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.

Friday, May 05, 2006

Deficit Hawks Want Bush's Tax Cuts to Expire. Deficit Turkeys Don't

Jason Furman and Robert Greenstein write:

What the New Trustees' Report Shows about Social Security, 5/1/06: Anyone concerned about Social Security'9s long-term impact on the federal budget ought to be even more concerned about the long-term fiscal impact of extending the 2001 and 2003 tax cuts. If made permanent, the tax cuts will cost nearly three times as much, over the next 75 years, as the 75-year deficit in Social Security (see Figure 1). Any attempt to address the looming fiscal challenges should include Social Security, Medicare (and the U.S. health care system as a whole), and overall government revenues.

I agree. Anyone who claims to be a "deficit hawk" who favors extending Bush's tax cuts is not a deficit hawk, but a deficit turkey.

Eric Boehlert Watches David Ignatius Rewrite History

Boehlert watches David Ignatius say that it was journalists' "professionalism" that led them to be lapdogs for Bush. And he responds appropriately: News | Lapdogs: Washington Post columnist David Ignatius, looking back on the press's failings with regards to Iraq, suggested, "The media were victims of their own professionalism. Because there was little criticism of the war from prominent Democrats and foreign policy analysts, journalistic rules meant we shouldn't create a debate on our own."

Little criticism of the war from prominent Democrats? In a sense, Ignatius was right and for Post readers that statement may have had a ring of truth to it simply because the Post seemed to do such a masterful job of ignoring prewar criticism from prominent Democrats, like party stalwart Senator Ted Kennedy. In September 2002 he made a passionate, provocative, and newsworthy speech raising all sorts of doubts about the war. It garnered exactly one sentence -- thirty-six words total -- of coverage from the Post, which in 2002 printed more than a thousand articles and columns, totaling perhaps 1 million words about Iraq, but only set aside thirty-six words for Kennedy's antiwar cry....

When the Post was not downplaying criticism from Democrats, it was downplaying the warnings from respected foreign policy analysts, and even decorated generals. On October 10, 2002, retired Marine General Anthony Zinni, the former head of Central Command for U.S. forces in the Middle East, delivered a keynote address at a Washington think tank where he outlined his grave concerns about the Bush administration's war with Iraq. Among the key points made by Zinni, who endorsed Bush during the 2000 campaign and whom Bush then handpicked to serve as the United States' envoy to the Middle East, was that war with Iraq should not be the United States's top priority. "I'm not convinced we need to do this now," said Zinni. "I believe that [Saddam] can be deterred and is containable at this moment." How did the Post play the antiwar speech by one of the administration's own senior officials? It set aside 336 words, which were tucked away on page 16. (One year later Zinni spoke before the U.S. Naval Institute and the Marine Corps Association, undressed the administration for its bungled handling of the war, and famously described its misguided preemptive war effort as "a brain fart of an idea." The Washington Post declined to cover those remarks.)...

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

Feeding the Beast

Bill Niskanen has a take on how counterproductive Republican fiscal policy has been over the past quarter century:

The Washington Monthly: FEEDING THE BEAST....What happens if you lower the cost of something? People buy more of it. What if you raise the cost? People buy less of it. So: what happens if the federal government reduces taxes and runs a deficit -- thus lowering the "cost" of government? People will "buy" more government. This actually makes a strange kind of sense -- if there are no additional taxes to cause you pain, why shouldn't you support big government? -- and William Niskanen, the chairman of the Cato Institute, says he now has research to back this up:

Niskanen recently analyzed data from 1981 to 2005 and found... "no sign that deficits have ever acted as a constraint on spending." To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.... "I would like to be proven wrong," says Niskanen. No wonder: for the modern conservative coalition, the implications of his findings are discomfiting, and in a sense tragic.

In other words, "starve the beast" doesn't work. If you cut taxes, all you do is encourage additional spending.

USA Today Founder Al Neuharth Is Shrill

Via the Carpetbagger Report:

Carpetbagger Report: USA Today founder Al Neuharth, generally known for his Republican views, seems to have officially given up on the president.

How low can Bush's approval rating go? My hunch is it's at or near the bottom. That 34% represents mostly unshakeable far-right wingers. Like Bush, Vice President Cheney and company, they are in denial. As were the 24% in the polls who still approved of President Richard Nixon before he resigned in disgrace.

What happened to the 37% who have switched from pro-Bush to anti-Bush? They finally realized they were suckered by Bush and his buddies back then about Saddam Hussein's alleged weapons of mass destruction, his tie to terrorists and his threat to the USA.

President Abraham Lincoln was right when he said: "You may fool all of the people some of the time; you can even fool some of the people all of the time, but you can't fool all of the people all of the time."

Employment Growth Slows Modestly

From Bloomberg: Top Worldwide: Employers in the U.S. added fewer jobs than expected last month, and wages jumped by the most in almost five years, government figures showed today. The unemployment rate held at 4.7 percent.

The 138,000 gain in payrolls for April followed a revised 200,000 increase the month before and was the smallest increase since October, the Labor Department reported today in Washington. Average wages were up 3.8 percent from April 2005, the biggest gain since August 2001.

The slowdown in hiring suggests record gasoline prices and rising borrowing costs are forcing companies to rein in costs to maintain profits. Hourly earnings increased as factories, which tend to pay higher wages than service providers such as retailers, added the most jobs in almost two years. Retail employment dropped by the most since September.

``Average hourly wages are rising but it's because of the shift,'' in demand for employees in higher-paying jobs, Anthony Chan, chief economist at JPMorgan Private Client Services in Columbus, Ohio, said before the report.

Economists expected payrolls to rise by 200,000, according to the median of 71 forecasts in a Bloomberg News survey, after an originally reported 211,000 gain in March. Estimates ranged from increases of 165,000 to 250,000. Economists at Stone & McCarthy Research Associates in Princeton said a typical range between the low and high forecast is about 150,000...

Thursday, May 04, 2006

Origins of Blue State Culture

Hal Varian writes about an article forthcoming in the *Journal of Economic Perspectives: Ed Glaeser and Bryce Ward on American political geography:

Red States, Blue States: New Labels for Long-Running Differences - New York Times: A recent working paper, "Myths and Realities of American Political Geography," by two Harvard University economists, Edward L. Glaeser and Bryce A. Ward, challenges this conventional wisdom [D]ifferences in political attitudes across states are nothing new: the Civil War and Roaring Twenties had much larger geographic variation in political views than we do today.... America is not becoming more polarized. Of course, Republicans have a more positive view of the Republican Party than the Democratic Party, and vice versa, but attitudes have hardly changed since 1978.... Thirty years ago, income was a better prediction of party affiliation than church attendance, but this is no longer true....

These cultural divisions have been around for a long time. In the 1936-37 Gallup poll, residents of New England and the Middle Atlantic states were far more likely than citizens elsewhere to support federally financed health measures aimed at venereal disease, to support a free press and to be willing to vote for Catholic or Jewish candidates.... It turns out that the degree of industrialization 85 years ago is an "astonishingly good predictor of Democratic support" among today's voters, as is the fraction of the population that is foreign-born.

But the biggest effect seems to be the correlation between religion and Republicanism. Among white voters who attend religious services at least once a week, 71 percent voted Republican in the last election, according to the Pew survey...

Here are Glaeser and Ward:

The extent and permanence of cultural divisions across space is one of America’s most remarkable features.... [I]n... April 2004... twenty-three percent of respondents in Oregon, Washington and California thought that Saddam Hussein was personally involved in the September 11, 2001, attacks. Forty-seven percent of respondents in Texas, Oklahoma and Arkansas had that view. In the 1987-2003 PEW Values surveys, 56 percent of Mississippi residents think that AIDS is God’s punishment for immoral sexual behavior. Only 16 percent of Rhode Island residents share that view....

