Economist's View

"Did Bush Steal the 2004 Election?: How 350,000 Votes Disappeared in Ohio"

This is interesting. I should add that I checked the Rolling Stone web site and searched the web for this story, but couldn't find anything more than what is in this report:

[Updated] Exclusive: Bobby Kennedy Jr. to Question 2004 Presidential Election in Major Rolling Stone Feature Article! Tells Brad Blog: A damning and detailed feature article, written by Robert F. Kennedy Jr., for Rolling Stone and documenting evidence of the theft of the 2004 Presidential Election is set to hit newstands this Friday, The Brad Blog can now confirm. The online version of the article will be posted tomorrow (Thursday) morning.

The article -- headlined on the cover as "Did Bush Steal the 2004 Election?: How 350,000 Votes Disappeared in Ohio" -- has been several months in development and will contend that a concerted effort was undertaken by high-level Republican officials to steal the Election in Ohio -- and thus the country -- in 2004!

Kennedy told The Brad Blog this morning that "the best evidence says the Republicans succeeded" in their plan. He writes in the 10-page long article, and confirmed to us today, that evidence shows Ohio Sec. of State J. Kenneth Blackwell was "certainly in on" the scheme, and there are indications that the effort went all the way up to the White House. ... Sources have told The Brad Blog that Kennedy "does not hold back..." ...here's a few quotes from the article...

U.S. Congressman from Ohio, Rep. Dennis Kucinich: "The secretary of state is supposed to administer elections – not throw them."

Pollster Lou Harris of the Harris Poll -- described in the piece as "the father of modern day political polling" -- says: "Ohio was as dirty an election as America has ever seen."

Despite Harris' comments, which may be amongst the most explosive in the article, Kerry himself brings up the rear...

John Kerry: "Can I draw a conclusion that they played tough games and clearly had intent to reduce the level of our vote? Yes, absolutely. Can I tell you to a certainty that it made the difference in the election? I can't. There's no way for me to do that. If I could have done that, then obviously I would have found some legal recourse."...

From a political perspective, and with an eye focused on the elections this fall, is this a smart move?

Update: Full article posted at Rolling Stone. Those who have followed this, anything new here?

Hidden in the Cabinet

The following commentaries are about the President's failure to make effective use of his cabinet. To begin, here's Robert Reich talking about how the President has kept the cabinet out of the policy loop, and the loopiness that has resulted from the failure to unleash "the knowledge and creativity of his cabinet departments, even in the service of his conservative agenda":

Truly Locked in the Cabinet, by Robert B. Reich, American Prospect: Shortly after the Senate confirmed John Snow’s nomination as Treasury secretary at the end of January 2003, Snow phoned me. He wanted to thank me for the guidance I had indirectly given him for how to survive a nomination hearing in my erstwhile memoir, Locked in the Cabinet. “Don’t defend yourself. Don’t lecture. Don’t take the bait,” I had written. If a senator asks for your view on a controversial issue, refrain from expounding. Instead say, “I look forward to working with you on that, senator.”

Since then, Snow has continued to refrain from expressing his views on controversial issues. He may have looked forward to working with senators on significant pieces of legislation, but there’s no evidence to date he has done so. I can’t remember a Treasury secretary who’s been less visible. ... He seems not to be in the loop. It’s now rumored that he is on his way out. By the time you read this he may already be gone.

Snow is not alone in his anonymity. Quick: Name a single cabinet officer other than Condoleezza Rice or Donald Rumsfeld. ... What do they do all day? My successor at the Labor Department, Elaine Chao, is a nice person with a sunny disposition. I met her at the start of her tenure. Since then I’ve lost sight of her and heard almost nothing about the Labor Department. Samuel Bodman is Energy secretary. The administration talks a great deal about energy policy, but I don’t believe I’ve seen anything... Michael Leavitt is Health and Human Services secretary. The White House touts the Medicare drug benefit as a signal achievement, but how often have we seen or heard from Leavitt on this?...

It is true that in recent decades presidential cabinets have been subordinated to turbocharged White House staffs. As Labor secretary, I was told with some regularity that “the White House” wanted me to do this or that -- give a speech in Cleveland, meet with a foreign dignitary, soothe ruffled feathers at a California military base about to close, and so on. Eventually I learned that “the White House” was a 30-something hot shot with a desk in the Old Executive Office Building.

Yet the Clinton cabinet was not known for its weak personalities. Bob Rubin, as Treasury secretary, would not have allowed himself to be nearly as far out of the loop as is John Snow. Donna Shalala wouldn’t have accepted the stand-in role now played by Michael Leavitt. Attorney General Janet Reno was no shy violet. I was called many things, but never quiet.

Why is this crowd so invisible? Because they’ve been cowed by a White House that has imposed extraordinary discipline. All policy pronouncements must flow through Karl Rove and Dick Cheney. Everyone else is out of the loop because there is no other loop. The result is the kind of loopiness we’ve seen again and again, such as the Medicare drug benefit’s “doughnut hole”..., or Bush’s silly band-aid of a one-year extension of relief from the Alternative Minimum Tax. Both the Health and Human Services and the Treasury departments have extraordinary talent. ... far better than the shills at The Heritage Foundation. But as long as the cabinet departments are kept out of the loop, their expertise is useless.

Bush could have pushed his cabinet secretaries to distinguish themselves. He could have unleashed the knowledge and creativity of his cabinet departments, even in the service of his conservative agenda. He could have used John Snow to be a forceful and effective spokesman for the administration on economic policy. That Bush, Rove, and Cheney chose instead to impose lockstep discipline and gag orders has not only diminished the role of the cabinet but also, in the end, diminished the role of the President.

Is it possible Bush has learned that this approach won't work? From Time:

How Bush Landed a Wall Street Titan for Treasury, by Mike Allen, Time: ...Tuesday's announcement that Goldman Sachs chairman Henry Paulson ... had agreed to be nominated for Treasury Secretary was a thrilling coup for a White House that has had little cause for rejoicing lately. ... The Administration almost didn't get that opportunity. ... most promising candidates had turned them down — including Paulson, just a few months ago. One of the reasons Bush had such a hard time landing ... Paulson is that the Treasury job had shrunk during his presidency — at least in the estimation of Wall Street — from a premier policymaking platform to a cheerleading outpost subservient to the West Wing.

But an official involved in the selection process said Bush "took it up himself, and wouldn't take 'no' for an answer." Aides said Bush convinced his quarry that he would have a seat and voice at the table...

Promises, promises. Stephen Cecchetti says Bush had better keep his word if he hopes to make progress on the nation's economic problems:

Paulson has the tools but needs Bush’s support, by Stephen Cecchetti, Commentary, Financial Times: The announcement of Hank Paulson’s nomination as US Treasury secretary is good news... The big question is what will President George W. Bush do with his new top-quality team? Will the White House finally promote high-quality economic policy above pure politics? Or will Mr Paulson be frustrated in the way that past Bush economic advisers have been? ...

We now have someone who has the tools to face the country’s big economic problems head on. Those challenges are huge. ... This means facing three separate, but related issues: the relationship of the federal government to the economy, the interactions between the US economy and the rest of the world’s economies, and the problems associated with financing retirees. ...

Solving these problems means negotiating the co-operation of groups with disparate interests. Mr Paulson will have to negotiate tax reform and deficit reduction; find a way to convince people that trade creates low-priced goods that benefit everyone and that international capital flows allow us to grow faster. He must persuade younger workers to save while convincing the relatively well-off elderly to give up some of their government-supplied pension benefits. ...

Paul O’Neill and John Snow, the previous two Bush Treasury secretaries, surely understood the economics of everything that I am saying. But they lacked the full support of the White House to push for good economic policy in the face of political unpopularity...

I'm not optimistic that Bush, Rove, and Cheney are willing to end the loopiness by letting others have more input in the policy process except to the extent that it serves political purposes to give such an impression. But we shall see whether new appointees like Ed Lazear and Hank Paulson are able to have more impact on administration policy than their predecessors who (we hope) voiced concerns behind the scenes that went unheeded.

FOMC Meeting Minutes

The minutes from the May 10 FOMC meeting were released today. Here are some quotes:

Meeting participants expressed some concern about recent price developments and their implications for inflation prospects. Core consumer inflation lately had been a little higher than expected... Participants noted that prices of non-energy commodities, such as industrial metals and building supplies, also had been climbing. The recent decline in the dollar was another factor that could add to inflation pressures... Business contacts had reported continued shortages of certain types of skilled labor and related wage pressures in some occupations, which would tend to boost costs.

Class Follow-Up

Arnold Kling reads your comments to this post of his class autobiography, then refines and defends his position on the causes of poverty:

Class Once More, by Arnold Kling: My class autobiography got people riled up. More commenters were riled up at Economist's View than here, by the way. There are some things that I wrote that I don't wish to stand by and defend, after thinking about it more. But there are some elements of truth in it. My guess is that any effort to defend the latter is ill-conceived, but here goes. [continue reading...]

Did he convince you?

Robert Reich: Good Luck, Hank, You'll Need It

Robert Reich talks about Hank Paulson, Bush's choice to be Treasury Secretary:

Good luck, Hank, by Robert Reich: I last saw Hank Paulson, Bush's new pick to be Treasury Secretary, when we were at college together. He was a football player. I wasn't. That was 38 years ago. If I remember correctly, when he graduated he went to work in the Nixon White House, which seemed a bit odd to me at the time.

He has his work cut out for him. The dollar is sliding. The deficit is growing. The economy is cooling. Wall Street may give two cheers to have one of their own at the helm at Treasury, but I don't really think the Street gives two hoots. Paulson's nomination doesn't alter the economic fundamentals. Bush continues to spend like there's no tomorrow, while cutting taxes (mostly on the rich). Global capital markets don't care who's Secretary of Treasury. They see huge U.S. government expenditures ... coming up ... without revenues to support them, and they recognize that the nation's IOU (the dollar) is therefore going to be worth less and less.

The only serious question is whether the dollar drops quickly -- in which case hold your hats and expect a surge in inflation, sky-high interest rates, and an economy in the tank -- or drops gradually (in which case the standard of living of the typical American gradually declines). The only serious remedy is to cut unnecessary spending (corporate welfare, farm price supports, earmarked pork, the Medicare drug benefit that subsidizes big pharma) and raise taxes on the only people who are doing well in this country, who are earning well over $200K a year. I won't hold my breath waiting for Bush to do these things.

Good luck, Hank.

A RESPONSE: Opie is looking only at federal income taxes (as does the IRS, in its various calculations of who pays what). Include all other taxes -- especially sales, payroll, user fees et al. -- and lower-income people are paying a larger portion of their earnings to the government than are upper-income people. As to income taxes, the rich (earning over $200K a year) are a smaller portion of their incomes than they have at any time since the start of World War II. The only reason their payments total up to be a large percent of revenues from income taxes is the rich are taking home the largest slice of the nation's total income than at any time since the 1920s (and by some measures, the 1890s). Shift your gaze from income to wealth and it's even crazier. Bill Gates alone owns more assets than the bottom fifty percent of Americans put together.

Update: Greg Mankiw has a commentary in the WSJ on the new Treasury Secretary nominee, Hank Paulson. In one part, he says he does not find claims made by proponents of the Laffer curve to be credible:

Some supply-siders like to claim that ... increasing tax rates reduces tax revenue. Like most economists, I don't find that conclusion credible for most tax hikes... [free link to article - Mankiw's blog]

Greg might note, as he does elsewhere, that Feldstein estimates:

An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and only collects about two-thirds of the revenue implied by a “static” calculation.

But not all taxes are the same in this regard as Greg acknowledges in discussing potential tax increases in his WSJ commentary.

Protesting the Lack of Protests

Here's one perspective on why there haven't been more protests over the war in Iraq and over other issues from the younger segment of the population:

Where have all the protesters gone?, by Sam Graham-Felsen, Commentary, International Herald Tribune: The greatest disappointment of my generation has been its failure to ... actively oppose the war in Iraq. We are the youth who are living through what will perhaps be remembered as the most scandal-plagued, secretive, privacy-invading, rights-infringing, incompetent administration in American history - and we have barely made a peep.

How is it possible ... that this generation has remained so silent, so acquiescent? Many point to the lack of personal threat; there is, as of now, no draft to frighten us into action. Others suggest that the pressures of an unstable and uncertain economy have caused my generation to look inwards, focusing on creating a solid economic future for themselves rather than dilly-dally with Utopian visions.

All of these explanations have merit, but I want to offer an alternative hypothesis. The reason that youth aren't protesting about anything, let alone the war in Iraq, is because ... this generation does not believe in its ability to alter, or even slightly disrupt, the status quo. Community service and volunteering is at an all-time high, so young people do, in fact, care. But this generational shift from activism to volunteerism reflects our lack of faith in our ability to affect broad social change.

We were force-fed the ideology that there is no alternative to the existing model of neoliberalism and corporate- controlled globalization. If we tried to suggest that we could play a role in molding our own destinies, we were laughed at. What's best for business is what's best for the world, we were told, and if you disagree..., too bad, because no one's going to listen.

All you can do is face this cold reality, get a good job, and try to keep as warm as possible... Idealism died in this country because the doctrine of "There Is No Alternative" killed it. ... So it's no wonder that our parents, not us, are showing up to protest the war in Iraq. They believe in the power of social movements because they saw the civil rights movement and the anti-Vietnam War movement shape history before their very eyes.

I grew up with the belief that the only people who had real power were CEOs. ... But we are not asleep. ... We know our economy is on the verge of collapse, that the climate crisis will soon leave our cities under water, that nuclear weapons will soon find themselves in the hands of willing detonators.

We know that the current course is unacceptable. ... And we are finally beginning to channel this anxiety into action. This month, in one of the most significant moment of youth opposition to the war yet, New School undergraduate Sara Jean Rohe boldly challenged commencement speaker and uber-hawk John McCain. "I am young," Rohe stated after scrapping her original speech, "and although I don't profess to possess the wisdom that time affords us, I do know that pre-emptive war is dangerous and wrong, that George Bush's agenda in Iraq is not worth the many lives lost."...

If America's young are ever going to shape their own futures, they must first help put an end to this costly, bloody, directionless war. And if millions of young people take to the streets - as they have in other countries, and as they have in the past in this country - policies will change, the status quo will shift, and young people will once again believe in their own power.

I'm not sold on neoliberalism as the cause. My own experience, though I just missed being subjected to it for Vietnam, is that the draft makes a difference. Knowing you might go, or having people you know be forced to go unwillingly, knowing people who are injured or killed after going, matters. Even now, if I'm honest with myself, I have to admit that I'd probably be far more strident if my own kids had a any chance at all of being drafted and forced to risk their lives. I've believed from the day this war started that it would be viewed quite differently if everyone's kids had an equal chance of going. I don't want a draft because I don't want my kids or your kids forced into armed conflict, but there is an argument for sharing the sacrifice across all strata of society when choosing to enter into war.

Update: From CBS News Political Points (more in comments):

A new book by Kathy Roth-Douqet and Frank Schaeffer, "AWOL: The Unexpected Absence of America's Upper Classes from Military Service - And How It Hurts Our Country," deals with the small number of children of elites going into the military.

They say, for example, that 400 of the 750 members of the Princeton class of 1956 joined the military, compared to only nine members of the class of 2004. Speaking on ABC's "This Week with George Stephanopoulos," Rep. John Murtha pointed out that only 1 percent of the people in the United States are involved in the war and many of them go back over and over again.

Is that the reason for the lack of protest? Is it because so few Americans are personally impacted that the outcry isn't louder?

USA, inc.

Molly Ivins on the corporate takeover of America:

Closing the book on Enron, by Molly Ivins, Commentary, Creator's Syndicate/CNN: A Houston jury convicted both Ken Lay and Jeff Skilling ... Many a thoughtful analyst has given us to understand that Lay and Skilling are guilty of arrogance and hubris. Actually, they were convicted of fraud -- massive, overwhelming and monstrous fraud. They also stole money and looted pension funds. They rigged energy markets and almost drove California (seventh-largest economy in the world) into bankruptcy.

And all along the way, this monstrous fraud was connected to government. Enron bought the politicians who bent the rules that let them steal, con and gyp. Lay and Skilling talked state after state into following the California model and deregulating electricity. ... And then, of course, there was the thumbing-the-nose thievery...

The interesting thing about Lay and Skilling is they weren't trying to evade the rules, they were rigging the rules in their favor. The fix was in -- much of it law passed by former Sen. Phil Gramm of Texas, whose wife, Wendy, served on the board of Enron.

Where does that sense of entitlement come from? What makes a Ken Lay think he can call the governor of Texas and ask him to soften up Gov. Tom Ridge of Pennsylvania on electricity deregulation? ... The extent to which not just state legislatures but the Congress of the United States are now run by large corporate special interests is beyond mere recognition as fact. The takeover is complete. Newt Gingrich and Tom DeLay put in place a system in which it's not a question of letting the head of the camel into the tent -- the camels run the place. ...

I'm not attempting to make this a partisan deal -- only 73 percent of Enron's political donations went to Republicans. But I'll be damned if Enron's No. 1 show pony politician, George W. Bush, should be allowed to walk away from this. Ken Lay gave $139,500 to Bush over the years. He chipped in $100,000 to the Bush Cheney Inaugural Fund in 2000 and $10K to the Bush-Cheney Recount Fund.

Plus, Enron's PAC gave Bush $113,800 for his '94 and '98 political races and another $312,500 from its executives. Bush got 14 free rides on Enron's corporate jets during the 2000 campaign, including at least two during the recount. Until January 2004, Enron was Bush's top contributor.

And what did it get for its money? Ken Lay was on Bush's short list to be energy secretary. He not only almost certainly served on Cheney's energy task force, there is every indication that the task force's energy plan, the one we have been on for five years, is in fact the Enron plan. Lay used Bush as an errand boy, calling the governor of Texas and having him phone Tom Ridge of Pennsylvania to vouch for what swell energy deregulation bills Enron was sponsoring in states all over the country.

It seems to me we all understand this is a systemic problem. We need to reform the political system...

Hitting It Big for Retirement

Given the amount of tax revenue that states raise regressively through legalized gambling such as lotteries and video poker, I thought this was an interesting table. It compares the expected earnings in constant dollars from investing various amounts in an S&P 500 index fund versus using the money to play the lottery. The reason for looking at this is that, according to the Tax Foundation article:

A recent survey conducted by Opinion Research Corporation ... and ... reported in a MarketWatch article, found that Americans are, for the most part, pessimistic about their ability to save for retirement—so pessimistic, in fact, that 21 percent of respondents said playing the lottery is “the most practical strategy for accumulating several hundred thousand dollars” for retirement.

The MarketWatch article continues saying "...with 38% of those who earn less than $25,000 pointing to the lottery as a solution." This table looks at the expected losses from pursuing such a strategy over a 40 year time period:

Table 1. Rate of Return on Lottery vs. Rate of Return on Stocks over a Forty-Year Period in 2006 Dollars

Average Amount Spent or Invested per Month	Total Spent or Invested over 40 Years	Expected. Return from Lottery(a)	Expected Return from S&P 500	Increased Retirement Savings from Investing Rather than Playing Lottery
$1	$761.37	$178.14	$1,622.17	$1,444.03
$5	$3,806.85	$890.72	$8,110.85	$7,220.13
$10	$7,613.70	$1,781.44	$16,221.69	$14,440.26
$25	$19,034.26	$4,453.59	$40,554.23	$36,100.64
$50	$38,068.52	$8,907.18	$81,108.46	$72,201.29
$100	$76,137.03	$17,814.35	$162,216.92	$144,402.57
$150	$114,205.55	$26,721.53	$243,325.39	$216,603.86
$200	$152,274.07	$35,628.70	$324,433.85	$288,805.14
$250	$190,342.59	$44,535.88	$405,542.31	$361,006.43
$300	$228,411.10	$53,443.05	$486,650.77	$433,207.72

Note: Calculations assume a constant 2 percent inflation rate, 7 percent return on S&P 500 average, and monthly compounding. Lottery spending is not adjusted for life cycle or income cycle.
(a) Based on a 53% cumulative payout rate for all lotteries from 1964 through 2003. ... [Source: Tax Foundation]

Interesting difference in expected returns, but I'm not convinced that people would invest much more if lotteries and other forms of legalized gambling did not exist. The more important concern is, of course, the highly regressive nature of this form of "voluntary" taxation that provides false hope for those in dire economic conditions. Lotteries are easy politically, but they impose large and inequitable costs on some segments of the population. The state should get out of the gambling business and raise taxes by some other means. Nobody has to pay a dollar more and no services have to be cut, just levy the taxes directly so that the tax burden is clear rather than having it obscured through lotteries and other devices.

