A Morning Coffee Non-Videocast

From a mailing list that I know:

From: xxxxxx

Of course, I usually just drink instant coffee from one pint mug, taking water from hot water tap and warming the coffee up a bit in microwave after adding milk and some black molasses sugar. However, I am partial about instant coffee brand: I tried many, but it seems that Nestlé knows something that others don't. Classic gusto forte, Espresso and Cap Colombie are particularly good.

UGH ugh ugh ugh ptui must wash out mouth after reading! How could a post that started that way, have ended that way?

Oh, it gets worse. I've found that for those hard to resist MMM (Monday morning meetings) that a sprinkling from the handy jar of Nescafe sitting on the ledge in the shower mixes quite quickly in a small glass tea cup with the shower water. Awake in 5.

Friends have named this beverage 'mud'. Apologies.

Department of "Huh?"

Josh MIcah Marshall reads Dan Balz in the Washington Post:

Talking Points Memo: by Joshua Micah Marshall: April 16, 2006 - April 22, 2006 Archives: In his front page piece in Thursday's Post, Dan Balz writes: "Realigning the White House staff and bringing in new faces appear central to [the] effort ... to revitalize this presidency quickly enough to avoid crippling GOP losses in November that could thrust Bush into instant lame-duck status."

And Josh's jaw drops as he asks the natural question:

I can't get past this point of, where are the new faces? It's like they cannot take on anyone who hasn't a) already taken the Bush omerta or b) works currently for Fox News.

Josh is right: there are no new faces: Chief of Staff out, OMB Director to Chief of Staff, STR to OMB, Deputy STR to STR, Press Secretary out.

Why--aside from the fact that "new faces" is an administration talking point--does Dan Balz write "new faces"?

Why oh why can't we have a better press corps?

Rising Oil Prices...

Nominal oil prices rise:

WSJ.com - Oil Price Reaches $71.35 a Barrel Over Concerns of a Nuclear Iran: By MASOOD FARIVAR April 19, 2006: Oil prices on the New York Mercantile Exchange topped $71 a barrel, the latest in a series of exchange records triggered by nervousness over Iran's nuclear program and falling gasoline supplies ahead of the summer.... The May crude contract on Nymex jumped as high as $71.60 before settling 95 cents higher at $71.35 a barrel, the highest level for a front-month contract since crude futures began trading on the Nymex in 1983. Crude futures for delivery beyond May were much higher, reflecting worries about a possible disruption later in the year....

The rally in oil prices has been driven by at least three fundamental forces: real production problems in major producing countries such as Nigeria and Norway; anxiety about the Iran nuclear row; and concern about shrinking supplies of gasoline ahead of the peak summer driving season. Gasoline inventories have fallen nearly 18 million barrels over the past six weeks as refiners have reduced operations to conduct seasonal maintenance.

Some market analysts blame the Iran nuclear dispute for adding as much as $10 a barrel to oil prices since the start of the year. Others, however, played down the likelihood of an Iran supply disruption this year and said speculators have used the Iran story as an excuse to bid up futures.

I wonder what Masood Farivar thinks he means by "speculators have used the Iran story as an excuse to bid up futures"? Speculators who are buying now want to pay more in order to diminish the chances they'll profit when they sell later on in the year? It's not something an economist can make sense of.

Why Oh Why Are We Ruled by These Morons? (Trade Policy Edition)

Dan Drezner:

danieldrezner.com :: Daniel W. Drezner :: So I'm thinking Doha is dead: This morning George W. Bush announced a new director of the Office of Management and Budget... U.S. Trade Representative Rob Portman.... As Portman's replacement as trade representative, Bush chose deputy trade representative Susan Schwab.... Portman has done an excellent job at USTR for the brief time he was there, and his move to OMB might be, on the whole, a good thing for fiscal policy. That said, Bush and Bolten have decided to switch teams at USTR in the weeks before various deadlines for the Doha round of trade talks come up. This is a bad, bad sign for the likelihood of those negotiations to succeed.

I don't see how you can be said to have done a "good job" at any job that you leave after less than two years. The costs of getting first you and your successor up to speed are simply too large.

The excellent Paul Blustein reaches a similar judgment:

Paul Blustein: Hopes for Trade Talks Dim After Personnel Switch: By switching his chief trade negotiator yesterday, President Bush sent a gloomy signal.... The announcement that Bush was naming Rob Portman to become head of the Office of Management and Budget... just 11 months as U.S. trade representative... as global trade negotiations are in serious trouble, with a major deadline just weeks away... widely viewed as indicating that the administration holds little hope for securing a far-reaching deal in the talks this year and possibly for much longer than that.... Yesterday's news fueled worries that the talks might collapse or at least fall into a long state of paralysis....

"For this administration, it is important to get its act together, and that trumped the WTO negotiations," said Claude Barfield, a trade specialist at the American Enterprise Institute. "The White House must think that Portman brings something to the team that is beyond trade... changing leaders at a critical time is bound to have some impact."... The E.U. reacted to word of Portman's reassignment with a caustic suggestion that Washington had diminished the chances for a deal. "We will, of course, manage without him, but at this stage in the round, it would have been easier to manage with him," said Peter Mandelson, the E.U. trade commissioner, in a statement...

Lots of other people would make good OMB Directors. Nominating any of them would not have further disrupted the Doha Round--if anyone in the Bush administration cared, which they don't.

What a Long Strange Trip It's Been...

Back in the old days--when Donald Luskin, Andrew Sullivan, and Mickey Kaus first decided that there were reputations to be made and Republican brownie-points to be earned by attacking Paul Krugman as "shrill," and when you could (well, maybe not you, but one, or some of those one might call "one") using only the suckers of one's tentacles count us few members of the Ancient and Hermetic Order of the Shrill as we gathered in the night psychotically ululating shrill screeds of Bush hatred at the dead, uncaring stars, having been driven into shrill unholy madness by the incompetence, mendacity, malevolence, and sheer disconnection from reality of George W. Bush and his administration--back in those old days, as I was saying, few would ever have thought that we would ever have the privilege of being led in Evensong here at Order of the Shrill headquarters here at Miskatonic University by tonight's fine and harmonious quartet, made up of Newsweek's Howard Fineman, the Wall Street Journal's Peggy Noonan, Meet the Press's Tim Russert, and the New York Times's John Tierney.

