Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Saturday, March 04, 2006

Stupid and Poor...

Correspondents have been asking where my four-times-a-year pointing out that Donald Luskin is a *real* idiot--and that anyone who cites him as an authority is bonkers--is. The problem is that surfing over to his website is so painful and sad. But I'll do it.

Here we have Donald Luskin writing that Paul Krugman should "aspire" to becoming a totalitarian dictator and killing twenty million people:

The Conspiracy to Keep You Poor and Stupid : SOMETHING FOR KRUGMAN TO ASPIRE TO: Reader Perry Eidelbus informs us that Paul Krugman has been selected in a poll as number 35 among the top economists of the 20th century. Perry notes: "At least 13 people out of 1249 respondents thought Krugman was one of the top five (12 for first-place votes, and a 13th for a second-place vote). At most, 64 people voted for him (all fifth-place votes). At least 36 were similarly minded to vote for Lenin, of all people, as at least the fifth greatest. Mao apparently didn't make it. I guess you can still kill 20 million people and be called an economist..."

It appears that Luskin is making the point--if there is a point--that economists who like Krugman are also economists who like Lenin. But what Luskin doesn't point out is that in the poll Lenin's 36 points (and Paul's 64) are swamped by right-wingers Joseph Schumpeter's 1080 points, Friedrich Hayek's 469, Milton Friedman's 319, Ronald Coase's 246, and even Ludwig von Mises's 78.

(Keynes wins by a landslide, with 3.5 times Schumpeter's vote point total.)

As I said, painful and sad: Luskin can't open his mouth without misrepresenting something--in this case an online poll--and misrepresenting it for no purpose.

Ed Glaeser and Housing Price Appreciation

Mark Thoma directs us to:

Economist's View: [A]n interesting NY Times article on Edward L. Glaeser, an urban economist at Harvard:

Home Economics - New York Times : By JON GERTNER: Edward L. Glaeser grew up on the East Side of Manhattan, went to school in Princeton, N.J., and Chicago, lived for a time in Cambridge, Mass., and Palo Alto, Calif., and recently moved with his wife and young son to a house on six and a half acres in the affluent suburb of Weston, Mass. To Glaeser, this last move has been a big adjustment. For one thing, he is not a good driver, and the new commute has prompted him to leave his house by 6 a.m. so as not to get ensnared in the morning rush hour. For another, Glaeser and the suburbs are clearly an unholy marriage of sensibilities, especially since his new house is bordered by about 600 acres of conservation land. "I wake up every day, thinking, My goodness, how many units of housing could you build here?" he says. Glaeser is a creature of density. An economist at Harvard, he has spent almost his entire professional life walking around, and thinking about, cities -- seeking explanations why some metropolitan areas thrive and some suffer and what factors make some places pricey and some cheap. He is just 38. In the years since earning his Ph.D. at the University of Chicago, though, he has been prolific and provocative in a way that has left many of his colleagues awestruck. "I think he's a genius," says George Akerlof, an economist at the University of California, Berkeley, who was awarded a Nobel Prize in 2001....

Glaeser's recent work on real estate addresses the issues of supply rather than of demand. He is far more interested in the forces shaping land development and residential building in the United States than in the forces shaping buyers' motivations and actions. He views supply as crucial to appreciating what has happened to the U.S. real-estate market over the past 30 years. A few months ago, he traveled from his Harvard office to the Massachusetts State House, near Boston Common, to discuss with the leaders of the State Legislature a research project he had just completed on the local housing market. Between 1980 and 2000, four of the five cities in the U.S. with the fastest-growing housing prices were in Boston's metropolitan area: Cambridge, Somerville, Newton and Boston itself. (Palo Alto had the second-fastest-rising prices over that time.) Glaeser and several colleagues considered two explanations. First, the possibility that builders in the metro area were running out of land and that home prices reflected that scarcity. The second hypothesis was that building permits were scarce, not land. Had the 187 townships in the metro area created a web of regulations that hindered building to such a degree that demand far outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has previously noted (with a collaborator, Matthew Kahn) that 95 percent of the United States remains undeveloped and that if every American were given a house on a quarter acre, so that every family of four had a full acre, that distribution would not use up half the land in Texas. Most of Boston's metro area, he concluded, wasn't particularly dense, and even in places where it was, like the centers of Boston and Cambridge, there was ample opportunity to construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the housing crisis was man-made. The region's zoning regulations -- which were enacted by locales in the first half of the 20th century to separate residential land from commercial and industrial land and which generally promoted the orderly growth of suburbs -- had become so various and complex in the second half of the 20th century that they were limiting growth. Land-use rules of the 1920's were meant to assure homeowners that their neighbors wouldn't raise hogs in their backyards, throw up a shack on a sliver of land nearby or build a factory next door, but the zoning rules of the 1970's and 1980's were different in nature and effect. Regulations in Glaeser's new hometown of Weston, for instance, made extremely large lot sizes mandatory in some neighborhoods and placed high environmental hurdles (some reasonable, others not, in Glaeser's view) in front of developers. Other towns passed ordinances governing sidewalks, street widths, the shape of lots, septic lines and so on -- all with the result, in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon, he says, has inflated prices in metro areas all along the East and West Coasts....

"He doesn't wake up in the morning and say, 'My agenda is to fight government,"' says his Harvard colleague Martin Feldstein, an economist long in favor of privatizing Social Security and who, you might argue, knows what it's like to wake up with that agenda. While Glaeser admits to a libertarian bent, with a preference for market solutions over government solutions (he calls rent control "bad, bad, bad"), his inconsistencies are such that his colleagues disagree over whether he comes from the political center or the right. Certainly no one accuses him of being a lefty. But Glaeser has many admirers, and several research collaborators, on the liberal end of the spectrum; he likewise displays an odd enthusiasm for progressive efforts like those by London's mayor, Ken Livingstone (Glaeser affectionately calls him by his popular nickname, Red Ken), who imposed a stringent "traffic tax" on vehicles in the center city to reduce congestion....

My two cents are that there are two things going on here. First, there is the transformation of local governments--especially local governments of neighborhoods made up of detached houses--from machines to enrich developers via new construction to machines to enrich homeowners by generating upward pressure on house prices.

Second, there's a version of the "limited land" hypothesis: starting around 1970, many of America's metropolitan areas filled up in the sense that there was no longer greenfield land within less than half an hour's commute of anywhere you wanted to go. (New York is different, and was different for a long time.) Before 1970 being within half an hour's commute isn't valuable--it's there for everybody. Since 1970, being within half an hour's commute of Georgetown or Boston Common or the Embarcadero has become increasingly scarce and increasingly valuable.

If not for fact (1)--local political control prohibiting substantial density upgrades--fact (2) wouldn't matter much: we'd be changing Cambridge to look much more like the Upper West Side, and changing Berkeley to look much more like Cambridge. If not for fact (2)--SMSA-level congestion--fact (1) wouldn't matter much: we'd be building more greenfield neighborhoods within half an hour of the most interesting places, and the fact that established inner-belt suburbs restrict increased density wouldn't boost their housing values much or cause anybody much concern.

It is the interaction of the two, I think, that is key. IMHO zoning changed first, and then the consequences were triggered when congestion arrived as the freeways filled up.

Needless to say, none of this means that I am anything other than a huge and adoring fan of Ed Glaeser. In fact, is there a lobby pushing him for the Clark Medal?

And let's not forget that Red Ken Livingstone stole his congestion tax ideas from Milton Friedman...

Relative Material Deprivation Behind the Iron Curtain...

From Slavenka Drakulic (1992), How We Survived Communism and Even Laughed (New York: Harper: 0060975407):

"...that almost ten years after we saw each other in New York... there are still no strawberries [in Poland] and perhaps there won't be for another ten years.... Both of them took just one strawberry each, then put the rest in the refrigerator 'for Grzegorz.' This is how we tell our kids we love them, because food is love, if you don't have it, or if you have to wait in lines, get what you can, and then prepare a decent meal.... All this stays with me forever. When I come to New York and go shopping... Balducci's.... Third Avenue and 71st... I think of Zofia, my mother, my friend Jasmina who loves Swiss chocolates... my own hungry self still confused by the thirty kinds of cheese.... In an article in Literaturnaya Gazeta May 1989... Yevgenii Yevtushenko tells of a kolkhoz woman who fainted in an East Berlin shop, just because she saw twenty kinds of sausages..."