We find little support for the belief that these cultural differences represent long-standing differences in religiosity or the legacy of slavery. Instead... Blue State culture reflects primarily the legacy of different ethnicities working together at high densities: the most important historical explanatory variables are the share of the labor force in manufacturing in 1920 and the share of the population that was foreign born in 1920 in predicting liberal beliefs and voting for John Kerry. We interpret these results as suggesting that the liberal views that reduced traditional social divisions came about because there were gains to reducing economic and religious conflicts that could derail interactions in the marketplace.

The second important truth captured by the red state/blue state framework is that political parties and politicians have had an increasing tendency to divide on cultural and religious issues rather than on economic differences. Again, in historical perspective, cultural politics is not unusual. In the late 19th century, “Rum, Romanism and rebellion” were the core issues that determined the Republican Party. The true aberration was the mid-twentieth century era of economic politics...

Why Oh Why Are We Ruled by These Liars?

The Bush administration: lying about everything, everything. Duncan Black reports:

Eschaton: AP, 1998: "Helping matters, [George W.] Bush also speaks fluent Spanish..."
Portsmouth Herald, 1999: "Bush also took a question from a Spanish reporter and answered in fluent Spanish..."
McLaughlin Group, 6/2000: "MR. O'DONNELL: Absolutely, and they both -- they both do it well. I mean, George W. Bush is fluent in Spanish..."
CNN 8/2000: "PRESS: Well, I wonder how good George Bush's Spanish is. Did he know what the lyrics were before he said they ought to play the song at the convention? I don't know. O'BRIEN: Yes, he says he's fluent..."
Scott McClellan today: " White House spokesman Scott McClellan said the assertion did not ring true to him because, 'The president speaks Spanish, but not that well. I'm saying that not only was that suggestion absurd, but that he couldn't possibly sing the national anthem in Spanish. He's not that good with his Spanish,' McClellan said..."

The Current Economic Situation

Notes for my talk at St. Mary's College's State-of-the-Economy Conference, May 3, 2006:

Wednesday, May 03, 2006

Yet More on the Sustainability of the U.S. Current Account

The extremely sharp John Kitchin has an optimistic paper giving his heterodox view of the sustainability of the U.S. current-account deficit: Large and increasing U.S. international deficits and debt have led to an apparent conventional wisdom that the United States will pay an increasing share of total U.S. output over time to service the growing international debt. This paper presents a detailed framework and analysis of the issues surrounding the question of whether the U.S. is, in fact, on track to be a society of “sharecroppers” or rather is actually more consistent with being a society of “shrewd capitalists.”

The base scenario projects that the U.S. likely will experience continued growth in its net international debt position, but with a relatively minor cost of servicing that debt in terms of the associated net international income flows. Alternative scenarios based on other analysts’ projections also are presented to illustrate the reliability of the modeling framework and to show how alternative future paths for key variables affect the outcomes. The detailed analysis provides insights into how the underlying relationships affect the final result. In particular, valuation changes – and notably valuation changes beyond those resulting from exchange rate changes – have played, and likely will continue to play, a large role in the determination of the U.S. net international investment position.

In general, the results indicate that there is a higher likelihood for the U.S. international financial position to be “sustainable” and manageable – even if we were to observe persisting trade deficits – than is typically considered to be the case.

Memo to Self: I should see if there's broad interest on trying to lure John out here for the International Seminar in the fall...

The Shrill Are Legion...

Jonathan Chait counts coup on David Frum:

The Plank: A few years ago I wrote a column making the point that George W. Bush's economic agenda is essentially the accumulated desires of his financial backers. Whether he goes right (say, taxes) or left (Medicare, farm subsidies, tariffs, etc.) he's going along with K Street. In response, National Review's David Frum sneered: "Can anyone seriously believe that the reason that George W. Bush signed the prescription drug bill was to please American business?"

But now serious people, and not just us rabid Bush-haters, have come to recognize the business lobby played a major role in shaping the Medicare bill in particular and Bush's agenda in general. I give you one prominent conservative... writing today for Cato Unbound: "I think it's been fairly established now that the Republican party responds far more attentively to the practical needs of business constituencies than to the abstract principles of free-marketeers.... Republicans worked a lot harder to ensure that the prescription drug benefit relieved businesses of the burden of their past prescription drug promises than to protect taxpayers."

In case you didn't click on the link, the author is David Frum. Apology accepted, David.

Eddie Lazear Is a Mensch

He does good in his seat at the CEA:

Bush Economist: Gas Tax Cut Not the Answer: Cutting gasoline taxes is not a good way for the country to deal with soaring energy prices, President Bush's top economist said Tuesday. "One of the things we worry about when we cut the tax on gasoline is that it basically stimulates additional use," said Edward Lazear, chairman of the White House's Council of Economic Advisers.

"Over a longer period of time, it would be a significant problem ... because what it would do is it would encourage us to use more oil, not less and that is the way we got to the situation right now," he explained. "That probably is one of the policies that we would like to avoid," he said. Lazear's comments come as lawmakers on Capitol Hill grapple with ways to provide Americans with relief from rising energy prices...

Why Oh Why Can't We Have a Better Press Corps?

Andrew Samwick signs up for New York Times select. One encounter with Tom Friedman and he needs professional help:

Vox Baby: You Pay Your Money, You Take Your Chances: I finally decided to go in for TimesSelect. I am greeted by Tom Friedman's column, "Let's (Third) Party," where I read this gem about gasoline prices:

Like someone who will tell the truth: The only way Americans are ever going to enjoy relatively cheap gasoline again is if we raise the price now with a gasoline tax--and fix it at that higher level for several years--so investors know that it is not coming down, and therefore it makes economic sense for them to make the long-term investments in alternative, renewable sources of energy. That is the only way to break our oil addiction and ultimately bring down the price.

That's a fascinating "truth." Note that he is not writing here about the externalities associated with our dependence on oil--he is writing about the direct consumption of it through gasoline. So in order to have cheap gasoline later, we should insist on having expensive gasoline today, even if the price of gasoline would fall in the interim. That is beyond silly...

Don't worry too much, Andrew. You do build up an immunity--somewhat--over time.

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

Doug Struck of the Washington Post is a bad person. ThinkProgress reports:

ThinkProgress: Today's Washington Post has a story about Canada's conservative government cutting funds for programs to reduce greenhouse gas emissions. This passage stuck out:

Canada, which has long clung to its "green" image, hosted early work that led to the Kyoto Protocol, in which 163 countries and regional organizations pledged to meet quotas to reduce the carbon dioxide emissions that many scientists believe are warming Earth, melting glaciers and brewing more-intense storms.

Many scientists believe carbon dioxide emissions are warming the earth?

Science Magazine analyzed 928 peer-reviewed scientific papers on global warming published between 1993 and 2003. Not a single one challenged the scientific consensus the earth's temperature is rising due to human activity. This scientific debate only exists in newspaper articles...

Memo to Post: the Bushies cannot reward you for your subservience any more. And your reputation will take a long time to recover--if it ever does.

Public Affairs Press Falls Down on the Job...

How come nobody has sent me a pre-release copy of:

Daniel Okrent (2006), Public Editor Number One: The Collected Columns (with Reflections, Reconsiderations, and Even a Few Retractions) of the First Ombudsman of The New York Times

Are there no editorial assistants? Is there no publisher's plan to generate buzz?

How am I expected to procrastinate without a copy?

