Tastykake."

The second flaw is economic, and is of even more immediate concern. Even if the American people did choose to bear the extreme political costs of monopoly, the particular type of power wielded by Wal-Mart and its emulators makes no economic sense in the long run. On the surface, it may seem to matter little who wins the great battles between such goliaths as Wal-Mart and Kraft, or between Wal-Mart and P&G. Yet which firm prevails can have a huge effect on the welfare of our society over time. ...

There are many ways to counterbalance the power of Wal-Mart and the other new goliaths. ... If, however, we choose the path of the free market, and of individual freedom within the market; if we choose to ensure the health and flexibility of our economy and our industrial systems and our society; if we choose to protect our republican way of government, which depends on the separation of powers within our economy just as in our political system -- then we have only one choice. We must restore antitrust law to its central role in protecting the economic rights, properties, and liberties of the American citizen, and first of all use that power to break Wal-Mart into pieces. We can devise no magic formula or scientific plan for doing so -- all antitrust decisions are inherently subjective in nature. But when we do so, we should be confident that we act squarely in the American tradition...

As we make our case, we should be sure to call one expert witness in particular. Last year, Wal-Mart CEO Lee Scott called on the British government to take antitrust action against the U.K. grocery chain Tesco. Whenever a firm nears a 30 percent share of any market, Scott said, "there is a point where government is compelled to intervene." Now, Wal-Mart has never been shy about using antitrust for its own purposes. In addition to the Toys R Us case, the firm was also the instigator of a Sherman Act suit against Visa and MasterCard. And so such a statement, by the CEO of a firm that already controls upward of 30 percent of many markets and has announced plans to more than double its sales, sets a new standard for hubris. It also sets a simple goal for us -- elect representatives who will take Citizen Scott at his word.

Race to the Bottom of the Agenda

Paul Krugman follows up on today's column, "Black and Blue." Here's the last part of his response to reader's comments:

Like Oil and Vinegar, by Paul Krugman, Money Talks: ...I don't usually write about what motivates my columns, but I thought it might be worth saying a bit more in this case.

You see, my wife is African-American, which gives me at least a bit of a personal connection to race issues. (Wait until the right-winger who just sent me a fax that begins "Leftist Jew Slime Paul Krugman," then goes downhill from there, hears about that!) Last week we had my mother-in-law's pastor, a black South African woman who grew up under apartheid, over for dinner. And afterwards, I decided I really needed to say something about race and politics.

Let me mention in particular one thing that didn't make it into the column. In 1986 Dick Cheney, then a congressman, voted against a resolution calling on the apartheid regime to release Nelson Mandela from prison. At the time he had, alas, plenty of company - and the Reagan administration blocked all efforts to impose sanctions on the regime. But what's truly amazing is that in 2000 Cheney was still defending his vote, on the grounds that the African National Congress was "then viewed as a terrorist organization." The truth is that even in the mid-'80s most of the world viewed the A.N.C. as a group legitimately fighting for its people's freedom.

It's things like that which make me doubt the sincerity of the Bush-Cheney administration when they claim to be crusaders for democracy and human rights. In practice, they always end up defending privilege. And even before 9/11, they were both promiscuous and selective about whom to call terrorists: to Cheney, the A.N.C. - which did pursue violent resistance, in which some innocent people were killed, but was remarkably restrained considering the situation - was a terrorist organization, while the apartheid regime, which relied on brutal repression to stay in power, somehow escaped the label.

Democrats in the Closet

I just received an interesting email:

From "Imperial Life in the Emerald City" by Rajiv Chandrasekaran, the former chief Washington Post correspondent in Iraq, pub date Sept. 22, p. 81:

Bumper stickers and mouse pads praising President Bush were standard desk decorations in the Republican Palace. Other than military uniforms, "Bush-Cheney 2004" T-shirts were the most common piece of clothing. (Dan Senor, Bremer's spokesman, wore one for a Thanksgiving Day "Turkey Trot" road race in the Green Zone.) CPA staffers weren't worried about employment prospects after Baghdad. "Oh, I'll just work on the campaign" - the Bush-Cheney reelection campaign - several told me.