Howard Fineman Is Shrill
Peggy Noonan Is Shrill
Tim Russert Is Shrill
John Tierney Is Shrill

Welcome, friends! We are happy to give you your robes and your copies of the Krugmanomicon as we formally induct you into the Order! It's been a long strange trip, and you are late to the party, but you are very welcome now that you are here!

Now we will sit back and listen as your shrill ululating harmonies fill the sky beneath the dead, uncaring stars with that old favorite melody of Aaaiii! Ph'nglui Mglw'nafh Krugman R'lyeh Wagn'nagl Fhtagn! Aaaiii!!!

Why Oh Why Can't We Have a Better Press Corps? (Tom Friedman Edition)

Tom Friedman wakes up and has a rendezvous with reality--three years late and half a trillion dollars short. Eric Alterman snarks:

Eric Alterman: Hey look, you can fool thirty-five percent of the people all of the time. But Tom Friedman gets off the boat here:

I look at the Bush national security officials much the way I look at drunken drivers. I just want to take away their foreign policy driver's licenses for the next three years. Sorry, boys and girls, you have to stay home now — or take a taxi. Dial 1-800-NATO-CHARGE-A-RIDE. You will not be driving alone. Not with my car.

Um, Tommy boy. Maybe we should retire that foreign policy guru title, since this insight comes say, three years, tens of thousands of lives and about a trillion dollars too late.

Still wondering what that invasion was about, Tommy? "Three years after a U.S.-led invasion toppled Saddam Hussein, only one major U.S. building project in Iraq is on schedule and within budget: the massive new American embassy compound."

Involuntary Organ Donors

Jockey of Norfolk, be not bold, for Dickon thy master is bought and sold:

BBC NEWS | Asia-Pacific | China 'selling prisoners' organs': By Jill McGivering BBC News: Top British transplant surgeons have accused China of harvesting the organs of thousands of executed prisoners every year to sell for transplants. In a statement, the British Transplantation Society condemned the practice as unacceptable and a breach of human rights. The move comes less than a week after Chinese officials publicly denied the practice took place.

In March, China said it would ban the sale of human organs from July...

Professor Stephen Wigmore, who chairs the society's ethics committee, told the BBC that the speed of matching donors and patients, sometimes as little as a week, implied prisoners were being selected before execution.... "The weight of evidence has accumulated to a point over the last few months where it's really incontrovertible in our opinion. We feel that it's the right time to take a stance against this practice."

The emergence of transplant tourism has made the sale of health organs even more lucrative. Patients increasingly come from Western countries, including the UK, as well as Japan and South Korea. Professor Wigmore... and his colleagues, he said, had all seen cases of British patients who had considered going to China for transplants. He really hoped, he added, that people would think very hard about whether they should.

Secrecy surrounding executions in China has always made it difficult to gather facts.

The Chinese authorities recently announced steps to tighten regulations. From July, selling organs will be illegal and all donors must give written permission.

But the practice is lucrative and critics say much will depend on how well those rules are implemented.

Gives new meaning to the phrase, "worth more dead than alive."

Covering the Economy: Washington Post vs. the Internet, Round XXXIV

Washington Post vs. the Internet, Round XXXIV

Two pictures of weblogger Maryscott O'Connor. Which of these do you think the Washington Post ran?

Covering the Economy: April 19, 2006: Fiscal Policy Plus Loose Ends

Greg Mankiw has a weblog, which he is using--among other things--to try to nudge the budget debate along:

Greg Mankiw's Blog: Greg Mankiw I teach introductory economics at Harvard University. I use this blog as a way of communicating with my students. Students and teachers at other schools, as well as others interested in economic issues, are welcome to use this resource.

Here's some of the nudging:

Greg Mankiw's Blog: Is Social Security Income Risky?: A new paper by John Shoven and Sita Slavov, however, points out that our current Social Security system is far from risk-free:

Pay-as-you-go Social Security is typically characterized as a universal defined benefit pension program. Implicit in this characterization is a sense that the participant's investment in future benefits is somehow guaranteed, or safe from risk. This study develops the concept of "political risk" as the possibility that some future legislature will be forced to change the tax and benefit provisions of pay-as-you-go social security programs, when there are changes in the demographic and macroeconomic variables that support it. Thus there is a "political risk" to participants that might be compared to the "market risk" in a personal accounts retirement scheme.... The debate over personal accounts, therefore, is not one of "safe" versus "risky" benefits, but one of portfolio choice...

Greg Mankiw's Blog: Hubbard on the Fiscal Future: Economist Glenn Hubbard (who preceded me as CEA chair and is now back at Columbia) has an op-ed in today's Wall Street Journal. He reminds us that unless we see significant entitlement reform, taxes are heading higher:

Imagine the nightmare of a tax burden 50% higher -- not so farfetched as it sounds.... The Congressional Budget Office regularly quantifies these shadows of the Ghost of Tax Day Future. Their forecasts are not sanguine. A generation from now, absent any changes, increases in Social Security and Medicare spending alone are projected to consume 10 more percentage points of national GDP than they do today.

There is nothing very new here, but it is good to have Glenn saying it anyway. As George Orwell once said, "We have now sunk to a depth where the restatement of the obvious is the first duty of intelligent men." http://online.wsj.com/article/SB114522990077327169.html?mod=opinion_main_commentaries

Greg Mankiw's Blog: AMT: Catalyst for Tax Reform?: The Panel recommended repealing the AMT. By itself, repeal is very expensive. To make the reform revenue-neutral, the Panel also recommended broadening the base of the income tax by eliminating the deductibility of state and local taxes (as well as many other changes, such as cutting back on the mortgage interest deduction). There is a certain rough justice in this recommendation: The taxpayers in high-tax states would lose more from eliminating deductibility of state and local taxes, but they would gain more from repealing the AMT.... Question for ec 10 students: Should people living in high-tax states pay less in federal income taxes than other people with the same income living in low-tax states? Current law answers YES to this question, while the Panel answered NO. What do you think?