Ab Abuse ERISA/Libera Nos, Domine

V: Ab omni malo...
R: Libera nos, Domine.
V: Ab omni peccato...
R: Libera nos, Domine.
V: Ab ira tua...
R: Libera nos, Domine.
V: A subitanea et improvisa morte...
R: Libera nos, Domine.
V: Ab insidiis diaboli...
R: Libera nos, Domine.
V: Ab furore Normannorum...
R: Libera nos, Domine.
V: Ab abuse ERISA...
R: Libera nos, Domine.

From the abuse of ERISA--The Employees' Retirement Income Security Act--by the churchmen of Newark, O Lord, deliver us!

Wow. An incredible story:

Pensions in Peril Over Church Exemptions - New York Times: The Hospital Center at Orange became affiliated with the Newark archdiocese in 1998, but it did not apply for the church designation until 2002, when both the hospital and the plan were in deep trouble. Records show the affiliation was part of a plan to coordinate the Hospital Center's operations with those of a nearby Catholic hospital, St. Mary's Life Center. St. Mary's, a specialized hospital offering outpatient services and long-term care, was part of the Cathedral Healthcare System, a family of hospitals run by the Archdiocese of Newark.

The Hospital Center, meanwhile, was a conventional community hospital providing acute care. It had a big caseload of Medicaid and uninsured patients and was constantly strapped for money, said Linda A. White, its former vice president for finance. Officials at Cathedral wanted to turn St. Mary's into a "premier cancer center," according to the affiliation agreement. They proposed sending St. Mary's long-term care services to the Hospital Center, and bringing the Hospital Center's acute-care services to St. Mary's. Cathedral also pledged $10 million for renovations. But the archdiocese now says that none of those arrangements obliged it to assume the Hospital Center's pension fund.

"In the beginning, the affiliation was looked at as a positive thing," Ms. White said. The Hospital Center was more than 100 years old and plagued with elevators that stuck frequently, broken pipes, inadequate computers and many other problems. When the deal was struck, Ms. White said, the pension plan had 95 cents for every dollar it owed the work force -- a respectable level of funding. Then came the bear market. Many pension plans lost ground, including the one at the Hospital Center. By the end of 2001 it had just 76 cents for every dollar it had promised the work force.

In 2002, market conditions did not improve, and employers everywhere began running into special safeguards in the pension law, requiring them to start pumping in money quickly. The Hospital Center's plan slipped to just 58 cents for every dollar promised, and its actuary wrote to the I.R.S. requesting church plan status, retroactive to 1998. The application said the Hospital Center was "controlled by" and "associated with" the Roman Catholic Church. "An employee of the hospital is deemed to be an employee of the Roman Catholic Church," the application letter concluded. The employees were not told of this assertion. They say they considered themselves employees of a secular community hospital.

The I.R.S. approved the application in early 2003. Soon after, the employees learned what had happened. Horrified, they set about trying to get their pension insurance back. But so far, they are caught in a legal Catch-22, struggling to prove violations of the law when the I.R.S. has determined that the law does not apply. The employees retained a lawyer, who brought suit in federal court in New Jersey, arguing that the provision exempting churches from the pension law is unconstitutional.

The judge, Joel A. Pisano, said he was reluctant to take on a constitutional challenge if the problem could be resolved in a simpler way. He gave the I.R.S. 90 days to review its decision. If the I.R.S. would rescind it, he said, then the pension law would once again apply and the employees could bring their case in the normal legal framework. More than 90 days have passed, and the I.R.S. is continuing with its review. Judge Pisano dismissed the lawsuit, saying it was "not yet ripe for adjudication" because the I.R.S. was still deliberating...

One cannot help but think that Jesus would have something to say about this, like "Depart from me, ye cursed, into everlasting fire, prepared for the devil and his angels: For I was an hungred, and ye gave me no meat: I was thirsty, and ye gave me no drink: I had a pension for my old age, and ye did steal it..."

Covering the Economy: What Makes an American?

Ezra Klein on immigration:

Ezra Klein: What Makes an American?: Larry King last night. The show featured wall-to-wall coverage of the May Day rallies with continuous commentary by a panel of Lou Dobbs, smiling beatifically; Dana Rohrabacher, who was unsuccessfully trying to hide the crazy; Bill Richardson, whose jowls could be used to smuggle immigrant families across the border; and Janet Murgala, president of the National Council of La Raza. What struck me throughout the broadcast was the pains Rohrabacher and Dobbs took to qualify every statement with a paean to the goodness and virtue of the immigrants in question. Hard-working folks, good, kind and honorable, too. Indeed, some of the best people you'll ever meet. Now let's put 'em on a bus.

The reason I'm relatively sanguine about the outcome of this debate is that the anti-immigrant forces are chained to some very tough rhetoric. The essence of "American" has never been geography, rarely do politicians wax rhapsodic over the quirk of fate that saw them born in San Diego rather than five miles further south. Instead, we've always prided ourselves on comprising a collection of transcendent characteristics, characteristics which allowed us to emerge a global nation, easily able to incorporate all those who would seek to share our values.

In this debate, however, the poor Mexicans who undergo a dangerous trek so they can work agonizingly hard for very little, and do all of it to guarantee their children a better life, are such quintessential expressions of American ideals that it's impossible to exclude them from the more metaphysical description of citizenship. So, instead, folks like Rohrabacher are being forced to redefine "American", making it nothing but an accident of geography, divorcing it from everything that has made our citizenship as more myth than mundane statement of birth place. And that, I think, is going to prove a pretty hard sell.

Nell Henderson of the Washington Post:

Effect of Immigration on Jobs, Wages Is Difficult for Economists to Nail Down: By Nell Henderson Washington Post Staff Writer: Saturday, April 15, 2006; D01: According to the economic models, it's a no-brainer: a surge of low-skilled immigrants should increase the supply of such workers, driving down wages at the expense of working-class Americans. Sen. Byron L. Dorgan (D-N.D.).... "I don't think you need a professor to understand that when you import substantial cheap labor, it displaces American workers."

But recent research suggests that the economic impact of immigration is not so simple. The effects are difficult to disentangle from other factors that have dampened wage growth for most workers in recent decades, including new technologies, the decline in manufacturing jobs, the drop in unionization, globalization and recessions. Yes, an influx of immigrants has helped depress the incomes of the lowest-skilled workers in recent decades, many economists agree. But they argue about the magnitude of the effect; some say it's big while others see it as slight. Meanwhile, increased immigration -- legal and illegal -- helps keep inflation low, boosts rents and housing values, and benefits the average U.S. taxpayer while burdening some state and local governments, other research finds...

My assessment of Henderson:

Brad DeLong's Semi-Daily Journal: The Immigration debate (Why Oh Why Can't We Have a Better Press Corps?): The problem, of course, is that Henderson's is a "he said, he said" article. Henderson doesn't provide readers with any information to help them evaluate the reasons why Borjas and Card have different views of what the data say. I like George Borjas and Larry Katz, but I do wish that Henderson had written that the large minus eight percent estimate of the effect on the wages of high-school dropouts reported by Borjas and Katz in is imprecisely estimated: their data are fuzzy, and give an approximately one-sixth chance that the effect on high-school dropouts is positive. I like David Card, and do wish that Henderson had quoted enough to allow us to see why Card thinks the effects are small...

Paul Krugman on immigration:

North of the Border: I'm instinctively, emotionally pro-immigration. But a review of serious, nonpartisan research reveals some uncomfortable facts about the economics of modern immigration, and immigration from Mexico in particular. If people like me are going to respond effectively to anti-immigrant demagogues, we have to acknowledge those facts. First, the net benefits to the U.S. economy from immigration, aside from the large gains to the immigrants themselves, are small. Realistic estimates suggest that immigration since 1980 has raised the total income of native-born Americans by no more than a fraction of 1 percent. Second, while immigration may have raised overall income slightly, many of the worst-off native-born Americans are hurt by immigration -- especially immigration from Mexico.... George Borjas and Lawrence Katz... estimate that U.S. high school dropouts would earn as much as 8 percent more if it weren't for Mexican immigration. That's why it's intellectually dishonest to say, as President Bush does, that immigrants do "jobs that Americans will not do." The willingness of Americans to do a job depends on how much that job pays -- and the reason some jobs pay too little to attract native-born Americans is competition from poorly paid immigrants...