"Living under such conditions and holding Vogue magazine in your hands is... almost like holding a pebble from Mars.... 'I hate it,' says Agnes, an editor at a scientific journal in Budapest.... 'Just look at this paper--glossy, shiny, like silk.... Once you've seen it, it immediately sets... a visible boundary. Sometimes I think that the real Iron Curtain is made up of silky, shiny images... pictures from women's magazines.'... For us, the pictures in... Vogue were... important.... [T]he message that we absorbed was that the other world was a paradise. Our reading was wrong and naive... [but was] a powerful force, an inner motivation, a dormant desire for change, an opportunity to awaken.... What [did] we care about the manipulation inherent in the fashion and cosmetic industries? To tell us the are making a profit by exploiting our needs is like warning a Bangladeshi about cholesterol.... [T]he images [made] you hate the reality you [lived] in... not only can you not buy any of the things... but the paper itself, the quality of print, is reachable. The images... [were] more dangerous than any secret weapon, because they [made] one desire that 'otherness' badly enough to risk one's life trying to escape. Many did..."

Friday, March 03, 2006

The Pony Question...

Robert Waldmann writes:

Robert's Stochastic thoughts: All us reelly kool bloggers celebrate extremely bad news for Bush with photos of cute little ponies.... I don't have the faintest idea why, but I am blindly obeying the blog borg.

I thought it was in homage to Belle Waring's best weblog post ever: If Wishes Were Horses, Beggars Would Ride -- A Pony!:

[H]e should not only wish that Bush would say a lot of good things about democracy-building and fighting terrorism in a speech written for him by a smart person, he should also wish that Bush should actually mean the things he says and enact policies which reflect this, and he should wish that everyone gets a pony. See?

Bryan Caplan Believes in the Equity Premium Puzzle

He not only believes in it, he believes in the home bias puzzle too--and he acts on his beliefs:

EconLog, Four Bad Role Models, Bryan Caplan: Library of Economics and Liberty : Karen Lewis' excellent article on home country bias in the Journal of Economic Literature convinced me that I should drastically increase my ratio of international assets to domestic assets. After a brief "cooling off" period imposed by my ever-prudent wife, we went forward and made the change.

But has he mortgaged his house to the gills and invested the proceeds in international equities? Enquiring minds want to know!

We Leave Saving to the Private Investor...

As part of an attack on Paul Krugman, Michael Stastny approvingly cites George Reisman who approvingly quotes Ludwig von Mises:

Mahalanobis: George Reisman writes: "Paul Krugman is very upset. In his Monday New York Times Op-Ed column this week, he complains that while the real incomes of the great majority of Americans have essentially stagnated or declined over the last thirty-five years.... The essential thing to understand here about Krugman is that he is a Keynesian. And as Mises observed, 'The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions'."

Well, let's pull out John Maynard Keynes from behind the curtain:

John Maynard Keynes : We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits he expected to accrue to himself in terms of money. Those who are not in favor of drastic changes in the existing organization of society believe that these arrangements, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer--all proceed, in large measure, from the instability of the standard of value.

Keynes was neither a Fascist nor a Communist--i.e., he was not one of those "in favor of drastic changes in the existing organization of society." Does it sound like Keynes failed to conceive the role that saving plays in the improvement of economic conditions?

I've often thought that von Mises must never have read Keynes very carefully.

Virginia Postrel Is a Saint

She writes:

Dynamist Blog: A Medical Adventure: Unless people like Leon Kass get their way, someday patients with failing kidneys will be able to get made-to-order replacements that are exact genetic matches, either through therapeutic cloning or some now-unknown future technology. Now, however, if your kidneys stop working, you have three options: die, go on dialysis (regularly described as "living hell" by dialysis patients and their loved ones), or find a donor kidney. And donor kidneys are in short supply, made shorter by legal restrictions and social taboos.

Last fall, my friend Sally Satel wrote about the issue in general and her own search for a kidney donor. Between the time she wrote the article and the time it appeared in the NYT, I heard about her situation and volunteered as a donor. Our tissues turned out to be unusually compatible for nonrelatives and, when her Internet donor dropped out, I moved from backup to actual donor. We have our surgeries tomorrow morning.

As surgeries go, the procedure is safe and straightforward--far more so than people think. A donor can live a completely normal life with one kidney. The recipient is not so lucky, since a foreign organ requires a lifetime of immunosuppressant drugs. But that's a lot better than the alternative.

Knight Ridder's Tom Lasseter Has an Appointment in Samarra

Greg Mitchell writes:

Why Tom Lasseter Stays Behind in Iraq: Two weeks ago, I wrote a column alerting readers to a report by Knight Ridder's longtime Baghdad correspondent Tom Lasseter. He had returned from an embed mission to little-visited Samarra and, in his usual way, offered a remarkably frank look at a city that was taken by the U.S. last year but never really pacified. Well, timing is everything. A few days later, insurgents blew the top off the main mosque there and a near-civil war has raged since, with hundreds killed.

Lasseter's mid-Februrary dispatch proved prescient, but what surprised me most of all was that he was still out there risking his life. When last we heard from him last autumn, he was planning to wind up his long, award-winning stint in Iraq in January 2006, and move to Washington, D.C., to work for the KR bureau there. So what was he doing in mid-February, still in Iraq, filing another wrenching dispatch, embedded with U.S. troops in Samarra? What's with this guy? And how does he manage to get all of these stories, and revealing quotes, from military personnel when few others can?

E&P has covered Lasseter several times in the past two years. His assignment in Samarra caused me to ask him how it came about. From Baghdad, he replied that he had been curious about Samarra for quite some time. Was it indeed pacified last year, as claimed by the U.S., or more like still-boiling Ramadi? After expressing his interest to the public affairs chief for the 101st Airborne, he got the OK to hitch a ride in a helicopter to the city in January. Lasseter wrote in this e-mail that he was "pretty surprised by the level of destruction in the town." Its population of over 200,000 had been cut in half. Despite being surrounded by a seven-mile-long security wall, it was beset by an increasing number of explosions set off by insurgents...

Yet More Journamalism From the Washington Post (Why Oh Why Can't We Have a Better Press Corps?)

Matthew Yglesias inspects the sleazy Richard Cohen:

Matthew Yglesias | TPMCafe: Phase one of the Dubai port pushback has been for the President's defenders to call his critics racists and dismiss our concerns as baseless. After all, the Coast Guard will still be running security. Well, the Coast Guard turns out to have concerns. Thus, Richard Cohen and his phase-two pushback:

Would that anyone could say the same about many of the deal's critics. Whatever their concerns may be, whatever their fears, they would not have had them, expressed them or seen them in print had the middle name of the United Arab Emirates been something else.

I think I would need to be a card-carrying rightwinger to have an appropriate reply to this kind of racial demagoguery. The problem isn't that my concerns are without merit. My concerns may well have merit. But whatever my concerns may be they should be ruled out of bounds because Cohen knows -- he just knows -- that really, deep down, they're just motivated by racism. This is like a six year-old's approach to argumentation.


Matthew: I'm sure that at six you had a more adult and less sleazy approach to argumentation than this. I know my children did. You have to be a grownup Washington Post columnist to sink this low.

Economist's View

Mark Thoma transmits some good advice from Robert Rubin:

Economist's View: Robert Rubin urges Democrats to define the nation's fiscal problems broadly and not to fall into the trap of focusing solely on Social Security and Medicaid in formulating a solution:

Rubin Urges Democrats to Reject Bush Social Security Proposal, Bloomberg: Former U.S. Treasury Secretary Robert Rubin urged fellow Democrats to reject President George W. Bush's plan for a bipartisan commission to examine solutions to the mounting costs of Social Security and health care. Rubin... said Democratic leaders in Congress should instead insist Bush join them in a "fiscal commission" to discuss all options for cutting the budget deficit, including rolling back Bush's tax cuts. "It only makes sense substantively, in my judgment, to get together around this if everything is on the table, including the tax cuts," Rubin ... said... "Otherwise you have a one-sided approach to what is a very large problem."...

Rubin is--as he almost invariably is--right. We don't need an Entitlements Commission, we need a Fiscal Commission

Why Oh Why Can't We Have a Better Press Corps? (Today's Acts of Journamalism From the Washington Post Company)

Over at the Washington Post's Slate, John Dickerson drives Betty the Crow around the bend and over the cliff:

BTC: [John] Dickerson, the former Time Magazine Washington correspondent who now holds down the Ruminant desk at Slate, is shocked and alarmed by the presiden's lack of engagement [during] the [pre-Hurricane] briefing.... "I don't know what question the president should have asked," Dickerson plaintively writes toward the end of his column, "but shouldn%u2019t he have asked something?"... that little cri de coeur pales next to something Dickerson wrote earlier in the piece.