Greg Mankiw's Blog: How to Increase National Saving: Brad DeLong (econ prof at Berkeley, former ec 10 student and assistant prof at Harvard, and super-blogger) welcomes me to the blogosphere at his blog and then complains about my post on the trade deficit. He thinks that I am being "elliptical" for saying I would like to see an increase national saving. I thought that my statement was pretty clear, but I am happy to explain to Brad what I mean.

I suppose Brad wants to know how I would increase national saving. Part of the answer is that tax policy could do more to encourage private saving. I have long been an advocate of moving the tax system in the direction of a consumption tax. The Hall-Rabushka flat tax or the Bradford X tax would be ideal. But one can also do incremental reform within the current tax structure. I would, for example, vastly expand the opportunities for tax-deferred saving, such as IRAs and 401k plans. I would like to move toward allowing corporations to expense all capital investments.I also think there is some compelling evidence coming out of the behavioral economics literature that the details of savings plans matter a lot for how successful they are. My colleague David Laibson has put together some persuasive evidence that the default is crucial. If workers are automatically enrolled in 401k plans, and have the option of opting out, participation is much higher than if workers have to actively opt-in, as is usually the case today.

The other piece of the national saving picture is public saving. A smaller federal budget deficit would mean more national saving, less reliance on foreign capital flows, and a smaller trade deficit. The trade deficit and the budget deficit are not twins, but they are cousins. As anyone who has looked at the numbers knows, the federal government's current budget deficit is, in a sense, only the tip of the iceberg of the fiscal problems to come. The federal budget is on an unsustainable path. When the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. The policy options aren't pretty--either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. The stalemate over Social Security reform that we have seen over the last year suggests that the Washington establishment is not ready for the bipartisan consensus that will be necessary to put the budget on a sustainable path.

In my view, there is plenty of blame on both sides of the aisle. The Democrats are not willing to entertain significant cuts in entitlement programs, but they are also not willing to admit that large tax increases that would be necessary to fund those programs as they currently exist. They talk as if reversing the Bush tax cuts on those making over $200,000 would solve the problem, even though the funding gap is far too large for such an easy fix. Similarly, the Republicans will not entertain talk of any tax increases, even as they expand entitlement spending with a costly bill to expand Medicare spending to cover prescription drugs...

Greg Mankiw's Blog: Are the Rich Paying Enough?: Now that it is tax season, there is sure to be a bunch of articles and op-eds on the question of whether the rich are paying their fair share in taxes.Before one starts expressing opinions, it is good to look at the facts. The Congressional Budget Office is one place to look for the data on such issues. Here is the Total Effective Federal Tax Rate (all federal taxes divided by income) for different income groups, according to a CBO report, for 2005:

Lowest quintile 5.5 percent
Second quintile 12.0
Middle quintile 15.6 Fourth quintile 19.6 Highest quintile 26.3

Top 10 percent 27.8
Top 5 percent 29.0 Top 1 percent 31.1

Does the average tax rate not rise sufficiently with income? Or does it rise too much? Or is it just right? Economics alone does not provide the answer. But when thinking about the issue, these are the key numbers that people should focus on.

---

Dean Baker joins the 4th Journalistic Overwatch Keyboarding Taskforce:

Beat the Press: Dean Baker is an economist and co-director of the Center for Economic and Policy Research. He was author of the Economic Reporting Review, a commentary on economic reporting in the New York Times and Washington Post, from 1996-2006. He holds a Ph.D. in economics from the University of Michigan.

And my best friend since second grade, Michael Froomkin, reveals his true colors: he's with the ink-stained wretches who spend every night wrestling with hot lead:

Discourse.net: Dean Baker Wants Numerate Reporting: [Dean Baker's] inaugural posting asks, reasonably enough, why most economic journalism fails to put raw numbers in context.... In this case, though, it seems to me that this question actually answers itself: $285 billion sounds like a front-page headline; "approximately 1.7% of federal spending over the next six years" sounds like what William Safire used to call a "nine-point MEGO" where the MEGO stood for "my eyes glaze over."... And while I'm carping at my betters, let me point out that telling people that the new transportation bill will be 1.7% of federal spending or even "approximately 4.6 percent of projected discretionary spending" won't tell most readers all that much either...unless you tell them how it compares to transportation spending last decade, whether it covers deferred maintenance, current expenditures or new capital projects, and what it does to the deficit... And your economic journalist has, what, fourteen column inches on a good day?

---

The Washington Post vs. the Internet, Round XXXIV?

This story in last Saturday's *Post* is being played up as Round XXXIV of the Wahington Post vs. the Internet. I don't think that's what's going on. Look here: http://delong.typepad.com/sdj/2006/04/covering_the_ec_2.html

Like Being Trapped in a Very Tiny Room Being Hectored by Your Clone...

Gene Healy is horrified by his archives:

AFF's Brainwash :: Gene Healy :: Happy Blogiversary to Me: Four years ago today, I started this humble site. I'm not always happy I did.... Blogs do a lot of good things, but they also bring out the worst in people. There are the folks whose idea of a good time is to jump into a comments section and shove some other kid: "You want some? Hah? Whatta you lookin' at?" What's the point? And then there's just the whole blogosphere itself.... Have you ever spent an hour or so reading through your own archives? It's like being trapped in a very tiny room being hectored by your clone. You don't look like you think you look, sound like you think you sound. The effect is probably something like the dysphoria Nixon experienced when he had to read through the transcripts of his Oval Office tapes: "[expletive deleted]: is that really me?"...

Immigration Once Again

Greg Anrig directs us to "the most significant new study about" immigration by the excellent and hard-working Gianmarco Ottaviano and Giovanni Peri:

Gianmarco I.P. Ottaviano and Giovanni Peri: "Rethinking the Gains from Immigration: Theory and Evidence from the U.S.": The standard empirical analysis of immigration, based on a simple labor demand and labor supply framework, has emphasized the negative impact of foreign born workers on the average wage of U.S.-born workers (particularly of those without a high school degree). A precise assessment of the average and relative effects of immigrants on U.S. wages, however, needs to consider labor as a differentiated input in production. Workers of different educational and experience levels are employed in different occupations and are therefore imperfectly substitutable.