Krugman the Crusader, Persuader, and Trade Theory Maker

More on Paul Krugman. This is good:

People in Economics , Economist as Crusader, Arvind Subramanian interviews economist Paul Krugman, IMF, Finance and Development:  Economics made Paul Krugman famous. Punditry has made him a celebrity, famous for being famous. But Krugman aspires to be long remembered, and, in this respect, John Maynard Keynes is the gold standard. Keynes left his mark in three distinct ways: through the power of ideas, through the art of public persuasion, and through the shaping of historic changes. This last is denied to all but those who find themselves at the right place at an epochal time. But on the first two scores, at least, Krugman may well become the first person outside the field of literature to win both the Nobel and Pulitzer Prizes, the acme of achievement in academics and journalism.

The dismal science has produced many versatile economists. Other giants of the 20th century, such as John Hicks, Ken Arrow, and Paul Samuelson, sparkled in several fields. Within international economics, though, specialization has tended to be the rule. ... But Krugman ... is a rare economist whose accomplishments at the highest level span ... subfields. He opened up the study of trade under increasing returns and imperfect competition and later resuscitated the study of economic geography. And his work on currency crises and exchange rates has been highly influential. In 1991, he was awarded the John Bates Clark medal... The cognoscenti know that this honor, which is awarded once every two years to an economist under 40, is a little more difficult to win than the annually awarded Nobel Prize.

Then there is Krugman the communicator. From writing "Greek letter" academic papers, he moved on to conveying economic ideas to the wider world (see Box 1). His Age of Diminished Expectations and Peddling Prosperity ... ended up being not just an analysis of the U.S. economy in the postwar period but also a cracklingly lucid primer on international economics. Peddling Prosperity was an incisive and opinionated account of the history of economic ideas...

Box 1 Sharp words Jagdish Bhagwati tells the story of Krugman's first summer job as his research assistant at MIT. "I was in the middle of a paper on international migration. I gave Paul an outline of my thoughts—when he came back, he already had a finished paper, and I could not change even a comma! So I gave him the lead authorship." Princeton's Avinash Dixit has said that if Krugman were not so valuable to academics, "we should appoint him to a permanent position as the translator of economic journals into English." Indeed, Krugman is perhaps without peer among economists in the clarity and sharpness of his prose. Commenting on the changing rationale for the tax cuts of the Bush administration, he called them "an obsession in search of a justification." His recipe for the Japanese deflation of the early 2000s was aggressive monetary expansion, and he called upon the ultraorthodox Bank of Japan to "credibly commit itself to being irresponsible." Keynes's famous remark "In the long run we are all dead" is more widely quoted than understood. Here is how Krugman explains it: "What he meant was recessions may eventually cure themselves. But that's no more a reason to ignore policies that can end them quickly than the fact of eventual mortality is a reason to give up on living." He raised questions about the plausibility of real business cycle theory by asking, "If recessions are a rational response to temporary shocks in productivity, was the Great Depression really just an extended, voluntary holiday?"

Krugman as public persuader was so successful that the New York Times offered him an op-ed column, the most prestigious piece of real estate in mainstream U.S. journalism. ... One of his former teachers, Jagdish Bhagwati, tells F&D, "We were all pleasantly surprised that Krugman has been able to play the Mike Moore of the economics profession." Another teacher, Nobel Laureate Robert Solow, calls his former student "an all-purpose pest to the Bush administration." To many on the right, Krugman has seemed a shrill partisan who makes repetitious whining his stock-in-trade. But to others, he is now a cult figure: a brilliant and prescient analyst and, more important, a man of courage who stepped up to the plate in the aftermath of 9/11, when his fellow journalists became derelict in their duty to question, probe, and dissent.

The Mountains Are High and the Emperor is Far Away

Martin Wolf discusses the political and economic future of China and the growing tension he foresees between the goals of those in power and the goals of society:

China’s autocracy of bureaucrats, by Martin Wolf, Commentary, Financial Times: What happens when a communist autocracy presides over a dynamic market economy? Do they live together happily ever after or does one destroy the other?

A visit to Beijing last week, combined with reading the thought-provoking new book by Minxin Pei ..., an American scholar of Chinese origins, has persuaded me to raise these questions. But they have been bubbling in my mind since I read S.E. Finer’s illuminating discussion of the history of China’s government. What emerges from this masterpiece is how much today’s party-state is just another imperial dynasty in twentieth century guise.

Finer summarised the contrast between the ideology of the Ch’in state, which unified China 2,200 years ago, and of the Greek and Roman republics, which are the west’s ancestors, as follows: “Collective and mutual responsibility, not individualism; authoritarianism, paternalism and absolutism, not self-determination; inequality and hierarchy, not equality before the law; subjects not citizens; duties not rights.” Who, reading this list, can fail to recognise its continued relevance?...

In imperial China, strong rulers could subject the bureaucrats to their will. This was easiest in the early years of a dynasty. Sooner or later, however, the bureaucrats pushed the emperor into a ritual role: ossification then ensued. ...

“The mountains are high and the emperor is far away.” This well-known saying captures what so often happened. When the emperor was weak, it became difficult to reach decisions. Officials looked after themselves and their families. Infirmity of purpose, corruption and an inability to protect the empire itself ensued. Sooner or later the dynasty fell, to be replaced by another, often after a period of chaos.

Using the analytical machinery of political science, Mr Pei describes today’s “dynasty” as being in just such a period of bureaucratic ossification. He points to the emergence of a “decentralised predatory state”, in which officials feather their nests at the expense of the state, the economy and the people. ... Tension is growing, he suggests, between the state and the society.

Mr Pei argues, persuasively, that China’s gradualism, often favourably contrasted with the former Soviet Union’s ... radical reforms, is as much a political as an economic strategy. Its aim is also to generate rents for those with political power or those whose support the powerful need... This is a vision of the state, not as benign maximiser of the public welfare, as traditional Chinese and contemporary communist ideology would suggest, but rather as a vehicle for competitive rent-seeking. By preserving profitable distortions, gradualism creates the rents. The more dynamic the economy, the greater are the rents. But the bigger the distortions, the less dynamic the economy risks becoming. The government is walking a tightrope.

One vast difference between what is happening to China today and what has happened to it in the past is evident: its dynamic economy. By offering its cheap, hard-working labour to the world and investing almost half of gross domestic product, China has managed to lift itself from age-old poverty. The society now emerging is increasingly urbanised, literate and open to the world. What might all this mean for the country’s political and economic future and so for its relations with the rest of the world? I envisage four possibilities.

First, reforms continue, the economy grows and political reform restarts. A democratic, law-governed society then emerges smoothly over the next few decades.

Second, China becomes a prosperous market economy under a reforming communist regime. An autocratic superpower then transforms the political balance of the world.

Third, China proves unable to pursue the necessary reforms, which ultimately stifles the economy’s progress. The regime becomes ever more repressive and China becomes a sad case of failed development.

Fourth, slowing growth generates political crisis. Turmoil ensues. But a democratic regime finally emerges.

I find it hard to believe in the smooth transition explicit in the first possibility. I find it as hard to believe in an advanced, internationally integrated economy governed by a communist autocracy... The third also looks implausible: it is hard to believe the Chinese will allow anything to stop them from gaining greater prosperity. The last possibility is far easier to imagine.

I am forecasting neither a political crisis nor a sharp economic slowdown in the near future. The Chinese economy could continue to grow rapidly for years. But the combination of a market-led economy with a bureaucratic autocracy does not look a good bet for the long run. The market’s irresistible force is meeting the party’s immovable object. At some point, one of them must surely give.

Baby-Sitting the Economy

I have been intrigued by this story ever since anne first dropped it into comments -- I missed it when it first came out. It's an article by Paul Krugman that appeared in Slate in 1998, and it is also discussed here in another article. I'm not sure it changed my life like it did Krugman's, but it certainly caught my attention:

Baby-Sitting the Economy, by Paul Krugman, Commentary, Slate, August 14, 1998: Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism... The story is told in an article titled "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis." Joan and Richard Sweeney published it in the Journal of Money, Credit, and Banking in 1978. I've used their story in two of my books, Peddling Prosperity and The Accidental Theorist, but it bears retelling...

SmartEconomist: Global Job Markets

From SmartEconomist:

Global Job Markets and US Leadership: Q&A 7 - Harvard University Professor Richard B. Freeman will answer readers' questions on the relationships among immigration flows, scientific education and the global market for skilled workers, on how they affect US technological leadership, and on their implications for economic policy.. Ask Your Question. [Also, answers to all previous questions are available.]

Is Head Start "The Beast"?

To help finance tax cuts, social programs such as Head Start are being cut. Is this what they mean by "Starve the Beast"?:

Expand, not cut, Head Start, by John Bancroft, Commentary, Seattle PI: It is clear to anyone paying attention that President Bush's tax cut proposal just passed by Congress benefits mostly the well-to-do. But much less attention has been given to the inevitable double whammy these cuts will have on middle- and low-income families. For the 12,000 low-income Head Start children in Washington, this measure gives their families no financial relief, but does set the stage for a further erosion of vital services...

Clearly, a measure that cuts taxes by $42,000 for a millionaire, but only $46 for a family earning $50,000, gives most of its tax relief to the wealthy. Reductions in taxes on investment income, small-business investment, research and development costs and overseas corporate income primarily benefit those affluent enough to receive income from these sources.

On the other hand, the measure does not even extend the federal deduction for sales taxes, which would have benefited lower-income families in Washington who pay a much higher proportion of their income on our regressive sales tax.

But the effect of this $69 billion in federal revenue will be felt quickly by low- and middle-income families... Our Head Start program, which serves 1,800 children in King and Pierce counties, received a budget cut for the first time in 40 years. One percent may not seem like much but when combined with 7 percent in cost increases, we have had little choice but to cut back on our services.

We have cut back on our bus services for children, which will mean that the most at-risk families, who often don't have cars, may not be able to get their kids to Head Start. We have cut back our teachers' hours, giving them less time to provide quality early learning to our children. We have cut back the hours of our family support staff, who play a crucial role in helping our families access the services they need to escape poverty. These dedicated professionals can hardly afford pay cuts, since most earn less than $20,000 a year. Many will leave to seek higher paying jobs.

There is considerable research that shows Head Start is effective in getting low-income children ready for school and helping their parents become economically self-sufficient. ... Now many of those [services] are at risk. Our partnerships with community child care programs, providing full-day Head Start services for low-income working parents, have been reduced. The innovative programs we added to help build strong families, including adult literacy, job training, health education and boosting father involvement, have been reduced.

The negative effect of those cuts is multiplied because many of the broader social services our Head Start families rely on have been cut, including housing assistance, nutrition services and child care programs. ... In King and Pierce counties, we have funding to serve only 30 percent of the eligible 3- and 4-year-old children, and less than 2 percent of the infants and toddlers eligible for Early Head Start. That leaves almost 25,000 eligible young children languishing on our waiting lists.

Meanwhile, one huge tax cut has passed, and another one has been proposed. In our Head Start classrooms, we help young children begin to look at the consequences of their actions. Should we expect any less from our elected leaders?...

Class

Here are two more class autobiographies. First, Chris Dillow of Stumbling and Mumbling:

A class autobiography, by Chris Dillow: Bryan Caplan is soliciting class autobiographies. Here's his. Here's mine.

I spent most of my first 18 years in the same terraced house in Leicester; it wasn't quite a 2-up, 2-down as it had a garden. Our neighbours were mostly working class - carpenters, mechanics - but increasingly Ugandan Asians displaced by Idi Amin.

Mum was a secretary; her dad was treasurer of a working man's club. Dad, and his dad, was a lorry driver. However, dad went to prison when I was five - after the contents of his lorry went missing - and mum and dad never lived together after then. I only saw him once a week. ...

We weren't poor - though I don't know how much money mum got from dad. ... We never went abroad. The first time I got on a plane was when I worked in the City, and had to fly to Scotland to give presentations to fund managers.

I went to the local junior school, passed the 11+ (the only boy in my school to do so) and got a place at a grammar school. I never wanted to go; it was two bus rides to the other side of town, and I thought it was posh; my mates (quite gently) took the piss out of me.

School wasn't too bad, except that it forced us to play rugby rather than football. I was quite a lazy schoolboy, but I got a bunch of O levels and ... chose to stay on to do A levels; mum seemed to welcome the extra child benefit.

By this time, our grammar school had been converted into a 6th form college, as part of comprehensivization. This had the effect of generating greater class divisions than existed in the grammar school. Our 6th form was split between working class kids who liked Kraftwerk and the Human League, and posh ones who still liked prog rock. I have retained a visceral hatred of Emerson, Lake and Palmer.

I gave no thought at all to life after school until my history teacher, in front of a whole class, disturbed my reverie by telling me: "Oxford would have you like a shot" He was right. And I became the first member of my family for 500 generations to go to university...

So, what effect did this class background have on me? It didn't stop me doing well financially after university. But there's a big element of luck here. I was lucky enough to benefit from selective education, lucky to meet great teachers, lucky to go to university when few did and so had a strong signal of ability. And I was lucky that, as I left university, there was big demand for technical-ish skills as the City was expanding.

Had I been a few years younger, I'd not have had this fortune. In this sense, I disagree with Bryan when he says "differences in ability and character are the cause of class differences". I'd stress the role of luck.

My background has held me back in some respects. ...my upbringing did not give me expensive tastes. As a result, I've never felt the need to earn more than I have.

Also, I've never had the imagination to see that I could do jobs that posher people do... When I was interviewed for my current job, I was asked: "why didn't you become a journalist straight after university?" My instinctive reply was: "the thought never occurred to me." Even now, some jobs - the more mainstream media or politics - are mostly closed to people like me.

Probably the biggest effect, though, of my background is social. I've never felt that l fitted in, always feeling that I owe my place, wherever I've worked, only to my above-average intellect. People only want me for my brain.

Does this make me resentful, as Bryan alleges of the notion of class autobiography? No. Everyone is scarred by their upbringing. The only question is: how?

Next, Arnold Kling of EconLog:

My Class Autobiography, by Arnold Kling: Bryan is encouraging these things.

On both sides of my family, my grandparents were immigrant Jews who tried to make a living as merchants. My mother's family settled in Bradford, Pennsylvania, a declining steel town. My father's family settled in St. Louis, Missouri.

The Great Depression was hard on both families. It hit the steel towns particularly hard. Meanwhile, my St. Louis grandfather went bankrupt and lost his clothing store in 1937. The Depression was the biggest event in my parents' lives. They were frugal... But I did not grow up having to worry about money--my father's salary as a college professor seemed more than adequate for us.

The Depression also turned my mother and my father's older sister into Communists. My mother renounced her party membership in the 1940's, but my father's sister and her husband remained committed Communists until they died, even after the fall of the Berlin Wall. I gather that my uncle was a pretty effective union organizer, but he was kicked out of the unions when they purged their leadership of Communists. Their family lived in public housing in Chicago, since he had no source of income and she was often too ill to work.

Part of the post-1930's frugality was that we lived in a lower-middle-class neighborhood until 1964, when I was 10. ... When I was 11, we moved to Clayton, Missouri, which was and is the richest suburb of St. Louis. Thinking that I must be uneducated (because I did not have the privilege of growing up in Clayton), the school district assigned me to the low math track and to take a double period of English. By the time I got to high school, that nonsense had been sorted out. But I took away a lifelong belief that affluent people think way too much of themselves, and they are way too condescending and patronizing to everyone else.

There is serious mental illness on both sides of my family. Those aunts, uncles, and cousins who were least affected by it are rather affluent. Those most affected by it are not. So I tend to associate poverty with mental illness. Perhaps I am overly optimistic about the economic prospects of those in good mental health. But my family's experience leads me to think that poverty in the United States is mostly a mental health issue. Leaving aside new immigrants, I do not see American poverty as being determined by social class.

Broken Pledge Not to Raise Taxes?

Remember this?:

Mr. Bush pledged in 1999 to veto any bill that raised taxes. ..."If elected president, I will oppose and veto any increase in individual or corporate marginal income tax rates or individual or corporate income tax hikes," he wrote in June 1999 to Grover Norquist, president of the Americans for Tax Reform.

I don't know enough about the tax discussed below to say if this is a reasonable change in tax policy or not, but setting that aside, did Bush keep his pledge?

Americans Living Abroad Get a Nasty Tax Surprise, by Keith Bradsher and David Cay Johnston, NY Times: In an effort to raise revenues, tax writers in Congress added a last-minute provision that retroactively increased taxes for Americans living abroad. But the sudden imposition of new taxes has surprised overseas taxpayers, and it has employers concerned about the added cost...

Senator Charles E. Grassley of Iowa, the chairman of the Finance Committee, who has long been a proponent of higher taxes on overseas Americans, has said that the tax policy had been overly generous. .... The law changes the way taxes are calculated on subsidies like housing allowances, which should push many of those Americans into higher tax brackets, analysts say. ...

Over all, the bill raises taxes on overseas Americans by about 6 percent, but most individuals will pay nothing more, while others will see their taxes quadruple. For Kristine Kraabel, a gift shop owner in Singapore, and her husband, who is now the regional human resources director there for an American company, the new legislation will more than triple their American tax bill. Their tax adviser calculates that they will owe $20,000 to $25,000 more ..., up from $5,000 last year, even as they pay $20,000 in Singapore taxes....

[A]nalyses by the accounting firms Ernst & Young and PricewaterhouseCoopers show that by adding provisions to how the exclusion is calculated, it raises the overall tax bill and marginal tax rates as well for some overseas Americans. ...

Michael Abdalian, a tax partner at Ernst & Young, said ... "Most companies have programs designed to protect their employees from additional taxes," he said, so the expense will likely be borne by employers. ...

In a furious letter to Senator Grassley, widely circulated among expatriates, Ms. Kraabel contended that overseas Americans subsidize their countrymen in the United States by helping to pay for services they never use.

"You will be hard pressed to find us on federal roads, state roads, county roads, or even to find us on the ruins of Decorah's old green bridge," she wrote. "We are your subsidy. We are your constituents, whose interests you condemn and refuse to represent."

Senator Grassley has long attacked the tax break for overseas Americans as an overly generous subsidy that does little to improve the American economy...

Increasing taxes on overseas Americans was cited in a report last year by the Congressional Joint Committee on Taxation on tax reform and improving compliance, the staff noted, adding that it "has been in the works for at least several years" and should not have been a surprise. ...

I assume it wasn't a surprise to the President either.  Maybe he only meant the pledge for people living here.

Global Utopian Scoundrels?

This commentary knocks down a free-trade position that is more extreme than the one held by most economists -- it is well understood that globalization is not necessarily utopian for all, there can be costs to some sectors as production is reallocated globally and many of us believe more could be done to help those who are affected during the transition, but even so, and whether economists agree or not, I think the message in this commentary will resonate with many of you:

Save globalisation from radical global utopians, by Barry Lynn, Commentary, Financial Times: Now may hardly seem the time to imagine a more global future, let alone do so with optimism. Most of us are hard pressed just to maintain the illusion that the present system is not breaking down, to deny ... that the grand trade liberalisation project is, at best, on life support. ...