Alan Krueger on Immigration

Alan Krueger on Immigration: Immigration policy involves fundamental issues about what and who we are as a country. There are no simple answers on immigration policy because different people can legitimately assign different weights to the welfare of new immigrants, recent immigrants, and various groups of natives. In addition, there is considerable debate disagreement among economists about the economic impacts of immigration...

Gianmarco Ottaviano and Giovanni Peri:

Brad DeLong's Semi-Daily Journal: 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%)...

Arnold Kling gets medieval on George Borjas:

Arnold Kling: Open Markets, Open Borders...:

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.... 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...

Singing the National Anthem in Spanish:

Think Progress:

President Bush, 4/28/06:

I think the national anthem ought to be sung in English, and I think people who want to be a citizen of this country ought to learn English and they ought to learn to sing the national anthem in English.

But in his book American Dynasty, Kevin Phillips notes that during Bush's first presidential campaign, he would often sing the national anthem in Spanish. From pg. 142:

When visiting cities like Chicago, Milwaukee, or Philadelphia, in pivotal states, he would drop in at Hispanic festivals and parties, sometimes joining in singing "The Star-Spangled Banner" in Spanish, sometimes partying with a "Viva Bush" mariachi band flown in from Texas...

Peter Baker of the Washington Post:

Administration Is Singing More Than One Tune on Spanish Version of Anthem: President Bush declared last week that the national anthem should be sung in English not Spanish, but he evidently never told his own government or campaign organizations. The State Department posts four Spanish versions of "The Star-Spangled Banner" on its Web site, and accounts from the 2000 election suggest that the song was at times performed in Spanish at Bush campaign events. Critics even turned up one reference to Bush himself singing the anthem in Spanish on the trail, but there was no confirmation.

The furor over a newly released Spanish version of the anthem has underscored once again the power of symbols in American politics. At a time when the immigration debate in Washington has divided Republicans on Capitol Hill, drawn hundreds of thousands of protesters into the streets and triggered a nationwide boycott, all sides are scrutinizing the words and records of the president and other politicians for signs of inconsistency.... Responding to a reporter, Bush said: "I think the national anthem ought to be sung in English. And I think people who want to be a citizen of this country ought to learn English, and they ought to learn to sing the national anthem in English."

And there seems little evidence that the matter had concerned Bush before. The Center for American Progress, a liberal group run by Clinton chief of staff John D. Podesta, posted on its blog a reference to Bush singing the anthem in Spanish. In his book, "American Dynasty," Kevin Phillips wrote that Bush "would drop in at Hispanic festivals and parties, sometimes joining in singing 'The Star-Spangled Banner' in Spanish, sometimes partying with a 'Viva Bush' mariachi band flown in from Texas."

White House spokesmen and former campaign operatives said they could not recall whether that happened, though given the level of Bush's Spanish proficiency, they seemed dubious.

"Honestly, I don't remember him ever singing the national anthem in Spanish," said Leonard Rodriguez, who was national director of Hispanic Coalition for Bush/Cheney 2000. "I can't see any of his advisers recommending it." But he added: "They may have played it. That's certainly in the realm of possibility." And Rodriguez said he does not recall Bush ever objecting to it.

Tuesday, May 02, 2006

Latter-Day Bourbons in Bolivia

It was said that after their return to power in France in 1815, that the Bourbon dynasty monarchs and their aristocracy had "learned nothing, and forgotten nothing"--learned nothing about governance, legitimacy, or the public welfare; and forgotten none of the insults and injuries visited upon them during the First Republic and Napoleon's Empire.

Now it looks as though Bolivia's president Evo Morales is today's equivalent of the Bourbon King Louis XVIII. Decoupling Bolivia from the world economy will be costly and painful. Having your major extractive industries run by political hacks will be very destructive. And doing so in a way that will maximize the alienation of Brazil and Spain is just plain stupid.

And what kind of person thinks engineers come in battalions? / Americas / Latin America - Bolivia set to seize foreign-run gas fields: By Hal Weitzman in Lima: Bolivia ordered its military to seize natural gas fields controlled by foreign investors as the 100-day-old government of Evo Morales signalled it was putting into effect a campaign pledge to nationalise the sector. Bolivia’s gas industry is dominated by international energy companies... Brazil’s Petrobras, Repsol of Spain, Total of France, and BG and BP of the UK, and the decree is the latest sign of a hardening approach to foreign investors.... “We want to ask [the armed forces] that, starting now, they occupy all the energy fields in Bolivia along with battalions of engineers,” Mr Morales said after signing an official nationalisation decree in a ceremony at a gas field in south-eastern Bolivia operated by Petrobras.

The document stated that “the state recovers ownership, possession, and total and absolute control of these resources”. Bolivia has the second-biggest reserves of natural gas in Latin America.... The intervention will heighten investors’ concerns about the investment climate in the energy sector generally, and Mr Morales’ willingness to pursue a leftwing agenda in particular....

Álvaro García, Bolivia’s vice-president, said officials from YPFB, the state energy company, and the military had begun to take control of 53 installations. YPFB and the state, he added, would assume responsibility for production, sales and pricing. Congress last year passed a law that obliges foreign energy companies to hand over 50 per cent of their revenues in taxes and royalities. But Mr Garcia indicated that at the two largest gas fields, San Alberto and Sabalo, the split would now be 82-18 in the state’s favour....

Last month Mr Morales expelled EBX, a Brazilian steelmaker, for allegedly breaking environmental law. Repsol’s chief executives were imprisoned in March on oil-smuggling charges...

This looks bad.

Covering the Economy: David Cay Johnston

One of the best journalists we have at making numbers real. Here's some of what he thinks:

THE POWER OF ONE, which means reducing everything to $1 or to percent. Everyone, everyone gets 22-cents on the dollar; but hardly anyone grasps that $3.33 billion is 22 percent of $15.15 billion.

Million, billion, trillion -- they are all just meaningless to most people.... The journalist's job is to translate complex numbers into simple English and concepts easily grasped. Best to turn things into so many cents out of each dollar, or into dollars per hour or week or, if the numbers are small enough, per year. Then most people get it...

Make sure someone asks about the benefits and detriments of complex charts...

Wile E. Coyotenomics II: Unpleasant Balance of Payments Arithmetic

Brad Setser starts doing math:

RGE - Unpleasant balance of payments math -- why the interest rate matters for dark matter: The US probably needs to sell $1000b of new debt a year to sustain a current account deficit of 7% of US GDP or so. I assumed $500b of that would be Agencies and Treasuries, but that still leaves $500b in private debt that the US would need to sell to foreigners every year.

US banks and firms already owe to foreign creditors about $5.5 trillion, and about $3.4 trillion of those debts look to be short-term claims whose rate should move up quickly (Wonky note: I tried to adjust the end 2004 stocks with the 2005 flows to estimate the end 2005 stocks). Fortunately, the $4.3b trillion of US lending to the rest of the world - overwhelmding denominated in dollars -- will also reprice. And about $3.3 trillion of that is short-term, so it should reprice as fast as the $3.4 trillion short-term debt the US owes the rest of the world. That helps.