We see the president all the time in public settings, giving speeches, shaking hands, looking concerned. But this footage is fascinating because it is the first video I can recall of the president at work in private. It's our chance to see how the image of the president painted by his allies compares with the actual man. And the result is somewhat alarming. Based on what I'd been told by White House aides over the years, I expected to see the president asking piercing questions that punctured the fog of the moment and inspired bold action. Bush's question-asking talents are a central tenet of the president's hagiography. He may not be much for details, say aides, but he can zero in on a weak spot in a briefing and ask out-of-the-box questions. I have been repeatedly told over the years that he once interrupted a briefing on national defense to pose a 30,000-foot stumper: What is the function of the Department of Defense?...

I don't know what's most distressing... that Dickerson believed what Bush allies told him... that the president would... ask what the Pentagon is for, that [his aides]... were stumped by the question, that Bush aides thought the anecdote... flattering to Bush... or that a veteran reporter can reference "the view from 30,000 feet" without the slightest hint of embarrassment or irony.... It's tempting to think, or hope, that Dickerson is writing tongue in cheek, but he makes clear a bit later that no, he really did buy the bridge.

Perhaps the Katrina briefing was an aberration. But I worry that it isn't.... Former anti-terrorism official Richard Clarke and Treasury Secretary Paul O'eill both wrote about Bush's lack of curiosity. L. Paul Bremer's account... inadvertently paints a similar picture...

So. Okay. What we have here is an experienced Washington hand who has presumably been conscious during at least some of the past five years, and is only now -- and only because he saw the frickin' video beginning to worry that Bush may not be quite as competent as those responsible for covering his ass say he is...

And over at Romanesco, the real reporters at Knight-Ridder go on the warpath:

Poynter Online - Forums:

TO: Knight Ridder Editors
FROM: Clark Hoyt [Washington bureau chief] John Walcott

On Feb. 7, Warren Strobel reported on a State Department reorganization that sidelined career arms control experts who don't share the Bush administration's mistrust of international arms negotiations and agreements. Exactly two weeks later, The Washington Post published a virtually identical story by Glenn Kessler. We say "virtually identical" only because the stories were written with different words. There was not a single fact in Kessler's story that was not in Strobel's, the product of weeks of careful enterprise reporting and interviews with 11 current and former government officials. We have asked, through the Post's ombudsman, Deborah Howell, who was once executive editor in St. Paul, for a published acknowledgement of the Knight Ridder story. To date, it hasn't happened. We understand that there has been vigorous opposition from the Post reporter, who has claimed, in essence, that the "trade press" had already widely reported the story, a contention that is in fact not correct. We're waiting to see what happens....

[W]hy do we harp on this? Because the reporters who do the groundbreaking work deserve the credit. Because Knight Ridder, which invests substantially in this kind of original journalism, deserves the credit, even -- or perhaps especially -- in these trying times for all of us. And because the integrity of our profession, already under all-out assault from partisans, requires that we and others be honest with readers about how news originates. That's why, though it breaks our competitive hearts, we acknowledged right at the top of this morning's story about President Bush's briefing on Hurricane Katrina that the Associated Press was the first to obtain the video and transcripts of the briefing, if only by hours...

As somebody--Matthew Yglesias?--once said, these are the reasons that people interested in news-as-information rather than news-as-entertainment are increasingly turning to respected weblogs of good reputation for their information and serious analysis.

If Dickerson can sit in Washington for five years and really think that Bush routinely asks "piercing questions that puncture the fog of the moment and inspire bold action," what other stupid and insane--make that stupidly insane--beliefs underpin his writings? If Washington Post reporters and editors feel under no ethical obligation to acknowledge Knight-Ridder's priority, what other parts of what they do are ethics-free?

Paul Krugman on George the Unready

The reference is to the late tenth century English king who lost his kingdom to the invading Danes, Ethelred the Unready--in Old English Aethelraed Unraed. "Aethelraed" was his name, meaning "noble judgment." "Unraed" was attached to it as a pun--"unraed" meaning not "unready" but "bad judgment." It's a pun.

Anyway, Paul Krugman is good this morning:

George the Unready - New York Times : Iraqi insurgents, hurricanes and low-income Medicare recipients have three things in common. Each has been at the center of a policy disaster. In each case experts warned about the impending disaster. And in each case.... Knight Ridder's Washington bureau reports that from 2003 on, intelligence agencies "repeatedly warned the White House" that "the insurgency in Iraq had deep local roots, was likely to worsen and could lead to civil war." But senior administration officials insisted that the insurgents were a mix of dead-enders and foreign terrorists. Intelligence analysts who refused to go along with that line were attacked for not being team players. According to U.S. News & World Report, President Bush's reaction to a pessimistic report from the C.I.A.'s Baghdad station chief was to remark, "What is he, some kind of defeatist?"

Many people have now seen the video of the briefing Mr. Bush received before Hurricane Katrina struck... really striking, given the gravity of the warnings, is the lack of urgency Mr. Bush and his administration displayed in responding to the storm... Newsweek reports, for several days nobody was willing to tell Mr. Bush, who "equates disagreement with disloyalty," how badly things were going. "For most of those first few days," Newsweek says, "Bush was hearing what a good job the Feds were doing."

Now for one you may not have heard about. The new Medicare drug program got off to a disastrous start: "Low-income Medicare beneficiaries around the country were often overcharged, and some were turned away from pharmacies without getting their medications, in the first week of Medicare's new drug benefit," The New York Times reported. How did this happen? The same way... experts who warned of trouble ahead were told to shut up....

[O]ur country is being run by people who assume that things will turn out the way they want. And if someone warns of problems, they shoot the messenger. Some commentators speak of the series of disaster... as if it were just a string of bad luck. But it isn't. If good luck is what happens when preparation meets opportunity, bad luck is what happens when lack of preparation meets a challenge. And our leaders... think they can govern through a mix of wishful thinking and intimidation...

Impeach George W. Bush. Impeach Richard Cheney. Do it now.

Thursday, March 02, 2006

Fafblog Raises Itself to a Higher Dimension of Fafbloginess

Possibly the best Fafblog ever:

Fafblog! the whole worlds only source for Fafblog. :

Q. Why are we in Iraq?

A. For freedom! Recent intelligence informs us it is on the march.

Q. Hooray! Where's it marching to?

A. To set up a government of the people, by the people, for the people, and held in check by strict adherence to the laws of Islam.

Q. Huh! Freedom sounds strangely like theocracy.

A. No it doesn’t! It is representative godocracy, in which laws are written by the legislative branch, enforced by the executive branch, and interpreted by an all-powerful all-knowing deity which manifests its will through a panel of senior clerics.

Q. Whew! Is democracy on the march?

A. Democracy was on the march. Sadly, freedom and democracy were caught in a blizzard and freedom was forced to eat democracy to survive. It died as it lived: sautéed in garlic sauce with a side of scalloped potatoes. Democracy is survived by sectarian violence and fanaticism. In lieu of flowers, please send a coherent exit strategy.

There is more.

Lecture Notes on the Equity Premium: Part I

Lecture Notes on the Equity Premium: Part I
J. Bradford DeLong
March 2, 2006

There is, somewhere, a marginal investor: somebody just about indifferent between stocks and bonds. If the expected return to stocks were a little higher, he or she would move more money to stocks. If the extra risk associated with holding stocks were a little higher, he or she would move more money to stocks. In either case, that increase in demand for stocks would push their prices up, and so push the relative returns on stocks--which are the dividends that will be paid out on stocks in the future divided by the stocks' current price--down. But this marginal investor fears the risk as much as he or she values the return, and so does not move more money into stocks, and that is why the current price of stocks and the current value of the equity risk premium are what they are.

Now let's look at patterns of returns over the twentieth century, and try to figure out what this marginal investor has been seeing and thinking to make the equity risk premium what it has been, and then try to figure out what the current equity risk premium is.

Our first candidate marginal investor is someone who has some wealth that they want to invest for one year, and is considering whether to invest it in (relatively safe) one-year government bills (a "bill" is a short term bond) or in a (riskier) diversified portfolio of stocks. Figure 1 below plots the difference in returns for these two strategies for each year from 1900 to 2004--with the return differentials ranked from lowest to highest. 1931, with its (geometric) return differential of -60% (yes, 1931 was a bad year for the stock market) is at the far left; 1933 (the rich may not have voted for Roosevelt, but they certainly voted with their dollars that his "New Deal" was going to add value to American corporations) is at the far right.