Few outside the US doubt that America’s free-trade system, constructed with such care in the decades after the war, is crumbling fast. The proximate cause is America’s looming bankruptcy. As the ongoing Doha round of world trade negotiations has already proved, the US simply lacks the currency – in the form of believable promises of sustainable access to the US marketplace – to “buy” the next round of trade liberalisation, as Washington has “bought” every round since the 1960s. Clearly no other nation is willing or able to take America’s place.

Yet we will find no better moment ... than today to face up to the two fatal flaws of the radical globalisation project that in the early 1990s came to supplant the more careful trade liberalisation of the postwar era: first, America’s utopian belief that an unregulated “market” would somehow do the work of government; and second, the rise of global companies – especially in the retail and electronics sectors – to fill the power vacuum created by the retreat of the American state from its traditional role managing US trading relationships.

Similarly, there is no better time than now to grasp that the real question is not, as Americans like to frame it, free trade versus protectionism. It is whether the world trading system will be regulated by private companies that are answerable only to the rich and powerful, ... or by states built to assess risk and to be answerable to all citizens.

It would be Pollyannaish to deny that grave dangers abound. ... By far the greatest obstacle to understanding the failings of post-cold-war globalisation is the US’s own utopian ideology. For most of the nation’s history, America was guided by deeply realistic thinking, and idealistic rhetoric was trotted out mainly to clothe ... strategic aims.

But after the fall of the Berlin Wall, in that moment of self-congratulatory euphoria, much of the US’s ruling elite came to believe the rhetoric itself. The result was a uniquely American ... absolute faith in the ability of an all-determining market mechanism to deliver universal prosperity and peace, in perpetuity – which was then hawked abroad with evangelical zeal...

The depth and intensity of America’s trade utopianism becomes more astonishing as time wears on. Look at how the US treats oil politics and you will see the realistic America of old. The nation’s leaders shape an energy policy, they intervene in markets, they invade oil-rich nations. But when it comes to the global trading system, America today operates on an entirely different set of principles. No one dares whisper the words “industrial policy”. No one dares admit the degree to which the trade system is actually manipulated, not by any state but by companies built to straddle many states. No one dares admit the degree to which these companies tend to destroy not merely soft social infrastructure, such as pensions and wages, but basic production infrastructure.

The dangers of this perverse duality in the US mind are extreme. Yet even in America, the fantastic delusion of trade utopianism cannot last – it is neither logically nor physically sustainable. Indeed, as can be seen in the growing willingness of politicians in both parties to engage in xenophobic demagoguery, America’s utopian fever seems to be breaking. This brings us back to the question of whether the nations of the world will, together, take proactive steps to expand an open global system, or will stumble into blind and destructive protectionism.

The biggest reason for hope is the prospect of a reformed, sober US. Once the American mind is exorcised of today’s mechanistic utopianism, the most probable result will be a return to a far more realistic, practical, ethical internationalism. ... America will re-embrace the responsibility of using state power to engineer markets and systems to serve its own people, while ceding to other states far more space to serve their citizens in ways of their own choosing. ...

Utopian universalism is dead. The sooner nations gather to bury its corpse ... the more likely we will be to save globalisation. ...

First Jobs Matter for Academic Economists

Where you start your academic career can have a large influence on your success: 

Roach College, U.S.A, by Joel Waldfogel, Slate: Graduate students tend to be paranoid about aspects of their careers that are largely under their control: Will I ever finish my studies? Will I sufficiently impress my adviser? But if new research for academic economists holds up, students should also be freaked out by a factor they can do nothing about: the strength of the job market at the precise time they enter it. ...

The best jobs generally go to students who have demonstrated the most promise: the fledgling historian whose dissertation looks like an important book, the budding economist whose first articles appear to change the way others think. Producing pathbreaking work is hard and unpredictable. But ... students can take comfort in the idea that even if they can't get a great first job, say at a Top 50 research institution, they can do solid work wherever they land and then move up the prestige ladder.

But can they? Are jobs in the lower reaches of the profession staging areas for later success? Or are they more like the Roach Motel, where you can check in, but you can't check out?

This is the question that Paul Oyer of Stanford University's Graduate School of Business asks... Oyer tracked the careers of all graduates of seven top economics Ph.D. programs between 1980 and 2003. He asked several questions: ... most significant, did their initial job placements determine how successful they became later on, measured by how many articles they published and whether they ended up at highly ranked institutions?

The trick to determining whether good initial placements cause graduates to be more successful is to find a reason, independent of the candidates' talent, that the quality of their first jobs varied. You could imagine a cruel experiment: Flip a coin and randomly send some graduates to better schools and others to worse ones. ... It would be tough to find volunteers, though. So the task of a clever empirical economist like Oyer is to find some historical circumstance that works like the coin toss.

Oyer uses the year-to-year fluctuations in demand to compare the first jobs of fledgling economists of equal promise. Imagine two newly minted Ph.D.s who have produced equally important dissertations. Both are on the edge between a good job and a bad one. One finishes her degree in a year when there is strong demand for new faculty. As a result, she gets a good job at a Top 50 university. The other finishes in an off year, when a recession keeps most public universities from hiring. Although equally promising as a scholar and teacher, she starts her career at a more obscure school. Five or 10 years hence, what do the careers of these two young professors look like? ...

In keeping with   the fluctuating market, about 60 percent of boom-year (1980 and 1990) econ   graduates found tenure-track first jobs at ranked research institutions,   compared with fewer than 40 percent of bust-year (1985) graduates. If the   quality of initial placements persistently affects career success, then the   academics who start in boom years should remain in better positions five or 10   years out-even though the bust-year graduates were equally talented and   qualified when they left the starting gate.

And sure enough, five years into their respective careers, members of the   boom cohorts are more likely to hold good jobs at Top 50 institutions than   similar candidates entering the job market in bust years. In general, about a   quarter of elite Ph.D.s end up at first-tier institutions. Starting one's   career in a boom year raises the probability of ending up at a Top 50   department by between 40 and 60 percent.

Boom-year graduates don't end up in better jobs arbitrarily. Along the way they publish more articles that are more influential. Despite their elite credentials when hired, more than a third of the econ Ph.D.s in Oyer's study had not published anything 10 years after graduation. The other two-thirds had published an average of 6.2 articles. Starting at a Top 50 institution raised that total by roughly a factor of two.

What about the effect on publication in the best-regarded journals-the only way to earn real street cred in the field? Most economists never crack these outlets in their entire careers. But an initial job in a Top 50 institution has an enormous impact, raising the probability of publishing in one of the top five journals by a whopping 50 percent. So, quality of the first job really matters. ...

I have only scanned the paper, so this may be covered, but I wonder why this happens. Is it a peer effect, i.e. having superstars around can make everyone on the team a better player, something like that? Higher quality co-authors? Is it hidden bias, editors more likely to select a paper from the home team, or a differential presumption of quality by referees and editors based on what school a paper is from? Is it differences in resources or teaching loads, more publications from working with better graduate students, or some other effect? Should we worry about countercyclical graduate school enrollment patterns or the demand for academics in foreign countries? Guess I'd better add this paper to the pile. While scanning through it, I did find a section that says:

The results of the analysis are consistent and suggest that the productivity effect of getting a good first job are large. However, the results are not overwhelming in terms of statistical significance. The evidence suggests that there is a causal effect of getting a good first job on publication records and that at least some of the long-term effects ... are due to this placement making the person more productive. This rules out a very strict form of influence activity, asymmetric information, or search cost models being the primary reason for long-run effects of initial job placement. The evidence seems consistent with the idea that economists develop “task-specific” human capital as in Gibbons and Waldman (2006). Those who place at research-focused institutions develop research skills that lead to more publications. It could also be the result of peer effects from better colleagues or from initial job placement endogenously affecting economists’ ambitions and preferences. Naturally, the true underlying model is probably some combination of these possibilities.

So why this happens does not seem to be well understood.

Paul Krugman: Swift Boating the Planet

In response to a recent post about John Kerry and the Swift Boat crowd, many of you called for Democrats to get tougher. Paul Krugman agrees:

Swift Boating the Planet, by Paul Krugman, Climate Lies Commentary, NY Times: A brief segment in "An Inconvenient Truth" shows Senator Al Gore questioning James Hansen, a climatologist at NASA, during a 1989 hearing. But the movie doesn't ... tell you what happened to Dr. Hansen later.

And that's a story worth telling, for two reasons. It's a good illustration of the way interest groups can create the appearance of doubt even when the facts are clear and cloud the reputations of people who should be regarded as heroes. And it's a warning for Mr. Gore and others...: you're going to have to get tougher, because the other side doesn't play by any known rules.

Dr. Hansen was one of the first climate scientists to say publicly that global warming was underway. In 1988, he made headlines with Senate testimony in which he declared that "the greenhouse effect has been detected, and it is changing our climate now."...

By rights, Dr. Hansen should have been universally acclaimed... But soon after Dr. Hansen's 1988 testimony, energy companies began a campaign to create doubt about global warming... And in the late 1990's, climate skeptics began a smear campaign against Dr. Hansen himself.

Leading the charge was Patrick Michaels, a professor at the University of Virginia who has received substantial financial support from the energy industry. In Senate testimony, and then in numerous presentations, Dr. Michaels claimed that the actual pace of global warming was falling far short of Dr. Hansen's predictions. As evidence, he presented a chart supposedly taken from a 1988 paper written by Dr. Hansen and others, which showed a curve of rising temperatures considerably steeper than the trend that has actually taken place.

In fact, the chart Dr. Michaels showed was a fraud... The original paper showed a range of possibilities, and the actual rise in temperature has fallen squarely in the middle of that range. So how did Dr. Michaels make it seem as if Dr. Hansen's prediction was wildly off? Why, he erased all the lower curves, leaving only the curve that the original paper described as being "on the high side of reality." ...

Dr. Hansen has been trying to correct the record for years. Yet the claim ... has remained in circulation, and has become a staple of climate change skeptics, from Michael Crichton to Robert Novak. There's a concise way to describe what happened to Dr. Hansen: he was Swift-boated.

John Kerry, a genuine war hero, didn't realize that he could successfully be portrayed as a coward. And it seems to me that Dr. Hansen ... didn't believe that he could successfully be portrayed as an unreliable exaggerator. His first response to Dr. Michaels, in January 1999, was astonishingly diffident. ... rather than denouncing the fraud involved, he offered a rather plaintive appeal for better behavior.

Even now, Dr. Hansen seems reluctant to say the obvious. "Is this treading close to scientific fraud?" he recently asked about Dr. Michaels' smear. The answer is no: it isn't "treading close," it's fraud pure and simple.

Now, Dr. Hansen isn't running for office. But Mr. Gore might be, and even if he isn't, he hopes to promote global warming as a political issue. And if he wants to do that, he and those on his side will have to learn to call liars what they are.

Previous (5/26) column: Paul Krugman: A Test of Our Character
Next (6/2) column: Paul Krugman: Secretary, Protect Yourself

Reich: More Tax Obscenity

Who's afraid of the big bad wolf?:

More Tax Obscenity, Robert Reich: Real wages haven't budged in five years. Yet the typical worker is far more productive now than five years ago. Where has all the extra value gone? Mostly to people at the top -- to the very rich. So if we want to have good schools, good roads, safe streets, clean air, safe drinking water, homeland security, national defense, Social Security, and Medicare, who should pay more? Yes, the very rich. Their taxes should rise. We should have a national wealth tax equal to one-tenth of one percent of a person's total net worth, payable each year. This is not rocket science. So why are Dems so afraid to say it? Because, as J_Krehbiel suggests, conservative Republicans have so demagogued the issue that Americans believe taxes are bad.

Higher taxes would be bad for most working people who are now paying through their noses for health care, gas, and variable-rate mortgages. But average Americans are already paying higher taxes in the form of rising sales taxes, user fees, tolls, payroll taxes, gas taxes, alcohol and tobacco taxes, and property taxes passed through even to the third of American households renting their homes. Meanwhile, the rich are paying a smaller and smaller share of their total income and wealth in taxes.

The next tax obscenity happens in a few weeks when congressional Republicans try again to eliminate the estate tax -- which Newt Gingrich and his heirs have called the "Death tax." But the estate tax now hits only the richest one-eighth of one percent of Americans. If it's eliminated, federal revenues will be reduced by tens of billions of dollars over the next decade. What does this mean? Fewer or lousier public services, or higher taxes on the middle class.

Class Autobiography

Bryan Caplan writes:

My Future Class History, by Bryan Caplan: Class Action challenges visitors to write a Class Autobiography: "Write your 'Class Autobiography.' A powerful way to reflect on class is to take an hour and write the story of your upbringing in relation to money and class." I had a lot of fun writing my Intellectual Autobiography, so I'm intrigued enough to give Class Autobiography a try. I'll probably post it in a few days. Any other bloggers care to join me?

Bryan's class essay is here. I decided to take up the challenge. I'm kind of nervous about this, it's self-centered, whiny, all sorts of stuff, I'm not sure how it reads, so I won't be the least bit upset if you decide to skip this post. But what the heck, here it is:

My mom's family is Mormon, something that ended with my grandmother, and they helped to settle the area where I grew up. My mom was born in the town I grew up in, a town of 3,500 people in California in a place called Colusa. It is named after the Colus Indians. Her dad sold farm equipment for the Caterpillar dealer in town and they were lower middle class, though she describes it as being very poor - getting a pair of socks for Christmas, that sort of thing.

My dad grew up on a small farm just outside of Yuba City, California near a one store town called Tudor. His family was lower middle class at best, though poor might describe them better. During World War II he also lived in San Francisco (briefly) while my grandfather worked in the shipyards.

Most of my family on my mom's side is involved in farming in one way or another, and as I just noted my dad grew up on a farm. Because of that background, education wasn't important. Until my generation, there is only one relative I know about who graduated from a four year school, and that was probably because he played football there.

My parents did attend college briefly, a community college, and that is where they met. I think my dad was there just to play football, and I'm not sure what my mom's goals were, but I do know they both dropped out before graduating at age 20 when I was born. My dad went to work for a tractor dealer selling tractor parts, and my mom held brief peach cannery, telephone company, UC extension, and so on kinds of jobs. They tell me it was a struggle financially. My having surgery a couple of days after I was born didn't help (without modern technology, I would have died).

I was born in Yuba City where the community college was, then we moved to Colusa when I was one, then back to Yuba City when I was four, back to Colusa again at 12 where I stayed through high school. I hated moving. I grew up in working class neighborhoods with a lot of freedom. From the time I was six or seven years old, I could pretty much do as I pleased so long as I stayed out of serious trouble, and I mostly managed to do that. I hung out with what I would think of now as "the tough kids" when I was in Yuba City, but somehow avoided any serious trouble. I was the instigator - the one who got other people to do things but would not do them myself.

Once I moved back to Colusa when I was 12, the groups changed a bit. Because the town is so small, there is only one school at each level so it wasn't possible to sort by income as much as it was in Yuba City which is bigger. My social group cut across social strata and the groups stayed together from kindergarten through high school pretty much, even after high school. Because all social groups were together in the same school, I also began to see the differences in ways I had not seen before. For example, there was a nine hole golf course in town and a tennis club with a swimming pool and there were two groups of kids - those who belonged to the tennis and golf club, and those who did not.

I did not and I began to feel the exclusion. A lot of my friends spent a lot of time at the golf course (one would turn pro later and it was the gathering place for the "top" social group). I could never go. Same with the tennis club. We'd all be together having fun, they'd go to one place or another and I'd go home. I hated it.

I did solve the golf course problem by getting a job there in junior high school. I picked up range balls, washed clubs, that sort of thing. The pro, Bob Billings, was unbelievably good to some of us. In exchange for working, he paid us of course, but he also let us play free whenever we wanted, gave us free lessons, and so on. There were several of us who worked there. Because of the pro, we had the best, or near the best, golf team in the state. And that was among all schools, not just small ones (though I played baseball instead of golf). If you didn't have money, sports was another way to get noticed and have the privileges of money. My brother, a scholarship football player for Oregon State after high school, took advantage of that.

Back to my being a bad influence, and I probably was. I didn't have a curfew in high school, I could drink all I wanted and not get into trouble, etc. There was one mom in particular who wouldn't let her son hang out with me. His dad was an eye doctor (not sure which kind) and they lived in the small enclave of the well-to-do in town. I wasn't good enough for her son. That pissed me off, still does to this day, but I owe where I am to people like her.

At some point I made up my mind that I would prove that someone with my background, my lack of social graces, with my lack of money, etc., could kick their butt. It was a determination that's hard to describe, though the language I slipped into there is revealing. As I said, all the exclusion based on class, all the small town crap that goes on, all of it served to make me want to prove people wrong. It was a small town, a place where those with power and money (for the small pond called Colusa) persist for generations.

So, growing up I had a chip on my shoulder, probably still do. I was lucky though for two reasons. First, no matter what I did or how much I screwed around (e.g. in class disrupting others out of sheer boredom), school came easy and I was always at the top of the class somehow. Second, from an early age my mom knew I could go to college and began putting that idea in my head. I never assumed anything else, going to college after high school seemed a natural progression.

I was thinking about this yesterday and it occurred to me that I read every book that was in our house at least twice (all 15 of them...). My dad cannot write or spell very well, and he never reads. My brother was diagnosed with dyslexia and I think my dad must have had similar problems growing up. But my mom was an avid reader. Unfortunately, they were mostly trashy novels. She always left them lying around while reading them or before giving them away, and she must have known that I read every one of them when she wasn't home. What if there had been real books in my house? Or if my parents had been educated enough to direct my reading? I don't blame them, they had no idea about books. I would have sponged up anything put in front of me, but maybe I was better off spending my summers getting on my bike and going and playing baseball or basketball and hanging out with friends instead. Who knows.

When the time came to leave Colusa after high school my choices were very limited, not because of academics, that would have gotten me most places, but because of resources. I was from the small town of Colusa, and from the other side of the tracks. A friend of mine growing up, the rich kid in our class whose dad was a big rice farmer in town, went to Stanford because a congressman got him in (I assume campaign contributions were involved - his grades and mine weren't that different).

Me, I had two choices, go to a junior college or Cal State Chico as it was called then. I chose Chico. I worked my butt off all summer after graduating from high school to save $1,400. The tuition was around $100 per semester and I had enough left over to pay the dorm bill (remember, inflation). My parents contribution, after negotiation, was $20 per month, though they did buy me a car and insure it. But mostly it was up to me. I did two things while there. I never missed a class, and I never missed a party. I did miss a day at work once though.

I did well at Chico, really well, but I was naive. This is going to sound dumb to all of you, but I really didn't understand the difference between Stanford, Berkeley, and Chico State. Where I grew up, there were two types of people, those who went to college, and those who didn't. It didn't much matter where, just going and getting a degree was enough. I suppose the "upper class" understood the difference, but in working class land where I grew up, such distinctions weren't drawn, at least not in my house. The Ivy league was for other people, and people either went to college or they didn't, to Chico, maybe to a UC if they could afford it. And those who went often never returned. When I hear Bryan Caplan say in his essay "What if I had grown up rich? ... I would have gone to the Ivy League instead of UC Berkeley, but it's not like Berkeley held me back," I have to laugh because to me, Berkeley was an elite school, a dream, not something I could ever do. My third year at Chico a faculty member took me aside and told me I needed to go to a UC school, Chico wouldn't do. I called my parents and told them, and they said, simply, that's not going to happen.

I had no idea how limiting coming out of Chico would be. I've seen a lot of graduate applications in my life, and mine was more than competitive as a math/econ/stat major with really good GREs and great supporting letters. But I was denied every place I applied and to this day I think that still affects my attitude about this profession. I can remember opening the letter with the last chance I had on my front porch and feeling crushed. I was going back to the tractor store just like my dad, brother, and grandfather. You can't get there from Chico no matter how good your record is.

Fortunately for me, I was working for a faculty member doing work for Medicaid estimating reimbursement levels for pharmaceutical drugs and he got to know me pretty well (he's president of a university now). When he found out I had been rejected everywhere, he made a phone call and got me into Washington State University with money, the place where he had gone to graduate school (in an afternoon - it wasn't until much later that I realized how much I owed him for doing that).