Add it all up -- the $3.1 trillion in Treasuries and Agencies foreigners own, the $5.5 trillion private US banks and US firms owe to the rest of the world, the $4.3 trillion the US has lent to the rest of the world. It turns out the US owes about $4.1 trillion to the rest of the world (net). Over the next three years the $4 trillion net US debt position will rise to at least $7 trillion. And the interest rate on much of the existing $4 trillion will rise as existing debts need to be refinanced. So a net interest bill of roughly $140b (by my rough calculations) in 2005 will rise to $350b.


$150b of the increase comes from new debt (3 trillion at 5%); $60b from the repricing of existing US debt. If the average rate should rise to 6% -- roughly the interest rate the US paid back in 2000 -- the 2008 US interest bill would reach $420b. That is more than three times the 2005 interest bill. The US external balance is potentially quite vulnerable to an interest rate shock.

My calculations assumes that the US gets what it pays on a lot of debt claims that I net out. I think that is right. But Hausmann and Sturzenegger would certainly challenge that assumption -- and I haven't yet some the leg work needed to refute their argument that the US borrows low and lends high. It doesn't seem to be true judging from the average interest payments in the past and the composition of US lending (Most US loans are to low risk/ low return kinds of places). But I still need to do a bit more work. Moreover, some US debt finances US equity holdings abroad, since by the end of 2005, the US probably holds about $1.5 trillion more in foreign equity (FDI + portfolio equity) than foreigners hold in US equity (FDI+portfolio).

The numbers here are very rough. Still, they don't look good...

Particularly if you think the US is paying out a lot more on FDI in the US than shows up in the US data. The "real" income balance is gonna look ugly pretty quickly...

What happens if international bond traders start doing the same math?

A Telco Lobbyist Strikes Back...

I don't know enough about "net neutrality" to have an opinion, other than that Telco regulation is incredibly complicated. The argument against "net neutrality" is that it is a form of rate regulation, and even good rate regulation tends to turn very bad over time--witness the ICC--and I tend to think that that is a good argument.

But Telco lobbyist Mike McCurry deserves some kind of prize for claiming that what is in the interest of the side that has been writing him paychecks for eight years just happens to be "what I believe." I don't think McCurry knows enough about technology or economics to have an opinion on net neutrality--let alone a belief. I might have a different view of McCurry if he knew what the first name of Vinton G. Cerf was.

The Blog | Mike McCurry: Hostile Commentary and Net Neutrality | The Huffington Post: Reading lots of comments on my last post, I guess my point got made: the culture and discourse of the Internet is not what you would teach kids at the dinner table -- unless you kept a bar of soap handy.

On net neutrality, I feel like screaming "puh-leeeze." The First Amendment of the Internet is under assault! Oh yeah, how many of you lifted a finger to protect the First Amendment when the Washington Post and other "MSM" cited it to ferret out the truth about WMD and the wars inside the U.S. intelligence community over the pre-Iraq war (and now pre-Iran war)?...

The Internet is not a free public good. It is a bunch of wires and switches and connections and pipes and it is creaky. You all worship at Vince Cerf who has a clear financial interest in the outcome of this debate but you immediately castigate all of us who disagree and impune our motives. I get paid a reasonable but small sum to argue what I believe. How many of the net neuts out there are honest about the financial resources and special interests behind your side of the argument? Do you really believe this is good v. evil or just an honest disagreement about what will make the 'net flourish and prosper?...

As it is, I think Arianna Huffington is making a mistake in letting McCurry use her podium to do his work as a lobbyist for his clients.

Does John Scalzi Need His Meds Adjusted?

Hyperinflation in Zimbabwe

Greg Mankiw directs us to Michael Wines, who is covering Zimbabwe's hyperinflation:

Greg Mankiw's Blog: Hyperinflation in Zimbabwe: The first page of today's New York Times has a good article, reminding us how bad monetary policy can be. Here is an excerpt:

How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital, toilet paper costs $417. No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 -- in American currency, about 69 cents....

Mr. Mugabe's government has printed trillions of new Zimbabwean dollars to keep ministries functioning and to shield the salaries of key supporters -- and potential enemies -- against further erosion. Supplemental spending proposed early in April would increase the 2006 spending limits approved last November by fully 40 percent, and more such emergency spending measures are all but certain before the year ends....

Inflation, about 400 percent per year last November, edged over 600 percent in January, but began to soar after the government revealed that it had paid the International Monetary Fund $221 million to cover an arrears that threatened Zimbabwe's membership in the organization. In February, the government admitted that it had printed at least $21 trillion in currency -- and probably much more, critics say -- to buy the American dollars with which the debt was paid. By March, inflation had touched 914 percent a year, at which rate prices would rise more than tenfold in 12 months. Experts agree that quadruple-digit inflation is now a certainty...

Why Thabo Mbeki has not moved to depose Mugabe is a great mystery.

The End Is Nigh!

After seven years as a global economy bear, Stephen Roach is now optimistic: / World / International economy - Former bear turns bullish on global economy: By Jennifer Hughes in New York: The world economy may be able to unwind its current imbalances without serious disruption, Stephen Roach, Morgan Stanley’s famously bearish chief economist, predicted on Monday, in a remarkable revision to several years of gloomy prognosis. Mr Roach had long warned that the US current account deficit and Asian central banks’ ballooning currency reserves risked destabilising the global financial system.

But on Monday, in a note to clients, he said: “I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages.” His comments came as the dollar hit a one-year low against the euro and seven-month low against the yen, as investors remained confident the US Federal Reserve was nearing the end of its interest-rate-tightening cycle. Mr Roach said the tipping point had been last month’s decision to mandate the International Monetary Fund to begin multilateral discussions with the aim of resolving the largest trade imbalances.... “I’ve been wringing my hands over the mounting global imbalances for longer than I care to remember,” said Mr Roach. “The world is finally taking its medicine - or at least considering the possibility of doing so. The risk is that this is so far only on paper, but it’s a critically important first step.”

Mr Roach also highlighted the orderly progression of currency adjustments. “The dollar is not collapsing, there’s not a run going on here.” said Mr Roach. “This is a gradual decline and while we’re talking year-lows, these levels are not sharp breaks from the levels we saw a month or two ago.” The dollar has fallen about 3 per cent against the euro since the IMF and G7 met.... Last year, the US current account deficit reached $900bn on an annualised basis and without some significant change in the current patterns, is expected to reach new records this year. At the same time, Asian central bank reserves are still growing, although at a slower pace. Both China and Japan hold more than $800bn each.

Could there be a stronger "sell" signal than this? :-)

Why Oh Why Are We Ruled by These Liars?

They lie about everything:

Think Progress:

George W. Bush, 4/28/06:

I think the national anthem ought to be sung in English, and I think people who want to be a citizen of this country ought to learn English and they ought to learn to sing the national anthem in English.

But in his book American Dynasty, Kevin Phillips notes that during Bush's first presidential campaign, he would often sing the national anthem in Spanish. From pg. 142:

When visiting cities like Chicago, Milwaukee, or Philadelphia, in pivotal states, he would drop in at Hispanic festivals and parties, sometimes joining in singing "The Star-Spangled Banne" in Spanish, sometimes partying with a "Viva Bush%" mariachi band flown in from Texas.

Impeach George W. Bush. Now.

People Should Read Dean Baker's New Weblog

Because he writes things like:

Beat the Press: I was struck by the reporting on the increases that the Commerce Department reported for March consumer spending and the personal consumption expenditure deflator (PCE). Both figures were presented as being higher than expected. It seems that the financial markets were surprised by the news, since the yield on 10-year treasury bills rose by 6 basis points.

I am surprised by the surprise because the spending and price data released on Monday was not new information. It was actually imbedded in the first quarter GDP data that was released on Friday. The Commerce Department needed to include March data for both consumption and inflation in order to compile GDP data for first quarter data. This means that anyone who cared could have pulled out the previously released data for January and February (which is subject to revision) to calculate the numbers that would appear in the March release.