Given this distribution of one-year returns over the twentieth century, the marginal one-year investor looks at it and reasons as follows:

Stocks certainly pay a healthier and higher return on average: over the twentieth century the inflation-adjusted real stock return has averaged 6.6% per year, while the real one-year Treasury bill return has averaged only 1.7% per year for an average gap of 4.9% per year. But look at all that extra risk: there's a 35% chance that you will do worse with stocks than bonds, a 10% chance that you will--relatively--lose more than 1/5 of your wealth if you put it in stocks, and in 1931 the (geometric) relative stock return was -60%! Considering the portfolio positions I already hold, the extra expected return to moving a little more of the wealth I'll need to spend next year out of bills and into stocks is simply not worth the risk.

Thus we understand why a--rational, reasonable, well-informed--marginal investor putting money away to spend in a year would not decide that stocks are underpriced, that the equity risk premium is appropriate. And so such a marginal investor would not put downward pressure on the equity risk premium.

The problem--the reason that the large value of the equity risk premium is called a "puzzle" is that the marginal one-year investor is not the only possible marginal investor. Consider the marginal twenty-year investor: somebody 40 with ten-year-old children who is putting money away to spend on his or her children's college, or somebody 50 saving for expenditures at 70 after they have retired. This marginal investor has to be satisfied with the configuration of asset returns as well. And what does the distribution of twenty-year-returns--either buy and hold a distributed portfolio of stocks (reinvesting the dividends) or buying and rolling over short-term Treasury bonds--look like? The answer is shown in Figure 2, which plots the twenty-year return differential over the twentieth century. The average return differential is (of course) the same: 4.9% per year. Over twenty years that cumulates to a lot: e20 x .049 = 2.67. But much more important is the lower tail: only 4% of the time do stocks do worse than bills over a twenty-year horizon. And the worst observation is the twenty years starting in 1965, when investing in stocks yields -0.84% per year less than investing in bills--a relative wealth loss of 17%.


What kind of investor would turn up a 96% chance of gain, associated with an expected more-than-doubling of relative wealth, that carries with it only a 4% chance of any relative loss and a maximum loss of 17% of relative wealth? Where is this twenty-year marginal investor, and what is he or she possibly thinking? All such twenty-year marginal investors should be furiously pulling much more money out of short-term bills and investing it into diversified portfolios of stocks, thus making the equity risk premium lower and stocks less of an overwhelmingly attractive long-run investment. That is the equity premium puzzle.

One possible answer that initially looked promising was that the marginal twenty-year investors had already moved all the money they could out of the short-term money market: that it was hard to short-sell Treasury bills (a large part of the value of them, after all, is certainty of immediate liquidity, which nobody other than the government can promise), and that the holders of Treasury bills are overwhelmingly institutions that needed them for specific institutional liquidity or transaction-cost-minimization reasons. The problem with this possible answer is that the same equity premium puzzle emerges when we look at twenty-year differential returns between diversified stocks and investment-grade corporate or longer-term bonds, which are extraordinarily widely held, and which do not have the special certain-liquid-value properties of short-term Treasury bills. Figure 3 shows the distribution analogous to that of Figure 2, where this time the marginal twenty-year investor is considering the relative returns to investing in a diversified stock portfolio (and reinvesting the dividends) as opposed to investing in a bond portfolio (and rolling maturing bonds over into new issues).


This time the lower tail is even smaller: in only 1% of the years in the twentieth century would investing in bonds for twenty years outperformed investing in stocks; and in that year--1929--the twenty-year returns to bonds would be only 8% ahead of the twenty-year returns to stocks. The equity premium puzzle is not due to the specific liquidity or collateral or other institutional properties of Treasury bills that make them especially valuable.

We have climbed into the box of the equity premium puzzle, which has now been locked and sealed with us on the inside. How are we going to get out of it? There are four possible roads, four possible arguments. They are:

  1. The twenty-year-horizon marginal investors are very, very risk averse--so averse to risk that they should be too scared to dare get into the bathtup (Daniel Altman cleaned this up a bit).
  2. There are no twenty-year-horizon marginal investors. Institutional features of Wall Street force everybody able to mobilize significant money to have a very, very short time horizon.
  3. The distribution of actual returns over the twentieth century does not match the true ex ante distribution of returns: we've been very lucky. If we hadn't been so lucky, relative stock returns would not look nearly so impressive and there would be no equity premium puzzle.
  4. Investors over the course of the past century have misjudged the return distribution: the true ex ante long-run return distribution matches the ex post distribution we see in Figures 2 and 3, but for one of a number of possible reasons investors have greatly overestimated the risk associated with lon-run diversified stock market positions.

To be continued...

Covering the Economy: A List of Some Smart, Talkative, and Thoughtful Macroeconomists

I promised the journalism students that I would come up with a list of smart, talkative, and thoughtful macroeconomists that they could refer to. My first thought was to send out the list of people who have signed up for Martin Wolf's economists' forum . But I can't: the list is ovary-free.

So let me add a random free-associated twenty who ought to be on the list: Anne Krueger, Valerie Ramey, Laura Tyson, Catherine Mann, Carmen Reinhart, Susan Collins, Christie Romer, Kristen Forbes, Karen Lewis, and Helene Ray.

Here's Martin Wolf's list:

Alberto Alesina, Harvard University
Olivier Blanchard, MIT
Willem Buiter, London School of Economics, Goldman Sachs
Ricardo Caballero, MIT
Stephen Cecchetti, Brandeis
Paul Collier, Oxford University
Richard Cooper, Harvard University
Guillermo de la Dehesa, Goldman Sachs
Brad De Long, Berkeley
Peter Diamond, MIT
Michael Dooley, University of California - Santa Cruz
Sebastian Edwards, UCLA
Barry Eichengreen, Berkeley
Martin Feldstein, NBER
Jeffrey Frankel, Kennedy School
Richard Freeman, Harvard University
Fan Gang, China Academy of Social Sciences
Wynne Godley, Cambridge University
Robert Gordon, Northwestern University
Ricardo Hausmann, Kennedy School
Glenn Hubbard, Columbia University
Taketoshi Ito, Tokyo Univeristy
Robert Laurence, Kennedy School
Richard Layard, London School of Economics
Robert Lucas, Chicago University
Gregory Mankiw, Harvard University
Alan Meltzer, Carnegie-Mellon
Ronald McKinnon, Stanford University
Edmund (Ned) Phelps, Columbia University
Jean Pisani-Ferry, Bruegel
Richard Portes, London Business School
Adam Posen , Institute for International Economics
Helmut Reisen, OECD
Danny Rodrik, Kennedy School
Kenneth Rogoff, Harvard University
Andrew Rose, University of California - Berkeley
Nouriel Roubini, New York University
Jeffrey Sachs, Columbia University
Andrei Sapir, European Centre for Advanced Research in Economics
Paul Seabright, Toulouse
Hans-Werner Sinn, University of Munich
Lawrence Summers
Tony Venables, London School of Economics
Juergen von Hagen, University of Bonn
Robert Wade, London School of Economics
Adrian Wood, Oxford University
Charles Wyplosz, Graduate Institute of International Studies
Luigi Zingales, Chicago University

The Pile Continues to Grow...

Added to the pile this week:

  1. (2005), The Silver Spoon (New York: Phaedon: 0714845310).

  2. Jeffrey Frieden (2006), Global Capitalism: Its Fall and Rise in the Twentieth Century (New York: Norton: 0393058085).

  3. John Scalzi (2006), Ghost Brigades (New York: Tor: 0765315025).

The only one of them I have managed to dip into so far is Scalzi's Ghost Brigades. It's very good, but not quite as good as his earlier Old Man's War. It's hard to write about without spoiling something. I found there was a little too much of "tell, not show." And I never could wrap my mind about the motivations of the antagonist.

Impeach George W. Bush. Impeach Richard Cheney. Do It Now

Scott Rosenberg writes:

Scott Rosenberg's Links & Comment : 85 percent of U.S. troops in Iraq polled by Zogby "said the U.S. mission is mainly 'to retaliate for Saddam's role in the 9-11 attacks.'"

This is the saddest thing I have read in a long time. (Thanks to Tim at War Room for pointing it out.) comment

Lying, mendacious swine. Impeach them now.

Deep Divisions Between Democrats?

Matthew Yglesias is bemused:

Dialogue of the Deaf | TPMCafe : My understanding of [GENE] Sperling's view is that he thinks the government ought to provide health care for all Americans, increased investment in education and other public services, a tax code more favorable to working people and less favorable to the wealthy, labor law reform so as to mandate card-check election procedures, and pursue reductions in farm subsidies inside the framework of the Doha Round of WTO talks.