So, I went to graduate school at Washington State. It was a pretty easy program for me, I'm embarrassed to say I didn't work much on weekends my first year of grad school, so I took electrical engineering classes (graduate stochastic processes), graduate level math/stat courses, that sort of thing to try and fill in the missing pieces. That turned out to be a good decision.

It is considered a success if you move parallel when you come out of graduate school. If you come out of a 25th ranked school and can get a job at similarly ranked school, that is considered a success. Moving up is pretty hard (and, of course, harder the closer you are to the top) so where you go to graduate school can make a huge difference on where you end up. Coming out of graduate school, I went to UCSD and did a two year post doc kind of thing, I taught a grad course and took one at the same time. At the end of the two years, I went to the school with a graduate program that would (a) get me closest to my kids who were living in Chico, and (b) give two jobs since I was married at the time to an economist. Oregon was the best fit on both scores, and it was the time at UCSD, I think, that got the door open and got me here. This is a much, much better program than the one I went through at WSU. I don't think Oregon would have given me a good look coming straight from WSU, it was the time at UCSD that did it.

This essay is supposed to talk about class and how it affected me. I am of two minds. I'm glad I grew up working class where baseball and football were as important as algebra. The kind of a background where we never once (or rarely) stayed in a motel on vacation, that was for rich people, we always went camping instead. Because of that, I am fluent in two worlds - I am always surprised when I go home how quickly my speech patterns revert. If I talked in class the way I talk to farming friends, I'd be fired pretty fast. When I'm at professional meetings or around school, my speech patterns are entirely different.

But there are still resentments hidden deep down because of the lack of opportunities I had. What if my dad had been the rich rice farmer instead of the guy selling him tractor parts and I was the one who went to Stanford rather than my classmate? On pure merit, we were equally deserving, so why did I have to go to Chico and work while attending? With the same record, would graduate schools have viewed me differently had my transcript said Stanford instead of Chico State?

I don't know if the people at the top schools really understand how they are viewed from the "lower" ranks. I think they would be quite surprised. We don't think the difference is purely merit based. It's not always a fair view, I acknowledge that, but little is done to change the impression by those at the top. We wonder how much of your success is really due to merit, and how much of it is because the editor of the journal was your dissertation adviser or buddy in graduate school, etc. There's a lot of "old boy" networks that serve to benefit a small number and if you are not on the inside from the start, it's a huge disadvantage. Perhaps it's hard to see from the inside.

My introduction to this was brunt. I went to UCSD out of graduate school and my first week there, at the Department party, another faculty member asked me where I was from. I said "Washington State." The response was "oh," in a way that made his opinion of that very clear, and the person turned, walked away, and never talked to me again. I even tried once a week or so later, but he didn't have time for me, even time to just be decent. If you aren't from the right place, there's is a lot of baggage to overcome, more than you think as a naive new Ph.D. from my background.

I used to go to NBER meetings, even presented at them, but I found it to be more of the same. I always felt on the outside and, though there were exceptions (and people I respect immensely because of it - they took a moment to be inclusive of someone from a lesser school - and I don't think I embarrassed myself when they did, I think I asked good questions, etc.), and I finally just stopped going. I was there to learn, not feel snubbed. It's less important now with the internet, but being from Oregon it was important to go to meetings to catch up with the latest research. But I never felt all that welcome, if that's the right word. That's too bad and there's really no reason to act that way.

So, yes, class affected me, still does. I carry resentments because of it, though when I see them I do my best to steer myself around them. As I look back at my life, going to a small high school, etc., the opportunities were different. When I write here, I find myself bristling against accusations of being part of the academic elite, one of those in the ivory towers. That's not how I see myself, not at all. I see myself as an outsider even here. The small town guy with the common sense that comes with that. One of my colleagues has a similar background, but mostly they don't. They are from the big name schools with big name advisers, their parents are professionals, etc. They grew up in a different world. My family is mostly working class with all the struggles everyone else has, and that's how I grew up. That's the identity I carry around.

But I also know how lucky I am to be here doing something I enjoy so much. I could never really complain wholeheartedly about salary, etc., not when you are from where I am from and feel as lucky as I do to be paid this much. Compared to waiting on farmers in the tractor store, well, there's no comparison.

Sometimes all of this can be used as an excuse, and it's hard for me to separate me and my choices from my environment. People at the fifth ranked school wonder why they aren't at the number one school and see the world as unfair because of it. People at Harvard wonder why they didn't win the John Bates Clark award and conclude it must have been politics, not merit. It's always easy to blame outcomes on the environment, on politics, etc., but still, I can't help thinking that while I might not have an entirely fair view of all of this, there are disadvantages due to class that are not easily overcome.

Run, Run, as Fast as you Can! You Can't Catch Me, I'm the Technology Man!

Get out your crystal ball:

In the long, long, long, long-run we'll all be

a) fat and happy.
b) barely surviving.
c) none of the above.

For hundreds of years, people have worried that resource constraints would eventually lead to declining living standards, but so far technology has overcome these gloomy predictions. Can it go on forever?:

What to Do When the Oil (or the Innovation) Is Gone?, by Daniel Altman, Economic View, NY Times: With global economic growth near its fastest pace in decades, is there a chance that we'll finally run out of the resources we need? ...

In the last few years, rapid growth in China, India, Brazil and other emerging economies has coincided, not surprisingly, with an upward trend in the prices of commodities like oil. In the short term, there's not enough time for suppliers to cope with ballooning demand; that's part of why prices rise. But market dynamics in the long term are likely to be more significant.

It's simple mathematics. Even though the world's population may peak sometime in this century, the global economy is likely to keep growing. Yet the planet is, for now, a closed system: we have finite amounts of every single raw material. At some point, surely, we'll use them up.

Or will we? This sort of thing has already happened. "There was a time when whales were being hunted to get oil for lamps," said Jorge E. Montepeque... "The number of whales started to decline. The price for it started to increase and, at some point, new technology kicked in."

Rather than paying higher prices for whale oil, people found new ways to light their homes — kerosene, propane and even electricity. Crude oil, however, may present more of a conundrum.

"Is there any source of energy that will be cheaper, for example, than Saudi oil?" asked Robert U. Ayres... In his opinion, even with conservation and innovation, the answer is no. Professor Ayres said companies and homeowners would eventually have to pay a higher price for their energy. He also said that other commodities were in danger of scarcity, sooner rather than later. ...

Technology and innovation are still likely to find a way around shortages, though, argued Dale W. Jorgenson, a university professor at Harvard. "This debate occurred before," he said. "The very rapid growth of the 1970's, which was fully as impressive as the current growth that we're experiencing now, didn't result in any increase in the price of oil or other commodities, and isn't likely to do so this time, either."

The supply of crude oil will benefit from technological improvements, Professor Jorgenson predicted. "People figure out clever ways to explore for oil, to produce it and transport it," he said. "All of that goes in the other direction."

There is also the chance that a burst of innovation will lay low the entire market. Imagine, for instance, what would happen if scientists finally developed a portable nuclear fusion reactor — the kind that could power a house...

There are a couple of areas, however, where scarcity is more predictable. "The long-run scarcities are for human labor and land," said Peter H. Lindert, a professor of economics at the University of California, Davis. He said their value, in terms of goods and services, would continue to rise forever.

Professor Lindert said the market for low-skilled labor, in particular, was likely to tighten in the coming decades. In the case of high-skilled labor, there are moderating factors.

"Low fertility won't hurt us in that respect, because you will get probably a slight improvement in development per kid by having so few," he said. "The family puts more resources and parental time into each kid, schools are less crowded and so forth."

The competition for talent is already intensifying, Professor Jorgenson said. ... "There is going to be a labor shortage, I don't think there's any doubt about that."

In Europe and Japan, populations are shrinking already — a trend that Professor Jorgenson attributes to hostility to immigration. As this occurs, he said, wages will begin to rise as each worker in the thinning labor force gains access to more capital....

Economic growth will also slow, Professor Jorgenson added, since you can't keep substituting capital for labor forever. "The question is, when do you encounter those diminishing returns?" ...

Holes in the Fence

What does a national border represent in a world of electronic communication, multinational corporations, and increased migration of both labor and business?:

Borders Aren't About Maps, by Moisés Naím Sunday Outlook. Washington Post: A country's borders should not be confused with those familiar dotted lines drawn on some musty old map of nation-states. ... Where is the real U.S. border, for example, when U.S. customs agents check containers in the port of Amsterdam? Where should national borders be marked when drug traffickers launder money through illegal financial transactions that crisscross the globe electronically, violating multiple jurisdictions? ... And when U.S. health officials fan out across Asia seeking to contain a disease outbreak, where do national lines truly lie?

Governments and citizens are used to thinking of a border as a real, physical place: a fence, a shoreline... But while geography still matters, today's borders are being redefined and redrawn in unexpected ways. They are fluid, constantly remade by technology, new laws and institutions, and the realities of international commerce -- illicit as well as legitimate.

They are also increasingly intangible, living in a virtual and electronic space. In this world, the United States is adjacent not just to Mexico and Canada but also to China and Bolivia. Italy now borders on Nigeria, and France on Mali. These borders cannot be protected with motion sensors or National Guard troops.

Political unions, economic reforms and breakthroughs in technology and business came together to revolutionize the world's borders during the 1990s. It was a decade during which a global passion for free markets erupted.... Meanwhile, new technologies were vastly reducing the economic and business importance of distance and geography. The only prices that dropped faster than shipping a cargo container from Shanghai to Los Angeles were those for sending e-mail, making phone calls, or rapid-firing text and images across borders.

With borders much more fluid, opportunities for profit multiplied and cross-border activity boomed. ... Today's borders are violated, enforced and remade not only on the ground but also in cyberspace ... and the virtual world of international finance. ... When an immigrant living in the United States sends her ATM card to her children in the Philippines and they draw money from her U.S. checking account, where has the transaction taken place? Did the kids cross a border to tap the funds from an American bank? In a sense, they did -- the ubiquitous ATM has become a powerful, easy-to-use, border-crossing tool...

National boundaries are also being transformed by new -- or newly empowered -- international institutions. For example, ... on ... trade, the borders that matter may be drawn at the WTO headquarters in Geneva as much as anywhere else.

The fluid, unpredictable nature of modern borders is evident even among the most geographically isolated and remote nations on earth. ... narco-traffickers regularly and swiftly connect Bolivia's remote Chapare region, where coca is cultivated, with Miami or New York... In major cities across the globe, the availability of banned merchandise stands as a monument of sorts to nations' eroding sovereignty -- no matter the billions of dollars that governments spend seeking to keep such goods from ... penetrating their borders.

In 2004, the Guardian published a dispatch from the banks of the Yalu River, on the border between China and North Korea. "Here and there shadowy figures can be seen on both sides of the misty river quietly carrying out an illegal -- but thriving -- trade ...," wrote Jonathan Watts.

If a paranoid police state such as North Korea is incapable of controlling its borders and deterring illicit trade, there seems to be little hope for open, democratic and technologically advanced nations...

"Closing the border" may appeal to nationalist sentiments and to the human instinct of building moats and walls for protection. But when threats travel via fiber optics or inside migrating birds, and when finding ways to move illegal goods across borders promises unimaginable wealth or the only chance of a decent life, unilateral security measures have the unfortunate whiff of a Maginot line.

Defining the extent of labor and product markets when both business and labor are mobile, and when some goods can be processed and distributed electronically, is a challenge.

Slow Boat to Redemption?

John Kerry realizes that if he doesn't forcefully rebut the distortions of his military record by the Swift Boat Veterans, he might lose the election:

Kerry Pressing Swiftboat Case, Long After Loss, by Kate Zernike, NY Times: ...Three decades after the Vietnam War and nearly two years after Mr. Kerry's failed presidential bid, most Americans have probably forgotten why it ever mattered whether he went to Cambodia or that the Swift Boat Veterans for Truth accused him of making it all up, saying he was dishonest and lacked patriotism.

But ... the battle over Mr. Kerry's wartime service continues, out of the limelight but in some ways more heatedly — because unlike then, Mr. Kerry has fully engaged in the fight. Only those on Mr. Kerry's side, however, have gathered new evidence to support their case...

Some of the principals behind the Swift boat group continue to press their claims. John O'Neill, the co-author of the group's best-selling manifesto, "Unfit for Command," criticizes Mr. Kerry on television talk shows and solicits money for conservative causes and candidates. In a South Carolina newspaper, William Schachte recently reprised his allegation that he was aboard the small skimmer where Mr. Kerry received the injury that led to his first Purple Heart, and that Mr. Kerry actually wounded himself.

Swift boat message boards and anti-Kerry Web sites still boil with accusations that Mr. Kerry fabricated the military reports that led to his military decorations. Mr. Kerry ... is now fighting back hard.

"They lied and lied and lied about everything," Mr. Kerry says in an interview... "How many lies do you get to tell before someone calls you a liar? How many times can you be exposed in America today?" His supporters are compiling a dossier that they say will expose every one of the Swift boat group's charges as a lie and put to rest any question about Mr. Kerry's valor in combat. ...

Mr. Kerry portrays himself as a wary participant in his own defense... "I'm moving on," he says several times. But he can also barely resist prosecuting a case against the group that his friends now refer to as "the bad guys." "Bill Schachte was not on that skimmer," Mr. Kerry says firmly. "...It is a lie to suggest that he was out there on that skimmer."

He shows a photograph of the skimmer ... insisting that it could barely fit three people... "The three guys who in fact were in the boat all say he wasn't there... We know he wasn't there, and we have all kinds of ways of proving it."

Mr. Kerry has signed forms authorizing the Navy to release his record — something he resisted during the campaign — and hired a researcher to comb the naval archives in Washington for records that could pinpoint his whereabouts during dates of the incidents in dispute. Another former crew member has spent days at a time interviewing veterans to reconstruct every incident in question.

In February 2005, Mr. Kerry's supporters formed their own group, the Patriot Project, to defend veterans who take unpopular positions... One of their first tasks was to visit newspaper editorial boards in defense of John P. Murtha ... a ... veteran whose military record has been attacked by Republicans and conservative blogs since he called for pulling the troops out of Iraq. ...

Members of the Swift boat group have not seen Mr. Kerry's newly gathered evidence. But they seem unwilling to cede much. Mr. O'Neill said he "would be thrilled to look at anything he wants to send." ... Mr. Schachte said that ... "if they crank this thing up again, I'm not going to be quiet." ... "...I was in that boat with Kerry."

The veterans group, led by Mr. O'Neill, a former Swift boat commander ... backed by Republican donors and consultants, ...[attacked] his greatest strength — his record as a military hero... Naval records and accounts from other sailors contradicted almost every claim they made, and some members of the group who had earlier praised Mr. Kerry's heroism contradicted themselves.

Still, the charges stuck. At a triumphant gathering of veterans in Fort Worth after the election, Mr. O'Neill was introduced as the man who "torpedoed" Mr. Kerry's campaign; the Swift boat group spent more than $130,000 for a "Mission Accomplished" celebration at Disney World. The president's brother, Gov. Jeb Bush of Florida, sent a letter thanking the "Swifties" for "their willingness to stand up to John Kerry." Even people within the Kerry campaign believed that the attacks had cost their candidate the presidency.

Some of Mr. Kerry's friends and former Swift boat crew members made advertisements during the race to try to shoot down the group's charges. But the campaign declined to air them widely because some strategists said that directly challenging the charges would legitimize them. They approached Mr. Kerry after the election with the idea of setting the record straight.

So they have returned, for instance, to the question of Cambodia and whether Mr. Kerry was ever ordered to transport Navy Seals across the border... The Swift boat group insisted that no boats had gone to Cambodia. But Mr. Kerry's researcher, using Vietnam-era military maps and spot reports from the naval archives showing coordinates for his boat, traced his path from Ha Tien toward Cambodia on a mission that records say was to insert Navy Seals.

Mr. Kerry's supporters have also frozen frames from his amateur films of his time in Vietnam and have retrieved letters and military citations for other sailors to support his version of how he won the Silver Star — rebutting the Swift boat group's most explosive charge, that he shot an unarmed teenager who was fleeing his fire.

Another photograph provides evidence for Mr. Kerry's version of how he won the Bronze Star. And original reports pulled from the naval archives contradict the charge that he drafted his own accounts of various incidents — which left room, the Swift boat group had argued, to embellish them.

Mr. Kerry's defenders have received help from unlikely sources, including some who were originally aligned with the Swift boat group... One of them, Steve Hayes, was an early member of the group. A former sailor, he was a longtime friend and employee of William Franke, one of the group's founders... But Mr. Hayes came to believe that the group was twisting Mr. Kerry's record.

"The mantra was just 'We want to set the record straight,' " Mr. Hayes said this month. "It became clear to me that it was morphing ... into a highly political vendetta. They knew it was not the truth." Mr. Hayes broke with the group, ending a 35-year friendship with Mr. Franke... He has provided a long interview to Mr. Kerry's supporters, backing their version of the incident for which Mr. Kerry received the Bronze Star.

Of course, plenty of disappointed and angry Democrats would like to know why Mr. Kerry did not defend himself so strenuously before the election. ...

Mr. Kerry and his defenders say that they did not have the extensive archival material, and that it was too complicated to gather in the rapid pace of a campaign. He was caught off guard, he says; he had been prepared to defend his antiwar activism, but he did not believe that anyone would challenge the facts behind his military awards. "We should have put more money behind it," Mr. Kerry says now. "I take responsibility for it; it was my mistake. They spent something like $30 million, and we didn't. That's just a terrible imbalance when somebody's lying about you."

Correlation is Not Causation: Bush, Spending, Tax Cuts, and Deficits

Recently, there has been criticism of President Bush from within the GOP for being a big spender. For example:

President Bush: Two-Thirds of a Real Conservative: ...Fred Barnes of The Weekly Standard magazine. ... has produced a book about George W. Bush, "Rebel-in-Chief," ... Barnes admits that he is "no libertarian or small government conservative," ... Bush "pays lip service" to limiting government, Barnes says. "More often than not," Barnes goes on to say, "he relies on a bigger federal government and billions of taxpayer dollars" to achieve his goals. ...

Or, another of many examples:

Hey, Big Spender, Peggy Noonan, Commentary, Opinion Journal: ...When George W. Bush first came on the scene in 2000, did you understand him to be a liberal in terms of spending? ... Mr. Bush ... "spends like a drunken sailor except the sailor spends his own money." ... If I'd thought he was a big-spending Rockefeller Republican--that is, if I'd thought he was a man who could not imagine and had never absorbed the damage big spending does--I wouldn't have voted for him...

The reasoning is that because deficits have increased since Bush took office, his spending habits must be the cause. But the evidence shows that this inference is spurious. While the two variables are correlated - deficits have increased under Bush - it is not because of his out of control spending habits:

[C]onservatives ... criticize Mr. Bush for presiding over runaway growth in domestic spending, because that implies that he betrayed his conservative supporters. There's only one problem ... it's not true. ...

I'm hoping to do more examples of "correlation does not imply causation," so if you come across examples of spurious correlation, please send them to me by email.

Of course, the first  place to turn on on such issues is The Simpsons. Here causality is inferred from the lack of a response to an action:

Homer: Not a bear in sight. The "Bear Patrol" is working like a charm!
Lisa: That's specious reasoning, Dad.
Homer: [uncomprehendingly] Thanks, honey.
Lisa: By your logic, I could claim that this rock keeps tigers away.
Homer: Hmm. How does it work?
Lisa: It doesn't work; it's just a stupid rock!
Homer: Uh-huh.
Lisa: But I don't see any tigers around, do you?
Homer: (pause) Lisa, I want to buy your rock.

Usually though, it is two variables moving spuriously together that results in the incorrect inference. For example, having lots of churches and lots of gambling in Nevada does not necessarily imply one causes the other. This is a case where causality does not exit between the two variables, instead a third variable, liberal regulations regarding gambling and marriage, cause a proliferation in both casinos and marriage chapels.