When taking this approach, one realizes that foreign-born workers are “complements” of U.S.-born workers in two ways. First, foreign-born residents are relatively abundant in the educational groups in which natives are scarce. Second, their choice of occupations for given education and experience attainments is quite different from that of natives. This implies that U.S.- and foreign-born workers with similar education and experience levels are imperfectly substitutable. Accounting carefully for these complementarities and for the adjustment of physical capital induced by immigration, the conventional finding of immigration’s impact on native wages is turned on its head: overall immigration over the 1980-2000 period significantly increased the average wages of U.S.-born workers (by around 2%).

Considering its distribution across workers, such an effect was positive for the wage of all native workers with at least a high school degree (88% of the labor force in year 2000), while it was null to moderately negative for the wages of natives without a high school degree.

Misreading Thucydides

We may have to reopen the Stupidest Man Alive contest:

Matthew Yglesias, Belle Waring, and Thus Blogged Anderson watch with dropped jaws:

The Golden Hanson | TPMCafe: Belle Waring writes:

Belle Waring: You should really read the Vodkapundit post and accompanying thread. He says you'll need a drink, and the man is not kidding at all. The story he links to [by Dan Simmons] takes grave misreadings of Thucydides to a whole new level, a category in which the competition is stiff. Simmons is sure to win this year's coveted "Golden Hanson". The trophy features a stern VDH uprooting an olive tree with one hand and hitting himself repeatedly on the head with an axe handle with the other...

The Vodkapundit post is here. You can find the collective works of Victor Davis Hanson here. Hanson is an under-analyzed figure on the political media scene. Ever since 9/11 he's been generating words as a fantastical rate the overwhelming plurality of which are based on pretty clear-cut misreadings of Thucydides--such that a book about how a once-great country ruined its foreign policy and its own moral virtue in an unnecessary foreign adventure somehow becomes a book about how wars that look really stupid are, in fact, good because they provide a lot of opportunities to show resolve. Why National Review would be interested in publishing this is hard for me to say. Indefensible as the Bush foreign policy has been, it would be child's play to devise less-silly-than-this accounts of why it's a good idea.

Here's Anderson:

Thus Blogged Anderson.: So much for the great books: Somebody claims to have read Thucydides & come away with the message that it's bad not to be ruthless enough. Wow. Next we'll be hearing about how the Sermon on the Mount really means "kill them all, God knows his own."

Open Markets, Open Borders...

Arnold Kling gets medieval on George Borjas:

EconLog, Free Trade Equals Redistribution?, Arnold Kling: Library of Economics and Liberty: George Borjas writes:

Immigration policy is just another redistribution program. In the short run, it transfers wealth from one group (workers) to another (employers). Whether or not such transfers are desirable is one of the central questions in the immigration debate.

There is an isomorphism between immigration, outsourcing, and free trade in general. In each case, overall economic efficiency is increased, due to the law of comparative advantage. There are distributional effects, to be sure, but no nation has been able to demonstrate an ability to use trade restrictions of any sort to reduce overall poverty.

Redistribution implies that trade is a zero-sum game. Borjas implies that immigration works like a tax on low-income workers and a subsidy to high-income employers. Of course, in any sort of competitive market, employers do not profit from lower costs but must instead pass them onto consumers. But why let a little economics get in the way of a folk-Marxist story?

Immigration, like all other forms of trade, is positive-sum game. All forms of trade restrictions hurt the economy. Immigration restrictions may change the composition of the least-well off. Overall, however, by weakening the economy immigration restrictions are likely to produce more poverty rather than less.

I am not a passionate supporter of open immigration as an economic policy. I do not think that the gains are huge. But I am angry any time an economist misleadingly describes trade as a "redistribution program." At that point, you forfeit your identity as an economist and instead become a demagogue.

Brad Setser on the Current Three-Cornered Balance of Financial Terror: Asian Manufacturers, American Homeowning Consumers, and Middle-Eastern Oil Producers

Nouriel Roubini is scared of $70-a-barrel oil.

Brad setser writes:

RGE - Abridged Roubini on oil at $70 -- and not-so-abridged Setser on Petrodollars: A condensed version of Dr. Roubini's latest post: "I was wrong about the impact of $40 oil, but I'll be right about the impact of $70 oil." I know Dr. Roubini was wrong about the impact of $40 oil because my name also appears on the 2004 note. We both were wrong. We thought high oil prices would be a drag on the economy in 2004. They often are.

Yet, global growth was very, very strong in 2004. Judging from the evidence, the magic formula for global growth is an undervalued Chinese RMB, high oil prices and a growing US current account deficit financed by the central banks of really poor countries and a few really rich oil sheiks. The formula is just so counter-intuitive that it took a long time to discover... 2005 wasn't quite as good as 2004, but it wasn't bad by any means.... I think James Hamilton would say that a strong global growth has been a tonic for oil producers. Oil prices are high mostly because demand for oil is high....

Nouriel identifies a couple of reasons why high oil prices might be a bigger drag going forward: The current run-up in oil prices seems to be driven at least in part by concerns about supply. Iran. Nigeria's delta. And, more generally, the folks that have oil are far more interested in renegotiating the terms of their existing contracts with big oil companies than in reaching agreement with the big oil companies on a new round of investment.... In 2003, 2004 and 2005, consumers tapped into their rising home equity (or just saved less as their homes appreciated) and kept on spending even as oil prices rose. Nouriel thinks that this process won't continue. The Fed will get in the way, pushing up short-term rates until long-term rates have to go higher. Or US consumers will simply burn out, and lose their desire to take on more debt.... I certainly wouldn't rule it the scenario he describes. But at least so far, there isn't much evidence the US consumer is cutting back. And I have been very struck by one thing that Nouriel doesn't put a lot of emphasis on. Call it the oil savings glut.