I have occasionally done this myself when I had no better use of my time. Unless the first two months data are revised by a large amount (unusual, but not impossible) it is possible to know almost exactly what the data for the third month will look like before it is officially released.

Given the six and seven figure salaries that stock market analysts earn, it seems absurd that they would ever be surprised by data that could be known in advance with simple arithmetic. I guess this shows that there are still good-paying jobs for unskilled workers.


(Tip for this week: productivity growth will be close to 2.0 percent. The reason is a reported first quarter surge in the number of self-employed workers will lead to hours growth at close to a 4.0 percent annual rate.)

Behind the Veil of Ignorance

Eric Umansky finds John Tierney making the pro-immigration test better than I have seen anybody else do:

Eric Umansky: I'm with Tierney: I tend to come away from John Tierney's columns thinking they're both wrong and predictable. Today, predictable or not, he's right on:

Suppose you were setting immigration policy from behind that veil of ignorance. [That's philosopher John Rawls dictum that societal rules are fair " if you would endorse them without knowing what your position in society would be.] Which of these would you choose?

(1) Restricting immigration to protect some of the lower-paid workers in America from a decline in wages that would be no more than 8 percent, if it occurred at all.

(2) Expanding immigration to benefit most Americans while also giving some non-Americans living in dire poverty the chance to quadruple their income.

You don't need to slog through "A Theory of Justice" to figure out this one.

Monday, May 01, 2006

Dollar Weakness?

Brad Setser fears? thinks? hopes? that the international financial Day of Wrath is finally at hand:

RGE - Brad Setser's Web Log: Can the dollar block survive another bout of dollar weakness? In case you haven't noticed, the dollar is now closer to 1.30 (v. the euro) than 1.20 - or even 1.15. Carry is no longer king. There is talk of a "regime change" in the fx market. Or at least an attitude change.... Steve Johnson of the FT:

Furthermore, the final communique from last weekend's G7 meeting, which called for greater currency flexibility in emerging Asia to help reduce global imbalances... also led to expectations that the dollar might finally weaken against Asian currencies.

Indeed this happened - for an entire 24 hours - before Japan started complaining about the speed of the move and South Korea backed up its own complaints with a wall of intervention to stop the won from strengthening.

I feel for the Koreans. The Bank of Korea seems to want to run an independent monetary policy. They don't want to be part of the dollar block. But it is hard out there for a won... when the rest of North Asia sits out the dollar move. Japan's Vice Minister is working hard to keep the yen very, very weak in real terms. And China decided not to operate a basket peg last week. The won isn't just strong v. the dollar. It is also strong v. its etymological cousins the yen and the yuan.

And against the Gulf currencies.

The US may - or may not - have a weak (strike weak; insert competitive) dollar policy. Tim Adams certainly would like China to have a strong RMB policy. Bernanke denied the G-7 statement signaled any intent to manage the dollar down, but he also said the G-7 wants market determined exchange rates. Bloomberg:

Bernanke today also said it is not correct'' that the G-7 sought to weaken the dollar. The groupsupports a market- determined dollar,'' he said.

In the first quarter, countries outside the G-7 spent about $180b (by my calculations) resisting market pressures for their currencies to appreciate. A market exchange rate for the dollar right now means a weaker dollar...

Republicans: The Deadbeat Daddy Party

Avedon Carol says something I've been trying to say for years:

The Sideshow April 2006 Archive: "Mommy Party" at Booman Tribune brings me back to my earlier thoughts of why I hate all that "framing" talk.... I believe in the original go-round, we were told that Democrats are the Mother and Republicans are the Father. As I later observed, this only works if the father you have in mind is a deadbeat dad.

And she has more:

The BooMan, happily for us, was joining Thomas Frank in stomping on Joe Klein.... Frank gets right to the heart of it, here:

The second fixed idea in Mr. Klein's mental universe is a persistent disdain for the liberal wing of the Democratic Party. This, too, is common sense for certain self-designated spokesmen of the 60's generation (remember the annoying "rebel capitalist" meme of the late 90's, in which the libertarian New Economy was supposed to be the final flowering of the counterculture?).... Mr. Klein... laughs off "state-run health care" as a "vegetarian notion" and, as he has done in his other books, heaps contempt on traditional liberalism-on the economic issues like education, wages and Social Security that once linked the Democratic Party to its working-class base. Economic liberalism, Mr. Klein yawns, is boring stuff--"jobs, health-care, and blah-blah-blah," is how he summarizes it at one point...

The FT Has a Good Obituary for John Kenneth Galbraith

The FT's Stephanie Flanders has a good obituary for John Kenneth Galbraith: >[ / Home UK - Obituary: John Kenneth Galbraith]( Liberal activists who believed, with Galbraith, that economies neither could nor should be left to an invisible hand lost almost every major political battle of the 1970s and 1980s. Yet while the triumph of free-market economics took his ideas further from the political mainstream, they did not make them irrelevant. Indeed, many of the dangers of untrammelled markets he had described in the 1950s and 1960s, not least the coexistence of "private opulence and public squalor", seem rather more obvious in George W. Bush's America than they had been in Eisenhower's.... The return of an income distribution that looks increasingly similar to that of a century ago must make his work increasingly relevant.... >[Galbraith's] earlier, far more influential, polemic, _The Affluent Society_, published in 1958. No other academic title of that era, (with the exception, perhaps, of the sociologist, David Reisman's The Lonely Crowd) moved so effortlessly on to the bestseller lists, or had such a lasting impact on contemporary debate.... [I]t is important to stress the novelty of some of the underlying ideas. Few had spoken before of a "consumer society", or worried about the implications of structuring an economy solely round consumption. These days, the notion that more may not always be better for the environment, or for the balance between private and public goods, is commonplace. >Time has been less kind to some of his other books: _The New Industrial State_, for example, a paean to economic planning by government and large-scale corporations, written in 1967, became outdated in the turbulent 1970s and 1980s. But at least two of his historical books, _The Great Crash_, a layman's guide to the stock market crash of 1929, and his later short compendium of booms and busts throughout history, _A Short History of Financial Euphoria_, published in 1990, have become classics of the genre, admired by readers on all sides of the political divide. Both works exemplified an abiding feature of Galbraith's writings: a fascination with the power of conventional ideas, especially economic ones (or mass lunacy, in the case of financial booms)....

Sunday, April 30, 2006

Robert Reich Is Right: Raise the Minimum Wage

He writes:

Robert Reich's Blog: Tenth Anniversary of Minimum-Wage Hike. Democrats Should Do it Again.: Message to Democrats: It's time to do it again. Current estimates are that 12 million Americans are at the federal minimum wage (now $5.15 an hour). Almost all the 1996 increase has been eroded by inflation. Democrats should propose increasing it to at least $7 an hour. Force Republicans to vote on it. If they refuse to, or they vote it down, make it a big issue in the fall campaign.

Contrast the plight of America's 30-million working poor with the fortunes of America's CEOs. The CEO of Exxon-Mobile just raked in over $400 million for his efforts last year. Assuming he worked a normal work week (not counting time on the golf course with members of his compensation committee), he got about $200,000 an hour....

In 1996, Republicans predicted that the raise from $4.25 to $5.15 would result in millions of job losses. But in fact, about 13 million new jobs were added to the American economy between 1996 and 2000. Earth to Congressional Democrats: Now's the time. Tenth anniversary. All the gain then now lost to inflation. 85 percent of Americans favor it. Mid-term election in the fall. It's a no-brainer.