I think an editorial in today's Washington Times may provide an example of this. Recently, a paper by Bill Niskanen, chairman of the Cato Institute reemerged (the paper is discussed here). The paper, to the distress of conservatives, claims that cutting taxes does not reduce the size of government. The commentary in the Washington Times attempts to reestablish that tax cuts "starve the beast" by looking at cross-country evidence:

Tax cuts as government curb, by Richard W. Rahn, Commentary, Washington Times: ...Nothing new here -- but back across the Atlantic in America, a little storm was raised when one of President Reagan's economic advisers said he thought the Reagan and Bush tax cuts had led to more, rather than less, government spending. One argument by advocates of President Reagan's tax cuts is that "they would starve the beast," meaning lower tax rates would force less spending. The fellow causing the storm was Bill Niskanen, chairman of the Cato Institute ... [He claims] "starving the beast" did not work and may have been counterproductive. ...

Bill Niskanen actually showed even the best economist can occasionally be wrong. Let's hop back to Europe where I am at the moment. Italy, France and Germany began several decades ago to adopt a high-tax and spend government model, while the U.S. was moving toward a lower tax rate model. ... Mr. Niskanen's mistake was to ... fail to look at what has happened in the rest of the world. Major low-tax economies, such as Japan, Switzerland and the U.S., have much smaller government sectors than the major high-tax-rate countries. ...

But couldn't it be that as in the Nevada example a third variable, the preferences of people who live in each country, explains both taxes and the size of government? Countries that want larger government choose higher taxes, and countries that want smaller government make the opposite choice. Trying to force causality where none exists - cutting taxes and hoping the size of government falls when the majority of people do not want such cuts in government - will not work. It may be that the preferences in the U.S. are inconsistent and, for now at least, people demand both large government and low taxes, or it may be that current policy is out of step with what people want. But it is preferences that determine the size of government, not the amount of revenue collected.

Honey or Vinegar?

What's the best way to bring about change in North Korea, overwhelm it with capitalism or isolate it from the global marketplace? Here's a small part of a much longer discussion of how North Korea is using front companies outside of the country to raise funds, and the response of the U.S. and other countries to this activity:

North Korea's creepy-crawly capitalism, by Bertil Lintner, ATimes.com: North Korean capitalism is thriving - just not inside North Korea. Pyongyang has steadily established a string of legitimate and less legitimate front companies across East and Southeast Asia, aimed at earning the cash-strapped government badly needed hard currency. And, by all indications, business is booming. ... While China is welcoming, North Korean companies have gotten a rise out of Japan and the United States, which contend that Pyongyang uses these concerns sometimes to procure raw materials and dual-use technologies clandestinely to support its missile and nuclear-weapons programs...

The US action [against Delta Asia bank for its dealings with North Korea] raised important questions about the nature of North Korean capitalism, and underscored the dilemma the world faces from a cash-starved, nuclear-armed Pyongyang. Washington, no doubt, realizes that more international trade and economic development is essential for Pyongyang to move forward and evolve into a responsible regional player. ... South Korea, in particular, has long advocated economic engagement with North Korea, arguing that unless the North is urged and helped to develop and strengthen its economy, both the South and the North would likely collapse upon reunification...

Others argue that the flow of more hard currency into Pyongyang's coffers only serves to delay the inevitable collapse of one of the world's most atavistic regimes, thus prolonging the extreme suffering of the North Korean people. There is little or nothing to suggest that the money that ... front companies are earning in the region is being employed for social development at home or spent on basic necessities, such as ... food...

Whatever the case, North Korea is likely to find new ways to continue its commercial drive across the region ... The US may try to tighten the screws on North Korea's expanding global businesses, but there are always others - Russia, China and Thailand - who are more than willing to do business with an enterprising Pyongyang.

Fed Watch: Chewing on the Data

Tim Duy interprets the latest data:

Chewing on the Data, by Tim Duy: So this is what is has come to:

A price index for personal consumption expenditures excluding food and energy rose 0.2% in April, meeting expectations. However, the unrounded number was 0.24968%, failing to calm inflation concerns.

This gem is from the Wall Street Journal’s first take at the April’s Personal Income and Outlays report.  We are all going to go crazy if data dependence really means that we need to start rounding to the fifth decimal place.  Considering the likelihood of revisions and measurement error, talking about inflation to the third decimal place is not particularly constructive; the fifth decimal place is downright silly.

I will put this as simply as I can – never, not once, in any discussion I ever had with a Federal Reserve official, did an official round beyond the second decimal place. Actually, I am not even confident I heard anyone round beyond the first decimal place. Let’s try to keep some perspective. This is monetary policy. We are not swinging satellites around the sun here.

A brief review of the week’s key data is in order before we all retire to enjoy a long weekend in the States. Working backwards, this morning’s PCE report revealed the twin concerns of a slowdown in consumer spending and an uptick in core inflation. My sense is that the FOMC will be comfortable downplaying the 0.3% rise in core in light of what is shaping up to be a significant easing of spending since the beginning of the year. The Fed will view recent inflation as an artifact of past economic strength and the pass through of higher energy prices. They cannot change the past, and instead must focus on the future. 

The future means keeping a close eye on demand pressures. And on that front, recent data show households struggling to maintain spending in the face of higher energy costs.  Spending growth has slowed to a crawl this YEAR.  The 5.2% gain in 1Q06 is an artifact of weak 4Q05 growth and, more importantly, driven by significant spending jumps late last year. For the record:

Real PCE Growth, % Change M-o-M

Sep-05	Oct-05	Nov-05	Dec-05	Jan-06	Feb-06	Mar-06	Apr-06
–0.5	0	0.9	0.7	0.3	0.2	0.1	0.1

If energy prices stabilize, however, won’t real growth kick up in response? After all, wage and job gains are solid (although nothing to get excited about). Yes, if price gains aren’t eating up spending gains, real spending growth will get a boost. But the Fed expects the slowing housing market to come to bear on consumer spending later this year. There, too, things look to be evolving as expected.  The rise in new home sales, being in part an artifact of the downward revision of the March bounce, will not dissuade Fed officials from that view. This is especially the case after seeing existing home sales figures – which revealed that inventories had climbed to a 6 month supply at the current sales pace. Fed officials have repeatedly pointed to the strength of the housing markets as a support for consumer spending; I find it hard to believe that they will ignore the slowdown now that it has begun.

Likewise, the durable goods report is supportive of the Fed’s view of the economy. Remember, Fed officials have consistently said they expect investment spending to remain strong even as the economy slowed as consumer spending pulled back. And while the headline and core new order numbers slipped in April, this reflected some give back for the March bounce (see also David Altig). Looking at the path of new order for nondefence, nonaircraft capital goods, I think it is tough to see anything expect a solid underlying trend:

Click on figure to enlarge

I don’t think it is realistic to expect the Fed to wait until this number has rolled over before they take a breather from the rate hikes – that would be overshooting plain and simple.

In short, the economy looks to be evolving very much as the Fed expected.  Moreover, considering lags, the impact of past tightening has yet to be fully felt further supporting the case for a June pause. And while I feel my resolve on that call strengthening again, hawkish sounding rhetoric from some Fed officials reminds us that nothing is a sure thing at this point, and a month of data is yet to come. Continue to remember that a pause does not mean done; with the economy set to bounce around capacity, Fed Chairman Ben Bernanke will keep one foot hovering over the brake.

Krugman: Nuclear Energy Should Not Be the Main Answer to Our Energy Problems

Paul Krugman responds to comments on his latest column and gives sources for his estimates of the cost of policies to offset global warming:

Krugman's Money Talks: Al Gore and the Future of Energy, Commentary, NY Times: Readers respond to Paul Krugman's May 26 column, "A Test of Our Character "

...William R. Mosby, Salt Lake City: Does nuclear energy have a part to play in mitigating global warming in the long term? ... [T]hose who see an urgent need to do something about global warming generally don't talk about nuclear energy as a prominent part of the solution. Do they think that nuclear energy would be a bigger problem than global warming?

Paul Krugman: I was at a reception for Al Gore after a screening of his movie, and he was asked that very question. I thought his answer was very good. He said that yes, nuclear should be part of the mix, but it can't be the main answer. And there are problems with nuclear we need to resolve: not just disposal of radioactive waste, but vulnerability to terrorist attack. In fact, as nuclear power becomes more common around the world, the possible misuse for weapons, terrorist or otherwise, will be a big problem. So unless there are some breakthroughs, nuclear power is only a piece, and maybe not a big one, of the solution.

Mark Neely, Santa Monica, Calif.: ...Is there a way to calculate the profit oil companies make relative to the price of a barrel of crude? ... I ask because it seems to me that all administration energy policies seem to encourage diminishing the availability of crude outside the Arctic Circle and U.S. coastlines at any rate. This only makes sense to me if profitability increases for the oil companies when the price of crude goes up and if, as seems obvious, the administration is facilitating the profitability of oil companies at the expense of the public good.

Paul Krugman: It's not that simple. It depends on what the oil company does. To some extent, oil companies own crude production, and in that case they make more money when the price of crude rises. But a lot of what they do is refining, and the profits on refining depend on the "crack spread" — the difference between the price of a barrel of crude and the price of the gasoline, fuel oil, and other stuff you make from that barrel. Right now both the price of crude and the crack spread are very high, so oil companies are making huge profits.

Michael Papenfus, Milwaukee, Wisc.: ...If you have them available, can you recommend a few citations of serious economic studies exploring the costs of reducing CO2 emissions?

Paul Krugman: Some correspondents have asked for sources on the costs of policies against global warming. It's all pretty technical stuff, but here are two things I looked at. (An awful lot of work goes into things that never make it into the column!) First, in 1998, the Energy Information Agency (a part of the Energy Department) did a survey on the costs of complying with the Kyoto treaty, back before Bush rejected the whole thing. The executive summary is at http://www.eia.doe.gov/oiaf/kyoto/execsum.html. Basically, EIA found that trying to meet the Kyoto target on emissions by 2010 might be fairly expensive, but that meeting the target by 2020 wasn't. The report also compared a number of other estimates: http://www.eia.doe.gov/oiaf/kyoto/cost.html.

Second, William Cline of the Institute for International Economics did a study of climate change policy, which can be found here (pdf), and gives very long-run analyses. I'd focus on Figure 7, on page 21: the costs of an aggressive anti-warming policy eventually reduce Gross World Product by about two percent, compared with what it would otherwise be, but only over a very long period.

What Do Blogs Do?

I've been thinking about what blogs do, economics blogs in particular. Here are some preliminary thoughts - please add to the list if you have more ideas:

1. Blogs are often criticized for simply echoing information. But in doing so, they provide information to readers. Blogs act as filters on information. When you come to trust a blog, or know it well enough to judge its content, the fact that an article is posted there tells you that the person running the blog thought it was important enough to bring to your attention. Blogs can also help by pointing out information that is misleading, wrong, etc.

2. Even if you don't fully trust any one information source, there is value in repetition. As blogs echo information, it gives a sense of its importance and credibility. If a report is only discussed in one place it might be notable, but in general if an issue is being discussed most places you happen to visit, that indicates the information has some significance. So, beyond the filtering role that blogs play as they echo information from other sources, they also give it weight, e.g. if all blogs are worried about how to interpret labor force participation statistics, that is notable. And on those occasions when blogs on both sides of the political fence (or whatever fence divides the issue) are discussing an issue and coming up with similar answers, that is informative, as are the cases when heated debate erupts among reputable blogs on opposite sides on an issue.

3. Blogs add new information. On occasion, bloggers are inclined to seek out new information, for example to present economic information graphically, in tables, descriptively, and so on that helps to place economic statistics in perspective or to point in new directions. Thus, novel information provided on blogs can buttress or rebut the topic of the day, or it can point in new directions altogether. And the information does not have to be novel to enlighten and inform a discussion. There is also a role for pointing to, say, existing academic research on topics being discussed in the news and elsewhere.

4. This is something that I think is new, or at least a speeded up version of what we had in the past. In a sense, a traditional column in the newspaper is a blog as are editorials. A columnist posts articles say twice a week, then comments come back in the form of letters to the editor. There are also discussion at work, and so on. The modern blog speeds this process up considerably and allows broader participation in the dissemination of information and in feedback. When there is an important question, say a proposal for an energy tax as we saw recently, instead of the discussion being dominated by a few columnists, editorials, letters to the editor, discussion on talk shows, etc., we have almost instantaneous discussion of these topics on blogs, some from people with expert credentials, along with feedback in comments, email, etc., and many rounds of discussion happen quickly as ideas richochet back and forth.

I think this will become important when we have a crisis of some sort, say a currency crisis, and there are important policy questions that require immediate reaction. We saw something like this after Hurricane Katrina with questions about whether the Fed should lower rates, pause, or continue increasing them in light of all the uncertainty and destruction that existed. Blogs began debating this topic almost immediately and added important elements to the discussion.

When a crisis hits, we have a collective capability to respond that did not exist in the past and it will be interesting to see how well it works when it is needed.

5. In addition to their filtering role, blogs also motivate the media to take care in how they write about economics and other topics. Though anyone writing publicly develops a thicker skin, it can't be fun to be skewered for something you have written, and tools like Google and The WayBack Machine hold people accountable for things they have written in the past in ways they never were before. It's no longer possible to present misleading points of view without being immediately and thoroughly rebutted in public and if the issue is important enough, on fairly prominent platforms.

So, what have I missed or gotten wrong? I suppose there's a whole post to be written about the downside of blogs, e.g. bad information can get echoed and magnified as well as good, so on balance are blogs a positive or negative influence, questions like that. But that will have to wait for another day, or perhaps others can fill in the missing pieces.

Jump on In

Is it safe to go back in the water? Daniel Gross points to a few shark fins in the surf:

Lay and Skilling Aren't the Only Guilty Ones, by Daniel Gross, Slate.com: Just minutes before the verdict in the Ken Lay/Jeffrey Skilling trial was announced, CNBC anchor Bill Griffeth asked former SEC Commissioner Laura Unger whether it would, once and for all, bring down the curtain on the corporate scandals of the 1990s. A dutiful guest, Unger replied: "I think this is the final page of the chapter."

The exchange neatly set up what is likely to be the business world's reaction to the trial's resolution. ... The upshot: Nothing to worry about anymore, it's safe to buy stocks. And you can bet that CEOs and the Wall Street Journal editorial page will soon be telling us that, now that the evildoers have been rooted from the system, it's time to scrap Sarbanes-Oxley and other post-scandal regulation.

It would be nice if this vision of a sparkling clean corporate America were true. It would also be nice if everyone could have a pony. Alas, the accounting games and executive-compensation excess that began in the 1990s are still very much with us. Some of the most obvious offenders have been caught, but huge amounts of corporate corruption remain.

Consider what's been making the headlines in the business press. On Monday, the Securities and Exchange Commission levied a whopping $400 million penalty on Fannie Mae to settle charges that the mortgage giant fudged earnings ... so that executives ... could receive larger bonuses. The accounting problems persisted well into the Sarbanes-Oxley era...

The biggest business news story of recent weeks is the Wall Street Journal series of reports on options backdating. ... [L]ead reporter James Bandler, working with number-crunching academics, unearthed several instances in which companies, including blue-chip firms..., repeatedly granted options to top executives on days when stocks were at or near their low points for a quarter or year. ... The odds of such a propitious set of options grants were calculated at one in 300 billion. The article helped set off a series of federal investigations and has already caused the resignation of two CEOs. Yet until enterprising journalists and a few academics pointed out the problem, Wall Street's highly paid analysts and the beefed-up Securities and Exchange Commission enforcement division hadn't noticed anything amiss. Clearly, the bugs in the system remain...

Finally, as we labor to congratulate the efficient marketplace on rooting out bad actors, we should bear in mind that Michael Kinsley's law applies as much on Wall Street as it does in Washington: "The scandal isn't what's illegal; the scandal is what's legal." And the prevalence of perfectly legal shenanigans should be sufficient to make us realize that a few years of Sarbanes-Oxley and these Enron verdicts haven't served to clean up the governance of publicly held companies...

Paul Krugman: A Test of Our Character

Paul Krugman wonders if we are ready for politicians who tell the truth about difficult issues:

A Test of Our Character, by Paul Krugman, Gore's Movie Commentary, NY Times: In his new movie, "An Inconvenient Truth," Al Gore suggests that there are three reasons it's hard to get action on global warming. The first is boiled-frog syndrome: because the effects of greenhouse gases build up gradually, at any given moment it's easier to do nothing. The second is the perception, nurtured by a careful disinformation campaign, that there's still a lot of uncertainty about whether man-made global warming is a serious problem. The third is the belief, again fostered by disinformation, that trying to curb global warming would have devastating economic effects.

I'd add a fourth reason... But first, ... Mr. Gore couldn't have asked for a better illustration of disinformation campaigns than the reaction of energy-industry lobbyists and right-wing media organizations to his film. ...

As evidence that global warming isn't really happening, [the National Review] offers the fact that some Antarctic ice sheets are getting thicker ... Curt Davis, ... whose work is cited ... has already protested. ... He points out that an initial increase in the thickness of Antarctica's interior ice sheets is a predicted consequence of a warming planet, so that his results actually support global warming...

[T]hey [also] issue hysterical warnings about the economic consequences of environmentalism. "Al Gore's global warming movie: could it destroy the economy?" Fox News asked. Well, no, it couldn't. There's ... broad consensus that even a very strong program to reduce emissions would have only modest effects on economic growth. At worst, G.D.P. growth might be, say, one-tenth or two-tenths of a percentage point lower over the next 20 years. ....

But "An Inconvenient Truth" isn't just about global warming... It's also ..., implicitly, a cautionary tale about what's been wrong with our politics.

Why, after all, was Mr. Gore's popular-vote margin in the 2000 election narrow enough that he could be denied the White House? Any account that neglects the determination of some journalists to make him a figure of ridicule misses a key part of the story. Why were those journalists so determined to jeer Mr. Gore? Because of the very qualities that allowed him to realize the importance of global warming, many years before any other major political figure: his earnestness, and his genuine interest in facts, numbers and serious analysis.

And so the 2000 campaign ended up being about the candidates' clothing, their mannerisms, anything but the issues, on which Mr. Gore had a clear advantage...

I won't join the sudden surge of speculation about whether "An Inconvenient Truth" will make Mr. Gore a presidential contender. But the film does make a powerful case that Mr. Gore is the sort of person who ought to be running the country.

Since 2000, we've seen what happens when people who aren't interested in the facts, who believe what they want to believe, sit in the White House. Osama bin Laden is still at large, Iraq is a mess, New Orleans is a wreck. And, of course, we've done nothing about global warming.

But can the sort of person who would act on global warming get elected? Are we — by which I mean both the public and the press — ready for political leaders who don't pander, who are willing to talk about complicated issues and call for responsible policies? That's a test of national character. I wonder whether we'll pass.

Previous (5/22) column: Paul Krugman: Talk-Show Joe
Next (5/29) column: Paul Krugman: Swift Boating the Planet

Interest Rates and Saving

Martin Feldstein says:

The Federal Reserve has reversed its low interest rate policy... It will only be a matter of time until the household saving rate is at least back to the 2.4 per cent level of 2002.

I was curious about this so I plotted the 3-month T-Bill rate against the personal saving rate since 1980 to get a rough idea of the association between the two variables:

Click to enlarge

Feldstein: Let the Dollar Fall

Martin Feldstein continues his warnings on global imbalances as he outlines the changes needed to reduce the current account deficit, a higher saving rate and a fall in the dollar, changes he says market pressures are already bringing about. To avoid a global slowdown or a protectionist backlash as these changes occur, other countries must avoid the temptation to prevent the fall in the dollar through exchange rate interventions and focus instead on increasing domestic consumption to replace falling exports to the U.S.:

Falling dollar sets test for Asia and Europe, by Martin Feldstein, Commentary, Financial Times:  Recent statements by the Group of Seven industrial nations and the International Monetary Fund underscore the growing pressure to reduce the massive US international deficit. Doing so will require both a higher national saving rate in the United States and a more competitive value for the dollar. Neither alone would be sufficient... The good news is that the saving rate of American households is beginning to rise and is likely to gain momentum during the coming year...