"I'm not here for the Iraqis," one staffer said. "I'm here for George Bush." When Gordon Robison, a staffer in the Strategic Communications office, opened a care package from his mother to find a book by Paul Krugman, a liberal New York Times columnist, people around him stared. "It was like I had just unwrapped a radioactive brick," he recalled. The CPA did have a small contingent of Democrats. Most were soldiers and diplomats who, by law, could not be queried about their political leanings ... The group faced regular harassment from hardcore Republicans ... Their posters were either ripped from the bulletin board or defaced with pro-Republican graffiti .. One ... compared being a Democrat in the Green Zone to being gay in a small town. "If you know what's good for you, you stay in the closet," he said.

Blogging and Academics

This is not the first time this question has been addressed in blog land, but there are some interesting views on the topic collected in one palce, so I thought it was worth bringing up again. It's about blogging and academic careers (via Daniel Drezner):

Can Blogging Derail Your Career?, 7 Bloggers Discuss the Case of Juan Cole, The Chronicle Review: With the debut of his Web log, Informed Comment, four years ago, Juan R.I. Cole became arguably the most visible commentator writing on the Middle East today. A professor of modern Middle East and South Asian history at the University of Michigan at Ann Arbor and president of the Middle East Studies Association, Cole has voiced strong opposition to the war in Iraq and to the treatment of the Palestinians, garnering him plaudits from the left and condemnation from supporters of Israel and President Bush's foreign policy. In the words of a colleague, Cole has done something no other scholar of the region has done since Bernard Lewis: "become a household word."

In the spring, Informed Comment took center stage in another arena — Cole's own career. After two departments recommended him for a tenured position at Yale University, a senior committee decided last month not to offer him the job after all. Although Yale has declined to explain its decision, numerous accounts in the news media have speculated that Cole's appointment was shot down because of views he expressed on his blog. We asked seven academic bloggers to weigh in on Cole's case and on the hazards of academic blogging.

• The Lessons of Juan Cole, by Siva Vaidhyanathan
• The Politics of Academic Appointments, by Glenn Reynolds
• The Trouble With Blogs, by Daniel W. Drezner
• Exposed in the Blogosphere, by Ann Althouse
• The Invisible College, by J. Bradford DeLong
• The Attention Blogs Bring, by Michael Bérubé
• The Controversy That Wasn't, by Erin O'Connor
• Juan R.I. Cole Responds

Here's Brad's contribution followed by my comments. I may follow with some of the other contributions later [Update: Brad DeLong just posted summaries of a few other contributions as well as his own, which is repeated below]:

The Invisible College by J. Bradford DeLong, The Chronicle Review Volume 52, Issue 47, Page B8: Right now I'm looking out my office window, perched above the large, grassy, Frisbee-playing, picnicking, and sunbathing area that stretches through Berkeley's campus. I'm looking straight out at the Golden Gate Bridge. It's a view that I marvel at every dayI wonder why the chancellor hasn't confiscated such offices and rented them out to hedge funds to improve the university's finances.

I walk out my door and look around: at the offices of professors who know more about topics like the history of the international monetary system or the evolution of income distribution than any other human beings alive, and at graduate students hanging out in the lounge. It's a brilliant intellectual community, this little slice of the world that is our visible college. You run into people in the hall and the lounge, and you learn interesting things. Paradise. For an academic, at least.

But I am greedy. I want more. I would like a larger college, an invisible college, of more people to talk to, pointing me to more interesting things. People whose views and opinions I can react to, and who will react to my reasoned and well-thought-out opinions, and to my unreasoned and off-the-cuff ones as well. It would be really nice to have Paul Krugman three doors down, so I could bump into him occasionally and ask, "Hey, Paul, what do you think of .. ." Aggressive younger people interested in public policy and public finance would be excellent. Berkeley is deficient in not having enough right-wingers; a healthy college has a well-diversified intellectual portfolio. The political scientists are too far away to run into by accident — somebody like Dan Drezner would be nice to have around (even if he does get incidence wrong sometimes).

Does Capitalism Need Democracy to Survive?

Brad DeLong finds Robert Reich thinking more about China:

What Is China?: Bob Reich tries to think about what China is:

China: Capitalism Doesn't Require Democracy : by Robert B. Reich: You may remember when the world was divided between communism and capitalism, and when the Chinese were communists. The Chinese still call themselves communists, but now they’re also capitalists. In fact, visit China today and you find the most dynamic capitalist nation in the world. In 2005, it had the distinction of being the world’s fastest-growing major economy.