Faux's view, by contrast is that the government ought to provide health care for all Americans, increased investment in education and other public services, a tax code more favorable to working people and less favorable to the wealthy, labor law reform so as to mandate card-check election procedures, and pursue reductions in farm subsidies outside the framework of the Doha Round of WTO talks because we shouldn't sign any new trade deals unless or until the trade deficit is closed.

This struck me as a very narrow disagreement, all things considered. It would be remarkable if two serious thinkers could get in a room together and agree about everything. When you agree about 90 percent of stuff, you ought to be pals. What's more, the disagreement was, to my view, of questionable relevance. Faux's notion of unilateral US reductions in agricultural protectionism is substantively correct, but politically impossible. Sperling's vision of the Doha Round isn't completely inconceivable but seems unlikely to happen irrespective of who runs the USA due to European and Japanese opposition. But even if the disagreement is relevant, it's just not all that significant relative to the very large range of things they agree about.

Faux and Sperling, however, didn't seem to see it that way at all. The debate was incredibly heated for an exchange on the dull-but- important topic of macroeconomic policy and there was a remarkable amount of vehemence. What's more, it didn't sound like vehement disagreement on a narrow point in the context of broad agreement, it sounded as if both participants, but especially Faux, felt they were engaged in a very grand clash of visions.

I'm totally open to the possibility of a grand clash of progressive visions but, honestly, I didn't see it

Economics and Ideology in China

What's going on inside China? Richard McGregor reports for the Financial Times:

A fierce battle hobbles China’s march to the market Liu Guoguang, a once influential but long retired Marxist economist, recently burst back onto the scene with an incendiary warning for the Chinese government. If it did not rein in market reforms and deal with the growing, gaping rich-poor divide, China would “change its colour”: code for the “red” Communist party losing power.... Almost overnight, symposiums were staged around the country to study his “economic thought”....

On one level, the attack by the elderly economist seemed to symbolise a backlash against Mr Hu’s government. But such straightforward interpretations no longer apply in a China where few debates fit neatly into an old-style Marxists-versus-the-market template. How, after all, could Mr Hu be criticised for the rich-poor gap when he, along with Mr Wen, has made tackling it a centrepiece of his economic policy?

When Mr Hu took over from Jiang Zemin three years ago, he inherited a country wealthier than it had been for generations but also more unequal. China is now less equal than the US and Russia, according to the World Bank, and income inequalities are still widening.... Even as official poverty levels have been falling and literacy rates rising, education researchers are discovering that drop-out rates among rural children from junior secondary schools average 30-40 per cent. “This is the most under-reported story in China – the country’s massive failure to educate its rural youth in the 1990s.” says Yasheng Huang.... Mr Hu and Mr Wen... declaring that addressing the rich-poor gap and improving the lot of those left behind by the boom years, especially farmers, would be a hallmark of their administration. Their policy response, however, has so far satisfied few.... To old Marxists such as Mr Liu, Mr Hu and Mr Wen have not done enough to uphold government – and, by implication, party – control of the economy.... [C]elebrity economists such as Lang Xianping... have criticised privatisation as a slow-motion Russian-style theft of state assets. Many mainstream economists counter that the Hu-Wen administration is shaping up as a disaster precisely because it refuses to tackle the state’s still dominant role....

For the Marxists, the growth in inequality and popular disenchantment with reform are directly related to the rise of the entrepreneurial economy and private wealth. Mr Huang at MIT turns this proposition on its head.... “The resilience of the state sector is a result of vast, powerful vested interests, powerful because so many of the remaining state enterprises are essentially wholly-owned subsidiaries of government agencies,” he says. “The best examples are the health and education sectors. Price inflation in these sectors since the mid-1990s has been rampant. At the same time,private entry into these two sectors has been minimal. Bureaucratic windfalls are enormous.”...

In the one area that there is a consensus on the need for urgent action – the countryside and small villages where most Chinese live – there is also increasing division about the proper response.... In rural areas the most sensitive issue, and one the government so far has dared not touch, also revolves around giving greater play to the market, with all the risk that entails. City residents can now buy and sell their homes but rural land remains under collective ownership and cannot be traded by farmers. As a result, land in rural areas has less than 10 per cent of the value of urban land.... Such differentials offer an irresistible financial incentive to corrupt officials to take rural land, reclassify it and sell it on for homes or factories....

Zhou Xiaochuan has been an unusually activist governor of the People’s Bank of China.... So for anyone attuned to the subterranean rhythms of Chinese politics, an article published last month in a small Hong Kong newspaper attacking Mr Zhou had ominous undertones. The article gave him no credit for his policy work as central bank chief, instead damning him as unprofessional. His support for market devices such as derivatives would attract foreign “wolves” into China and lead to an explosion in bad debts.... It is no secret why Mr Zhou and his supporters have accumulated enemies over the past year. At a time when market reforms have been under pressure, they have pushed ahead with their agenda and achieved notable successes....

Mr Zhou has not strayed from the orthodox party line on politics, but a number of prominent economists who are broadly aligned with his reforms have suffered in the crackdown on liberal think-tanks and non-governmental organisations in the past year. Economists Mao Yushi and Wu Jinglian have both had research institutes closed, in Beijing and Shanghai respectively. Others, such as Zhang Weiying of Peking University, have been taken to task for being too close to China’s new breed of entrepreneurs.... Hu Jintao and Wen Jiabao, prime minister, have engineered a stifling political climate, which has seen numerous newspapers closed and editors sacked.... [T]heir views on economics and on issues such as privatisation and foreign investment in banks are much less clear. Some see that as a product of weakness and indecision....

“We are all very much on the defensive right now,” says another well-known economist with close connections to the liberal camp. The economist... was stunned by the reaction to a recent speech he delivered in Beijing to a university economics faculty, a group that he thought might be open to ideas and debate.... Members of the faculty rose not to debate but to denounce him. “We must keep in mind our [foreign] enemies,” one professor told him, to wide applause. “We are still a socialist country.”...

Tuesday, February 28, 2006

Covering the Economy: February 28: International Trade

Covering the Economy: February 28, 2006: International Trade

Today's lecture is going to be much more like a standard economics lecture than our classes have been so far. I'm sorry. But I see no way of doing it otherwise.

Major points to be hit:

International Trade: Background

  1. From 2% of GDP (1800) to 8% of GDP (1913) to 5% of GDP (1939) to 15% of GDP (today) to ????
  2. Effects of trade:
    1. Comparative advantage--each specializes in what it does best
    2. Stolper-Samuelson: the "scarce" factor in each country loses from the opening-up of trade
    3. Dynamic effects
      1. Does manufacturing matter?
      2. The political economy of protection
      3. Extent of the market
      4. Examples of countries that have gained lots of relative ground under free trade?
    4. Political consequences: late nineteenth century Germany and the marriage of iron and rye

International Trade: Effects

  1. Not number of jobs, quality of jobs.
  2. What if monetary factors mean that the exchange rate is wrong?
    1. Reagan deficits and the high dollar of the 1980s
    2. Bush deficits, Chinese dollar purchase program, and the trade deficits of the 20002.
  3. Our current $1 trillion annual deficit
    1. Balance up or balance down?
    2. How long can this go on?


Monthly Trade Release


The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total December exports of $111.5 billion and imports of $177.2 billion resulted in a goods and services deficit of $65.7 billion, $1.0 billion more than the $64.7 billion in November, revised. December exports were $2.3 billion more than November exports of $109.2 billion. December imports were $3.3 billion more than November imports of $173.9 billion.

In December, the goods deficit increased $1.2 billion from November to $70.6 billion, and the services surplus increased $0.3 billion to $4.9 billion. Exports of goods increased $1.9 billion to $79.0 billion, and imports of goods increased $3.1 billion to $149.6 billion. Exports of services increased $0.5 billion to $32.5 billion, and imports of services increased $0.2 billion to $27.6 billion.

In December, the goods and services deficit was up $11.0 billion from December 2004. Exports were up $9.8 billion, or 9.6 percent, and imports were up $20.8 billion, or 13.3 percent.


From the Economists' Voice

Cultural Consumption and Identity in 18th Century Germany

Gerry Feldman invited Michael North to come up from his temporary home base at the Getty Museum to talk:

Cultural Consumption and Identity in 18th Century Germany : Monday, February 27, 2006 Time:4:00PM Speaker:Prof. Michael North (Professor of History Ernst-Moritz-Arndt University, Greifswald) Location:201 Moses: Description:The lecture will discuss culture and consumption and the issues of luxury and taste in Germany at the turn of the nineteenth century...

Absolutely fascinating. The nugget that fascinated me the most was this. I think I understood it properly:

If, in the late eighteenth century (if you were rich--solidly bourgeois) you wanted to get the score of a piano sonata by Karl Philip Emmanuel Bach, it was easy: C.P.E. Bach sold subscriptions and partnered with publishers to make money off of selling scores. He was, among other things, an intellectual property entrepreneur. On the other hand if, in the middle of the eighteenth century, you wanted to get the score of one of Johann Sebastian Bach's Brandenburg Concertos... you needed to know and be owed a favor by the Kapellmeister of some small princely state who knew and was owed a favor by the Kapellmeister of Frederick the Great and so had a copy of the score that could be recopied by hand. C.P.E. Bach was in lines of business that J.S. Bach was not.

I suppose this explains why we have only the St. Matthew and St. John Passions. Surely J.S. Bach wrote St. Luke and St. Mark Passions too, didn't he?

Monday, February 27, 2006

Graduates Versus Oligarchs

Why is America becoming a land of oligarchs and the insecure? Paul Krugman writes:

Graduates Versus Oligarchs - New York Times: What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite. I think of Mr. Bernanke's position, which one hears all the time, as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group -- that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don't have these skills.

The truth is quite different. Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

So who are the winners from rising inequality? It's not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that. A new research paper by Ian Dew-Becker and Robert Gordon of Northwestern University, "Where Did the Productivity Growth Go?," gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint.

Just to give you a sense of who we're talking about: the nonpartisan Tax Policy Center estimates that this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The center doesn't give a number for the 99.99th percentile, but it's probably well over $6 million a year.... The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story. Should we be worried about the increasingly oligarchic nature of American society? Yes, and not just because a rising economic tide has failed to lift most boats. Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There's an arrow of causation that runs from diverging income trends to Jack Abramoff and the K Street project. And I'm with Alan Greenspan, who... has repeatedly warned that growing inequality poses a threat to "democratic society."

Say, rather, that five things are going on:

  1. The rise of a very powerful, successful, exploitative upper class.
  2. Further increases in inequality as the tax and transfer system becomes less progressive.
  3. Increases in risk that threaten to move middle-class families sharply downward in the wealth distribution.
  4. Skill-biased technical change that sharply raises the benefits to education.
  5. Holes in the safety net--the fall in the value of the minimum wage, time-limited welfare, and so forth.

Franklin Foer Is Named Top Editor of New Republic

Ah. A good choice:

Franklin Foer Is Named Top Editor of New Republic: Franklin Foer, a senior editor with the magazine, is quietly taking over the shop next week.... [T]he magazine that Mr. Foer, 31, takes over is hardly on a roll. The New Republic's circulation has dropped by almost 40 percent in four years; it cut its circulation and staff salaries after aggressively spending on the Web in 2002. Meanwhile, its historical role as a maypole for middle-way Democrats is under challenge from countless Web sites and bloggers.... But the magazine is financially stable, its owners say, in part because there are now four of them. Roger Hertog and Michael Steinhardt, successful New York financiers with an interest in policy and media, were enticed in 2002 to share in The New Republic's glories and seemingly inevitable losses with its longtime owner and editor in chief, Martin Peretz. More recently, CanWest, a Canadian media conglomerate bought a share as well.

To look at The New Republic, with a weekly circulation of 62,000 and a demure size of about 40 pages, the subject of who might be its editor would seem to be a game that is played in a very small parlor....

This is the question: can the New Republic remain a central place for center-left argument in the digital age? What are its edges?

Wow. Abe Lincoln Would Be Proud

You can fool all of the people some of the time. But you can only fool 34% of the people all the time:

Poll: Bush Ratings At All-Time Low : (CBS) The latest CBS News poll finds President Bush's approval rating has fallen to an all-time low of 34 percent, while pessimism about the Iraq war has risen to a new high.... CBS News senior White House correspondent Jim Axelrod reports that now it turns out the Coast Guard had concerns about the ports deal, a disclosure that is no doubt troubling to a president who assured Americans there was no security risk from the deal.... In a separate poll, two out of three Americans said they do not think President Bush has responded adequately to the needs of Katrina victims. Only 32 percent approve of the way President Bush is responding to those needs, a drop of 12 points from last September’s poll, taken just two weeks after the storm made landfall.

Impeach George W. Bush. Impeach Richard Cheney. Do it now.

Sunday, February 26, 2006

What Are America's Intangible Exports?

Brad Setser continues to think about "dark matter" and related issues:

RGE - Mandel v. Setser. Round two. More on intangible exports and dark matter : [Michael] Mandel makes two points in response to my argument. Both are worth a bit of further discussion. First, he challenges the conventional wisdom that the United States has taken out external debt to finance a surge in consumption... relative to income and a surge in investment in residential real estate.... [He says] we in the US are borrowing from China to invest in ourselves. We are borrowing to invest in our human capital.... Mandel thinks pessimists are wrong on a second count as well.... We are investing in assets that generate external revenues - revenue that can be used to pay the US import bill once we stop exporting so much debt.... No worries, according to Mandel. Starbucks China may pay rent to the Chinese communist party (and its well-connected friends), and employ Chinese labor to operate Italian expresso machines. But the (predominantly) American owners get most of the profits, and those future profits in China can pay for lots of low-end electronics assembly....

Is Mandel right? Are we in the US taking on external debt to ramp up our investment in ourselves... intangible assets - human capital, management training, R&D, brands - that will generate enough dark matter and intangible exports to allow the US pay for lots of imported Asian assembly?.... Mandel thinks the worry warts (i.e. the gloom and doom caucus, trade deficit division) pay too much attention to the United States' lack of "tangible" exports.... [M]anagerial genius ekes out higher returns on US investment abroad than foreigners get on their investment in the US....

Should our image of the US economy shift from a home equity line financed by the Chinese central bank -- OK, really, the Chinese central bank, the Saudi monetary authority, the Russian central bank, the Abu Dhabi investment authority and a few less visible central banks in the emerging world -- to a college loan and corporate bond issue to finance US firms R and D?... Mandel wants to compare the US today with the US in the 1950s, and argue that since the 1950s, investment in intangibles is way up, even if investment in tangibles is way down.... My baseline world is one where the US current account deficit expanded during the US investment boom (and Asian bust) of 98-00, but then comes down.... Redefining a lot of spending as investment in intangibles doesn't change the balance between corporate savings and investment unless firms are investing a lot in intangibles than at the peak of the .com bubble. That's unlikely....

What of Mandel's second argument - one that parallels the argument of Hausmann and Sturzenegger. Will US investment in new intangible assets (the Starbucks brand, The Ipod's software, design and brand, and so on) allow the US to pay the bill for all its tangible imports?... There is no doubt that the US does better exporting intangibles than exporting tangibles. But that is a low bar for a country that imports twice as many tangible goods as it exports. The only question is does it all add up.... A point of clarification. The export of "intangibles" can come from foreign direct investment. Starbucks had the genius to marry Italian café culture with American drive-through (and walk-through) habits. The profit margins are higher if you take your tall skinny latte to go. In Mandel's vision, the profits from exporting the Starbucks experience -- the return on Starbucks investment in China -- will pay the US import bill. Coffee is a commodity. As is the labor required to make a tall skinny latte. Starbucks is an experience.... What matters... is the net external revenue.... The profits on Starbucks Beijing. The royalties on Microsoft's software.... Boeing's external sales.... The question is... whether [the US] can export enough intangibles to pay for all the tangible goods that enter US ports every month.... Mandel's argument is that the US right now is investing in ways that will generate future external revenues....

Why am I skeptical. Fist, the US will need to sell an awful lot of intangibles to make up for the exceptionally large gap between its (large) tangible imports and (small) tangible exports.... Second.... Third, I am not convinced that the US economy is gearing up to produce "intangible" goods that can readily be exported -- rather than just shifting into the production of domestic intangibles.... I don't see US firms doing a wonderful job building up the kind of intangible assets that easily translate into future exports. Like Calculated Risk, I see a lot of investment in housing, and lots of people training to be real estate brokers.

Fourth, I suspect that a lot of what Hausmann and Sturzenegger call dark matter - or what Mandel would call the gains from exporting "intangible" US expertise at financial and brand management - will turn out to be the product of exporting the Federal Reserves super-low US interest rates. I would be the first to concede the world has been -- and still is -- wiling to loan the US money at very generous terms. My big concern is that those terms are too generous to last....

Let me conclude by noting that in 2006, the US will export about one trillion less - counting both US exports of tangible goods and intangible services, including the service of financial intermediation - than it imports. It will - if all goes well - maybe borrow $1.2 trillion from the rest of the world. About $900 billion of that will go to pay for US impost of goods and services, and about $70 billion will go to pay interest on past US imports of goods and services (US debt).... About $200 billion will be used to finance US foreign direct investment abroad and US portfolio equity investment. Is there any plausible way that the $200 billion investment will generate sufficient investment income to pay for the interest on the $1 trillion the US takes on, let alone generate enough investment income in the future to let the US pay for its ongoing imports of tangible goods out of the returns on its past investment?

Try doing the math. It doesn't work.

Crooked Timber's Brain Explodes

It writes:

Crooked Timeber: [Bush's] latest defense is, "I didn't know anything about it." Whaaaa? "The president is a sock-puppet moron" is supposed to be a snide criticism, not an exculpatory point. In general I am confused and await further information. Matthew Yglesias rightly notes that the alert citizen will have learned not to trust the administration to make S'mores without plunging half the nation into a sticky-sweet inferno of death. Death that's sandwiched between Graham crackers! Food for thought.

Robert Shiller: U.S. Coastal Property Markets Are Overvalued

The Financial Times has lunch with Robert Shiller: / Arts & Weekend - Lunch with the FT: The man and the bubble By Jim Pickard: The Yale professor correctly predicted the last stock market crash five years ago in his book, Irrational Exuberance. Now he is predicting a property meltdown.... for a 59-year-old - young features. He wears a blue jacket over a light blue shirt.... Shiller has sold truckloads of books by using plain English and eschewing more arcane economic theory. But he is not averse to more complicated words....

What I really want to know, not least as a homeowner, is when and how the property market will crash. So I ask him. For a man whose written predictions seem so definite - and dire - he appears loath to be nailed as an inveterate doomster. “I really don’t know what prices will do,” he says hesitantly, playing with his cutlery. But hasn’t he predicted a huge drop in US house prices? Only in some specific cities and states, he clarifies. The professor is no doubt aware that the history of economic forecasting is littered with the names of those who made the right forecasts at the wrong time.

He was already well respected before he became an author. Indeed, he may have been the one who lent Alan Greenspan the phrase “irrational exuberance.”... Shiller’s life has changed since Irrational Exuberance was published in 2000. He now gives a dozen speeches a year to business audiences across the world and makes frequent media appearances....

Alan Greenspan was praised for his handling of the economy during his interminable run as head of the Fed; in particular for his rapid cuts in interest rates to keep the economy afloat after the last stock market crash. Yet this has pumped up the housing bubble even more. I want to provoke mild-mannered Shiller into a little criticism. What, exactly, can Ben Bernanke, Greenspan’s successor, do to rescue the US economy if the property market crashes? Has the Fed already used up its one silver bullet - that of interest rate cuts?

“Bernanke thinks there is no housing bubble,” says Shiller. “According to the White House website, he said recently that the fundamentals explained house price movements except in some speculative markets.” The new chairman of the Fed is a “brilliant man”, Shiller continues, but he has not shown any interest in behavioural economics.... Here we come to the crux of Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. “The bubble is made by a ‘story’, by excitement and glamour,” he says. And then, once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further....

First, I ask, is he underestimating the role of low interest rates in fuelling the global property bubble? Prices may seem ridiculously high but if the cost of servicing property debt is low, why should it matter? Shiller’s reply seems well-rehearsed: interest rates are not so low in a historical context and in the US they are rising. An unprecedented number of variable rate mortgages... spells danger.... My second criticism is that it is not enough for an academic to point out when a market has over-heated. It’s only really useful to know when a market is so over-heated it will implode. In other words: timing. It is a point that he concedes....

Later, as Shiller eats a poached pear with cinnamon ice cream - which he declares delicious - we discuss his own investment approach. If the professor thinks that property and shares are both overheated, then where would he invest? Under a bed in cardboard boxes? Shiller’s advice is to diversify and to keep plenty of money in the bank or in “boring” inflation-proofed bonds....

Launceston Place Restaurant, Kensington, W8, London

1 x cauliflower soup with blue cheese croutons
1 x pan-fried black pudding with apple sauce
2 x roast cod with parsnip puree and curry cream
1 x poached pear with cinnamon
1 x coffee
1 x bottle mineral water
1 x cranberry and apple juice
Total: £52.75

RGE - So where exactly are all the world's reserves going?

RGE - So where exactly are all the world's reserves going? : So where exactly are all the world's reserves going? Created: Feb 16 2006 We don't yet formally know the BEA's estimate for the end of the year current account deficit, but we have a pretty good idea. We have the trade data for the entire year, and data on investment income and transfers for the three of the four quarters. We also now have a lot of data about how the US financed its current account deficit. One hint: debt. Enough to have a pretty good idea what the year end data will show about a lot of things. One thing is clear. There is going to be a big fall off in recorded central bank flows to the US. A really big fall off. In 2004, central banks provided the US with close to $400 billion in financing. The BIS thinks that understates the "real" financing provided by central banks, since central banks increased their offshore dollar bank accounts by $100b or so - so roughly $500b of the world's $640b or so in (valuation adjusted) reserve growth ended up dollar assets of one kind or another. The US data is going to show far smaller inflows in 2005. The TIC data shows that central banks bought about $115b billion in long-term securities, down from $236b in 2004. And that overstates total central bank purchases of securities. In 2004, central banks added to their holdings of short-term Treasuries as well. In 2005, they reduced their holdings of short-term treasuries by $43 billion. So, in net, central bank holdings of US securities increased by $71-72 billion v. $324 billion or so in 2004. Foreign central bank's "onshore" dollar deposits are up by 19.2 billion in the first three quarters - so a reasonable estimate for the full year total is $26.6 billion. The total last year was $70b. That would put total central bank financing of the US - if you believe the US data - at a bit under $100 billion, or about ¼ the level of 2004. If you read this blog regularly, you know I don't believe the data. Why? Simple: there hasn't been a comparable fall off in global reserve accumulation. See Bill Pesek. The IMF put global reserve accumulation in 2004 at about $700 billion. Roughly $60 billion of that came from the rising dollar value of euro reserves, so the "flow" or "valuation adjusted reserve increase" was closer to $640 billion. The dollar/ euro started 2004 at around 1.26, and ended above 1.35. According to the IMF, total global reserves increased by $327 billion in the first three quarters of this year. During that time, the euro fell from $1.356 to 1.2060 - reducing the dollar value of a lot of euro denominated reserves. Other reserve currencies (the yen, for example) also fell against the dollar. Those moves cut the reported stock of reserves by about $100 billion by my estimates, so total reserve accumulation for the first three quarters was around $425 billion. Add in another $100b for q4. That is very conservative. I estimated a $92 billion (valuation adjusted) increase for the major emerging economies alone. That brings the global total up to $525 billion, maybe more. $550 b would not surprise me. The kicker: that doesn't include the $63b increase in the foreign assets of the Saudi Monetary Authority. The Saudi's don't report all the funds held by the central bank as reserves - only a tiny subset. That puts the total increase in central bank assets in 2005 at between say $588 billion (call it $590b) and $610 billion. And if you include all the foreign assets of the Saudi monetary authorities, by rough estimates, the pace of reserve accumulation by emerging economies actually picked up substantially in 2005. I get a (valuation-adjusted) increase of around $430 billion for the major emerging economies (all the major Asian economies, Brazil, Turkey, Mexico, Russia, and the Saudis) of the world in 2004, and closer to $510 billion in 2005. In sum, there hasn't been much of a fall off in reserve accumulation, only a fall off in recorded central bank inflows to the US ... Hmmm. If central banks really only invested $100b in the US in 2005, and my estimate on their total reserve accumulation is right, that implies $490-510b in inflows to other reserve currencies. But there has not been an acceleration in overall inflows into the Eurozone. I am not a huge fan of the overall "bond conundrum" analysis of Christopher Balz of Commerzbank - he take the US data at face value, and I think understates the role of central banks. But he does have a nice chart showing illustrating this point on p. 4 of his report. Hmmm Of course, there is another possibility: offshore dollar reserve accumulation and hidden central bank buying account for a decent chunk of the "private" inflows in the TIC data.

Outsourcing Torture

Hilzoy of Obsidian Wings writes:

Obsidian Wings: Maher Arar's Case Dismissed : Maher Arar's case has been dismissed.... [I] do not feel competent to address the legal issues it raises.... However, there is one point on which I disagree strongly with the Court. Apparently, one of the counts could have proceeded had the Court not found that the national security questions it raises require that it be deferred to Congress or the executive.... I think this is just wrong. Article VI of the Constitution states that "all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby". We have entered into the Convention Against Torture. Article III of that Convention states that "No State Party shall expel, return ("refouler") or extradite a person to another State where there are substantial grounds for believing that he would be in danger of being subjected to torture." There are very substantial grounds for believing that someone rendered to Syria, as Arar was, would be tortured, even leaving aside the possibility that we asked the Syrians to torture him. We have therefore violated one of those treaties which are, according to the Constitution, the law of the land.

This means that the extradition of Maher Arar is a violation of the law. It may also have foreign policy implications, but it does not thereby cease to be a violation of the law. And while conducting foreign policy may not fall within normal judicial expertise, reading laws, and determining whether the facts in evidence warrant conviction under them, is exactly what judges do. If determining when conduct violates a law and when it does not does not fall within their purview, I have no idea why on earth we bother to have them.

Moreover, while the Court argues that Congress has not addressed the issue of extraordinary rendition, I would have thought that it did so by ratifying the Convention Against Torture, thereby making it the law of the land.

The only way I can see of holding that Maher Arar's detention should not be justiciable is to say that when something is both (a) a violation of law and (b) significant for foreign policy, its foreign policy significance should trump its illegality. But this would be crazy. Do we really want to say that whenever foreign policy is in any way involved, our laws cease to apply? That whatever our officials do that relates to foreign policy is therefore immune to legal scrutiny? I don't.

I Don't Understand This

I don't understand this. I may never understand this.

Uncertain Principles :You Can't Get There From Here: Category: Quantum Optics: Buried beneath some unseemly but justified squee-ing, Scalzi links to an article about "counterfactal computation", an experiment in which the group of Paul Kwiat group at Illinois managed to find the results of a quantum computation without running the computer at all. Really, there's not much to say to that other than "Whoa." The article describing the experiment is slated to be published in Nature, so I don't have access to it yet, but I'll try to put together an explanation when I get a copy. The experiment involves a phenomenon know as the "Quantum Zeno Effect".... [M]ake the measurement a much shorter time after the excitation-- a tenth of a second, say. The probability that the atom has already decayed is really, really small-- 0.002%-- so you're really likely to find it in the excited state, after which the atom is entirely in the excited state again, and the decay clock starts over.... If you keep making measurements at short intervals, you can keep the atom in the excited state basically forever.

The cool thing is, you can do this sort of thing with passive measurements. You don't have to bounce a photon off the atom to prove that it's in the excited state-- instead, you can send in a photon that will only be absorbed by a ground-state atom, and see what happens. If it isn't absorbed (and it most likely won't be), that's just as effective at keeping the atom in the excited state as if you'd done something more active to detect the excited-state atom.... If you're really clever about it (and Paul Kwiat is a really clever guy)... computing without running a computer should come as no surprise...

Class, Status, Vehicular Manslaughter

An excellent story from Bitch, Ph.D., who finds two young American men's roads diverging on a wet slippery night:

Bitch Ph.D. : Mi familia; or, visiting the iniquity of the fathers on the children: Two stories about two different young men.

1. J. immigrated with his family from Russia. In Russia, his family was wealthy, and after they arrived in the States, they quickly re-established themselves, using their education and business acumen, so that they are now quite comfortably upper middle class. J. was a student of mine and is now a friend to whom I am something of a mentor. I wrote him recommendations for several law schools, and he is now enrolled at one of the better ones in this country.

J. loved car racing and driving fast. For his 16th birthday, his parents leased him a new sporty car. He did some modifications on it and, unknown to them, used the money that was amply provided to him to take racing classes at a local track, and to occasionally race there. He liked to speed, and had an accident (which pissed his parents off), but he generally avoided street races because he did not want to run afoul of the law, since he had aspirations to go to law school.

Inside Harvard Baseball Post I

Let me put on my Harvard College alumnus cap:

Harvard Economics Professor David Laibson writes in the Harvard Crimson:

Summers and the Students: Summers understood the embarrassing fact that Harvard is great because we admit great students, not because we give them a great faculty-led education. Of course, the students know this too, explaining why Harvard students rate their educational experience less positively than the students at almost all of our peer institutions. Summers led the charge to revamp the curriculum... improve the quality of undergraduate life... hold faculty accountable for their teaching. Some faculty faulted him for playing too central a role in the curricular review, and some faculty resented being told (fairly or unfairly) that they weren't living up to Summers's standards. Whatever the case, most students felt that Summers had their interests at heart and was working intensely to make Harvard better for them...

Back when I was an undergraduate the Harvard senior faculty teaching load in the humanities and social sciences seemed to be four courses a year, half graduate and half undergraduate--three lecture courses meeting three hours a week and one seminar meeting two hours a week, for (given Harvard's short semesters) an effective 120 or so teaching hours in the classroom a year. Even then we used to joke about the Harvard philosophy of education: herd the undergraduates onto the campus and let them educate and entertain each other, while the senior faculty occasionally pass through like juggling-bears-riding-bicycles.

It wasn't really true then: As an undergraduate I learned huge amounts from senior faculty members like Michael Walzer, David Landes, Stanley Hoffman, Marty Feldstein, Zvi Griliches, Wallace McCaffery, Simon Schama. But I learned much more from junior faculty, lecturers, and TAs like Shannon Stimson, Mark Watson, Andy Abel, Olivier Blanchard, Jeff Weintraub, and Bill Lazonick; and from stray MIT junior faculty hanging out in Harvard Square like Paul Krugman and Larry Summers.

But what was (largely) a joke to us a generation ago does appear to be true now.

The two Harvard professors who proposed votes of "no confidence" in Larry Summers are Judith Ryan of the German Department and J. Lorand Matory of Anthropology and AAAS. This year, the Harvard course catalog lists Judith Ryan as teaching one graduate seminar--22 teaching hours in the classroom:

German 290. Experience and Remembrance in W. G. Sebald: Seminar : Catalog Number: 7036 | Judith Ryan Half course (spring term). M., 2-4. EXAM GROUP: 7, 8. Close study of Sebald's narrative and poetic works, as well as a selection of his scholarly essays, against the backdrop of recent literary theory. Note: Expected to be omitted in 2006-2007. Readings in German, discussions in English.

This year, the Harvard course catalog lists J. Lorand Matory as teaching one seminar and one lecture course, both in the spring--55 teaching hours in the classroom:

African and African American Studies 140z. The Other African Americans: Catalog Number: 0300. J. Lorand Matory. Half course (spring term). W., 4-6. EXAM GROUP: 9. We survey the history and contemporary experiences of self-identified "mixed-race" groups, as well as voluntary immigrant groups from Africa and the Caribbean, such as Cape Verdeans, Nigerians, Jamaicans, Afro-Puerto Ricans, and Haitains in the US. Students are introduced to arguments central to the social scientific study of modern societies generally, such as the invention of ethnicity, and negotiation of identity, and the social constructedness of race.

Anthropology 1600 (formerly Anthropology 110). Introduction to Social Anthropology: Catalog Number: 8296. Theodore C. Bestor (fall term) and J. Lorand Matory (spring term). Half course (fall term; repeated spring term). Fall: M., W., (F.), at 1; Spring: Tu., Th., at 11. EXAM GROUP: Fall: 6; Spring: 13. Introductory exploration of anthropological approaches to society, culture, language, and history. Lectures, readings, and ethnographic films focus on global social and cultural diversity, and the intellectualand ethical challenges of anthropological research on human difference, experience, and complexity, across a wide range of theoretical perspectives and social/cultural topics, including kinship, social and political hierarchy, exchange, gender, language, ideology, religion, and global political economic systems. Note: Open to freshmen.

From this admittedly unrepresentative and far-too-small sample, it looks like the withdrawal of the Harvard senior faculty from teaching--especially teaching undergraduates--is nearly total.

So I have a question for the members of the Harvard Corporation: Patricia King, James Houghton, Nannerl Keohane, Robert Reischauer, James Rotheberg, and Robert Rubin: Should Harvard's next president be someone who will continue to acquiesce in this withdrawal of the senior faculty from the teaching classroom (as Neil Rudenstine and Derek Bok did)? If not, how can he or she change the faculty culture so that the senior faculty once again view themselves as teachers? If yes--if the current senior faculty are abandoned as a lost cause as far as undergraduate education is concerned--then how can he or she raise the quality of Harvard undergraduate education to the level of its peer institutions like Brown, Yale, and Princeton?