There is no doubt that the spare savings of the world's oil exporters - savings in excess of their investment - is now enormous. And with oil at $70, it will only get bigger. And there is no doubt that the United States' need to borrow savings is enormous. And it too is getting bigger. I suspect one of the reasons why oil didn't exert more of a drag on the world economy is that the US had - by that time - entered into a cycle of expansion fueled by a surge in residential investment and rising consumption spurred by consumers' ability to borrow against rising home values. The oil exporters spare savings stepped into the breach left by the reduction in the pace of Asian central bank intervention. Non-Chinese Asian central bank intervention that is. China is a special case: its current account surplus grew even as its oil import bill grew.

By holding US real interest rates down, the oil exporters reinforced a process that got started with the Fed cut rates, and got further fuel from Asia's unwillingness to allow their currencies to appreciate against the dollar from 2002 on. There is a certain lovely symmetry: The countries with the highest propensity to save - China and the oil exporters - financed the country with the highest propensity to borrow in order to spend.

Brad Setser on the Current Three-Cornered Balance of Financial Terror: Asian Manufacturers, American Homeowning Consumers, and Middle-Eastern Oil Producers

Nouriel Roubini is scared of $70-a-barrel oil.

Brad setser writes:

RGE - Abridged Roubini on oil at $70 -- and not-so-abridged Setser on Petrodollars: A condensed version of Dr. Roubini's latest post: "I was wrong about the impact of $40 oil, but I'll be right about the impact of $70 oil." I know Dr. Roubini was wrong about the impact of $40 oil because my name also appears on the 2004 note. We both were wrong. We thought high oil prices would be a drag on the economy in 2004. They often are.

Yet, global growth was very, very strong in 2004. Judging from the evidence, the magic formula for global growth is an undervalued Chinese RMB, high oil prices and a growing US current account deficit financed by the central banks of really poor countries and a few really rich oil sheiks. The formula is just so counter-intuitive that it took a long time to discover... 2005 wasn't quite as good as 2004, but it wasn't bad by any means.... I think James Hamilton would say that a strong global growth has been a tonic for oil producers. Oil prices are high mostly because demand for oil is high....

Nouriel identifies a couple of reasons why high oil prices might be a bigger drag going forward: The current run-up in oil prices seems to be driven at least in part by concerns about supply. Iran. Nigeria's delta. And, more generally, the folks that have oil are far more interested in renegotiating the terms of their existing contracts with big oil companies than in reaching agreement with the big oil companies on a new round of investment.... In 2003, 2004 and 2005, consumers tapped into their rising home equity (or just saved less as their homes appreciated) and kept on spending even as oil prices rose. Nouriel thinks that this process won't continue. The Fed will get in the way, pushing up short-term rates until long-term rates have to go higher. Or US consumers will simply burn out, and lose their desire to take on more debt.... I certainly wouldn't rule it the scenario he describes. But at least so far, there isn't much evidence the US consumer is cutting back. And I have been very struck by one thing that Nouriel doesn't put a lot of emphasis on. Call it the oil savings glut.

There is no doubt that the spare savings of the world's oil exporters - savings in excess of their investment - is now enormous. And with oil at $70, it will only get bigger. And there is no doubt that the United States' need to borrow savings is enormous. And it too is getting bigger. I suspect one of the reasons why oil didn't exert more of a drag on the world economy is that the US had - by that time - entered into a cycle of expansion fueled by a surge in residential investment and rising consumption spurred by consumers' ability to borrow against rising home values. The oil exporters spare savings stepped into the breach left by the reduction in the pace of Asian central bank intervention. Non-Chinese Asian central bank intervention that is. China is a special case: its current account surplus grew even as its oil import bill grew.

By holding US real interest rates down, the oil exporters reinforced a process that got started with the Fed cut rates, and got further fuel from Asia's unwillingness to allow their currencies to appreciate against the dollar from 2002 on. There is a certain lovely symmetry: The countries with the highest propensity to save - China and the oil exporters - financed the country with the highest propensity to borrow in order to spend.

The Current Situation

Glenn Rudesbusch on the macro outlook:

FedViews (4/14/2006): The Current Economy and Outlook: FedViews: April 14, 2006: Glenn Rudebusch, Senior Vice President and Associate Director of Research at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook:

Last year at this time, we anticipated continued steady growth in real output. As it turned out, the economy decelerated sharply in the fourth quarter... factors restraining the fourth quarter were temporary, and we expect a substantial rebound in growth this year.... [F]irst-quarter growth... may reach 5 percent at an annual rate. But that rapid pace is not expected to endure.... A year ago, we were expecting the core inflation rate to moderate a bit from the highs posted in 2004. In the event, core inflation did edge down a bit in 2005. Going forward, we now anticipate that core inflation will remain contained....

[T]here are probably two key risks to the forecast. First, we may be underestimating the underlying strength of aggregate demand in the economy and the impetus for higher inflation.... A second key risk is that we may be underestimating the effect of the past tightening of monetary conditions on the economy.... The recent removal of monetary accommodation has started to have some effect on mortgage rates, which should damp housing demand. Indeed, by one survey measure, home buying attitudes have soured recently....

Over the past 45 years, the real funds rate has averaged about 2-1/2 percent, which is probably close to the center of a neutral range for monetary policy. Monetary policy now appears to be positioned at the upper end of this neutral range, but the future path of policy is quite uncertain and very dependent on how the incoming data shape the outlook.

Joe Nocera on Jeffrey Skilling

Nocera writes:

Mr. Skilling, for the Defense - New York Times: In the world according to Jeffrey Skilling, Enron was brought down by two things: the revelation that Mr. Fastow was using his partnerships to make millions while also skimming from the company -- actions Mr. Skilling contends he knew nothing about.... And secondly, he says, Enron was done in by a handful of short sellers, who organized a conspiracy to attack the stock. (Gee, where have we heard that before?)

Well, what did you expect him to say?.... For most of the time on the witness stand, Mr. Skilling seemed smaller than life. He often wore a timid, tentative facial expression, a little like a third grader hoping not to be reprimanded by the teacher. But at least once a day he would have momentary meltdowns, and all the bitterness, sarcasm and self-pity would creep to the surface -- only to be damped back down by Mr. Petrocelli. In the course of answering a question about Mr. Fastow's crimes, for instance, Mr. Skilling took an unprompted swipe at the F.B.I. -- an incredibly foolhardy thing to do in front of a jury. When you're on the witness stand, fighting for your life, there is nothing more important than being disciplined in what you say and how you act....

Again and again, I found myself astounded listening to him describe Enron's business practices. He wants to bring in an outside C.E.O. to run Enron's new (and ill-fated) broadband business, but as soon as his buddy Ken Rice says he'll quit if that happens, Mr. Skilling folds like a cheap suit. Instead, he gives the job to the utterly unqualified Mr. Rice.... Mr. Fastow approaches him about setting up a partnership to do business with Enron. He blithely tells Mr. Fastow to work something up and bring it to him -- as if this extraordinary concept, so filled with conflicts and so easily abused -- is no big deal. He has a budget meeting with Lou L. Pai, the head of a poorly performing division called Enron Energy Services. The previous year, the division lost $69 million. Mr. Pai is projecting $50 million in profits for the next year, but Mr. Skilling thinks he's being "sandbagged," and tells Mr. Pai he wants $100 million. Why? Not because he knows anything about how the business is actually performing....

In the many detailed discussions about all the deals Enron did with Mr. Fastow's partnerships this last week, one thing usually was left out. Rarely did Mr. Skilling try to explain their underlying economic rationale. He acted instead as if Enron's dealings with those partnerships were as common as a thing could be, so ordinary they barely needed explaining. But of course that wasn't remotely true. What was extraordinary about those deals was they had no underlying economic purpose. They only had an accounting purpose. They existed to disguise the truth. If Mr. Skilling understands that fact, then he's a crook. If he doesn't, he's a fool. Either way, he should never have been in charge of Enron...

What I don't understand is how "short sellers" can destroy a company. As long as it has assets in excess of its liabilities, and is making money, where does the problem come from?

What One Low Number Doesn't Show

Floyd Norris doesn't really believe that the low unemployment rate indicates a strong labor markeet:

What One Low Number Doesn't Show - New York Times: Off the Charts By FLOYD NORRIS: IN the summer of 1983, the United States was just starting to come out of a brutal recession and the unemployment rate was 9.4 percent, twice what it is now in a recovery that has gone on for more than four years. But men in the prime of their working lives -- 35 to 64 -- were more likely to have jobs in the summer of 1983 than their successors in that age group are to have jobs now.

That is one reason it is necessary to look beyond the published unemployment rates to get a more accurate picture. The published unemployment rates count as unemployed only those who are actively looking for work. Those who have given up looking, or do not want to work, are not counted. Another way is to look at employment in comparison to the working-age population.... For a long time, the big news there was the influx of women into the labor force....

Even though the unemployment rate last month was 4.7 percent, not much higher than it was in March 2000, the percentage of people working has fallen in every age group except the highest ones. Men and women above 55 are more likely to be working now. Again, it is not easy to tell whether that reflects a greater opportunity or a greater need for income. What that means is that younger people are significantly less likely to have jobs now than they did six years ago. Thus, it should be no surprise that in the Conference Board's consumer confidence survey, the number of respondents who think jobs are plentiful now is barely half the number who thought that in March 2000.

So how can the unemployment rate be so low? Fewer people say they want to work. The labor force -- those with jobs or saying they want one -- is rising at a much lower rate than the working-age population. The rest do not count in the unemployment figures, but that may not mean they are happy about being unemployed.

Morning Coffee: Stocks Have Been an Extraordinarily Good Investment: Why?

In which I drink my morning coffee, hog bandwidth, and talk briefly about what I am going to do today--largely think hard about the equity premium, and about why stocks have been such a good investment

Why Oh Why Can't We Have a Better Press Corps? (Yet Another Washington Post Edition)

The clown show that is the Washington Post continues, with Deborah Howell saying that Fred Hiatt and the Washington Post editorial board are entitled to make up their own facts:

[I]t's important to understand that I have no purview over the editorial policy of The Post. The editorial board makes policy, and it is not my job to second-guess it. But this case provides an excellent opportunity to point out to readers how reporters and editorial writers can see things quite differently. Editorials and news stories have different purposes. News stories are to inform; editorials are to influence...

The Daily Kos is amazed, and quotes the New York Times's ombudsman in response:

Opinions expressed on the editorial and Op-Ed pages of The New York Times aren't part of the public editor's mandate. But the facts are. And so are corrections of any misstatements...

More Thuds and Screams from the Topkapi Palace

Bruce Bartlett writes:

Bruce Bartlett: The "Myth" of Bush's Loyalty: I disagree with your characterization of Bush as being famously loyal — a view so widely stated that you can be excused for repeating it. Bush is loyal ONLY to toadies, suck-ups and sycophants. Anyone who shows an ounce of independence — or loyalty to the country above loyalty to him — is punished or dispensed with. You mention Paul O'Neill, but a better example is Larry Lindsey. His estimate of the cost of the war was mildly embarrassing back in 2002 because it was higher than the absurdly low estimates being peddled by the White House at that time. So they threw him overboard, even though he may have done more to get Bush elected than anyone else, including Karl Rove. Now, as you know, Lindsey's estimate looks absurdly low. As I say in my book, loyalty with Bush is strictly a one-way street: total loyalty is demanded, but none is ever really offered in return.

Given that this is the case, I have never understood why so many people — both inside and outside the administration — continue to give Bush so much loyalty. I can only conclude that it is borne more from fear than agreement with his policies. I think there is genuine fear of crossing the president, although I have never been able to uncover the precise mechanism through which it is communicated — even in my own case. Nevertheless, it is real — just as fear of the unknown is real. I think somehow he communicates to everyone he comes in contact with that they will suffer if they go against him. And his obsessiveness about leaks — combined with Patriot Act powers — has shut off back channels that have previously existed in every presidency.

There is a CRYING NEED for an investigative reporter to plumb the depths of how this works and why so many people submit to it — even when Bush has poll ratings so low as to barely show a pulse. Even behind closed doors, with guarantees of confidentiality, I cannot get FORMER administration people to say a bad word about the guy even when they have been badly treated by him in some way. The climate of fear is pervasive.

It's particularly odd given Bush's tendency to give people assignments that publicly humiliate them.

We've already heard today about Bush's treatment of John Snow:

Paul Blustein: Snow has hewed strictly to the White House's talking points. That... [was] his undoing: He has been such a loyal salesman that he has come across as ineffective.... "[Snow] has followed the script too well"... said Pamela F. Olson, a former assistant Treasury secretary.... "been a good mouthpiece even when he would personally have been better off if he hadn't, and the president would have been better off too.... [A] top Senate Republican staffer [said]... "[T]he problem is that the White House plays it up themselves that [Snow's] the spokesman and policy gets made inside the White House. I think it hurts them, but it's their choice."... [Kevin] Hassett said. Snow could be an effective spokesman... "if he was the one who had the authority to speak and make policy..."

But consider Bush's humiliation of Andy Card by sending him out to repudiate his own advocacy of stem-cell research:

TNR Online | Card Away (print): As his White House service wore on, this ostentatious modesty morphed even further into creepy masochism. He seemed to delight in the most painful assignments. After his own father died of Parkinson's disease, Card became a supporter of the life-saving potential of stem-cell research. Yet, when Bush limited federal money for the research, it was Card who made the rounds on the Sunday shows to cheerily defend the policy...

Or cons Bush humiliated Larry Lindsey by sending him out to defend the steel tariff and the farm bill by pretending to be some bizarre clone of Ira Magaziner:

National Journal Magazine Archives: NJ: In an earlier interview, you summed up the NEC's role as "bringing economic arguments to bear on the policy process." Recently, I think, there is an impression that in several high-profile policy debates-on steel trade and agriculture, for example-economics was not a big part of the debate, and politics was the main consideration. Is that true?

Lindsey: Let's take steel first. I am not telling anything here that wasn't public. There were two legitimate economic points of view within the economic team. One that [U.S. Trade Representative Robert] Zoellick and [Commerce] Secretary [Donald L.] Evans put forward. Others, like Glenn Hubbard [chairman of the Council of Economic Advisers], certainly have a different view. One argument is that tariffs are never good. I certainly taught that in my economics class. The other argument [represented by Zoellick and Evans] is a little bit more subtle. The world has excess capacity in steel. In any market where that is the case, price is going to be at marginal cost, and marginal cost is going to be below long-run average total cost. And that is the method by which firms lose money and exit the market.

But this is a global issue. Either you say, "OK, we'll let our firms exit, and we'll let other countries pick up [the business], and we'll just import our steel." Or you say, "Well, that's not a very tenable long-run strategy for any country, because you are effectively letting others pick which industries are going to prevail." Do you unilaterally disarm, or do you use laws that are now on the books, that are on every country's books, that are consistent with [international trade rules] to challenge that process? I can make a case for either one of those. There is a sound economic case for doing what we did.

NJ: So economics was a big part of that argument. What about the big farm bill [which increased agricultural subsidies]? Did economics go into that?

Lindsey: Absolutely. With the bill that passed the Senate, we had three economic objectives: The first was to keep the overall cost consistent with the budget resolution. On that score, we reduced the price of the Senate bill by 29 percent. By any objective standard, cutting 29 percent is a victory. Our second objective was to have a bill that was consistent with [international trade] rules. We have a bill that is just consistent with those rules. The Senate bill was totally inconsistent with trade rules. The third economic objective was to avoid going back to the bad old days of permanent stockpiles and acreage allocation and all the rest. And this bill does not do this; it does not fundamentally change the basis for agriculture policy that was set up in the [1996] Freedom to Farm Act. Now, do I think the ag bill was a perfect bill? No, there are onion subsidies in the bill. I, personally, would never make the case publicly that onion subsidies are a good idea. I'll probably hear from a congressman whose district grows onions, but I don't think onion subsidies are a good idea...

More Thuds and Screams from the Topkapi Palace

Bruce Bartlett writes: >[Bruce Bartlett: The "Myth" of Bush's Loyalty](http://time.blogs.com/daily_dish/2006/03/the_myth_of_bus.html): I disagree with your characterization of Bush as being famously loyal — a view so widely stated that you can be excused for repeating it. Bush is loyal ONLY to toadies, suck-ups and sycophants. Anyone who shows an ounce of independence — or loyalty to the country above loyalty to him — is punished or dispensed with. You mention Paul O'Neill, but a better example is Larry Lindsey. His estimate of the cost of the war was mildly embarrassing back in 2002 because it was higher than the absurdly low estimates being peddled by the White House at that time. So they threw him overboard, even though he may have done more to get Bush elected than anyone else, including Karl Rove. Now, as you know, Lindsey's estimate looks absurdly low. As I say in my book, loyalty with Bush is strictly a one-way street: total loyalty is demanded, but none is ever really offered in return. >Given that this is the case, I have never understood why so many people — both inside and outside the administration — continue to give Bush so much loyalty. I can only conclude that it is borne more from fear than agreement with his policies. I think there is genuine fear of crossing the president, although I have never been able to uncover the precise mechanism through which it is communicated — even in my own case. Nevertheless, it is real — just as fear of the unknown is real. I think somehow he communicates to everyone he comes in contact with that they will suffer if they go against him. And his obsessiveness about leaks — combined with Patriot Act powers — has shut off back channels that have previously existed in every presidency. >There is a CRYING NEED for an investigative reporter to plumb the depths of how this works and why so many people submit to it — even when Bush has poll ratings so low as to barely show a pulse. Even behind closed doors, with guarantees of confidentiality, I cannot get FORMER administration people to say a bad word about the guy even when they have been badly treated by him in some way. The climate of fear is pervasive. It's particularly odd given Bush's tendency to give people assignments that publicly humiliate them. We've already heard today about Bush's treatment of John Snow: >[Paul Blustein](http://www.j-bradford-delong.net/movable_type/): Snow has hewed strictly to the White House's talking points. That... [was] his undoing: He has been such a loyal salesman that he has come across as ineffective.... "[Snow] has followed the script too well"... said Pamela F. Olson, a former assistant Treasury secretary.... "been a good mouthpiece even when he would personally have been better off if he hadn't, and the president would have been better off too.... [A] top Senate Republican staffer [said]... "[T]he problem is that the White House plays it up themselves that [Snow's] the spokesman and policy gets made inside the White House. I think it hurts them, but it's their choice."... [Kevin] Hassett said. Snow could be an effective spokesman... "if he was the one who had the authority to speak and make policy..." But consider Bush's humiliation of Andy Card by sending him out to repudiate his own advocacy of stem-cell research: >[TNR Online | Card Away (print)](http://www.tnr.com/docprint.mhtml?i=20060410&s=lizza041006): As his White House service wore on, this ostentatious modesty morphed even further into creepy masochism. He seemed to delight in the most painful assignments. After his own father died of Parkinson's disease, Card became a supporter of the life-saving potential of stem-cell research. Yet, when Bush limited federal money for the research, it was Card who made the rounds on the Sunday shows to cheerily defend the policy... Or cons Bush humiliated Larry Lindsey by sending him out to defend the steel tariff and the farm bill by pretending to be some bizarre clone of Ira Magaziner: >[National Journal Magazine Archives](http://nationaljournal.com/cgi-bin/ifetch4?ENG+NJMAG+7-njindex+1173066-REVERSE+0+0+48455+F+22+38+21+Lindsey+AND+PD%2f01%2f01%2f2002%2d%3e12%2f31%2f2002): NJ: In an earlier interview, you summed up the NEC's role as "bringing economic arguments to bear on the policy process." Recently, I think, there is an impression that in several high-profile policy debates-on steel trade and agriculture, for example-economics was not a big part of the debate, and politics was the main consideration. Is that true? >Lindsey: Let's take steel first. I am not telling anything here that wasn't public. There were two legitimate economic points of view within the economic team. One that [U.S. Trade Representative Robert] Zoellick and [Commerce] Secretary [Donald L.] Evans put forward. Others, like Glenn Hubbard [chairman of the Council of Economic Advisers], certainly have a different view. One argument is that tariffs are never good. I certainly taught that in my economics class. The other argument [represented by Zoellick and Evans] is a little bit more subtle. The world has excess capacity in steel. In any market where that is the case, price is going to be at marginal cost, and marginal cost is going to be below long-run average total cost. And that is the method by which firms lose money and exit the market. >But this is a global issue. Either you say, "OK, we'll let our firms exit, and we'll let other countries pick up [the business], and we'll just import our steel." Or you say, "Well, that's not a very tenable long-run strategy for any country, because you are effectively letting others pick which industries are going to prevail." Do you unilaterally disarm, or do you use laws that are now on the books, that are on every country's books, that are consistent with [international trade rules] to challenge that process? I can make a case for either one of those. There is a sound economic case for doing what we did. >NJ: So economics was a big part of that argument. What about the big farm bill [which increased agricultural subsidies]? Did economics go into that? >Lindsey: Absolutely. With the bill that passed the Senate, we had three economic objectives: The first was to keep the overall cost consistent with the budget resolution. On that score, we reduced the price of the Senate bill by 29 percent. By any objective standard, cutting 29 percent is a victory. Our second objective was to have a bill that was consistent with [international trade] rules. We have a bill that is just consistent with those rules. The Senate bill was totally inconsistent with trade rules. The third economic objective was to avoid going back to the bad old days of permanent stockpiles and acreage allocation and all the rest. And this bill does not do this; it does not fundamentally change the basis for agriculture policy that was set up in the [1996] Freedom to Farm Act. Now, do I think the ag bill was a perfect bill? No, there are onion subsidies in the bill. I, personally, would never make the case publicly that onion subsidies are a good idea. I'll probably hear from a congressman whose district grows onions, but I don't think onion subsidies are a good idea...

The Worse, the Better?

It's not clear to me that it is true that Lenin ever said "the worse, the better"--but Henry Farrell finds the Economist being plus Leninist que le Lenin:

Defunct Economist: The Economist gives us yet another rendition of "Western Europeans have it too good to realize how badly they need reform."...

THEY are two seemingly unconnected events, but they yield a common, depressing conclusion. The events were the decision by France's government to tear up its controversial law creating a more flexible job contract for the young, and the razor-edge outcome of Italy's rancorous election. The conclusion: the core countries of Europe are not ready to make the economic reforms they so desperately need--and that change, alas, will come only after a diabolic economic crisis.... their voters are not yet ready to swallow the nasty medicine of change... too many cosseted insiders.... The real problem, not just for Italy and France but also for Germany, is that, so far, life has continued to be too good for too many people: there is not yet a general consensus that their economies are in serious trouble.... There is one depressingly certain way to remedy the failings in the core European countries: to bring on a more serious economic crisis. This week will surely have brought that a lot closer.

This combines a few arguments that are true and important (there are problems of equity with sclerotic labour markets that discriminate against the young) with much that is quite bizarre -- the claim that Europe's fundamental difficulty is that "life has continued to be too good for too many people." Would that we all had such problems... a dolled up version of the old Marxist trope that we need (as David Lodge's Fulvia Morgana puts it) to "eighten ze contradictions" if we are to bring through the revolution.... The Economist, which appears to believe that there's no intellectual debate to the left of the New Republic owes rather more to defunct Marxist theorists than it imagines...

Let me pile on: the failure of the corrupt and bizarre Silvio Berlusconi to construct a comfortable and durable political majority is a sign of political health, not political sickness in Italy. The French situation is more complicated--but were I a young French non-economist, I would be suspicious of the fact that this change in the law was to apply to the young and only to the young. Europe's politics appear, well, to be consideraby healthier than America's politics right now.

Easter Vigil in Berkeley

Easter vigil in Berkeley:

C: Mary and Joseph
R: Pray for us
C: Holy Michael Archangel
R: Pray for us...

Berkeley is the place where you find the following passage in the Litany of the Saints:

C: Holy Julian of Norwich
R: Pray for us
C: Chief Seattle
R: Pray for us
C: Mohandas Gandhi
R: Pray for us...

On the whole, I think the existence of Berkeley is a very good thing.

Morning Coffee: International Issues

In which I drink my morning coffee, hog bandwidth, and talk briefly about the three most important long-run issues in international economics...