China is the manufacturing hub of the globe. It’s is also moving quickly into the highest of high technologies. It already graduates more computer engineers every year than the United States. Its cities are booming. There are more building cranes in use today in China than in all of the United States. China’s super-highways are filled with modern cars. Its deep-water ports and airports are world class. Its research and development centers are state of the art. At the rate its growing, in three decades China will be the largest economy in the world.

Communist, as in communal? Are you kidding? The gap between China’s rich and poor is turning into a chasm. China’s innovators, investors, and captains of industry are richly rewarded. They live in luxury housing developments whose streets are lined with McMansions. The feed in fancy restaurants, and relax in five-star hotels and resorts. China’s poor live in a different world. Mao Tse Tung would turn in his grave. So where are the Chinese communists? They’re in government. The communist party is the only party there is. China doesn’t have freedom of speech or freedom of the press. It doesn’t tolerate dissent. Authorities can arrest and imprison people who threaten stability, as the party defines it. Any group that dares to protest is treated brutally. There are no civil liberties, no labor unions, no centers of political power outside the communist party.

China shows that when it comes to economics, the dividing line among the world’s nations is no longer between communism and capitalism. Capitalism has won hands down. The real dividing line is no longer economic. It’s political. And that divide is between democracy and authoritarianism. China is a capitalist economy with an authoritarian government.

For years, we’ve assumed that capitalism and democracy fit hand in glove. We took it as an article of faith that you can’t have one without the other. That’s why a key element of American policy toward China has been to encourage free trade, direct investment, and open markets. As China becomes more prosperous and integrated into the global market -- so American policy makers have thought -- China will also become more democratic. Well, maybe we’ve been a bit naive. It’s true that democracy needs capitalism. Try to come up with the name of a single democracy in the world that doesn’t have a capitalist economy. For democracy to function there must be centers of power outside of government. Capitalism decentralizes economic power, and thereby provides the private ground in which democracy can take root. But China shows that the reverse may not be true -- capitalism doesn’t need democracy. Capitalism’s wide diffusion of economic power offers enough incentive for investors to take risks with their money. But, as China shows, capitalism doesn’t necessarily provide enough protection for individuals to take risks with their opinions.

I am not sure that he is right. I need to think harder about the relationship between China's upper economic class and its upper political class.

Yes, the long-run stability of the Chinese system is at issue - it is not yet clear to me that the current authoritarian/patronage model is sustainable. See Politics, Economic Reform, and Social Unrest in China, The Mountains Are High and the Emperor is Far Away, Stiglitz: China's Roadmap, and The Dark Side of China's Economic Boom for recent related posts.

Doha Talks Break Down

The Doha round talks collapse once again:

Doha Round Talks Break Down On Farm Support, Trade Barriers, WSJ: Global commerce talks at the World Trade Organization collapsed Monday as top powers failed to agree on steps toward liberalizing trade in farm and manufactured goods.

Indian Trade Minister Kamal Nath said the talks had been suspended and added that "it could take anywhere from months to years," to restart the negotiations. "This is a serious setback, a major setback," said Brazilian Foreign Minister Celso Amorim. ...

Bloomberg reports:

WTO Six-Way Talks Collapse, Jeopardizing Global Pact, Bloomberg: Talks among six key World Trade Organization governments collapsed, imperiling efforts to reach a global market-opening agreement worth billions of dollars.

Ministers from the U.S., the European Union, Brazil, India, Australia and Japan remained deadlocked, prompting WTO Director- General Pascal Lamy to suspend the five-year-old talks... Agriculture subsidies and tariffs have been the main obstacles to reaching a WTO deal. ...

EU Trade Commissioner Peter Mandelson said the U.S. is responsible for the failure of the six-way talks. After last week's meeting of leaders from the Group of Eight industrialized nations, each government ``except for the U.S.'' indicated that it would be more accommodating in yesterday's meeting, he said.

``The U.S. was unwilling to accept or even acknowledge the flexibility of others shown in the room,'' Mandelson told a news conference. ``This action has led to the round being suspended.''

The U.S. was the sole government among the six not to improve its offer, Indian Commerce Minister Kamal Nath said.

``It's very clear that the EU made a movement, and everybody put something on the table except for one country, who said we can't see anything on the table,'' he told reporters.

`Loopholes'

The U.S. didn't sweeten its offer to scale back spending on its farmers because trade partners were more concerned with protecting sensitive commodities such as beef with exemptions from tariff cuts, U.S. Agriculture Secretary Mike Johanns said. Such ``loopholes'' may exclude up to 98 percent of commodities from the cuts, he said, so a new U.S. offer was impossible. ``We didn't see it,'' Johanns told a news conference. ``There was just nothing there that allowed us to make that step.''

The G-8 leaders asked Lamy to find a way to break the stalemate by mid-August and told their trade chiefs to push for an accord. ... The Doha Round ''is not dead, but it's definitely between intensive care and the crematorium,'' Nath said. ...

Paul Krugman: Black and Blue

"African-Americans distrust Mr. Bush’s party — with good reason":

Black and Blue, by Paul Krugman, Bush and Blacks Commentary, NY Times: According to the White House transcript, here’s how it went last week, when President Bush addressed the N.A.A.C.P. for the first time:

THE PRESIDENT: “I understand that many African-Americans distrust my political party.”

AUDIENCE: “Yes! (Applause.)”

But Mr. Bush didn’t talk about why African-Americans don’t trust his party, and black districts are always blue on election maps. So let me fill in the blanks.

First, G.O.P. policies consistently help those who are already doing extremely well, not those lagging behind ... [B]oth the relative and absolute economic status of blacks, after improving substantially during the Clinton years, have worsened since 2000.

The G.O.P. obsession with helping the haves and have-mores, and lack of concern for everyone else, was evident ... in Mr. Bush’s speech... Mr. Bush never mentioned wages, which have been falling behind inflation... Mr. Bush also never used the word “poverty,” a condition that afflicts almost one in four blacks.

But he found time to call for repeal of the estate tax, even though African-Americans are more than a thousand times as likely to live below the poverty line as they are to ... leave a taxable estate.

Economic issues alone, then, partially explain African-American disdain for the G.O.P. But even more important is the way Republicans win elections.

The problem with policies that favor the economic elite is that ... there aren’t enough elite voters. So how did the Republicans rise to their current position of political dominance? It’s hard to deny ... barely concealed appeals to racism, which drove a wedge between blacks and relatively poor whites who share the same economic interests...

[T]he sainted Ronald Reagan began his presidential campaign with a speech on states’ rights in Philadelphia, Miss., where three civil rights workers were murdered in 1964. These days the racist appeals have been toned down; Trent Lott was demoted, though not drummed out of the party, when he declared that if Strom Thurmond’s segregationist presidential campaign had succeeded “we wouldn’t have had all these problems.” ... But the nasty racial roots of the G.O.P.’s triumph live on in public policy and election strategy.

A revelatory article in yesterday’s Boston Globe described how the Bush administration has politicized the Justice Department’s civil rights division, “filling the permanent ranks with lawyers who have strong conservative credentials but little experience in civil rights.”

Not surprisingly, there has been a shift in priorities: “The division is bringing fewer ... cases involving systematic discrimination against African-Americans, and more alleging reverse discrimination against whites and religious discrimination against Christians.”

Above all, there’s the continuing effort of the G.O.P. to suppress black voting. ...

Mr. Bush [wouldn't be] in the White House ... if the administration of his brother [in] Florida, hadn’t misidentified large numbers of African-Americans as felons ineligible to vote. In 2004, Ohio’s Republican secretary of state tried to impose a ludicrous rule on the paper weight of voter registration applications; last year, Georgia Republicans tried to impose an onerous “voter ID” rule. In each case, the obvious intent was to disenfranchise blacks.

And if the Republicans hold on to the House this fall, it will probably only be because of a redistricting plan in Texas that a panel of Justice Department lawyers unanimously concluded violated the Voting Rights Act — only to be overruled by their politically appointed superiors.

So yes, African-Americans distrust Mr. Bush’s party — with good reason.

_________________________
Previous (7/21) column: Paul Krugman: The Price of Fantasy
Next (7/28) column: Paul Krugman: Reign of Error

"Scientific Communities Include Tortoises and Hares, Mavericks and Mules"

Historians of science would be surprised if there weren't people unwilling to concede that global warming is caused by human activity no matter how much evidence accumulates to the contrary:

Global Warming -- Signed, Sealed and Delivered, by Naomi Oreskes, Commentary, LA Times: An Op-Ed article in the Wall Street Journal a month ago claimed that a published study affirming the existence of a scientific consensus on the reality of global warming had been refuted. This charge was repeated again last week, in a hearing of the House Committee on Energy and Commerce.

I am the author of that study, which appeared two years ago in the journal Science, and I'm here to tell you that the consensus stands. The argument put forward in the Wall Street Journal was based on an Internet posting; it has not appeared in a peer-reviewed journal — the normal way to challenge an academic finding. (The Wall Street Journal didn't even get my name right!)

My study demonstrated that there is no significant disagreement within the scientific community that the Earth is warming and that human activities are the principal cause. .... Not a single paper in a large sample of peer-reviewed scientific journals between 1993 and 2003 refuted the consensus position...

To be sure, there are a handful of scientists, including MIT professor Richard Lindzen, the author of the Wall Street Journal editorial, who disagree with the rest of the scientific community. To a historian of science like me, this is not surprising. In any scientific community, there are always some individuals who simply refuse to accept new ideas and evidence. This is especially true when the new evidence strikes at their core beliefs and values.

Earth scientists long believed that humans were insignificant in comparison with the vastness of geological time and the power of geophysical forces. For this reason, many were reluctant to accept that humans had become a force of nature, and it took decades for the present understanding to be achieved. Those few who refuse to accept it are not ignorant, but they are stubborn. They are not unintelligent, but they are stuck on details that cloud the larger issue. Scientific communities include tortoises and hares, mavericks and mules.

A historical example will help... In the 1920s, the distinguished Cambridge geophysicist Harold Jeffreys rejected the idea of continental drift on the grounds of physical impossibility. In the 1950s, geologists and geophysicists began to accumulate overwhelming evidence of the reality of continental motion... By the late 1960s, the theory of plate tectonics was on the road to near-universal acceptance.

Yet Jeffreys, by then Sir Harold, stubbornly refused to accept the new evidence, repeating his old arguments about the impossibility of the thing. He was a great man, but he had become a scientific mule. For a while, journals continued to publish Jeffreys' arguments, but after a while he had nothing new to say. He died denying plate tectonics. The scientific debate was over.

So it is with climate change today. As American geologist Harry Hess said in the 1960s about plate tectonics, one can quibble about the details, but the overall picture is clear.

Yet some climate-change deniers insist that the observed changes might be natural, perhaps caused by variations in solar irradiance or other forces we don't yet understand. Perhaps there are other explanations for the receding glaciers. But "perhaps" is not evidence. ... Climate-change deniers can imagine all the hypotheses they like, but it will not change the facts...

None of this is to say that there are no uncertainties left — there are always uncertainties in any live science. Agreeing about the reality and causes of current global warming is not the same as agreeing about what will happen in the future. There is continuing debate in the scientific community over the likely rate of future change: not "whether" but "how much" and "how soon." And this is precisely why we need to act today: because the longer we wait, the worse the problem will become, and the harder it will be to solve.

Reforming Welfare Reform

The "dark side to the story" of welfare reform. This commentary argues that welfare agencies aren't doing enough to address the needs of those who come into their offices seeking help:

Welfare Reform's Shortcoming, by Mark E. Courtney, Commentary, Washington Post: Almost 10 years after President Bill Clinton signed the welfare reform law, it's pretty clear that it has, as promised, ended welfare as we knew it. Nationally, cash-assistance rolls have fallen by almost half. Many former welfare recipients now work. And more low-income parents are receiving child care subsidies than ever before.

You'll be hearing a lot of success stories as the Aug. 22 anniversary of welfare reform approaches. But research ... at the University of Chicago has uncovered a dark side to the story. Simply put, many of the parents coming into the welfare office today are too unhealthy, too poorly educated, too service-needy and too psychosocially challenged to work. And the typical welfare office isn't doing enough to help them.

Beginning in March 1999, my colleagues and I spent four years tracking 1,075 parents, primarily mothers, who applied for welfare in Milwaukee County, Wis., the epicenter for experimentation with welfare since the mid- '80s. It was the first major long-term study of a representative sample of welfare applicants since welfare reform became the law of the land.

Wisconsin took a "work first" approach to reform, which many states have copied. The goal was to put people to work as fast as possible without assessing barriers to employability. We wanted to understand what kind of parents were still seeking help from the government even though they knew that not much was to be had, and whether the help they got improved their circumstances. What we found was sobering:

· More than four of five parents reported at least one potential barrier to employment: a disability; a disabled family member; poor or fair health; no high school diploma or general equivalency diploma; a mental health problem; an alcohol or drug problem; involvement in a physically abusive relationship. More than half reported two or more barriers to employment, and almost three in 10 reported three or more. ...

· Perhaps most alarming, there was evidence of serious stress at home. More than half the parents had already been investigated for child maltreatment when they applied for welfare. Two of five were investigated in the next five years, and about one-sixth had a child placed in foster care.

It's clear from our study that Wisconsin's work-first approach did not pay off for many parents. After peaking in 1999, the proportion of parents who were employed in any year declined steadily. By 2003 only three of five parents had worked in at least one quarter. On average, only one in three worked in all four quarters in any given year.

In addition, four years after asking the welfare office for help, the parents were no better off financially. By 2003 the sample's median income from earnings and welfare payments had actually fallen. Eighty-six percent were raising children on incomes below poverty level.

Partly in response to our research, Wisconsin officials admitted that their work-first approach was a mistake. They say that they are now doing more to help welfare applicants address their personal challenges. ...

The Deficit Reduction Act that Congress passed last year will penalize states that fail to significantly increase the proportion of welfare participants working or training for work. But states that don't help welfare participants overcome their personal challenges will have trouble avoiding penalties. If Wisconsin's experience is any indication, the majority of parents applying for welfare today are simply not employable when they walk in the door.

The typical welfare office has changed since 1996, but not enough. The post-welfare-reform welfare office needs to do much more than certify eligibility ... and serve as a source of low-wage workers for big employers. For a start, it should assess the educational and psychosocial needs of every applicant. And then it must help parents address those needs.

Let's not forget that welfare is first and foremost a program for the support of children. If we know that many parents applying for welfare have been investigated for child maltreatment and that they're very likely to be investigated again, how can we justify not offering them voluntary preventive services, such as parenting classes?

It's time for the post-welfare reform welfare office to stop focusing only on putting parents to work and to begin providing parents with the supports they need to succeed at both parenting and work.

Nature vs Nurture: Poverty Matters

This is interesting and important for our approach to social problems. We have come to believe that genetics largely determines our fate, but this research shows that environment can matter too, particularly poor environments that do not allow genetics to fully express themselves:

After the Bell Curve, by David L Kirp, Sunday Magazine, NY Times: When it comes to explaining the roots of intelligence, the fight between partisans of the gene and partisans of the environment is ancient and fierce. ... What is at stake is not just the definition of good science but also the meaning of the just society. The nurture crowd is predisposed to revive the War on Poverty, while the hereditarians typically embrace a Social Darwinist perspective.

A century’s worth of quantitative-genetics literature concludes that a person’s I.Q. is remarkably stable and that about three-quarters of I.Q. differences between individuals are attributable to heredity. This is how I.Q. is widely understood — as being mainly “in the genes” — and that understanding has been used as a rationale for doing nothing about seemingly intractable social problems like the black-white school-achievement gap and the widening income disparity. ... In their 1994 best seller, “The Bell Curve,” Richard Herrnstein and Charles Murray relied on this research to argue that the United States is a genetic meritocracy and to urge an end to affirmative action. Since there is no way to significantly boost I.Q., prominent geneticists like Arthur Jensen of Berkeley have contended, compensatory education is a bad bet.

But what if the supposed opposition between heredity and environment is altogether misleading? A new generation of studies shows that genes and environment don’t occupy separate spheres — that much of what is labeled “hereditary” becomes meaningful only in the context of experience. “It doesn’t really matter whether the heritability of I.Q. is this particular figure or that one,” says Sir Michael Rutter of the University of London. “Changing the environment can still make an enormous difference.” If heredity defines the limits of intelligence, the research shows, experience largely determines whether those limits will be reached. And if this is so, the prospects for remedying social inequalities may be better than we thought.

When quantitative geneticists estimate the heritability of I.Q., they are generally relying on studies of twins. Identical twins are in effect clones who share all their genes; fraternal twins are siblings born together — just half of their genes are identical. If heredity explains most of the difference in intelligence, the logic goes, the I.Q. scores of identical twins will be far more similar than the I.Q.’s of fraternal twins. And this is what the research has typically shown. Only when children have spent their earliest years in the most wretched of circumstances, ... has it been thought that the environment makes a notable difference. Otherwise, genes rule.

Then along came Eric Turkheimer to shake things up. Turkheimer, a psychology professor at the University of Virginia, is the kind of irreverent academic who gives his papers user-friendly titles like “Spinach and Ice Cream” and “Mobiles.” He also has a reputation as a methodologist’s methodologist. In combing through the research, he noticed that the twins being studied had middle-class backgrounds. The explanation was simple — poor people don’t volunteer for research projects — but he wondered whether this omission mattered.

Together with several colleagues, Turkheimer searched for data on twins from a wider range of families. He found what he needed... In a widely-discussed 2003 article, he found that, as anticipated, virtually all the variation in I.Q. scores for twins in the sample with wealthy parents can be attributed to genetics. The big surprise is among the poorest families. Contrary to what you might expect, for those children, the I.Q.’s of identical twins vary just as much as the I.Q.’s of fraternal twins. The impact of growing up impoverished overwhelms these children’s genetic capacities. ... home life is the critical factor for youngsters at the bottom of the economic barrel. “If you have a chaotic environment, kids’ genetic potential doesn’t have a chance to be expressed,” Turkheimer explains. “Well-off families can provide the mental stimulation needed for genes to build the brain circuitry for intelligence.”

This provocative finding was confirmed in a study published last year. An analysis of the reading ability of middle-aged twins showed that even half a century after childhood, family background still has a big effect — but only for children who grew up poor. ...

In seeking to understand the impact of nature and nurture on I.Q., researchers have also looked at adopted children. Consistent with the proposition that intelligence is mainly inherited, these studies have almost always found that adopted youngsters more closely resemble their biological than their adoptive parents. ...

But researchers in France noted a shortcoming in these adoption studies and set out to correct it. Since poor families rarely adopt, those investigations have had to focus only on youngsters placed in well-to-do homes. What’s more, because most adopted children come from poor homes, almost nothing is known about adopted youngsters whose biological parents are well-off.

What happens in these rare instances of riches-to-rags adoption? To answer that question, two psychologists, Christiane Capron and Michel Duyme, combed through thousands of records from French public and private adoption agencies. ...

Regardless of whether the adopting families were rich or poor, Capron and Duyme learned, children whose biological parents were well-off had I.Q. scores averaging 16 points higher than those from working-class parents. Yet what is really remarkable is how big a difference the adopting families’ backgrounds made all the same. The average I.Q. of children from well-to-do parents who were placed with families from the same social stratum was 119.6. But when such infants were adopted by poor families, their average I.Q. was ... 12 points lower. The same holds true for children born into impoverished families... These studies confirm that environment matters — the only, and crucial, difference between these children is the lives they have led.

A later study of French youngsters adopted between the ages of 4 and 6 shows the continuing interplay of nature and nurture. Those children had little going for them. Their I.Q.’s averaged 77, putting them near retardation. Most were abused or neglected as infants, then shunted from one foster home or institution to the next.

Nine years later, they retook the I.Q. tests, and contrary to the conventional belief that I.Q. is essentially stable, all of them did better. The amount they improved was directly related to the adopting family’s status. Children adopted by farmers and laborers had average I.Q. scores of 85.5; those placed with middle-class families had average scores of 92. The average I.Q. scores of youngsters placed in well-to-do homes climbed more than 20 points, to 98 — a jump from borderline retardation to a whisker below average. That is a huge difference — a person with an I.Q. of 77 couldn’t explain the rules of baseball, while an individual with a 98 I.Q. could actually manage a baseball team — and it can only be explained by pointing to variations in family circumstances.

Taken together, these studies show that the issue has changed: it is no longer a matter of whether the environment matters but when and how it matters. And poverty, quite clearly, is an important part of the answer.

That is not to say that an affluent home is necessarily a good home. ... On average, though, well-off households have the resources needed to provide better settings for the fullest development of a child’s natural abilities...

Is there a way to reduce such gaps? In recent years, the case for investing in early-childhood education has become stronger and stronger. The federal Early Head Start program for infants and toddlers is effective when it is well implemented — in part because it succeeds in getting parents more involved with their children. Recent research also shows that one year of high-quality state prekindergarten can give children as much as a seven-month advantage in vocabulary; this, in turn, is a good predictor of how well they will read when they are in primary school. As you would expect, poor children benefit the most, especially when they are in classes with middle-class youngsters.

The push for universal preschool is not a red-state-blue-state issue; the pioneers in the area are Oklahoma and Georgia, not generally known for social progressivism. And with the support of business groups and prominent philanthropists ..., it may enter the national agenda. If it does, it will be a small step toward a society in which not only the most fortunate children will be able to “max out” their potential.

I always liked Brad DeLong's take down of "[Michael] Barone's claim that "maybe" the fall in social mobility in America is due to the fact that a high IQ genetic elite has risen to the top of the fair meritocracy that is our society."

The Need for Immigration

A defense of businesses employing migrant workers from the director-general of the British Chambers of Commerce:

Employers are not the villains in the battle over immigration, by David Frost, Commentary, Financial Times: The publicity surrounding the launch of the government’s proposals on asylum and immigration, due tomorrow, has focused heavily on punishing British businesses for employing illegal migrants.

As far as business is concerned this is a complete diversion. The real issue is the fact that UK companies are increasing their use of legal migrant labour at an enormous rate. ... Businesses tell me that the single biggest problem they face is finding the skilled people they need to drive their businesses. They are solving the problem by employing migrant labour.

At the root of this, our school system is not providing significant numbers of our young people with the foundation in essential skills they need for the workplace. Only 44 per cent of school-leavers gain five GCSEs at grade A to C including English and maths. The Department for Education and Skills views this standard as the very minimum employability skills for basic productivity. In addition, there are up to 8m adults lacking the very lowest level of literacy and numeracy needed for the world of modern work.

The response of the business community to the poor quality of young people entering the labour market is to look increasingly to migrant labour, particularly from central Europe and specifically Poland. Employers tell me the reasons for this are simple and twofold: migrants have higher-level skills and a far better attitude to work than local people. They are enthusiastic and committed. ... Indeed, I met the owner of an electronics company in the east of England this month who has now given up recruiting through local newspapers. He finds it more cost effective to send his human resources manager out to Poland to recruit directly.

While business needs continued managed migration, we have to question whether this is the panacea for the UK’s skills shortages. We could be storing up significant social problems, especially in urban areas, if we assign the large number of young people with no qualifications and no work ethic to the scrap heap. Overall numbers in the labour market are rising, but so are the numbers of unemployed. It will not be a cohesive society if we have increasing numbers of migrants employed but at the same time the indigenous population is unable to find jobs.

The government must, therefore, ensure that the education system is fit for purpose. ... The current focus ... within our schools is divisive and elitist. The education system must engage all young people, whatever their talent or ability, and inspire them to learn and succeed. Our businesses and economy need skilled young people...

In addition, the government must ensure that the tax and benefits system acts as an incentive to get people into work. It is clear, particularly in the case of hourly-paid employees, that it does not currently provide a strong enough incentive... Until these issues are dealt with, migration will continue to play an ever growing role in addressing the needs of British business.

The British Chambers of Commerce will never support employers who flout the law and employ illegal immigrants. Indeed, ... employers who knowingly take on illegal immigrants [must be] punished accordingly. However, the overwhelming majority of employers are keen to ensure that they are operating within the constraints of the law. What business needs is an immigration process that is simple, clear and transparent...

But the employment of illegal migrants is a minor part of the issue and it is disingenuous to imply otherwise. The government should concentrate on solving the problems that are making our economy dependent on migration instead of shifting the blame for the failure of its complex and bungled immigration policy on to business.

I don't know how the percentage of illegal immigrants in the U.K at various skill levels compares to the numbers here, but this is directed mainly at high skill, not low skill immigration. To that extent, I agree with the main thrust of the argument - it's a nasty sort of bait and switch when we let our schools deteriorate and then claim we must allow high skill immigration because domestic workers aren't up to the task and the needs of business must take precedence in the global economy.

So long as cheap skilled labor is available elsewhere, business does not have a strong incentive to participate in efforts to improve the skill level of domestic workers. Notice he says "government should concentrate on solving the problems that are making our economy dependent on migration instead of shifting the blame ... to business." He calls on government to do more, but the attempt is to absolve business of responsibility for problems. He doesn't call for business to share in the responsibility and participate in the effort by, minimally, helping to set the political tone needed to make the improvements in domestic education he desires.

Update: Comments lead me to believe that perhaps my assertion that this is directed at higher skill immigration is incorrect. The talk of the biggest problem being businesses "finding the skilled people they need," the mention of "skills shortages," and that "migrants have higher-level skills" as well as the electronics firm example (which I took to mean high-skill employment) led me astray...