Remember from October 13, 2004, when George W. Bush claimed to be in favor of raising the minimum wage? Third Presidential Debate -- President Bush and Sen. John Kerry: BUSH: Actually, Mitch McConnell had a minimum-wage plan that I supported that would have increased the minimum wage...

Note that he had to specify: McConnell's plan was to increase and not decrease the minimum wage.

Impeach George W. Bush. Impeach him now.

Impeach George W. Bush. Impeach Him Now

Josh Micah Marshall explains why:

Talking Points Memo: by Joshua Micah Marshall April 30, 2006 02:19 AM: Be warned. The White House is now telling us that engineering a confrontation with Iran is a key part of their plan to resuscitate the president's dismal approval ratings in time to survive election day.... With respect to what's coming on Iran, what is in order is a little honesty, just as was the case with the Social Security debate a year ago. The only crisis with Iran is the crisis with the president's public approval ratings. Period. End of story. The Iranians are years, probably as long as a decade away, and possibly even longer from creating even a limited yield nuclear weapon. Ergo, the only reason to ramp up a confrontation now is to help the president's poll numbers....

We have many challenges overseas today.... The period of peril the country is entering into isn't tied to an Iranian bomb. It turns on how far a desperate president will go to avoid losing control of Congress.... [T]he man is a laughing stock, whose lies and failures are all catching up with him.... Double or Nothing is Not a Foreign Policy....

[Don't] believe this president any more when he tries to gin up a phony crisis. [The public doesn't] believe [Bush would] have much of an idea of how to deal with a real one. Enough of the lies. Enough of the incompetence and failure.

Impeach George W. Bush. Impeach him now.

The Mind Is Its Own Place...

The mind is its own place, and can make a heaven of hell, a hell of heaven. Or so John Milton's Satan argued to himself, after his failed attempt at regime change.

Marginal Revolution: Did Gary Becker prove that advertising is informative?: Did Gary Becker prove that advertising is informative? So claims a NYT obituary for John Kenneth Galbraith. CrookedTimber and Brad DeLong question whether such models should be called "proofs." Fair enough, but neither does the obituary correctly represent Becker's theory of advertising. As I understand Becker's work (with Kevin Murphy) on the topic, individuals consume "social images" or "self-images." Having Nike shoes gives you the "benefits of being cool" if a) you actually have Nikes, and b) the ad links Nikes to a cool image for your relevant peer group. The standard economic theory of complements then applies for analyzing ads.

Under some conditions, advertising can be a "bad" for consumers, not a "good," and advertisers will pay consumers to watch ads. Furthermore ads will present images and cultural linkages, rather than substantive information in the traditional sense. This generates some Galbraithian results, but without requiring that consumers are "tricked" or even "persuaded" into a particular point of view. This is not a proof; I think of it as an existence theorem that advertising can make corporate sense, and sometimes be socially welfare-improving, yet without being very informative...

It is, of course, true that in the Becker-Murphy "social images" model commercial advertising cannot get you to the first-best. A world in which you have to wear Nike shoes in order to obtain a symbolic link to the successful athletic career of Michael Jordan is worse than one in which wearing any shoes at all gives you a symbolic link to the successful athletic career of Michael Jordan. The government should take Nike's TV advertising slots by eminent domain, and play commercials that link all shoes--not just Nikes--to the "cool image" of Michael Jordan.

John Kenneth Galbraith

What I wrote about John Kenneth Galbraith last year:

Foreign Affairs - Sisyphus as Social Democrat - J. Bradford DeLong: From Foreign Affairs, May/June 2005. John Kenneth Galbraith: His Life, His Politics, His Economics. Richard Parker. : Farrar, Straus & Giroux, 2005, 820 pp. $35.00:

If there were justice in the world, John Kenneth Galbraith would rank as the twentieth century's most influential American economist. He has published several books that are among the best analyses of modern U.S. history, played a key role in midcentury policymaking, and advised more presidents and senators than would seem possible in three lifetimes. Yet today, Galbraith's influence on economics is small, and his influence on U.S. politics is receding by the year.

In this lively and thoughtful biography, Richard Parker sets himself the task of explaining Galbraith's career: why it was so dazzling, and why its long-term impact has turned out to be so much less than expected. The result is not only the story of a smart, witty, and important man, but also a fascinating meditation on the rise and fall of twentieth-century American liberalism.


That Galbraith's career has been dazzling nobody can dispute. Professors of post-World War II American history can still do no better than to assign his books The Affluent Society and The New Industrial State to teach students how the midcentury U.S. economy came to dominate the world (and what should have been done to make it work better). Anyone wanting to learn about the beginning of the Great Depression should start with The Great Crash; there is no other history of the stock-market crash of 1929 that is as short and even half as worthwhile. During World War II, Galbraith helped run the Office of Price Administration, working to square the growth-inflation circle by pushing production far above economists' measures of potential output without sparking runaway price increases that would threaten the economic mobilization. And after the war, his work on the Defense Department's "United States Strategic Bombing Survey" made Washington rethink the efficacy of its standard war-fighting policy -- staying high in the sky and dropping lots of explosives on all kinds of people far below -- although perhaps the rethinking did not go far enough.

Lots of ideas in the background of contemporary U.S. political and economic thought are Galbraith's. His work as an economist was a scattered but comprehensive attempt to think through the consequences of the transition from a nation of small farms and workshops to one of large factories and superstores. In doing so, he took on many of the questions most central to the new U.S. economic landscape: How much can advertising shape demand? In a world of passive shareholders, autonomous managers and engineers, and firm decisions that emerge out of internal bureaucratic contests, just what are the objectives that drive big firms? How does competition work when its principal dimensions are quality and marketing rather than price? And critically, how do the limits of polite discourse allow the system to hold itself together while constraining its flexibility?

For decades, Galbraith's influence in politics was unmatched by any other economist. The pieces of his advice best remembered are those that went against the "conventional wisdom" (a now ubiquitous phrase that Galbraith coined): strategic bombing did not win World War II; Vietnam was a strategically unimportant quagmire where the United States would do more harm than good; macroeconomic "fine tuning" is likely to blow up in the face of policymakers; the businessman's capacity for self-delusion is nearly infinite. Galbraith sees the United States as a would-be social democracy that has lost its way, assuming that if only the self-serving declarations of the right could be wiped away, the benefits of a bigger, more activist government would become obvious to everyone. The right-wing claim that the most efficient economy is one in which the gales of perfect competition scour the land is, in Galbraith's view, nonsense. Modern industrial and post-industrial production is a large-scale process, large-scale processes require planning, and planning requires stability -- which means that the gales of the market must be calmed.

This political vision, however, has been in retreat since the early 1980s. Nobody wants to hear about the importance of Big Government, Big Bureaucracy, or Big Labor (which hardly even exists). Galbraith's economic views have undergone an even more distressing eclipse. Among economists (excluding economic historians), the 70-year-olds have read Galbraith and think he is very important; the 50-year-olds have read Galbraith and know that the 70-year-olds think he is important but are not sure why; and the 30-year-olds have not even read him.

Parker has an explanation -- a relatively convincing one -- for the retreat of Galbraith's politics. The story behind it is the Democratic establishment's loss of nerve. Too many party intellectuals and politicians drink cocktails on Martha's Vineyard, in Parker's view, and too few spend time on the shop floor learning what issues are important to those sweeping up or manning an assembly line or tending the convenience-store cash register from midnight to six a.m. Thus, the mass base of the Democratic Party has withered, and without a mass base Democratic politicians listen too much to their rich contributors and turn into Eisenhower Republicans -- people who are interested above all in balancing the budget. Galbraith, a committed social democrat, has wielded his pen and his tongue in an effort to halt this decades-long rightward drift. But he has failed: his allies are too few, and the loss of nerve among the party elite is too complete.