The saving rate began falling in the early 1990s as households increased consumption in response to their rising level of wealth – initially a rising stock market and, more importantly, double digit increases in house prices. More recently, this wealth effect was reinforced by the rise in mortgage refinancing that was induced by falling interest rates. Households extracted trillions of dollars ... from the value of their homes and a substantial part of that cash found its way into consumer spending.

The forces that lowered the US saving rate are now being reversed. House prices nationwide are down from the peak reached in the middle of last summer. The Federal Reserve has reversed its low interest rate policy... It will only be a matter of time until the household saving rate is at least back to the 2.4 per cent level of 2002. To convert this higher saving to a reduction in the current account deficit requires increased exports and a shift in Americans’ spending from imports to domestically produced goods and services. A lower dollar will provide the necessary incentive for both of those changes to occur.

Natural market forces are already causing the dollar to fall against the euro, the yen and other currencies. The dollar’s fall is responding to the narrowing gap between US interest rates and those in Europe and Japan. It also reflects a shift in the market’s focus from short-run cyclical conditions to the fundamental trade imbalance. Past experience shows that a more competitive dollar can substantially reduce the trade deficit. The last big fall of the dollar, a 37 per cent decline in the mid-1980s, was followed by a 40 per cent fall in the trade deficit.

A lower US trade deficit will of course mean a decline in the exports of our trading partners around the world. Countries that lose exports need to adopt policies to stimulate domestic spending in order to prevent a decline in their GDP and employment levels. Where this all ends will depend not only on market forces but also on the policies of the governments and central banks of Europe and Asia. It will be tempting but wrong for them to resist the decline in the US trade imbalance by using a combination of monetary policy and exchange market intervention to prevent the dollar’s shift to an appropriately competitive level.

Without that competitive dollar, the higher saving rate in the US will mean slower US growth and rising unemployment. If that happens, the American political process is likely to turn to protectionist measures to shrink the trade imbalance and maintain employment. It would be far better to allow the natural market forces to bring about the needed currency realignment. Instead of seeking to resist the dollar’s shift to a more competitive level, governments in Europe and Asia should focus on developing policies to maintain aggregate demand in their individual economies as their export sales decline...

Immigrants and Welfare Costs

Robert Rector of the NRO claims, based on a Heritage Foundation report, that:

The Wrong Course The Senate’s proposed amnesty will cost a fortune, by Robert Rector, NRO: Congress is in the midst of the most dramatic overhaul of our nation’s immigration laws in 80 years. So why is hardly anyone is asking the basic question, How might this affect government costs?

In the case of the leading reform proposal ... by Sens. Mel Martinez (R., Fla.) and Chuck Hagel (R., Neb.), we have an answer: It would raise them substantially. The ... net addi­tional cost to the federal government of benefits for these individuals will be around $16 billion per year. ...

To make matters worse, once an illegal immigrant becomes a citizen, he has the right to bring his parents to live in the U.S. The parents, in turn, may become citi­zens. The long-term cost of government benefits for the parents of 10 million recipients of amnesty could be $50 billion per year or more. In the long run, the Hagel-Martinez bill, if enacted, would be the largest expansion of the welfare state in 35 years. ...

Hardly anyone is asking? There's an entire CBO report on this topic, and it does not support the Heritage Foundation claims. The CBPP summary of the CBO report says:

CBO Aanalysis Shows Heritage Foundation Claims on the Cost of Immigration Reform are Greatly Exaggerated: ...Even without considering the effects of the increases in revenues that would result from S. 2611, the CBO analysis of the budgetary impact of the legislation indicates that the costs of the bill’s provisions would be a fraction of the cost that Heritage estimates. ...  Furthermore, once the effect of taxes is considered, the CBO data suggest it is likely that the net costs of the legalization provisions will be close to zero, not $30 billion per year. ... Taking into account both the increased revenues from the bill as a whole and the increased benefit costs from the bill as a whole, CBO’s estimates indicate that the bill would raise more in revenues over the next ten years than it would cost in increased public benefits. ...

The Heritage report is largely based on a flawed study by the Center for Immigration Studies (CIS). ...  and estimates that these “welfare” costs ... ultimately would reach $16 billion a year. Heritage further speculates that a significant proportion of the new citizens would bring their parents into the United States and that the parents would subsequently gain citizenship and become eligible for Supplemental Security Income (SSI) and Medicaid in large numbers, bringing the total costs up to $30 billion a year. ... CBO estimates that the ultimate increase in benefit expenditures as a result of the legalization provisions could be $6.9 billion a year (expressed in 2016 dollars). This CBO estimate — which does not reflect any of the increased revenues that would result from the bill — is less than one-fourth of the Heritage estimate of $30 billion a year...

And on that 6.9 billion dollar figure, repeating a quote from above:

When the increased revenues are taken into account, much — and perhaps all — of the $6.9 billion a year that CBO projects in eventual benefit costs are offset.  The net effect on the budget thus may well be close to a wash.

I couldn't find the 50 billion a year figure cited in the NRO commentary, just the 30 billion a year estimate, but it doesn't matter since both are wrong according to the CBO.

Try to Get Lucky

How to make it to the top through hard work and loyalty by getting lucky and landing a good first job, and then jumping ship when better opportunities arise:

Hello, Young Workers: One Way to Reach the Top Is to Start There, by Austan Goolsbee, Economic Scene, NY Times: ...Hillary Clinton's recent comments to the United States Chamber of Commerce [were] about the need for a better work ethic among the young. She said that "young people today think work is a four-letter word" and "think they're entitled to go right to the top with $50,000 or $75,000 jobs when they have not done anything to earn their way up." The remarks certainly got tongue rings wagging all over the country. Senator Clinton's own daughter, Chelsea, who earns high pay while working long hours as a management consultant for McKinsey & Company, called to object that she and her friends work hard, indeed. Mom soon apologized.

Lost in the argument over whether young people today know how to work, however, is the mounting evidence produced by labor economists of just how important it is for current graduates to ignore the old-school advice of trying to get ahead by working one's way up the ladder. Instead, it seems, graduates should try to do exactly the thing the older generation bemoans — aim for the top.

The recent evidence shows quite clearly that in today's economy starting at the bottom is a recipe for being underpaid for a long time to come. Graduates' first jobs have an inordinate impact on their career path and their "future income stream," as economists refer to a person's earnings over a lifetime.

The importance of that first job for future success also means that graduates remain highly dependent on the random fluctuations of the economy, which can play a crucial role in the quality of jobs available when they get out of school. ... Consider the evidence uncovered by Paul Oyer, a Stanford Business School economist, in his recent paper, "The Making of an Investment Banker: Macroeconomic Shocks, Career Choice and Lifetime Income" ... Dr. Oyer tracked the careers of Stanford Business School graduates in the classes of 1960 to 1997.

He found that the performance of the stock market in the two years the students were in business school played a major role in whether they took an investment banking job upon graduating and, because such jobs pay extremely well, upon the average salary of the class. That is no surprise. The startling thing about the data was his finding that the relative income differences among classes remained, even as much as 20 years later. ...

And as economists have looked at the economy of the last two decades, they have found that Dr. Oyer's findings hold for more than just high-end M.B.A. students on Wall Street. They are also true for college students. A recent study, by the economists Philip Oreopoulos, Till Von Wachter and Andrew Heisz, "The Short- and Long-Term Career Effects of Graduating in a Recession" ... finds that the setback in earnings for college students who graduate in a recession stays with them for the next 10 years.

These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don't catch up. The recession graduates who actually do catch up tend to be the ones who forget about rising up the ladder and, instead, jump ship to other employers.

Dr. Oyer himself never bought into the view that young people today are slackers. "Kids today," he said in an interview, "are harder working and more programmed than any kids in history." ... His research and that of other labor economists point out that hard work is not the only thing this year's graduates ought to have on their minds. But, if these findings represent the new reality of today's labor market, what remains for aspiring commencement speakers to say? Dr. Oyer's advice to the class of 2006 is not lofty: "Try to get lucky. And also, think carefully about that first job because it can matter for the rest of your career."...

The Cost of Getting Paid

"Tardiness or refusal to pay what doctors consider legitimate medical claims may add as much as 15 to 20 percent in overhead costs for physicians":

The Check Is Not in the Mail, by Milt Freudenheim, NY Times: Few things rankle a doctor more than an insurance company's saying it cannot find a claim for medical services. ... It is a problem known to many doctors as they struggle to balance the rising cost of providing patient care with what they see as a reluctance by some powerful insurers to pay promptly.

Pediatric Alliance's 37 doctors are among the 7,000 physicians, nurse practitioners and other health care providers around the country who are clients of the claims-processing company Athenahealth, which plans today to present a rare warts-and-all look at how well — or not — the nation's seven biggest health insurers pay their bills.

Not well enough, in many cases, according to the data and to experts... Tardiness or refusal to pay what doctors consider legitimate medical claims may add as much as 15 to 20 percent in overhead costs for physicians...

The survey, an analysis of more than five million line items from health insurance claims submitted in the last three months of 2005, sheds light on the challenges that doctors and their patients face in getting their bills paid.

"We all pay that cost," said Dr. William F. Jessee, a pediatrician... "It winds up getting passed on to consumers and employers who purchase health insurance." The data may also provide the glimmer of an answer to a seeming conundrum: How is it, as the nation staggers under growing health care costs, that the commercial insurers responsible for paying much of the bill tend to be highly profitable and have stocks that are performing well? Tight-fisted approaches to paying bills may be part of the answer.

Athenahealth concedes that its survey, while broad and fairly representative of a cross section of the nation's doctors, is not statistically scientific. That is a limitation that WellPoint, the nation's largest commercial insurer, quickly pointed out in saying that its own poor showing was unjustified. ... Most of the other national insurers in the report, which also included Aetna, UnitedHealth Group and Cigna, regardless of how they fared, acknowledged the survey as a unique and potentially useful snapshot. ...

Phil Pead, the chief executive of Per Se Technologies, a large claims-handling company ... said errors made by doctors' offices also accounted for a large share of their problems in being paid. "About 40 percent of denials occur because of incorrect information — the wrong insurance card or address or other information," he said. ...

The results are to be posted for public viewing today on a new Web site, www.athenaPayView.com, and revised every three months. ...

Doctors in a number of states said they welcomed the Athenahealth report, which also compared dozens of regional insurers around the country. Dr. Molly Katz, a Cincinnati gynecologist and former president of the Ohio Medical Association, said she hoped the publicity would encourage insurers to improve their payment practices. "I would much rather have my staff talking to patients than talking to insurance companies," Dr. Katz said.

I'm not sure how much to make of this given the statements about statistical validity, hopefully that will get resolved over time, but even with uncertainty the costs appear large, especially since there are additional costs over and above the extra overhead costs to physicians described above. For example, the administrative costs to insurance companies from screening applicants and reviewing claims are also significant.

Paul Krugman: Once and Again

The post below this one advising against listening to the advice and forecasts of pundits reminded me of a Paul Krugman column I came across not too long ago. This is from the Krugman archives and it is his very first column for the New York Times. It was on January 2, 2000 and the topic is globalization. Krugman has written other columns which better illustrate that while nobody gets everything right, some pundits are well worth listening to, but I thought his very first column discussing the big issues he foresaw for the economy would be of interest:

Once and Again, Paul Krugman, Commentary, NY Times, January 2, 2000: CAMBRIDGE, Mass. -- Beginnings are always difficult: even the most tough-minded writer finds it hard to avoid portentousness. And since this is a quadruple beginning (new year, new century, new millennium, and, for me, new column), I won't even try. What follows are some broad opening-night thoughts about the world economy.

I deliberately say world economy, not American economy. Whatever else they may have been, the 90's were the decade of globalization. Both the bad news (it was a banner decade for financial crises) and the good (living standards in much of the world continued to rise, in some cases -- China -- spectacularly) were closely tied to the ever-increasing integration of national economies with each other, to the seemingly unstoppable logic of growing trade and investment.

Or is it unstoppable? You see, we've been here before.

Historians sometimes call it the First Global Economy: the era from the mid-19th century onward in which new technologies of transportation and communication made large-scale international trade and investment possible for the first time. In their quest to create that global economy, to abolish the traditional constraints of geography, engineers accomplished miracles -- laying telegraph cables beneath the Atlantic, digging tunnels through the Alps and building paths between the seas. The Panama Canal, whose construction required breakthroughs not only in earth-moving technology but in medical science, was the high-water mark of the age (literally: the locks raise ships 85 feet above sea level).

And just as the canal reached completion, the global economy fell apart.

To some extent, the First Global Economy was a casualty of war. The Panama Canal and the Western Front both went into action in August 1914. The war and its indirect consequences -- hyperinflation and political instability in Germany, isolationism in the United States, and so on -- partly explain why the forces of globalization went into a retreat that by 1945 left the world economy thoroughly Balkanized. But the truth is that even before 1914, though the volume of trade and investment continued to expand, the globalist idea was on the defensive. Intelligent men might explain that wars were no longer worth fighting and borders obsolete; a sophisticated, cosmopolitan elite -- like the U.S.-educated technocrats who ran Mexico until they were overthrown in 1911 -- might move freely between continents; but the political foundations for a global economy were never properly laid, and at the first serious shock the structure collapsed.

We are now living in the era of the Second Global Economy -- a world economy reconstructed, largely under American leadership, over the past half century. It took a long time to put Humpty Dumpty back together again: the share of world output entering into trade didn't reach its pre-1914 levels until the 1970's, and large-scale investment in "emerging markets" -- that is, places that are to today's world economy what America was to our great-grandfathers' -- has revived only in the last decade. But this time the economic achievement is built on stronger foundations -- isn't it?

Well, yes -- but maybe not strong enough. True, we have gotten better at making the distinction between commerce and conquest -- trade no longer follows the flag and blatant imperialism is out of style. (We handed the Panama Canal back last month.) And Western nations seem to have more or less grown out of the saber-rattling nationalism that led to catastrophe back in 1914. But now as then the global idea is very much a minority persuasion, all too easily portrayed as an ideology of and for a rootless cosmopolitan elite that is out of touch with ordinary people.

For that, surely, is the lesson of the trashing of the World Trade Organization meeting in Seattle last November. Not that the protesters were right: it is a sad irony that the cause that has finally awakened the long-dormant American left is that of -- yes! -- denying opportunity to third-world workers. But though the facts may be on the side of the free traders, though global trade really ought to have mass public support, one can hardly deny that the opponents are winning the propaganda war. For the moment, as long as it seems to deliver the goods and services, globalization is tolerated; but it is not loved. The big economic question for the next century, in other words, is really political: can the Second Global Economy build a constituency that reaches beyond the sort of people who congregate at Davos? If not, it will eventually go the way of the first.

Should You Listen to Pundits?

Does the market for pundits "creatively destruct" the lousy ones?:

How Accurate Are Your Pet Pundits?,  Philip E. Tetlock, Project Syndicate: Every day, experts bombard us with their views on topics as varied as Iraqi insurgents, Bolivian coca growers, European central bankers, and North Korea’s Politburo. But how much credibility should we attach to the opinions of experts?

The sanguine view is that as long as those selling expertise compete vigorously for the attention of discriminating buyers (the mass media), market mechanisms will assure quality control. Pundits who make it into newspaper opinion pages or onto television and radio must have good track records; otherwise, they would have been weeded out.

Skeptics, however, warn that the mass media dictate the voices we hear and are less interested in reasoned debate than in catering to popular prejudices. As a result, fame could be negatively, not positively, correlated with long-run accuracy.

Until recently, no one knew who is right, because no one was keeping score. But the results of a 20-year research project now suggest that the skeptics are closer to the truth. ... The basic idea was to solicit thousands of predictions from hundreds of experts ..., and then score the predictions for accuracy. We find that the media not only fail to weed out bad ideas, but that they often favor bad ideas, especially when the truth is too messy to be packaged neatly.

The evidence falls into two categories. First, ... when hordes of pundits are jostling for the limelight, many are tempted to claim that they know more than they do. ..

Between 1985 and 2005, boomsters made 10-year forecasts that exaggerated the chances of big positive changes in both financial markets (e.g., a Dow Jones Industrial Average of 36,000) and world politics (e.g., tranquility in the Middle East and dynamic growth in sub-Saharan Africa). They assigned probabilities of 65% to rosy scenarios that materialized only 15% of the time.

In the same period, doomsters performed even more poorly, exaggerating the chances of negative changes in all the same places where boomsters accentuated the positive, plus several more (I still await the impending disintegration of Canada, Nigeria, India, Indonesia, South Africa, Belgium, and Sudan). They assigned probabilities of 70% to bleak scenarios that materialized only 12% of the time.

Second, again as the skeptics warned, over-claimers rarely pay penalties for being wrong. Indeed, the media shower lavish attention on over-claimers while neglecting their humbler colleagues.

We can see this process in sharp relief when, following the philosopher Sir Isaiah Berlin, we classify experts as “hedgehogs” or “foxes.” Hedgehogs are big-idea thinkers in love with grand theories: libertarianism, Marxism, environmentalism, etc. Their self-confidence can be infectious. They know how to stoke momentum in an argument...

That wins them media acclaim. But they don’t know when to slam the mental brakes by making concessions to other points of view. They take their theories too seriously. The result: hedgehogs make more mistakes, but they pile up more hits on Google.

Eclectic foxes are ... are comfortable with protracted uncertainty about who is right even in bitter debates, conceding gaps in their knowledge and granting legitimacy to opposing views. They sprinkle their conversations with linguistic qualifiers that limit the reach of their arguments: ‘but,’ ‘however,’ ‘although.’

Because they avoid over-simplification, foxes make fewer mistakes. Foxes will often agree with hedgehogs up to a point, before complicating things: “Yes, my colleague is right that the Saudi monarchy is vulnerable, but remember that coups are rare and that the government commands many means of squelching opposition.”

Imagine your job as a media executive depends on expanding your viewing audience. Whom would you pick: an expert who balances conflicting arguments and concludes that the likeliest outcome is more of the same, or an expert who gets viewers on the edge of their seats over radical Islamists seizing control and causing oil prices to soar? ...

Return to Sender

The Postal Service is allowing advertising on postage stamps. I wonder, will they accept ads from any legal business? Will it be okay to have ads for adult bookstores? Will individuals be able to purchase ads to promote a message? Will there be objections from some groups if the government allows advertising of particular products believed to be harmful to health, the environment, or if the good or service advertised on the stamp is objectionable to a religious group? Will stamps grow in size over time to increase revenues?

If all ads won't be allowed, where exactly is the line between acceptable and unacceptable and who decides? Who regulates the messages that appear on the mail coming into homes and businesses? If all legal ads are accepted, what happens when GM refuses mail with Toyota stamps, and hard-core Raider fans absolutely will not take an envelope with a stamp promoting the Chargers or some other team? Someone else can deliver that envelope the day after a tough loss.

I'm not sure this view is widespread, but I would prefer that government parks, buildings, vehicles, and so on be free of advertising, recognition of corporate donors (they can do this on their own property and advertising), and other commercial relationships. I can do without the Google Library System, the Frito-Lay chain of National Park Visitor Centers, Wal-Mart Community Colleges, and the Exxon National Interstate System:

Stamps to Become a Marketing Vehicle, by Caroline E. Mayer, Washington Post: Advertising might soon be pushing the envelope. The U.S. Postal Service is allowing companies to create their own branded stamps for first-class mail. Instead of flags, you can expect to see a company logo; instead of photos of famous Americans, you might see pictures of your local real estate agent.

It is a test, part of an effort to reverse the decline in first-class mailings. As USPS spokeswoman Joanne Veto said, "We want to make mail more interesting to consumers." The first company to buy in is Hewlett-Packard, which is using its corporate logo and pictures from its early days -- including founders Bill Hewlett and Dave Packard -- on mail sent to customers and partners. ...

For the past year, consumers have been able to create personal stamps, with pictures of babies, pets and other loved ones, for about twice the cost of a regular stamp. But advertising was barred from stamps until earlier this year when Congress overturned a 19th-century law barring commercial images on stamps. ...

I can't claim to have thought long and hard about this, or that it would matter if I had, but it seems to me that the lines between the public and private sectors are becoming blurred as public-private partnerships proliferate in response to budgetary pressures, and private donors require recognition from the government as a condition of supporting universities, parks, stadiums, cleaning litter (in return for recognition on road signs), etc. So if you'd care to weigh in, I'm interested in hearing thoughts on where these lines ought to be.

Leapfrogging

A look at the advantages a newly constructed Toyota auto assembly plant will have over an existing GM plant:

A Tale of Two Auto Plants, by By Lee Hawkins Jr. and Norihiko Shirouzu, WSJ: For more than 50 years, General Motors Corp. has built cars and trucks here at Texas' only auto assembly plant... The sprawling factory, one of GM's best, employs 3,000 people and buys myriad parts and services from local suppliers to build the big sport utility vehicles that have been among the company's most profitable -- including "the national car of Texas," the Chevrolet Suburban.

Now, though, a rival has come deep into the heart of Texas to battle GM. At a 2,000-acre site in San Antonio, Toyota Motor Corp. is getting ready to start production later this year of the newest generation of Tundra pickup trucks in a plant that will use the Japanese car maker's most advanced machinery and methods.

Separated by 280 miles, these two factories bring into stark relief the competitive problems plaguing GM... In no small part, the world's largest auto maker's difficulties stem from the fact that its challengers can start fresh, unencumbered by old plants and old obligations that limit innovation and add ... to the cost of each vehicle...

Toyota appears to be working aggressively to make the most of its advantages. The company has been able to deploy the latest know-how to fit various manufacturing processes ... into a relatively compact space and make the plant more efficient.

On the other hand, ... GM can't maximize its success by adopting its newest, best methods... "Arlington is doing a great job for GM, but they can't have an optimal layout, and their footprint is landlocked because a world with subdivisions and expressways has grown up around it...," Mr. Robinet says...

Even so, Arlington ranked No. 1 among North American large-SUV factories last year, at 22.39 assembly labor hours per vehicle... Two decades ago, GM factories suffered from a sizable gap compared with similar Toyota factories... Recent ... surveys show that this gap has narrowed substantially. But GM's productivity gains are offset by higher hourly labor costs and the burden it carries for benefits owed to retirees.

In Arlington, GM pays union-scale wages of ... about $1,800 ...  per vehicle. ... Harbour Consulting President Ron Harbour estimates Toyota's total hourly U.S. labor costs, with benefits, at about $35 an hour -- less than half of GM's rates. The brand-new plant won't have any direct retiree costs for many years. So if the San Antonio factory does no better than match the Arlington plant in productivity, it could still enjoy a labor cost advantage of about $1,000 per vehicle, a substantial sum in industry terms...

Click to enlarge

Being new means Toyota can use its most-efficient manufacturing technology... Further, Toyota has arranged for 21 key Tundra suppliers to set up factories right on the same site, sandwiching the plant on the north and south sides. Engines still come from a Toyota plant in Alabama and axles from a supplier in Arkansas, but most other major parts, from instrument panels to seats to exhaust systems, are assembled at those on-site suppliers. That cuts the cost of transporting parts and storing large inventories on site as insurance against missed shipments...

GM, in contrast, is restricted by space, existing deals with suppliers who are located elsewhere and its agreements with the United Auto Workers that prohibit it from using lower-wage, non-union workers on the same site. Of the total 3,330 different kinds of parts that are supplied to the Arlington facility, about 1,075 come from Michigan suppliers, while 739 come from Texas and the rest from Canada and Mexico. Having suppliers located far away has a price tag...

Moreover, because the Tundra plant brings new jobs to San Antonio, Toyota ... has been able to bargain for a generous package of subsidies from various levels of government. ... The direct incentives alone, averaged over roughly one year's production, amount to more than $600 per vehicle in savings for Toyota. Even though it has made significant investments in Arlington in recent years, GM no longer gets the same pampering...

About a third of all cars built in the U.S. last year were assembled in the 14 plants owned by foreign-based auto makers... Toyota executives routinely downplay the threat the company's growth poses to traditional American auto companies. But there's little doubt that Toyota has big plans for using the new San Antonio factory to grab a chunk of market share in the large pickup market, one of Detroit's last bastions of profit...

Update: A comment made me think of previous posts on this topic:

• Why Toyota is Better than GM and Ford
• Who's to Blame for GM's Problems?
• GM Responds to Its Critics
• Who Pays for the Failure of Management?
• Robert Samuelson: Ghosts That Still Haunt GM
• Paul Krugman: Bad for the Country

Bull!!!

There's been a lot of discussion recently on whether this statement or that statement is a lie. Maybe a more "refined" definition of lying will be helpful. Wikipedia gets us started:

In his book On Bullshit (2005; first published as an essay in 1986), Harry Frankfurt suggests that lying and bullshitting are not the same thing. A liar differs from a truth-teller in that the former wants to hide the truth while the latter wants to reveal it; but both are very much aware of what the truth is. A liar must remain mindful of the truth, if only so that he does not inadvertently reveal it. A bullshitter, however, is utterly indifferent to the truth. He would not mind if his statements turn out to be true. For example, a bank robber who denies that he robbed the bank is a liar; but a car salesman who assures a buyer, without bothering to check, that the car he is trying to sell has been driven only 10,000 miles is a bullshitter. The salesman would not care if it were to turn out that his claim is true after all. He simply does not care what is the truth of the matter... Frankfurt acknowledges that "humbug", as discussed in Max Black's "The Prevalence of Humbug" (1985), is close in meaning to bullshit.

Here's a shortened version of a much longer essay. Note the essential difference here, one that I think is important in understanding the current debate over whether lies were told about WMDs to justify the war in Iraq and about other things. A liar hides what is believed to be the truth. A bullshitter does not care about the truth and tells whatever story is necessary to attain a predefined goal:

On Bullshit, by Harry Frankfurt, Princeton University: One of the most salient features of our culture is that there is so much bullshit. Everyone knows this. Each of us contributes his share. But we tend to take the situation for granted. Most people are rather confident of their ability to recognize bullshit and to avoid being taken in by it. ... In consequence, we have no clear understanding of what bullshit is, why there is so much of it, or what functions it serves. ... In other words, we have no theory.

I propose to begin the development of a theoretical understanding of bullshit... I shall not consider the rhetorical uses and misuses of bullshit. My aim is simply to give a rough account of what bullshit is and how it differs from what it is not... Even the most basic and preliminary questions about bullshit remain, after all, not only unanswered but unasked. So far as I am aware, very little work has been done on this subject. I have not undertaken a survey of the literature, partly because I do not know how to go about it...

Another worthwhile source is the title essay in The Prevalence of Humbug by Max Black. I am uncertain just how close in meaning the word humbug is to the word bullshit. Of course, the words are not freely and fully interchangeable; it is clear that they are used differently. But the difference appears on the whole to have more to do with considerations of gentility... It is more polite, as well as less intense, to say “Humbug!” than to say “Bullshit!” For the sake of this discussion, I shall assume that there is no other important difference between the two, Black suggests a number of synonyms for humbug, including the following: “balderdash”, “claptrap”, “hokum”, “drivel”, “buncombe”, “imposture”, and “quackery”. This list of quaint equivalents is not very helpful. But Black also confronts the problem of establishing the nature of humbug more directly, and he offers the following formal definition:

Humbug: deceptive misrepresentation, short of lying, especially by pretentious word or deed, of somebody’s own thoughts, feelings, or attitudes.

A very similar formulation might plausibly be offered as enunciating the essential characteristics of bullshit...

Nonetheless, I do not believe that it adequately or accurately grasps the essential character of bullshit. It is correct to say of bullshit, as he says of humbug, both that it is short of lying and that chose who perpetrate it misrepresent themselves in a certain way. But Black’s account of these two features is significantly off the mark. ...

In Eric Ambler’s novel Dirty Story, a character named Arthur Abdel Simpson recalls advice that he received as a child from his father:

Although I was only seven when my father was killed, I still remember him very well and some of the things he used to say. … One of the first things he taught me was, “Never tell a lie when you can bullshit your way through.”

This presumes not only that there is an important difference between lying and bullshitting, but that the latter is preferable to the former. Now the elder Simpson surely did not consider bullshitting morally superior to lying. Nor is it likely that he regarded lies as invariably less effective than bullshit in accomplishing the purposes for which either of them might be employed. After all, an intelligently crafted lie may do its work with unqualified success. It may be that Simpson thought it easier to get away with bullshitting than with lying. Or perhaps he meant that, although the risk of being caught is about the same in each case, the consequences of being caught are generally less severe for the bullshitter than for the liar. In fact, people do tend to be more tolerant of bullshit than of lies... The problem of understanding why our attitude toward bullshit is generally more benign than our attitude toward lying is an important one, which I shall leave as an exercise for the reader. 

The pertinent comparison is not, however, between telling a lie and producing some particular instance of bullshit. The elder Simpson identifies the alternative to telling a lie as “bullshitting one’s way through.” This involves not merely producing one instance of bullshit; it involves a program of producing bullshit to whatever extent the circumstances require. This is a key, perhaps, to his preference. Telling a lie is an act with a sharp focus. It is designed to insert a particular falsehood at a specific point in a set or system of beliefs, in order to avoid the consequences of having that point occupied by the truth. ... The liar is inescapably concerned with truth-values. In order to invent a lie at all, he must think he knows what is true. And in order to invent an effective lie, he must design his falsehood under the guidance of that truth.

On the other hand, a person who undertakes to bullshit his way through has much more freedom. His focus is panoramic rather than particular. He does not limit himself to inserting a certain falsehood at a specific point... He is prepared to fake the context as well, so far as need requires. This freedom from the constraints to which the liar must submit ... is less analytical and less deliberative than that which is mobilized in lying. It is more expansive and independent, with mare spacious opportunities for improvisation, color, and imaginative play. This is less a matter of craft than of art. Hence the familiar notion of the “bullshit artist.” My guess is that the recommendation offered by Arthur Simpson’s father reflects the fact that he was more strongly drawn to this mode of creativity, regardless of its relative merit or effectiveness, than he was to the more austere and rigorous demands of lying....

The bullshitter may not deceive us, or even intend to do so, either about the facts or about what he takes the facts to be. What he does necessarily attempt to deceive us about is his enterprise. ...  The fact about himself that the bullshitter hides ... is that the truth-values of his statements are of no central interest to him; what we are not to understand is that his intention is neither to report the truth nor co conceal it. This does not mean that his speech is anarchically impulsive, but that the motive guiding and controlling it is unconcerned with how the things about which he speaks truly are.

It is impossible for someone to lie unless he thinks he knows the truth. Producing bullshit requires no such conviction. ... Someone who lies and someone who tells the truth are playing on opposite sides, so to speak, in the same game. Each responds to the facts as he understands them, although the response of the one is guided by the authority of the truth, while the response of the other defies that authority and refuses to meet its demands. The bullshitter ignores these demands altogether. He does not reject the authority of the truth, as the liar does, and oppose himself to it. He pays no attention to it at all. By virtue of this, bullshit is a greater enemy of the truth than lies are...

[See also The Prevalence of Humbug by Max Black]

Science versus Spin Doctors

This commentary says when science and entrenched interests collide, it's not a fair fight:

Scientists have no chance against spin doctors, by David Bodanis, Commentary, Financial Times: Last week, touched by winning a science prize at the the UK’s Royal Society, I donated it to the family of David Kelly, the British scientist who committed suicide after governmental criticism associated with his research into weapons of mass destruction in Iraq.

Not everyone thinks mine was the right decision, on the grounds that science should not be sullied by bringing politics into it. From my years looking at the history of science, I do not agree. For science often leads to technologies that can undermine the established powers in society – and when those powers fight back, they fight to win.

Sometimes that retaliation is deadly and scientists die for the truth. Soviet authorities of the 1930s, for example, hated biologists who pointed out that changing a plant’s environment did not alter its genetic nature. That truth undercut the authorities’ belief that by altering society, they would be able to create a new Marxist man in a single generation. If there were any exceptions to this idea at all ... then those opponents had to be crushed. Many were demoted; others were sent to prison, beaten or killed.

George W. Bush’s attitude to science is less deadly, of course, but similar in essence. The US president and many of his supporters know that if the public were to be convinced that present uses of coal and oil were putting the planet in grave danger, there would be an outcry...

Two worlds are set on a collision course. One is the world of science... In that world, what counts is finding the truth and adjusting your actions – and, if need be, changing established industries – accordingly.

But in the world of politics, what is most important is what you have previously decided you are going to hold to. Anyone who threatens those goals has to be blocked, for they get in the way of what you consider the greater good. Often that is for the best – just think of any political change or institution you especially like that had to be pushed through against strong opposition.

The problem comes when the two worlds collide. For in the short-term, the world of politics almost always wins. Politicians are good at pressing the buttons of emotion, or group feeling, or character assassination, or selective evidence... Very few scientists can fight back. Although in their private lives they might be psychologically astute, their profession teaches them that arguments are ultimately won by appeals to the truth. That is their reflex: it is what they are habituated to do. Against spin doctors, leaked governmental whispers, smooth lobbyists and the like they have scarcely any defence.

There is an added twist. These two worlds operate on different timescales. Scientists are exceptionally good at picking out small indicators of what is happening in the outside world, and accurately foretelling their consequences. That is the enormous power that centuries of development in instrumentation and analytic technique have given them. Politicians, however, naturally take more of the layman’s attitude, where only evidence that is large-scale and immediately obvious is truly important.

In my books I have written about many people who, like Kelly, abided by the logic of science, confident that what they saw would be justified as time went on. Yet so often they crashed up against the very different world of politics and established power, and they ended up crushed by it...

Incarceration Rates

Nearly 12% of black males in their late 20s are incarcerated, and overall 4.7% of black males are in prison or jail. Overall, as compared to other countries, we have high incarceration rates:

Incarceration Rates, by Kieran Healy, Crooked Timber: Via Chris Uggen, some new Bureau of Justice Statistics for incarceration in the United States as of mid-2005. Imprisonment rose by 1.6 percent on the pervious year, and jail populations rose by 4.7 percent, for a total of just over 2.1 million people behind bars. The total population in prison has gone up by almost 600,000 since 1995.

Women make up 12.7 percent of jail inmates. Nearly 6 in 10 offenders in local jails are racial or ethnic minorities. In mid-2005, the BJS reports that “nearly 4.7 percent of black males were in prison or jail, compared to 1.9 percent of Hispanic males, and 0.7 percent of white males. Among males in their late 20s, nearly 12 percent of black males, compared to 3.9 percent of Hispanic males and 1.7 percent of white males, were incarcerated.” State by state, “Louisiana and Georgia led the nation in percentage of their state residents incarcerated (with more than 1 percent of their state residents in prison or jail at midyear 2005). Maine and Minnesota had the lowest rates of incarceration (with 0.3 percent or less of their state residents incarcerated).”

(You can get this figure as a PDF file if you like.)

Comparative context is provided by Roy Walmsley’s World Prison Population List. The U.S. has an overall incarceration rate of 738 per 100,000 people, the highest in the world. Belarus, Russia and Bermuda (!) come next, distantly trailing with rates in the 530s. Fifty eight percent of countries have incarceration rates below 150 per 100,000. There is a lot of heterogeneity within continents. I left China out of the figure above—its incarceration rate is 118, but this only includes 1.55 million sentenced prisoners, not trial detainees or those in “administrative detention.”

A June, 2004 study on state prison costs in 2001 for the Department of Justice  found:

The average annual operating cost per State inmate in 2001 was $22,650... Among facilities operated by the Federal Bureau of Prisons, it was $22,632 per inmate...

This is not a trivial cost. I wonder how state budgets, estimates of Social Security solvency, unemployment rates, etc. would be affected if all of the people incarcerated for drug sales were released, or if you find that objectionable, if our incarceration rates were equivalent to those in other developed countries and the usual numbers for this population were able to find employment.

Releasing Preliminary Research to the Public

We present a lot of preliminary research on these sites, research that has not yet passed through the full peer review process. But should preliminary research be released to the public before it has been fully evaluated by experts in the field? As John Kay writes in the Financial Times:

Journalists in search of stories and scientists anxious for publicity and research funding issue early, oversimplified or downright misleading accounts of research. Unsubstantiated claims of a link between immunisation and autism have caused distress to millions of British parents...

What is the solution to this problem? The Royal Society, the UK national academy of science, released a report addressing this issue. Here's a small part of the press release and link to the full report:

Royal Society: Scientists need to consider the public interest for research results: Scientists should consider the public interest when deciding whether, when and how to communicate their research results, according to a report... The report outlines 15 questions that researchers should ask themselves to help them take the public interest into account.

The report, which deals with issues arising from recent controversies ... warns that the results of research presented at conferences may be preliminary, and that media coverage for them may not be in the public interest because they might be shown to be wrong after being checked by peer review. It also notes that some misleading media reports have occurred because researchers have not checked press releases for accuracy... [Download a copy of the report]

Here's an example of research that changed after it was discussed in a New York Times Economic Scene column (it's about the effect of Fox News on voting behavior).

Once research has gone through the peer review process, is it reliable? Should recent cases of research fraud, mistakes, and misinterpretation have been caught by the peer review process? Returning to The Financial Times article:

The Society's answers are self-restraint and peer review. Peer review is the process by which professions review their own work. Articles submitted to journals receive critical assessment from referees experienced in the field. Peer review is a bulwark against cranks, crooks and incompetents. But too much reliance on peer review carries its own dangers. Every profession defines its own concept of excellence in inward-looking ways. Successful academics learn how to trigger the buttons that win the approval of referees...

Referees in the peer review process are usually anonymous to the author of the paper. When you get reports, you rarely know who they are from and because of that the reports can be frank in their appraisals. The freedom to deliver truthful appraisals without fear of retaliation is an important part of the process.

Going back to the Royal Society report, would the process be improved by revealing the identity of referees after publication in cases where papers are accepted?:

Many journals are wary, for good reasons, about revealing the identity of referees involved in peer review. Some critics argue, however, that public confidence in the integrity of the process might be improved if referees allowed their names to be revealed. A debate is needed about lifting the cloak of anonymity when an article has been accepted for publication and has public interest implications. Other changes in journal operation and practice, such as the publication of papers on the world wide web before the completion of peer review, need to be considered in terms of the implications for the public. Similarly, great care is needed when results are communicated to the public, for instance via the media... Lay summaries ... could serve an important function when communicating to the public. Researchers should be encouraged to acquire the skills needed for such communication...

I'm not in favor having referees revealed ex-post. One reason is that it doesn't help with the problems involved with the release of work prior to full peer review. Another reason is the incentives it creates to accept papers from people in position to return favors later, the opposite of the retaliation problem.

In economics the quality of the peer review process is not our main problem anyway, it is the long time it takes to complete the peer review process and it is hurting our junior faculty. I've seen too many cases where the sluggishness of the refereeing process clouded judgment unnecesarily and distorted decisions.

This probably isn't a post that will draw a lot of comment, but our peer review process is not functioning optimally and it's something our profession needs to address before more junior faculty are hurt by the process.

Fed Watch: Stirring Up the Tea Leaves

Tim Duy gives his assessment of where the Fed is headed next:

Stirring Up the Tea Leaves, by Tim Duy: This is a heck of a rollercoaster ride we are on, with all the ups and downs dutifully charted by David Altig, I hope I don’t lose my lunch. The disconcerting combination of data and Fedspeak certainly provides some serious gristle for Fed watchers to chew on. Some stand firm on the cause for a pause in June; others are jumping onto the “additional quarter” point bandwagon.

Reasonable arguments can be made for either call. I still expect a hold in June, but some recent Fedspeak is telling me that I am making a risky bet. With two unsettling CPI reports on the table, as well as a solid industrial production reading, Richmond Fed President Jeffery Lacker is sounding a hawkish tone:

Unfavorable inflation numbers and adverse movements in inflation expectations are going to require a higher path for real interest rates, and are going to make a pause less likely.

Which can be interpreted as either “we were planning to pause, but not now,” “the odds of a pause were 80%, and are now 70%,” or “the odds of a pause were 30%, and are now 20%.” You get the idea. The upshot is that the inflation numbers are rattling Lacker’s cage. And he is not alone. St. Louis Fed President William Poole notes that growing expectations of another rate hike are appropriate. From MarketWatch:

Lobbyists' Payments to Lawmakers

The Wall Street Journal's Washington Wire notes a study on lobbyists' donations to Capital Hill:

Public Citizen: The Bankrollers: Lobbyists’ Payments to the Lawmakers They Court, 1998 - 2006, Congress Watch, May 2006: Introduction Lobbyists and the political action committees of their firms have contributed at least $103.1 million to members of Congress since 1998.This figure is more than 90 percent higher than what is reported by the Center for Responsive Politics (CRP), which has been the most authoritative source to date, because this study’s methodology cast a wider net to capture lobbyists’ contributions. (The methodology ... is discussed in detail in Appendix II.)...

Executive Summary

• Lobbyists have given more than $100 million to members of Congress since 1998.
• The percentage of lobbyists making personal contributions is small.
• Just over 6 percent of lobbyists account for more than four-fifths of the money lobbyists have contributed to members of Congress since 1998.
• Just 0.2 percent of lobbyists account for than 13 percent of the money lobbyists have contributed to members of Congress since 1998. 
• Lobbyists’ contributions are on the rise.
• Lobbyists’ have given more to Republicans than Democrats since 1998.
• Thirty-six members of Congress have received a half-million dollars or more from lobbyists and their PACs since 1998.
• Many lobbyists give heavily to both parties.
• Some former-members-turned-lobbyists become big contributors.
• Several big-donor lobbyists raised $100,000 or more for Bush or Kerry.
• Personal contributions from lobbyists are just the tip of the iceberg.

Here's an interesting table from the report:

Click on figure to enlarge

The study also lists the largest donors and recipients. Washington Wire says:

The highest ranking lobbyist-donor on Public Citizen’s Top Ten list is Stewart Van Scoyoc, whose firm specializes in appropriations. Disgraced lobbyist Jack Abramoff pleaded guilty in January guilty to trying to bribe lawmakers — but still ranked 30th in the Public Citizen study.

Oil, Religion, and Debt

An email (thank you) says to take a look at this review of Kevin Phillip's book outlining three perils facing the U.S., oil, religion, and debt:

The US in Peril?, by Jeff Madrick, The New York Review of Books, June 8, 2006: Review of  American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, by Kevin Phillips:

1. ...In Kevin Phillips's view, the Bush energy policy is a prime example of America's failure to confront its most difficult challenges. Phillips, once a member of the Nixon administration, ... argues that America is very different from the independent and omnipotent nation portrayed by President Bush and his administration. Dependency on oil is one of three major tendencies that will seriously undermine America's future, he writes, the other two being the influence of radical religion and the growing reliance on debt to support the economy. For Phillips, these constitute "the three major perils to the United States of the twenty-first century," and he offers little hope that the US will avoid the consequences...

Heretical Realities of the New World?

George McGovern says business is not the enemy of labor. Workers and unions must recognize that the world has changed to avoid making self-destructive demands in wage negotiations. That does not mean the fight for social justice should be abandoned, but globalization forces the battle for health and economic security to be relocated to other arenas such as government supported universal healthcare:

The end of 'more', by George S. McGovern, Commentary, LA Times: I have never wavered in my support for policies that relieve poverty and improve the standard of living of American workers. As a lifelong liberal, I supported Medicare and Medicaid, civil rights, Social Security and workplace safety requirements. Today, I strongly support universal healthcare.

And I have always been a supporter of the labor movement. ... But lately I have seen developments that have me worried. And I have been reminded of legendary union leader John L. Lewis, who was once asked what his miners were after. His answer? "More." It was a funny answer, and perhaps it was honest too. But these days, it's not a very effective strategy, and we are seeing some unfortunate and unintended consequences of Lewis' "more" philosophy.

Delphi Corp., the biggest auto parts supplier in the country ... is bankrupt. One big reason is that the company's unionized workers earn ... more than twice what some of its competitors pay. General Motors and Ford ... have stated that they will lay off 30,000 workers each. ... Airlines have come under similar pressure. The bankruptcy stories ... are driven in large part by the compensation packages and work rules that unions have won... "More" has, unfortunately, become "too much" in a global and far more competitive economy.

Many of my friends will consider this view heretical. But it is based on stark reality. Some progressive union leaders, facing this economic reality, have come to the same conclusion. Others are holding fast. ...

It's very difficult to ... say that "more" is not always possible. It can be galling to hear companies argue that they have to cut wages and benefits for hourly workers — even as they reward top executives with millions of dollars in stock options. The chief executive of Wal-Mart earns $27 million a year... But let's assume that the chief executive got 27 cents instead ... Wal-Mart ... hourly workers ... would each receive a bonus of less than $20. It's not executive pay that has created this new world.

I understand the attraction of asking business — the perceived "deep pockets" — to shoulder more of the responsibility for social welfare. But there are plenty of businesses that don't have deep pockets. And many large corporations operate with razor-thin profit margins...

The current frenzy over Wal-Mart is instructive. Its size is unprecedented. Yet ... profit ... amounts to less than four cents on the dollar. Raise the cost of employing people, and the company will eliminate jobs. Its business model only works on low prices, which require low labor costs. Whether that is fair or not is a debate for another time. It is instructive, however, that consumers continue to enjoy these low prices and that thousands of applicants continue to apply for those jobs.

Maryland recently passed a law aimed at requiring Wal-Mart to spend more on health insurance. This is ... extremely flawed... We need universal coverage, not piecemeal legislation... The fact is, demanding more from business based on sales or the number of employees is not always the best way to achieve a just result.

Although I believe we should allow businesses to pay employees based on their skill level, I also believe we should supplement the wages of those who earn the least. Universal healthcare provided by the federal government is one way to supplement income. It is also a way of relieving hard-pressed businesses of one of their highest cost burdens. ... Another way to benefit workers financially is the earned income tax credit. ... It also has the virtue of being supported by a progressive tax system, in which the rich are asked to pay more.

Liberals must never abandon their core principles of justice and equality. But union leaders who still see American businesses as the enemy must update that vision.

While negotiators should be reasonable, I'm not yet willing to concede that, in general, workers and firms negotiate on equal footing.

Paul Krugman: Talk-Show Joe

Paul Krugman looks at Joe Lieberman's declining popularity as he has become a centrist — a centrist within the Republican party:

Talk-Show Joe, by Paul Krugman, Commentary, NY Times: Friday was a bad day for Senator Joseph Lieberman. The Connecticut Democratic Party's nominating convention endorsed him, but that was a given for an incumbent with a lot of political chips to cash in. The real news was that Ned Lamont, an almost unknown challenger, received a third of the votes. This gave Mr. Lamont the right to run against Mr. Lieberman in a primary, and suggests that Mr. Lamont may even win.

What happened to Mr. Lieberman? Some news reports may lead you to believe that he is in trouble solely because of his support for the Iraq war. But there's much more to it than that. Mr. Lieberman has consistently supported Republican talking points. This has made him a lion of the Sunday talk shows, but has put him out of touch with his constituents — and with reality.

Mr. Lieberman isn't the only nationally known Democrat who still supports the Iraq war. But he ... has joined the Bush administration by insisting on an upbeat picture of ... Iraq that is increasingly delusional. Moreover, Mr. Lieberman has supported the attempt to label questions about ... Iraq and criticism of the administration's policies ... as unpatriotic. How else is one to interpret his warning, late last year, that "it is time for Democrats who distrust President Bush to acknowledge that he will be Commander-in-Chief for three more critical years, and that in matters of war we undermine Presidential credibility at our nation's peril"?

And it's not just Iraq. A letter sent by Hillary Clinton ... credited Mr. Lieberman with defending Social Security "tooth and nail." Well, ... that's not what happened. In fact, Mr. Lieberman repeatedly supported the administration's scare tactics. "Every year we wait to come up with a solution ...," he declared in March 2005, "costs our children and grandchildren and great-grandchildren $600 billion more."

This claim echoed a Bush administration talking point... But the talking point was simply false... There's more. Mr. Lieberman supported Congressional intervention in the Terri Schiavo affair... And ... Mr. Lieberman showed far more outrage over Bill Clinton's personal life than he has ever shown over Mr. Bush's catastrophic failures as commander in chief. ...

Mr. Lieberman, who is often described as a "centrist," is or was very much at odds not just with the Democratic base but with public opinion as a whole. ... Mr. Lieberman's defenders would have you believe that his increasingly unpopular positions reflect his principles. But ... the common theme in Mr. Lieberman's positions seems to be this: In each case he has taken the stand that is most likely to get him on TV.

You see, the talking-head circuit loves centrists. But a centrist, as defined inside the Beltway, doesn't mean someone whose views are actually in the center... Instead, a Democrat is considered centrist to the extent that he does what Mr. Lieberman does: lends his support to Republican talking points...

But this "center" cannot hold. And that's the larger lesson of what happened Friday. Mr. Lieberman has been playing to a Washington echo chamber that is increasingly out of touch with the country's real concerns. The nation, which rallied around Mr. Bush after 9/11 simply because he was there, has moved on — and it has left Mr. Lieberman behind.

Update: Brad DeLong appends the following to Krugman's column:

As Jonathan Chait writes:

Jonathan Chait: [L]ots of Democrats supported the Iraq war initially and believe now that we can and must win.... Lieberman, unlike other Democratic hawks, musters little passion for exposing and correcting the massive blunders the Bush administration has committed. When the Abu Ghraib scandal broke, Lieberman noted, in Bush's defense, "Those who were responsible for killing 3,000 Americans on Sept. 11, 2001, never apologized." (As if anybody was suggesting we were as bad as the terrorists.) Last fall he said, "In matters of war, we undermine presidential credibility at our nation's peril." The clear implication is that it's counterproductive -- traitorous, even -- to call the administration on its foreign policy dishonesties. This is not how the loyal opposition in a democracy ought to behave.

Foreign policy is hardly the only smudge on Lieberman's record.... He has long opposed sensible financial regulations. Even after his pro-business stance came under fire in the wake of the Enron scandal, Lieberman opposed sensible reforms. (As one of Lieberman's friends told the New Republic's Michael Crowley in 2002, "It'll be remembered that he didn't go off the deep end" -- meaning, after the populist furor dies down, Lieberman could resume raking in contributions from grateful executives.) He supported the disgraceful energy bill and federal intervention in the Terri Schiavo case.

Lieberman obviously relishes his role as every conservative's favorite Democrat. It's a mutually beneficial relationship. He's lavished with praise for his statesmanship, vision and bipartisanship. And, in the process, Republicans implicitly get to show what's wrong with the rest of his party. Bush and Dick Cheney applaud Lieberman regularly for believing we must win in Iraq, as if to suggest no other Democrat thinks the same...

Previous (5/19) column: Paul Krugman: Coming Down to Earth
Next (5/26) column: Paul Krugman: A Test of Our Character

Outsourcing Surgery and Other Medical Services

Some corporations are taking a serious look at medical outsourcing - sending people abroad for medical care - and some insurance plans are adding foreign hospitals as preferred providers:

Outsourcing Your Heart Elective surgery in India?, by Unmesh Kher, Time: Whiplash was just the first agony that Kevin Miller, 45, suffered in a car accident... The second was sticker shock. The self-employed and uninsured chiropractor ... learned that it would cost $90,000 to get the herniated disk in his neck repaired. So, over the objections of his doctors, he turned to the Internet and made an appointment with Bumrungrad Hospital in Bangkok, the marble-floored mecca of the medical trade that ... resembles a grand hotel more than a clinic. There a U.S.-trained surgeon fixed Miller's injured disk for less than $10,000. "I wouldn't hesitate to come back for another procedure," says Miller...

With this surgical sojourn, ... Miller joined the swelling ranks of medical tourists. As word has spread about the high-quality care and cut-rate surgery available in such countries as India, Thailand, Singapore and Malaysia, a growing stream of uninsured and underinsured Americans are boarding planes not for the typical face-lift or tummy tuck but for discount hip replacements and sophisticated heart surgeries. Bumrungrad alone ... saw its stream of American patients climb to 55,000 last year, a 30% rise. Three-quarters of them flew in from the U.S.; 83% came for noncosmetic treatments. Meanwhile, India's trade in international patients is increasing at the same rate.

That's still a trickle compared with the millions of surgeries performed each year in the $2 trillion U.S. health-care system. But a significant shift is under way. It's one that could put greater competitive pressure on U.S. hospitals... Elective surgeries are key moneymakers for hospitals, and even a small drop-off can cut deep into their profits.

What may accelerate the trend is that some pioneering U.S. corporations ... are taking a serious look at medical outsourcing. Blue Ridge Paper Products of Canton, N.C ... may soon offer employees outsourcing as a health-care option. The carrot? The patient would get to pocket some of the firm's substantial savings.

A Closer Look at the Evidence Against "Starving the Beast"

A 2004 Cato Policy Report by William A. Niskanen claiming there is evidence that cutting taxes increases government spending has reemerged and made a bit of a splash lately since it runs contrary to the "Starve the Beast" hypothesis.

I hate to do this because the result that "starving the beast" does not work is useful in political battles, but after reading the paper I feel obligated to follow up whether it runs contrary to particular politics or not. The bottom line is that this paper did not deserve the attention it received.

Here is a 2004 update to the 2002 paper Niskanen mentions in his Cato report (the 2004 paper wasn't easy to find, I finally got it from the WayBack Machine).  For background, Daniel Drezner provides a link to "a Jonathan Rauch column in the Atlantic Monthly (non-subscribers can click here to read the whole thing)" summarizing Niskanen's results. He also notes:

I see that this paper made the blog rounds a few years ago -- but it does not appear to have been published. Furthermore, the link to the original conference paper is not working.

The 2002 paper is “Comments,” in Jeffrey A. Frankel and Peter R. Orszag, American Economic Policy in the 1990s, Cambridge, Massachusetts: MIT Press 2002, but as Niskanen notes below the 2004 paper supersedes the 2002 paper. Here's the 2004 paper followed by comments on the methodology used to obtain the regression results:

Some Intriguing Findings About Federal Spending, by William A. Niskanen and Peter Van Doren, The Cato Institute, presented at the annual meeting of The Public Choice Society, Baltimore, Maryland, March 11-14, 2004: In two prior exploratory articles, I found ... that the federal spending share of GDP from 1981 through 2000 was a negative function of the federal revenue share... Our ... joint paper presents ... new estimates...

The “Starve the Beast” Hypothesis

For nearly three decades, many conservatives and libertarians have argued that reducing federal tax rates, in addition to increasing long-term economic growth, would reduce the growth of federal spending by “starving the beast.” This position has recently been endorsed, for example, by Nobel laureates Milton Friedman¹ and Gary Becker² in separate Wall Street Journal columns in 2003.

The problem with this hypothesis is that it is not consistent with the evidence, at least beginning in 1981. In my article published in 2002, I presented evidence that the relative level of federal spending over the period from 1981 through 2000 was coincident with the relative level of the federal tax burden in the opposite direction; in other words, there was a strong negative relation between the relative level of federal spending and tax revenues.³ Controlling for the unemployment rate, federal spending during this period increased by about one-half percent of GDP for each one percentage point decline in the relative level of federal tax revenues. What is going on? The most direct interpretation of this relation is that it represents a demand curve – that the demand for federal spending by current voters declines with the amount of this spending financed by current taxes. Future voters will bear the burden of any resulting deficit but are apparently not effectively represented by those making the current fiscal choices.

One implication of this relation is that a tax increase may be the most effective policy to reduce the relative level of federal spending. On this issue, I would be pleased to be proven wrong...

Updating the Test of the “Starve the Beast” Hypothesis

The following equation is used to test the “Starve the Beast” hypothesis:

(S/Y) = a + b(R/Y) + cU + dAR(1) + u,

where

S = current federal expenditures
R = current federal revenues,
Y = GDP,
U = civilian unemployment rate, and
AR(1) = a first-order autoregressive term.

Our new estimates of this equation revise and expand my prior estimate in two ways: The data for federal expenditures, federal revenues, and GDP are from the major new revision of the national income accounts.

A separate estimate of this equation is made for the sample 1949 through 1980, in order to test the stability of this relation over a longer sample. These tests would be consistent with the “Starve the Beast” hypothesis only if the estimated coefficient on (R/Y) is positive and significant.

The results from these tests are summarized by Table 1 below. Standard errors of the estimated coefficients are in parentheses.

Table 1 Tests of the “Starve the Beast” Hypothesis

	Sample
	1949-1980	1981-2000
Variables	Coefficients
Constant	18.069	30.651
	(6.763)	(2.001)
(R/Y)	- .038	- .624
	(.304)	(.111)
U	.321	.443
	(.237)	(.044)
AR(1)	.877	.429
	(.049)	(.135)
Adjusted R-sq.	.790	.943
S.E.R.	.791	.275
D-W	1.629	1.503

The first conclusion from these tests is that there was no significant effect on the relative level of federal spending of either the relative level of federal revenues or the unemployment rate in the sample 1949-1980; (all of the explanatory power of this equation is in the autoregressive term.) This finding is not consistent with the “Starve the Beast” hypothesis in that the coefficient on (R/Y) is not positive and significant, but it does not suggest that a tax cut would increase spending.

The more important conclusion, consistent with my prior estimate of this equation, is that there was a very strong negative relation between the relative level of federal spending and the relative level of federal revenues in the sample 1981-2000. Controlling for the unemployment rate, federal spending during this period appeared to increase by about .6 of one percent of GDP for each one percentage point decline in the relative level of federal revenues. During the same period that conservatives and libertarians promoted the “Starve the Beast” hypothesis, the developing evidence was strongly contrary to that hypothesis.

Finally, we are left with a puzzle. Why was the relation between the relative level of federal spending and federal receipts strongly negative in the period 1981-2000 but insignificant in the period 1949-1980? What happened in federal fiscal politics that might explain the substantial difference in the estimates from these two samples? We do not know, but we suspect that the growing influence of the “supply siders,” who have a strong case that high marginal tax rates significantly reduce economic growth, undermined the influence of the traditional fiscal conservatives’ commitment to a balanced budget...

I don't want to get overly technical about the econometrics, but this regression is not convincing as it stands. For example, to name one problem, there is a simultaneity issue. The regression presumes that unemployment causes government spending but the reverse may be true as well, government spending may cause unemployment and the methodology does not account for this which can bias the results.

Also, briefly, the serial correlation properties of the model need more investigation. The paper doesn't say if the data are quarterly or annual, so I can't evaluate the DW statistic, but I think the data are annual (Durbin's h-statistic should be used anyway, or better yet, an LM test, etc.). What happens to the results if a second lagged endogenous variable is added to the regression as it appears may be needed? As for the sample, if the data are annual then the sample size is relatively small, just 20 observations.

Throwing out a few more questions, what if R/Y is lagged to allow time for political pressure to build before spending is changed? Do the results still hold? What if the data are lagged? What is logs are taken? Are the results robust to the use of other scale measures for aggregate activity besides the unemployment rate? What if spending is broken into different components to isolate components that might be under more legislative discretion? Should other variables such as the interest rate be included to capture interest payments on the debt? Why is the sample broken at 1981? What are the results for the full sample?

There are many more questions and until there is a much more thorough and complete investigation of this issue, I don't think these results should be taken very seriously.