Parker also has an explanation -- also a relatively convincing one -- for the eclipse of Galbraith's economic thought. The story here is of the blindness of an academic establishment steeped in Paul Samuelson's Foundations of Economic Analysis. Economists, Parker believes, have sold their birthright for a tasteless pottage of mathematical models. As a result, they can say much about theory but little about reality. And they ignore Galbraith because he is a guilt-inducing reminder of how much broader and more relevant economics can be.


This explanation, however, is far from complete. Late-twentieth-century American economics centers on the use of mathematical models to reach one of two conclusions: that the market is already doing a good job, or that some imperfection is causing "market failure" and correcting or counterbalancing the imperfection will make everything okay.

Thus there are New Classical macroeconomists, who believe that the market works fine and that even depressions are necessary and inevitable; Monetarists, who believe that recessions result from failures in the banking system, which can be corrected by ensuring stable growth of the money supply; and New Keynesians, who are indistinguishable from Monetarists save for their identification of market failures in the labor market or in the investment decisions of firms. In all these cases, it is clear what an economist must do to belong to a particular school: start underneath the lamppost, take a few steps in one direction by describing a market failure, and then start searching for lost keys. New Classicals master the solutions of "dynamic stochastic general-equilibrium representative-agent models." Monetarists analyze the details of the financial system in an effort to define a "neutral monetary policy." New Keynesians trace the implications of subtle differences in labor- and capital-market failures.

Just what a "Galbraithian" economist would do, however, is not clear. For Galbraith, there is no single market failure, no single serpent in the Eden of perfect competition. He starts from the ground and works up: What are the major forces and institutions in a given economy, and how do they interact? A graduate student cannot be taught to follow in Galbraith's footsteps. The only advice: Be supremely witty. Write very well. Read very widely. And master a terrifying amount of institutional detail.

Harry Johnson, in his superb but not entirely fair critique of Milton Friedman's Monetarists, said that in order to carry out an intellectual revolution in economics, one must propound a doctrine that has three qualities: it can be summarized in a single sentence, it provides the young with an excuse for ignoring the work of their elders, and it tells the young what they can do to further the revolution. John Maynard Keynes and Friedman both offered such doctrines. They said, respectively, that "aggregate demand determines supply" and that "inflation is always and everywhere a monetary phenomenon"; they dismissed their predecessors as obsolete; and they set hundreds of young to the task of estimating consumption, investment, and money-demand functions.

Galbraith propounded no such easily summarized doctrine. The closest we can get is: "the world is complicated, and both right-wing ideology and the conventional wisdom that is this age's self-image are terribly wrong." He offered critiques that required you to read and understand old theories, not new theories that allowed you to dismiss everything prior as irrelevant.

The result? Nearly all economists today are Paul Samuelson's children. Many are Keynes' children. Friedman, Robert Lucas, Robert Solow, and James Tobin all have plenty of descendants. But there are few Galbraithians on the ground. Would economics as a discipline be stronger if the 50-year-old and 30-year-old economists had a better appreciation of Galbraith? Almost surely. Will the winds of economic fashion shift and cause economists to appreciate Galbraith once again? For that to happen, an astute young economist would have to devote himself to "mathing up" chapters of The Affluent Society and The New Industrial State and publishing them in journals -- not a likely prospect in today's risk-adverse academic environment.


Galbraith's life traces an arc through an age in which three gigantic shocks appeared to transform U.S. politics. The Great Depression convinced the upwardly mobile that they could be downwardly mobile too, the middle class that it and the working class had common interests, and high-wire entrepreneurs that even they needed government to provide a strong safety net -- hence Franklin Roosevelt's New Deal. Then the self-destruction of the Republican Party in the wake of its takeover by Barry Goldwater led to a decade of Democratic dominance that brought forth Lyndon Johnson's Great Society. And finally, with the advent of Richard Nixon's "southern strategy," the base of the northern Democratic Party moved to the left, leading to a decade of southern conservative Democrats voting for northern Democratic liberals to chair committees and run Congress. This was the age of Galbraith's ascendancy -- an age during which the United States looked to be moving ever closer to his vision of the good society.

But all these shocks turned out to be temporary. The middle class no longer fears impoverishment at the hands of another Great Depression, as it did in the 1950s, and it is less certain that it shares interests with the working class. Republican legislators may still feel that extremism in the defense of liberty is no vice, but they are now smart enough to keep quiet about it. The Democratic South has morphed into the Republican South, and enough electricity to power Illinois and New York could be produced if only one could attach magnets to Abraham Lincoln and William Seward as they spin in their graves.

What has survived throughout is the American myth of rugged individualism, and it is this that Parker's political story neglects. The power of this myth has meant that the United States is not, and never will be, a European-style social democracy. People may come together for barn raisings, but America is still the land of upward mobility and opportunity, where the most common questions are, I've done it, so why haven't you? and Doesn't this social solidarity stuff mean that I've got to pull more than my share of the weight? In spirit, it is still a nation of upwardly mobile immigrants blessed with an abundance of resources (free land) and an absence of government constraints (free labor).

Galbraith would say, sardonically, that this national self-image is just another fraudulent piece of conventional wisdom -- nurtured by the delusional, who cannot see reality, and the rich, who see it all too well but know that such delusions make them richer and more powerful. And Galbraith would be more than half right. But this self-image is also a very powerful social fact, and this more than anything else explains his waning influence on U.S. politics. It is not that the Democratic establishment has lost its nerve or been seduced by law firms and lobbyists; it is that the old Horatio Alger myth has proved extraordinarily durable.

At the beginning of the twenty-first century, it has become clear who John Kenneth Galbraith really is: Sisyphus, constantly pushing the boulder of social-democratic enlightenment up the hill. But the hill, it turns out, is too steep, and Galbraith not mighty enough.

And here's a genuinely bad passage from Holcomb Noble and Douglas Martin's obituary of John Kenneth Galbraith. Embarrassing:

John Kenneth Galbraith, 97, Dies; Economist, Diplomat and Writer - New York Times: Mr. Galbraith argued that technology mandated long-term contracts to diminish high-stakes uncertainty. He said companies used advertising to induce consumers to buy things they had never dreamed they needed.

Other economists, like Gary S. Becker and George J. Stigler, both Nobel Prize winners, countered with proofs showing that advertising is essentially informative rather than manipulative.

Proofs? I know many people who find Becker's and Stigler's arguments powerful ones. I know nobody who would call them "proofs."

Many viewed Mr. Galbraith as the leading scion of the American Institutionalist School of economics, commonly associated with Thorstein Veblen... [which] deplored the universal pretensions of economic theory, and stressed the importance of historical and social factors in shaping "economic laws." Some therefore said that Mr. Galbraith might best be called an "economic sociologist." This view was reinforced by Mr. Galbraith's nontechnical phrasing, called glibness by the envious and antagonistic...

I thought the rule in an obituary was that it was the one time when it was profoundly uncool to cite those critics who are too cowardly to name themselves...

Ironically, Mr. Galbraith's pride in following in the tradition of Veblen was challenged by the emergence of what came to be called the New Institutionalist School. This approach, associated with the University of Chicago, claimed to prove that economics determines historical and political change, not vice versa.


Some suggested that Mr. Galbraith's liberalism crippled his influence. In a review of "John Kenneth Galbraith: His Life, His Politics, His Economics" by Richard Parker (Farrar, 2005), J. Bradford DeLong wrote in Foreign Affairs that Mr. Galbraith's lifelong sermon of social democracy was destined to fail in a land of "rugged individualism." He compared Mr. Galbraith to Sisyphus, endlessly pushing the same rock up a hill that always turns out to be too steep.

That's not what I said. Here's what I said: