Department of "Huh?"

Progressive Liberal and Mark Thoma both get medieval (and not in a good, Chaucerian way) on Tom Nugent and Robert Clarke of National Review:

Angry Bear: if Nugent & Clarke think that issuing options to CEOs does not have a cost to the shareholders of the company, there are not qualified to write about executive compensation. Which is of course why they get to write for the National Review.

I think that Nugent and Clarke are trying to be clever: they think they can dance around and say that "compensating [CEOs with options]... has not come at the expense of company profits" because stock issues and repurchases are not income-statement but balance-sheet events. Hence what they say has truthiness: the loss of shareholder value that comes about through ownership dilution produced by CEO options does not "come at the expense of corporate profits." However, it has the same effect on shareholder wealth as an equivalent salary payment to CEOs that does come at the expense of company profits.

They hope that their readers will overlook this.

Which is, of course, why they get to write for National Review. If you're fooled once by believing something you read in National Review, shame in them. If you're fooled twice, shame on you.

General Motors Complains About the New York Times

As I've said before, I am wondering if there will be a New York Times in twenty years. If they want to remain as gatekeepers, they have to start building a reputation as honest gatekeepers. It may well be too late:

FYI Blog: The Ban on 'Rubbish' in The New York Times: By Brian Akre: GM Corporate Communications

I've spent much of the past week trying to get a letter to the editor published in The New York Times in response to the recent Tom Friedman rant.... I failed.... Friedman spent 800 words on the Times op/ed page to accuse GM of supporting terrorists, buying votes in Congress and being a corporate "crack dealer" that posed a serious threat to America's future. He suggested the nation would be better off if Japan's Toyota took over GM. Mr. Friedman later acknowledged in television interviews that the column was a bit "over the top," but that he wanted to get our attention.

He got it.

Part of our response was to send a letter from my boss, Steve Harris.... You'd think it would be relatively easy to get a letter from a GM vice president published in the Times.... Just a matter of simple journalistic fairness, right? You'd also think that the newspaper's editing of letters would be minimal -- to fix grammar, remove any profane language, that sort of thing. Not so....

First, there's the word limit. Our first letter came in at 490 words... after the Times ran four letters in support of Friedman's column on Friday, June 2, totaling 480 words.

The Times told us it would "consider" our response only if it were limited to 175 words max.... I note that today's (June 8) Times has a 304-word letter from two Democratic senators, Hillary Clinton and Charles Schumer). We countered by offering to cut our letter to 300 words. They offered to go up to 200 words. OK, we reluctantly concluded, 200 is better than nothing.

Then came the editing.

They removed our invitation to Mr. Friedman to come to Detroit to learn the facts.... They removed a sentence in which Steve said falsely accusing GM of "buying votes" in Congress was irresponsible.... Our letter opened with a paragraph that accurately summarized the most bizarre elements of Mr. Friedman's attack, then reacted with this one-word sentence: "Rubbish."...

The Times suggested "rubbish" be changed first to, "We beg to differ." We objected. The Times then suggested it be changed to, "Not so." We stood our ground. In the end, the Times refused to let us call the column "rubbish."

Why? "It's not the tone we use in Letters," wrote Mary Drohan, a letters editor.

What rubbish.

A Clerk Ther Was of Oxenford...

And, of course, the most well-known text about medieval literacy, scholarship, and universities:

Geoffrey Chaucer, General Prologue to The Canterbury Tales:

A CLERK ther was of Oxenford also,
That unto logyk hadde longe ygo.
As leene was his hors as is a rake,
And he nas nat right fat, I undertake,
But looked holwe, and therto sobrely.

Ful thredbare was his overeste courtepy,
For he hadde geten hym yet no benefice,
Ne was so worldly for to have office.
For hym was levere have at his beddes heed
Twenty bookes, clad in blak or reed,
Of Aristotle and his philosophie
Than robes riche, or fithele, or gay sautrie.
But al be that he was a philosophre,
Yet hadde he but litel gold in cofre;
But al that he myghte of his freendes hente,
On bookes and on lernynge he it spente,
And bisily gan for the soules preye
Of studie took he moost cure and moost heede.
Noght o word spak he moore than was neede,
And that was seyd in forme and reverence,
And short and quyk and ful of hy sentence;
Sownynge in moral vertu was his speche,
And gladly wolde he lerne and gladly teche.

How do you read this passage differently if you focus on the fact that the Oxford clerk's "twenty books, clad in blak or reed" piled by his bed represent as large a share of society's wealth then as $300,000 would represent today?

Emaciated and underfed, yes. Ill-dressed, yes. Sponging off his friends, yes. But this is not a person who is poor in the sense of being without resources. He just uses his resources in peculiar ways.

What is the twenty-first century equivalent?

"The Student Will Not Leave the City... [without Giving] Back [to His Creditors] the... Books"

A note on Frederick II Hohenstaufen's 1224 Statues establishing the University of Naples:

Medieval Sourcebook: Frederick II: Lictere Generales, establishing the University of Naples, 1224: These are the conditions that we offer to the students: First, that there will be doctors and teachers in every Faculty. We assure the students, wherever they come from, that they will be able to come, stay and return without any risk to their persons or goods. The best houses will be given to them, and their rent will be at most two ounces of gold. All the houses will be rented for a sum up to that amount, based on an estimate by two citizens and two students. There will be loans given to students, based on their needs, by those who are designated to do so, with their books pawned as collateral, which books will be temporarily returned to the student after receiving appropriate guarantees from other students. The student will not leave the city until he has paid back his debt, or has given back the pawned books returned to him temporarily. Such pawns will not be requested by the creditor as long as the student remains in school...

If you finish your term at university and haven't repaid your student loans, your creditors will take your books and hold them hostage until you do repay your debts.

According to Greg Clark, by the eighteenth century in England there was one book copy printed per year for every five people in the country. Go back to the late fifteenth century--just post-Gutenberg--and there is one book copy printed each year for every 200 people. Go back to 1300 or so, and there is one book copy each year hand-copied for every 1000 people. Or so we guess.

In the eighteenth century, a book copy sold for the same share of national productivity that $500 is today: not an overwhelming expense, but a significant one--the cost of a good but not extravagant TV, say. At the end of the fifteenth century, a book copy sold for the same share of national productivity that $1400 is today--the equivalent relative expense to this laptop I am typing on. Back in the thirteenth century, a book copy sold for the same share of national product that $14,000 is today. It was a substantial deal.

Thus back in the thirteenth century people took books seriously. Here, from 1271, is a document recording a success of the University of Paris's development office:

Medieval Sourcebook: University of Paris: Courses in Theology [1271] and Medicine [1270-74]: To all the officers of the court at Paris who shall read this document, greeting. in the Lord. We make known that John of Orleans, constituted master in our presence, canon and chancellor of Paris, acknowledges and admits that he has received and had from the venerable master Nicholas, archdeacon of the church at Paris, formerly chancellor of the aforesaid church at Paris, the books named below - to be lent to the poor students studying theology, according to a certain clause contained in the will of master Stephen of blessed memory, formerly arch-deacon of Canterbury, which is inserted in the present document, as follows:

I will and command that my books on theology shall be delivered to the chancellor of Paris who, for the sake of piety, shall lend them to poor students studying theology at Paris who are without books; in such a manner, however, that each chancellor each year, shall receive back the aforesaid books and after receiving them shall again deliver and lend them, each year, to the poor students, as shall seem expedient.

The names of the books are as follows: the Bible complete with a glossary. Also, Genesis and Exodus, glossed, in one volume. Also, the books of Solomon, glossed, in one volume. Also, Exodus, glossed by itself. Also, Job, glossed by itself. Also, Ezekiel, glossed by itself. Also, the Gospels, glossed by themselves, in one volume. Also, the psalter, with a complete glossary. Also, the four books of Sentences [of Peter Lombard]. Also, the books of Numbers. Also, Joshua, Judith, Ruth, Deuteronomy, glossed, in one volume. Also, the four books of Kings, Chronicles, first and second. Also, Esdras, first and second of Maccabees, Amos, glossed, in one volume. Also, the Twelve Prophets, glossed, in one volume. Also, the Psalter, glossed and complete. Also, the Epistles of Paul, glossed. Also, the Psalter, glossed and complete. Also, the Scholastic Histories. [probably the Scholastic history of Peter le Mangeur] Also the four Gospels, glossed. Also, the Epistles of Paul, glossed, with a smaller glossary. Also, the Psalter, glossed and complete. Also, the first and second books of Maccabees, glossed as far as the tenth chapter. Also, the Gospel of Mark. The Gospels, glossed.

We, the above-mentioned official, have thought indeed that, in testimony and witness of all the above-mentioned, we ought to place on the present writing the seal of the court at Paris, together with the seal of the aforesaid chancellor; hoping and asking that his successors, who shall be chancellors, shall order and do with the aforesaid books, for the sake of the divine piety, according to the contents of the aforesaid clause.

Done in the year of our Lord, I271, Wednesday, the feast of the Apostles Simon and Jude.

Also, the Bible, in two volumes, with marginal notes, bishop Stephen presented. Also, the original of the Sentences of master Peter Lombard, in a certain volume, bound in calf, now somewhat worn, with round copper nails in the covers.

An Early Student Loan Program...

From 1224. Frederick II Hohenstaufen wants bureaucrats, and wants them enough to do something about it--including an early student loan program, and dire threats against either students or professors who go out-of-state:

Medieval Sourcebook: Frederick II: Lictere Generales, establishing the University of Naples, 1224: Frederick [II Hohenstaufen] etc. to all the Archbishops, Bishops, priests, counts, barons, judges, executors of Justice, bailiffs, and all authorities of the Kingdom [of Naples]:

With the favor of God , thanks to Whom we live and reign, and to Whom we attribute all good deeds done by us, we wish that in all parts of the Kingdom many will become wise and knowledgeable, by having access to a fountain of knowledge, and a seminary of doctrine, so that they, made proficient by study and observation, will serve divine justice, and will become useful to us for the administration of justice and of the laws which we urge everyone to obey.

We have therefore decided that in the most pleasant city of Naples there should be teaching of the arts and of all disciplines, so that those who are starved for knowledge will find it in our own kingdom, and will not be forced, in their search for knowledge, to become pilgrims and to beg in foreign lands. We intend to provide for the good of those of our subjects who, after having become learned, will hope to acquire wealth, since the acquisition of what is good cannot be sterile, and will be followed by nobility, the halls of the tribunals, wealth, and the grace and favors of friendship. Therefore we will invite those scholars who are not without merit, and without doubt we will entrust them with the administration of justice once they have become able to do so. Therefore be happy and ready for the teachings that scholars desire.

We will allow you to live in a place where everything is in abundance, where the homes are sufficiently spacious, where the customs of everyone are affable, and where one can easily transport by sea or land what is necessary to human life. To them we offer all useful things, good conditions, for them we will look for teachers, promise goods and offer prizes to those who are worthy of it. We will keep them under the gaze of their parents, we will free them from many labors, and from the necessity of long trips, almost pilgrimages. We will protect them from the dangers of brigands who would deprive them of their goods on the long roads. Among the teachers that we have assigned to the School we have Roffredo of Benevento, a faithful judge, professor of civil law, a man of great science and proven loyalty.

We order therefore to all of you who govern provinces and preside over administrations, to let all these things known to all and everywhere, and to command, under danger of persons and goods, that no student will dare leave the Kingdom for reasons of study and that no one dare to teach in other places of the kingdom. And that, through their parents, you order to those students who are outside the Kingdom, to return here by the Feast of St Michael.

These are the conditions that we offer to the students: First, that there will be doctors and teachers in every Faculty. We assure the students, wherever they come from, that they will be able to come, stay and return without any risk to their persons or goods. The best houses will be given to them, and their rent will be at most two ounces of gold. All the houses will be rented for a sum up to that amount, based on an estimate by two citizens and two students. There will be loans given to students, based on their needs, by those who are designated to do so, with the pawning of the books, which will be temporarily returned after receiving the guarantee from other students. The student will not leave the city until he has paid back his debt, or has given back the pawns given to him temporarily. Such pawns will not be requested by the creditor as long as the student remains in school. In civil trials all will have to appear before their teachers.

As for grain meat, fish wine and other things that students need, we will not make any rule, since the province has all these things in abundance, and all will be sold to students as it is to citizens. We invite the students to such a laudable and great task, we promise to respect these conditions, to honor your persons and to order universally that you should be honored by all.

Syracuse 5 June 1224.

The Mystique of Central Banking

New Economist sends us to the work of the excellent Petra Geraats:

Oesterreichische Nationalbank %u2013 Working Papers: Working Paper 123: The Mystique of Central Bank Speak: In this paper Petra Geraats argues that despite the recent trend towards greater transparency of monetary policy, in many respects mystique still prevails in central bank speak. It is shown that the resulting perception of ambiguity could be desirable. Under the plausible assumption of imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial while it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak...

Rules for Monetary Policy

Mark Thoma points out to Greg Mankiw and myself that Michael Woodford is the real "state of the art" on the problem of what the central bank should try to stabilize.

Woodford speaks:

Rules for Monetary Policy: I have shown that in familiar classes of sticky-price dynamic stochastic general equilibrium (DSGE) models --- models that incorporate key elements of the current generation of empirical models of the monetary transmission mechanism, and even some relatively small complete macro models --- it is possible to show that the expected utility of the representative household varies inversely with the expected discounted value of a quadratic loss function, the arguments of which are measures of price and wage inflation on the one hand and measures of real activity relative to a (time-varying) target level of activity on the other.) Thus, it makes sense to rank alternative monetary policies according to how well they stabilize (an appropriate measure of) inflation on the one hand, and how well they stabilize (an appropriate measure of) the output gap on the other. The theory clarifies both the appropriate definition of these stabilization objectives, and the appropriate relative weights to assign to them when a choice must be made between them.

The answer obtained depends, of course, on the structure of the economy. In particular, inflation variability reduces welfare because of the presence of nominal rigidities; the precise nature of these rigidities determines the appropriate form of the inflation-stabilization objective. For example, if wages are flexible (or there are efficient contracts in the labor market), and price adjustments are staggered in the way assumed in the popular specification proposed by Guillermo Calvo (with an equal probability of any given price being revised in any time period), then inflation variation results in distortions caused by the misalignment of prices that are adjusted at different times. The resulting welfare losses are proportional to the expected discounted sum of squared deviations of the inflation rate from zero.

Other assumptions about the timing of price adjustments also imply that inflation variations reduce welfare, but with a different form of loss function, and thus a different ranking of equilibria in which prices are not completely constant. For example, if the probability of adjustment of an individual price is increasing in the time since that price was last reviewed -- a specification that is both intuitively plausible and more consistent than the simple Calvo specification with empirical models of inflation dynamics -- then welfare losses are proportional to a discounted sum of squared deviations of the current inflation rate from a moving average of recent past inflation rates, rather than deviations from zero. The goal of policy then should be to keep inflation from differing too greatly from the current "inertial" rate of inflation, which implies that inflation should not be reduced too abruptly if it has been allowed to exceed its optimal long-run level.

A similar conclusion is obtained if prices are assumed to be automatically indexed to a lagged price index, as in the well-known empirical model of Christiano, Eichenbaum, and Evans and related studies, or if some prices are adjusted in accordance with a backward-looking "rule of thumb," as proposed in the empirical model of inflation dynamics of Jordi Gali and Mark Gertler.

The theory also provides important insights into the question of which price index or indexes it is more important to stabilize. Again, the answer depends on the nature of the nominal rigidities. If prices are adjusted more frequently in some sectors of the economy than in others, then the welfare-theoretic loss function puts more weight on variations in prices in the sectors where prices are stickier, as first shown by Kosuke Aoki. This provides a theoretical basis for seeking to stabilize an appropriately defined measure of "core" inflation rather than an equally weighted price index.... [I]f wages are sticky as are goods prices, as implied by many empirical DSGE models, then instability in the rate of growth of a broad index of nominal wages results in distortions similar to those created by variations in goods price inflation. If wages are staggered in accordance with the Calvo specification, then the welfare-theoretic loss function includes a term proportional to the squared rate of goods price inflation and another term proportional to the squared rate of wage inflation each period. In this case, optimal policy involves a tradeoff between inflation stabilization, nominal wage growth stabilization, and output-gap stabilization, as first shown by Chris Erceg, Dale Henderson, and Andy Levin....

My research has emphasized that, when choosing a policy to best serve the goal of stabilization, it is crucial to take account of the effects of the policy's systematic component on people's expectations.... [W]hen one takes account of forward-looking behavior, it can be desirable for a central bank to only gradually adjust its operating target for overnight interest rates when underlying fundamentals change, rather than jumping immediately to a new level that depends only on current conditions. This kind of policy inertia -- often argued to characterize actual central bank behavior, but frequently assumed to indicate a failure of central bankers to fully optimize -- can reduce the amplitude of the swings in short-term interest rates required to stabilize inflation and real activity in response to real disturbances. It allows market participants to anticipate that the movements in short rates that occur will be more persistent, resulting in a larger effect on long rates and other asset prices, which are what matter for the effect of policy on aggregate demand....

The criteria used by inflation-forecast targeting central banks, such as the Bank of England (which seeks to ensure that CPI inflation is always projected to reach its target level of 2 percent per year at a horizon two to three years in the future), are an example of commitments... represent the closest approximation to the ideal of rule-based policymaking yet observed.... In the case of a canonical "New Keynesian" model, with an aggregate-supply relation of the kind implied by flexible wages and Calvo-style staggered pricing, the optimal target criterion is a "flexible inflation target," under which short-run departures of the inflation rate from a constant long-run target level should vary inversely with the projected growth in the output gap....

[I]f the likelihood of a price revision increases with the time since the last revision, then... temporary increases in inflation should not be immediately reversed.... [O]ne important conclusion from my study of this topic is that an optimal target criterion almost surely will not be focused so exclusively on projected outcomes two or more years in the future, as are the criteria that currently are used at the leading inflation-targeting central banks, at least according to their official rhetoric...

Rules for Monetary Policy

Mark Thoma points out to Greg Mankiw and myself that Michael Woodford is the real "state of the art" on the problem of what the central bank should try to stabilize.

Woodford speaks:

Rules for Monetary Policy: I have shown that in familiar classes of sticky-price dynamic stochastic general equilibrium (DSGE) models --- models that incorporate key elements of the current generation of empirical models of the monetary transmission mechanism, and even some relatively small complete macro models --- it is possible to show that the expected utility of the representative household varies inversely with the expected discounted value of a quadratic loss function, the arguments of which are measures of price and wage inflation on the one hand and measures of real activity relative to a (time-varying) target level of activity on the other.) Thus, it makes sense to rank alternative monetary policies according to how well they stabilize (an appropriate measure of) inflation on the one hand, and how well they stabilize (an appropriate measure of) the output gap on the other. The theory clarifies both the appropriate definition of these stabilization objectives, and the appropriate relative weights to assign to them when a choice must be made between them.

The answer obtained depends, of course, on the structure of the economy. In particular, inflation variability reduces welfare because of the presence of nominal rigidities; the precise nature of these rigidities determines the appropriate form of the inflation-stabilization objective. For example, if wages are flexible (or there are efficient contracts in the labor market), and price adjustments are staggered in the way assumed in the popular specification proposed by Guillermo Calvo (with an equal probability of any given price being revised in any time period), then inflation variation results in distortions caused by the misalignment of prices that are adjusted at different times. The resulting welfare losses are proportional to the expected discounted sum of squared deviations of the inflation rate from zero.

Other assumptions about the timing of price adjustments also imply that inflation variations reduce welfare, but with a different form of loss function, and thus a different ranking of equilibria in which prices are not completely constant. For example, if the probability of adjustment of an individual price is increasing in the time since that price was last reviewed -- a specification that is both intuitively plausible and more consistent than the simple Calvo specification with empirical models of inflation dynamics -- then welfare losses are proportional to a discounted sum of squared deviations of the current inflation rate from a moving average of recent past inflation rates, rather than deviations from zero. The goal of policy then should be to keep inflation from differing too greatly from the current "inertial" rate of inflation, which implies that inflation should not be reduced too abruptly if it has been allowed to exceed its optimal long-run level.

A similar conclusion is obtained if prices are assumed to be automatically indexed to a lagged price index, as in the well-known empirical model of Christiano, Eichenbaum, and Evans and related studies, or if some prices are adjusted in accordance with a backward-looking "rule of thumb," as proposed in the empirical model of inflation dynamics of Jordi Gali and Mark Gertler.

The theory also provides important insights into the question of which price index or indexes it is more important to stabilize. Again, the answer depends on the nature of the nominal rigidities. If prices are adjusted more frequently in some sectors of the economy than in others, then the welfare-theoretic loss function puts more weight on variations in prices in the sectors where prices are stickier, as first shown by Kosuke Aoki. This provides a theoretical basis for seeking to stabilize an appropriately defined measure of "core" inflation rather than an equally weighted price index.... [I]f wages are sticky as are goods prices, as implied by many empirical DSGE models, then instability in the rate of growth of a broad index of nominal wages results in distortions similar to those created by variations in goods price inflation. If wages are staggered in accordance with the Calvo specification, then the welfare-theoretic loss function includes a term proportional to the squared rate of goods price inflation and another term proportional to the squared rate of wage inflation each period. In this case, optimal policy involves a tradeoff between inflation stabilization, nominal wage growth stabilization, and output-gap stabilization, as first shown by Chris Erceg, Dale Henderson, and Andy Levin....

My research has emphasized that, when choosing a policy to best serve the goal of stabilization, it is crucial to take account of the effects of the policy's systematic component on people's expectations.... [W]hen one takes account of forward-looking behavior, it can be desirable for a central bank to only gradually adjust its operating target for overnight interest rates when underlying fundamentals change, rather than jumping immediately to a new level that depends only on current conditions. This kind of policy inertia -- often argued to characterize actual central bank behavior, but frequently assumed to indicate a failure of central bankers to fully optimize -- can reduce the amplitude of the swings in short-term interest rates required to stabilize inflation and real activity in response to real disturbances. It allows market participants to anticipate that the movements in short rates that occur will be more persistent, resulting in a larger effect on long rates and other asset prices, which are what matter for the effect of policy on aggregate demand....

The criteria used by inflation-forecast targeting central banks, such as the Bank of England (which seeks to ensure that CPI inflation is always projected to reach its target level of 2 percent per year at a horizon two to three years in the future), are an example of commitments... represent the closest approximation to the ideal of rule-based policymaking yet observed.... In the case of a canonical "New Keynesian" model, with an aggregate-supply relation of the kind implied by flexible wages and Calvo-style staggered pricing, the optimal target criterion is a "flexible inflation target," under which short-run departures of the inflation rate from a constant long-run target level should vary inversely with the projected growth in the output gap....

[I]f the likelihood of a price revision increases with the time since the last revision, then... temporary increases in inflation should not be immediately reversed.... [O]ne important conclusion from my study of this topic is that an optimal target criterion almost surely will not be focused so exclusively on projected outcomes two or more years in the future, as are the criteria that currently are used at the leading inflation-targeting central banks, at least according to their official rhetoric...

A National Review Trifecta

If National Review did not exist, it would be beyond the wit of humanity--beyond the wit of all intelligences in the universe--to invent it:

Matthew Yglesias watches Jonah Goldberg:

The New Journalism | TPMCafe: Jonah Goldberg misquotes John Murtha, truncating his statement in a manner that substantially alters the meaning. Following up, he justifies his action by noting that The New York Times did the same thing later. We're not even in "two wrongs don't make a right" territory here.

Meanwhile, Rich Lowry appears not to know that "crucial" means "decisive: will settle things one way or another":

The Corner on National Review Online: Tom Friedman['s saying] "the next six months will be crucial." When his repetition of that phrase over and over was pointed out in The Corner, I said I would have agreed with him every time he said it. Some readers asked why. Because every time Friedman said it, it was true. It was and is true because Iraq has never decisively tilted one way or the other. ..

And Iain Murray makes me sorry I named John Derbyshire the Stupidest Man Alive:

The Corner on National Review Online: A meteorite hit a remote area of northern Norway yesterday. The explosive force of the impact was equivalent to that of the atom bomb dropped on Hiroshima. I wonder if they'll try to blame this on global warming?

Estate Tax: Very Nice to See

Very nice to see. Especially Senator Voinovich: "Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest."

Senate Rejects Effort to Cut Estate Tax: WASHINGTON -- Senators voted Thursday to reject a Republican effort to abolish taxes on inherited estates during an election year with control of Congress at stake. GOP leaders had pushed senators to permanently eliminate the estate tax, which disappears in 2010 under President Bush's first tax cut, but rears up again a year later. A 57-41 vote fell three votes short of advancing the bill. Senate Majority Leader Bill Frist, R-Tenn., said the Senate will vote again this year....

"The estate tax is an extremely costly tax for a wealthy few that comes at the expense of every other American born and yet to be born for decades to come," said Senate Minority Leader Harry Reid, D-Nev.... Under current law this year, the first $2 million of a person's estate or $4 million of a couple's, escapes taxation. The remainder can be taxed at rates up to 46 percent. According to the most recent statistics available from the Internal Revenue Service, 1.17 percent of people who died in 2002 left a taxable estate....

Two Republicans, Sen. Lincoln Chafee of Rhode Island and Sen. George Voinovich of Ohio, broke with their party. "Repealing the estate tax during this time of fiscal crisis would be incredibly irresponsible and intellectually dishonest," Voinovich said.

There is an argument--not a very strong argument, but an argument--that a deficit-neutral repeal of the estate tax would boost saving and capital accumulation enough to be a good thing. I see no argument that an unpaid for repeal of the estate tax is a good thing.

Il Polipo Fascista ha Cantato la Relativa Canzone di Cygne

Patrick Nielsen Hayden loses patience with feckless young punditlets who misuse the English language:

Making Light: Where the feckless pundit class comes from: Where the feckless pundit class comes from: I lose patience (see comments) with one of the privileged young things at one of the blogs of the American Prospect.

Inflation and the Federal Reserve

I am on KQED Forum at 9 AM tomorrow, June 8, 2006, 88.5 FM, to talk about inflation, the Federal Reserve, and related topics. Susan Rasky moderates. Also on: Brad Williams, Chris Thornburgh.

KQED | Programs A-Z: Forum: with Michael Krasny: KQED's live call-in program presents wide-ranging discussions of local, state, national and international issues, as well as in-depth interviews.

My talking points:

To come...

What Is Wrong with Blogspot?

Does anybody know what is wrong with blogspot?

Mark Schmitt on the Future of American Politics

Mark Schmitt writes:

New America Foundation: Printable Version: Parliament Lament: Suppose that you wanted to find a list of the 30 or 40 Republican members of Congress most vulnerable to defeat this fall.... Here's an easy trick: Take a particularly egregious piece of legislation passed by the House, then look at the Republicans who voted against it. For example, last year the House passed Congressman Richard Pombo's bill to "modernize" (repeal) the Endangered Species Act. Thirty-four Republicans voted no. That list is virtually identical to any list of Northeast, Midwest, and Rocky Mountain Republican incumbents considered vulnerable this year.

If there is a voter backlash against the GOP this November, it will be aimed at the far-right Republicans who've been running the party. But, like a quail-hunting Dick Cheney, it will instead take out an unintended target—the so-called "moderate" Republicans who are somewhat pro-environment, more or less pro-choice, and sometimes labor-friendly leftovers of the genteel GOP tradition. Generally speaking, these are the only Republicans in vulnerable districts.

Shed no tears for the Republican moderates. As Minority Leader Nancy Pelosi said at a Prospect-sponsored breakfast in May, they are "enablers" of the culture of corruption. But the disappearance of Republicans who were willing to deviate occasionally from right-wing orthodoxy will mark a major change in our political life and culture. Back in 1994, many conservative Democrats were wiped out in the election and the party switching that followed. This year, whether Democrats win enough seats to control the House or not, the second shoe will drop. The hardening of our country into a parliamentary democracy, with two parties representing distinct ideologies and political traditions, will be complete.

Is this a bad thing? Polarized partisanship makes it hard to get things done, unless one party controls everything, as in a real parliament. Or could it be a good thing? In 1950, political scientists issued a plea for American parties to become just like this—ideologically coherent and "responsible," modeled on the British parliamentary parties. The answer doesn't matter; this is the way it's going to be. It may turn out that the political framework of the 20th century—-in which conservative and moderate factions in each of the two parties overlapped, and shifting bipartisan coalitions were always the way things got done—-was the anomaly, a living fossil dating from the peculiar history of the post-Reconstruction South.

Anomalous or not, that framework is exactly what almost everyone in Washington was trained for. We were all brought up knowing that the first thing you must do to pass legislation is to build a solid bipartisan coalition. But soon, whether we choose partisanship or not, we will all be absorbed into a more partisan world, and those who fight that trend will be left behind....

[I]t's not that NARAL and the Sierra Club are idiots. Up to now, it made perfect sense for them to endorse Chafee. You reward your friends, especially when they have stood up to pressure from within their own party. But at a certain point, rewarding friendly Republicans crosses the line into desperately trying to prop up a few so that you can still seem bipartisan—-at the price of legitimating a majority whose highest priority after tax cuts is the evisceration of environmental regulation....

One of the arguments of the 1950 political scientists was for this very result, to reduce the influence of "the pressure groups," because ideas would move through the parties rather than through external, unaccountable groups. But the political framework of the late 20th century had a lot going for it. In theory if not always in practice, it could find consensus and more stable solutions to public problems. But it's going, and in its place we will have a more rigid system in which the parties themselves dominate. The conservatives probably figured this out first and embraced it, thus explaining much of their political success in the last decade. Liberals can lament the loss of the old pluralist world, but we had better move on and deal with the new.

We've had all the defects of a presidential system and all the defects of first-past-the-post voting. Now we are about to add to them all the defects of a strong-party parliamentary system as well.

Br'er Furman and Br'er Mankiw

Over at Greg Mankiw's weblog, Jason Furman begs him to become a supporter of PAYGO--the principle that tax cuts need to be paid for by accompanying spending reductions, and that spending increases need to be paid for by accompanying tax hikes. He even offers Greg a special deal: PAYGO is to apply only to policies proposed by congress members and by future presidents--George W. Bush's policy proposals get a free pass, and are exempt:

Jason Furman @ Greg Mankiw's Blog: You don't need a lexicographic preference for deficit reduction to join Alan Greenspan, GAO Comptroller David Walker and me in supporting PAYGO rules for tax cuts and spending increases. You should give sincere thought to this, you would have a positive impact on current debates and do tangible good.... In the 1990s, PAYGO was commonsense. Dole and Gingrich supported it -- that's why they proposed Medicare and Medicaid cuts to pay for their tax cuts. Clinton supported it when we had a deficit -- his original prescription drug plan was fully paid for and even the later versions were explicitly contingent on being enacted together with a plan to ensure Social Security solvency. And John McCain, who you traveled on the bus with in 2000, remains a strong supporter of PAYGO.

The 1997 Balanced Budget Act was one product of this consensus. You would be heartened to know that it included about $400 billion in Medicare and Medicaid cuts and $400 billion in gross tax cuts (including capital gains, estate tax, and IRA expansions you would like).

I wouldn't expect you to agree with Alan Greenspan and me that PAYGO should apply to the extension of the tax cuts already enacted. Instead, you could agree with George Bush and the implicit position of the Kerry-Edwards campaign budget that these tax cuts were never intended to be temporary, that not extending them would be a tax increase, and that the baseline should assume they are extended....

It would be consistent with your philosophy -- and helpful in actual debates going on in Washington and not just on economics blogs -- if you argued that PAYGO should apply to all new tax cuts and spending increases. Admittedly it would put some constraint on tax cuts, but it also might put more pressure on Congress to reduce spending -- since they would need to eat their spinach contemporaneously in order to have their desert.

It's not going to happen. To admit that PAYGO discipline is an indispensable help for good fiscal policy--that's too great an implicit critique of George W. Bush for Mankiw to swallow, and the explicit pass for Bush makes it worse. Greg Mankiw is not going to accept Jason Furman's invitation to come into the PAYGO briar patch.

Morning Coffee Videocast: The Estate Tax

In which I hog bandwidth, drink my morning coffee, and express my frustration at the fact that estate tax repeal is even on the agenda:

Estate Tax Repeal: Brad DeLong June 7, 2006:

Brad DeLong's Morning Coffee. Why would we want to raise other Americans' taxes by $600 a year in order to allow the heirs of the superrich to inherit an extra $5,000,000 per estate?

Gene Sperling on the Estate Tax

He writes:

The Estate of Misguided Choices | TPMCafe: If only I were a more talented writer, I might be able to do justice to describing how distorted the priorities and values are that motivated the US Senate's decision today to move forward in the efforts to repeal (or nearly repeal) the estate tax.... [W]hat [does] it sas about our commitment to the value of economic mobility when we are shortchanging pre-school for those who start life with the least at the same time we give a massive tax cut to those who end life with the most[?]...

After Katrina, even the most ardent estate tax repeal advocates decided it was unseemly to push for complete repeal. Thus one started to hear so called compromises.... Let's see. The nation is at war and troops have been having trouble getting the safest equipment. Child poverty has been on the rise for four straight years. Deficits are projected to total $4 trillion in the next ten years, our entitlement challenge is unresolved, working wages have been stagnating or declining, and fixing the estate tax for the top 3 of every 1000 estates in 2011 is what we should rush to the floor of the Senate in the summer of 2006?... Why in the world then should the United Senates decide that only the most expensive, regressive tax cut perhaps ever proposed is the sole one that must be rushed to the floor?...

[Y]ou will not hear a word this week from supporters about how to pay for this tax cut so that it does not increase the deficit.... [W]e are... passing on the debt and interest payments to the 99.7% of Americans -- including our children and grandchildren -- who will not benefit one penny from these proposals.

Has Henry Paulson Made a Mistake?

Adam Posen thinks Henry Paulson has made a mistake:

The Washington Note: Adam S. Posen: Putting Money on More of the Same from Economic Policy: Just as in foreign policy, economic policy under the Bush Administration has been waiting for adult supervision.... [O]lder wiser moderates, like Pete Peterson, have been pushing for greater fiscal restraint, multilateral approaches to international economic policy, and some regard for the domestic political impact of corporate excess....

Last week's nomination of Henry Paulson to be Treasury Secretary, supposedly due to the increased influence of Chief of Staff Josh Bolten, is supposed to be the sign of the adults finally taking charge of the nation's finances.... [S]ome market chatter has been that this is the turning point, at least on the fiscal issue. The earlier meritocratic appointment of Ben Bernanke as Fed Chairman, as opposed to some Harriet Miers of central banking from the Bush bench of obscure buddies... was also a hopeful sign....

Would that it were so. It could turn out that way.... [But] there remain several reasons for skepticism.... Lots of momentum towards deepening difficulties -- The US fiscal and international economic positions are not irretrievably or even critically bad, but the last five years of mismanagement have done quite a bit of harm.... Lack of credibility from within the tent -- One might think of Paulson as a Colin Powell for economic policy, in which case the limited impact of such an appointment should be self-evident. The claim is made that someone of Paulson's stature would never take the job unless s/he were guaranteed that s/he could speak truth to power and pursue mature policies; otherwise, s/he would resign.... [B]ut as an economist I do know something about incentives and time-consistency. Once a senior official is in the administration, all forces motivate him/her to keep the job.... Josh Bolten oversaw the budget binges at OMB without a squawk or at least any noticeable restraining effect. There is no reason to think Paulson will be immune.

Absence of risks to what the Bush administration values -- There are elected officials who do undertake painful fiscal measures for the sake of a country's economic well-being. George Bush the Elder did so with regard to raising taxes, and Bill Clinton also did so by pursuing 'Rubinomics' rather than the spending programs that his 1992 platform seemed to portend. In both cases, the Presidents and their core advisers believed that the US' best interest was served by an American economy integrated with the world, with sufficient government resources (or credit lines unused) to marshal military force as needed, and (moreso Clinton than Bush) the predominance of financial and technological efficiency over protection of older declining corporate interests. Fiscal rectitude and a strong dollar supported these values. On each of these counts George Bush the Younger, Cheney, and Rove have revealed the opposite priorities....

There are many reasons to hope that the Paulson nomination to Treasury is indicative of a reversal of the Bush Administration of the destructive fiscal policies of the last five years, but far fewer reasons to expect that those hopes will come to fruition.

Why Oh Why Can't We Have a Better Press Corps? (Jacob Weisberg Edition)

Outsourced to Lance Knobel (who I really must have coffee with sometime in the next two weeks):

Lance Knobel: Jacob Weisberg... gets awfully muddled by trying to be politically even-handed.

Any political party counts on having a few hot buttons it can push at those moments when it is a few points behind in the polls with not much time until election day. These issues have certain characteristics -- a whiff of pandering, the flavour of insincerity, an aura of desperation. They aim to stir passion but have little, if any, effect on most people's lives.... Flag-burning has long been such an issue for Republicans. Raising the minimum wage sometimes serves the same purpose for Democrats.

Huh? Raising the minimum wage may be a touchstone issue for Democrats and it almost surely does appeal to the party's base. But how on earth is it "pandering" or insincere? How can anyone argue that it has "little, if any, effect on most people's lives"? And how can anyone equate an issue that has a real economic rationale (whether you want to argue pro or con) with one that is purely stirring emotions?

If you did an analogy test and claimed "flag-burning: Republicans" most resembled "minimum wage: Democrats," you would certainly fail.

The Prussian Way of War

Here is something thought provoking:

Consider, if you will, this practically forgotten scene from the pages of German military history:

They came up out of the dark forests, mounted and mobile, driving deep into the flank and rear of their enemy. The shock and surprise of their sudden assault carried all before them. So rapid was the advance that it overtook every attempt by their defenders to form a cohesive position. The attackers were not simply faster than their opponents. Moving in a compact, mobile column, they were also more agile, more flexible, and far more responsive to the commands of their officers.

This great mobile column chopped the bewildered enemy force in front of it into uncoordinated segments, each with little more on its mind than flight. It was a near-perfect marriage between the best available technology, a flexible system of command and control, and officers who understood the possibilities of both. It was war in a new, faster tempo.

And now, a quiz: from whence comes this scene?... the Tannenberg campaign of 1914?... the invasion of France in 1940?... Operation Barbarossa?...

Any of the three would certainly be a good guess, but each would be wrong.... Friedrich Wilhelm I, the "Great Elector" of Brandenburg... winter campaign of 1678-9.... The routed enemy was Swedish, and the mounted force launching the devastating mobile assault and pursuit was actually riding sleighs...

[...]

[T]here is indeed a German way of war and... it had its origins within the Kingdom of Prussia.... Prussian, and later German commanders, sought to maneuver their operational units... in a rapid and daring fashion. The Germans called it Bewegungskreig... the war of movement on the operational level.... Such a vigorous operational posture [required]... an army with an extremely high level of battlefield aggression, an officer corps that tended to launch attacks no matter what the odds, and a flexible system of command that left a great deal of initiative, sometimes too much, in the hands of lower ranking commanders.

Thus the Germans evolved a certain pattern of war making.... Other nations... evolved different patterns. Need to land a larg amphibious force on foreign shores? Call the Americans. Interested in deep strikes and consecutive operations on a vast scale of men and materiel? Study the Red Army in its prime. War as a means of colonial aggrandizement? Look to the British. Levels of firepower large enough to turn the enemy homeland into a parking lot? It's back to the Americans...

This is the beginning of Robert Citino (2005), The German Way of War: From the Thirty Years' War to the Third Reich (Lawrence, KS: University Press of Kansas: 0700614109).

Playing with Google Spreadsheets

Playing with Google Spreadsheets: http://spreadsheets.google.com/:

I've shared a spreadsheet with you - it is named: "DeLong All-Purpose Quadratic Equation Solver" Click on the following link to log into Google Spreadsheets and view the spreadsheet: http://spreadsheets.google.com/ccc?key=o15492383500274530193.8006390369701147059

I've shared a spreadsheet with you - it is named: "Black-Scholes Basics Spreadsheet (20060609)" Click on the following link to log into Google Spreadsheets and view the spreadsheet: http://spreadsheets.google.com/ccc?key=o15492383500274530193.6208879362082642290

Alas! Graphs don't work in Google Spreadsheets yet, which means it is not yet terribly useful for my purposes...

What Should the Federal Reserve Stabilize

Greg Mankiw writes:

Greg Mankiw's Blog: How should the Fed measure inflation?: If a central bank is to adopt inflation-targeting as a guide to policy, what inflation rate should it use? The Fed seems to focus on core PCE inflation--that is, inflation in the prices of consumer goods and services excluding certain volatile sectors, such as food and energy. From the standpoint of practical monetary policy, this choice seems sensible. But it is hard to square this common-sense decision with standard monetary theory, which doesn't readily yield a variable analogous to these empirical measures.

Steve Zeldes once observed that measures of core inflation are like the clues on the TV game show Jeopardy. The category is inflation. The answer is the CPI excluding food and energy. It is your job to figure out the question.

Some years ago, Ricardo Reis and I took a stab at this problem.... N. Gregory Mankiw and Ricardo Reis (2002), "What Measure of Inflation Should a Central Bank Target?" We developed a framework for thinking about the issue and applied it to U.S. data. We found that the price of labor (that is, the nominal wage) should be given substantial weight in the index used for monetary policy. But I will be the first to admit that this conclusion was too tentative to take to the (central) bank.

I (as I find myself doing so often these days) disagree with Greg Mankiw. The conclusions are tentative, yes, but they are very much worth taking to the (central) bank. The argument that central banks should focus mostly on stabilizing the growth rate of nominal wages is clear and convincing, as far as I know Mankiw-Reis is still state of the art, and it is an important and neglected problem that needs attention.

Friday Tyrannosaurus Blogging

Belle Waring pleads for knowledge:

John & Belle Have A Blog: Damn, He's Hot! Look At Those Tiny Arms! Or, Size Matters: This is really a question for PZ Meyers. Why did Tyrranosaurs have such dinky little front legs, so short they couldn't even use them to lift food to their mouths? It seems so dumb. I was considering it as I lay in bed last night and then I thought, aha, sexual selection! Their means of locomotion (rear legs) is such that they don't absolutely need front legs to get around. So maybe it was originally a signal, like, I'm so extrordinarily bad-ass that I can thrive even with these relatively wimpy arms! And then some kind of sexual selection feedback loop set in, and they were on a path to developing little nubbins and finally no arms at all, but they all got blown up by a meteor.

The End.

But then I thought, well, it can't really be the case that every time we see some apparent design flaw in a creature we're allowed to say about it, this is so stupid that only a really healthy, robust animal of this sort could survive, etc. You can't just claim sexual selection for everying, because chance ensures that lots of animals are just messed up from a teleological perspective. There's no guarantee that creatures will be optimally constructed; they just have to be good enough to stay alive and are saddled with all sorts of inherited templates which it is too late to change. So what do you guys think? Tell me what real scientists think so I can replace my imaginary version with a truer one.

IBM Outsources...

The spread of outsourcing continues:

Another blue chip changes color - Managing Globalization - Blogs - International Herald Tribune: Daniel Altman, the IHT's global economics correspondent, offers a look at the day's economic news with an eye to how individuals, companies and governments are coping with the challenges of globalization.

IBM announced Tuesday that it would invest $6 billion in India over the next three years. That is a stunning amount of money, almost enough to raise India's gross domestic product by a full percentage point. And as the article linked above tells us, IBM has hired 34,000 people in India in just the last two years.

Soon quite a few American household names may have more employees outside the 50 states than inside. Gillette already does, as I wrote last week. So who will be left working for IBM in the United States?

The answer probably consists of executives, marketing specialists and a bunch of tax lawyers. Yet this might not be such a bad thing for Americans. Just as India is a target for the outsourcing of customer service, programming and manufacturing, the United States could be the world's outsourcing destination for management expertise. In some ways, it already is - witness mammoth consulting firms like McKinsey and Accenture. As those guys know, there's nothing wrong with being an outsourced worker... when you're getting paid so handsomely.

So what will the U.S.'s comparative advantage be? And how will it use that comparative advantage as a base to keep upgrading the productivity of America's workers?

Why Oh Why Can't We Have a Better Press Corps? (Floyd Norris/New York Times Edition)

I cannot believe my eyes...

Suppose somebody offers you a choice between two houses...

1. House one costs $375,768.75, which you will finance by paying $75,153.75 down and borrowing the rest at 7% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.
2. House two costs $447,716.75, which you will finance by paying $75,153.75 down and borrowing the rest at 5% interest, which will give you a mortgage payment of $2000 a month; if you were then to rent out the house, you could rent it for $2200 a month.

Floyd Norris of the New York Times says that the second house is much more expensive--after all, it costs 19% more. The Bureau of Labor Statistics has a different view: the amount of money you have to pay in order to buy the second house is exactly the same, in amounts and in dates, as the amount of money you have to pay in order to buy the first. The amount it would cost to rent the two houses are the same. How can you think of the prices of the two houses as being other than identical?

Floyd Norris appears to think that the Bureau of Labor Statistics is stupid:

What Happens if Inflation Is Overstated? - New York Times: [Y]ou don't have to be a conspiracy theorist to conclude that in the last decade, an important part of the [consumer price] index has been understated. That is the housing component. Since 1983, the government has measured the price of homes not by looking at house prices but by computing what it calls "owner's imputed rent." That is the rental value of the house you own. It accounts for nearly a quarter of the entire Consumer Price Index....

Since [1986] the home price index maintained by the Office of Federal Housing Enterprise Oversight has doubled, while the imputed rent figure has risen by less than a third. Had the government computed the Consumer Price Index using actual home prices since 1996, I estimate that it would have risen by an average of 4.1 percent a year, as opposed to the 2.5 percent reported. The core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.

Perhaps the Federal Reserve was too hesitant to raise rates, and thus allowed speculative bubbles to form, because it was seeing inflation through rose-tinted glasses. But now the problem could be the opposite. If the housing boom is ending, rental costs may start to catch up with house prices. The reported inflation rate would be higher than the real rate, at least to people who say the best way to measure home prices is by measuring home prices.

To be sure, some economists like the rental gauge, saying it measures consumption spending. Others think that the best measure is mortgage payments. When interest rates were declining, those rose slower than home prices but faster than imputed rents...

Floyd Norris gives absolutely no sign of understanding any of the issues here. House prices have the big drawback that they rise when interest rates fall even if no homeowner pays any more for a house. Mortgage payments have the drawback that when inflation rises mortgage payments rise too even though homeowners gain in nominal appreciation what they lose in extra monthly payments. Rental equivalent values are--the BLS thinks for very good reasons, and I think too--the best way to construct the CPI. The BLS has thought about this a lot.

You won't get any of that thinking, or any idea of what the issues are, or any understanding of why the BLS has made the choices it has, by reading Floyd Norris's piece.

All you will get is:

[Y]ou don't have to be a conspiracy theorist to conclude that... an important part of the [consumer price] index has been understated... the housing component.... Had the government computed the Consumer Price Index using actual home prices... [t]he core rate -- inflation excluding food and energy costs -- would be 4.2 percent, not 2.2 percent.

Feh!

Cosma Shalizi Is On Drugs

He's ODed on coffee, I think:

2006 06: Neuropharmacological Foundations of the Public Sphere: The importance of coffee-houses in the Enlightenment, and the rise of the public sphere, is a historical common-place. But it's also puzzling: historians can say a lot of sensible things about how, as a social setting, the cafe was conducive to the give and take of (more or less) rational argument, and (relative) indifference to social standing in favor of persuasion. But I've never heard a good story for why coffee houses had to be run that way, nor that (say) taverns weren't, or couldn't have been, run that way. So, while not denigrating the social factor, it doesn't seem to explain why this connection took hold. Now, at last, scientific proof that Enlightenment had a sound material basis (via Mind Hacks):

Pearl Y. Martin, Jenny Laing, Robin Martin, and Melanie Mitchell, "Caffeine, Cognition, and Persuasion: Evidence for Caffeine Increasing the Systematic Processing of Persuasive Messages", Journal of Applied Social Psychology 35 (2005): 160-18: Abstract: Caffeine is known to increase arousal, attention, and information processing--all factors implicated in facilitating persuasion. In a standard attitude-change paradigm, participants consumed an orange-juice drink that either contained caffeine (3.5 mg/kg body weight) or did not (placebo) prior to reading a counterattitudinal communication (anti-voluntary euthanasia). Participants then completed a thought-listing task and a number of attitude scales. The first experiment showed that those who consumed caffeine showed greater agreement with the communication (direct attitude: voluntary euthanasia) and on an issue related to, but not contained in, the communication (indirect attitude: abortion). The order in which direct and indirect attitudes were measured did not affect the results. A second experiment manipulated the quality of the arguments in the message (strong vs. weak) to determine whether systematic processing had occurred. There was evidence that systematic processing occurred in both drink conditions, but was greater for those who had consumed caffeine. In both experiments, the amount of message-congruent thinking mediated persuasion. These results show that caffeine can increase the extent to which people systematically process and are influenced by a persuasive communication.

I should perhaps add that the leap from their findings to the rise of modern rationalism is entirely my own.

Daniel Gross Writes About the Fed

He writes about how the markets, and the financial press, seem puzzled by the fact that Ben Bernanke can think about more than one thing at a time:

Daniel Gross: June 04, 2006 - June 10, 2006 Archives: HELICOPTER MAN: Federal Reserve Chairman Ben Bernanke earned his reputation for being more concerned about deflation than inflation in part because of this 2002 speech where he approvingly quoted a Milton Friedman phrase about the utility of a "helicopter drop" of money. Now that Bernanke is suggesting that inflation is, indeed, a problem, the stock markets are getting somewhat antsy. Traders apparently didn't realize that Bernanke's helicopter comes equipped with a high-powered, super-duper liquidity vacuum. And it looks like he might have to turn it on.

Ben Bernanke is smart enough to worry about all future possibilities--and both accelerating inflation and dangerous deflation are possibilities. It shouldn't take long before the markets realize this, even though the press corps doesn't.

Al Gore Deserves More Credit, Guys

Afternoon Tea Audio Podcasts:

Al Gore Deserves More Credit, Guys: June 7, 2006:

I have observed in the past that it takes nerve to criticize Al Gore in one breath, call for a carbon tax in the next, and yet have neither the honor, the grace, nor the guts to remind readers that Al Gore was the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993...

The U.S. Current Account Deficit Once Again

>[The U.S. Current Account Deficit Once Again](http://web.mac.com/jbdelong/iWeb/6CBD68D6-0EFE-4970-B46E-B8BB2A2997FB/Afternoon%20Tea%20Podcasts/09A41205-503F-4415-9C61-AC96D27F9DD7.html): June 6, 2006 ---- >>[MarsEdit: Easy weblog editing](http://ranchero.com/marsedit/)

The U.S. Current Account Deficit Once Again

Afternoon Tea Audio Podcasts:

The U.S. Current Account Deficit Once Again: June 6, 2006

How Good Is the Economy, Really?

Afternoon Tea Audio Podcasts:

Do We Have a Good Economy?: May 29, 2006

Tony Snow's Missing 401(k)

Afternoon Tea Audio Podcasts:

The White House Press Secretary's Nonexistent 401(k): May 31, 2006

Henry Paulson to the Treasury Department

Afternoon Tea Audio Podcasts:

Henry Paulson to the Treasury Department: June 2, 2006

Afternoon Tea Audio Podcasts

More experiments with one-button audio-visual web publishing: Afternoon Tea Audio Podcasts:

The U.S. Current Account Deficit Once Again: June 6, 2006

Henry Paulson to the Treasury Department: June 2, 2006

The White House Press Secretary's Nonexistent 401(k): May 31, 2006

Do We Have a Good Economy?: May 29, 2006

Not Quite the Stupidest Man Alive...

A correspondent reminds me that it is past time to lay down another marker on the internet that Donald Luskin really has no clue what he is talking about. However, we can no longer call him the Stupidest Man Alive--that crown has been permanently taken by John Derbyshire.

Fortunately, my correspondent provides an excellent example of what we are talking about:

The Conspiracy to Keep You Poor and Stupid: WE CAN NEVER SAY THIS OFTEN ENOUGH.... Inflation is not rising prices. Inflation is a declining dollar.

Ahem:

inflation - Definitions from Dictionary.com: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

If the dollar declines against the Canadian dollar, but the prices of goods and services in dollars inside the United States remain unchanged, we do not say "there has been inflation." We say, instead, "the nominal and real exchange rates have declined." If the dollar stays constant against the Canadian dollar, but the prices of goods and services in dollars inside the United States rise, we do not say "there has been no inflation." We say, instead, "there has been inflation,a the real exchange rate has risen, and the nominal exchange rate has stayed constant."

One of the Stupidest Men Alive.

Tyler Cowen on Global Warming

Tyler Cowen's current views on global warming:

Marginal Revolution: My views on global warming: My views on global warming

1. It is by now pointless to deny that global warming is man-made to a considerable degree.
2. It is a very real problem. If you don't believe me, go visit the deltas of East Bengal or Bangladesh and think about it again. Sweden I am not worried about and Greenland may become valuable, but where do we put the losers and no this isn't just a few small islands in the Pacific.
3. I can imagine Manhattan and other major cities taking protective action against rising water levels, much as the Dutch do today. I recall reading that the Dutch spend about as a high a percentage of their gdp defending themselves from water as the U.S. does on national defense. That is quite a burden, but it is better than forsaking economic growth.
4. Like Arnold Kling, I do not much trust climate models. Perhaps I have spent too much time doing macro, and the experience carries over. Nonetheless uncertainty about final effects gives us more to worry about, not less. It is the worst-case scenarios for global warming which worry me, not the middling scenarios. Variance is our enemy in this matter.
5. I don't have a good plan for what to do. Imagine passing and extending Kyoto and turning 2/3 of the U.S. energy supply into nuclear, wind, and solar power. Heroic achievements, to be sure. But if China and India continue to industrialize, global warming will likely continue and perhaps accelerate, as I understand current knowledge.
6. I have yet to see a real plan which recognizes three points: a) without continued economic growth the world will probably fall apart, b) the problem is real and significant, c) any good preventive solution would require an enormous amount of concerted action across both time and across nations.
7. How much does the framing of the problem contribute to our political views on the matter? How much would we spend, or how intensively would we organize global action, if a typhoon were headed right for Bangladesh? An earthquake? A war? A much slower set of changes, not fully our fault? An out-of-control American nuclear weapon? Should it matter?
8. If we could relocate all the losers-to-be into freer and richer countries, should we consider this a satisfactory solution? Or are we still massive and unjustified aggressors if they are crying to us: "Don't let it happen, don't let it happen!"?

Stan Collender Has Advice for Hank Paulson

Stan Collender has advice for Treasury Secretary nominee Hank Paulson:

Treasury secretaries have little ability to make an immediate impact. This will be especially true in your case.... The House and Senate already adopted their own versions of a FY07 budget resolution; asking them to vote again would be politically naïve and infuriate many congressional Republicans who are already extremely angry with the White House. Asking Congress to consider a new budget also would be seen as an admission by the White House that its original plan was somehow inappropriate or incorrect. As you know, this is an administration that does not like to admit that it made a mistake....

Assuming the reports are correct and you have worked out an agreement with the White House to be involved in policymaking, you will eventually [have] influence.... The problem... is that [until]... Election Day this November, everything you will be asked to do will have a short-term perspective.... The White House will be asking... the Treasury secretary to be part of its campaign effort.... [Y]our main job will be to convince everyone in the United States they’re better off economically.

This will not be an easy task.... Focus solely on official statistics and you will likely have the same problem your predecessor at Treasury did sounding credible. That’s what made Treasury Secretary John Snow sound like a cheerleader.... That made it exceptionally difficult for Snow to represent the administration on issues on which the Treasury secretary had to be taken seriously. By the time he resigned, his official messages... were both largely ignored and treated with derision....

Rubin had something you will not have: credibility... a solid reputation as one of the president’s closest advisers and as someone who could be trusted... an “honest broker.”... He did not speak publicly that often so that, when he did speak, he was listened to carefully. You will not have any of these luxuries.... [Y]our need to campaign for the president over the next five months will mean you will... be seen as being far more political....

Here are three things you should consider to deal with this predicament: First, you absolutely need to limit the spin. For example, saying the deficit is falling precipitously because it is way below the forecast made in the president’s budget may sound good on the campaign trail, but it will also irrevocably establish your credentials as a hack. Second, use good numbers... if you tell Congress a debt ceiling increase is needed by October 1, be certain that the deadline you are imposing is real. Third... start thinking about the long-term; that is, in problems and issues that will arise after George W. Bush leaves office in January 2009.... [D]emonstrating a real interest in things that will blow up in the future will make you a real asset for the country who will quickly become indispensable to the president.

It's a problem. Paulson is coming in too late for the 2007 budget cycle. The 2009 budget cycle will be--because of the presidential campaign--a placeholder. He only has one budget where he can materially affect priorities.

It's a problem.

Department of "Huh?" (Wall Street Journal Op-Ed Edition)

One of the deepest bedrock beliefs held by all neoclassical economists is that, to a first cut, market failures, policy distortions, and other problems with resource allocations do damage roughly proportional to the square of the disequilibrium--to the square of the deviation of price from social value, or of the deviation of quantity from its optimal level. The damage done per unit of resource misallocated will be proportional to the gap between the price seen by the decision maker and the social value. The deviations of prices and of quantities from their ideal values will be related. Thus the bigger the already existing market failure, the more damage is done by making it worse.

This is, as I said, one of the deepest bedrock beliefs, ground into all neoclassical economists by every single course they ever took, starting with the first Harberger triangle they ever saw.

So when I read Ed Prescott's pro-estate-tax repeal op-ed and come across this sentence:

Ed Prescott, "Death and Taxes": [E]state taxes... would still do little to address the budget deficit. In 2003, net estate taxes accounted for $20.7 billion, a drop in the bucket of an $11 trillion economy. Clearly, we are not going to balance the budget by grave robbing.

I cannot believe my eyes. A neoclassical economist like Ed Prescott could write something like:

The budget is in approximate long-run balance, so little damage is done by a small increase in the deficit...

or:

The fact that the long-run deficit is huge means that even a small increase in the deficit is very costly indeed...

A neoclassical economist is prohibited from writing:

The problem is really bad--so let's make it even worse!

For embedded in the deep structure of neoclassical economic thought is the judgment that it is the problems that are really bad that are the ones for which even marginal improvements are the most valuable.

Prescott's is not a neoclassical economic or economist's argument. Indeed, I would not know how to characterize it.

Maintaining Orderly Market Conditions for the Dollar...

It's not clear to me that decision-making inside the Bush White House is as rational as Bob Reich thinks it is--that Paulson was brought in for one reason, or indeed for any combination of reasons at all. But I think Reich is right in assessing what Paulson's most important task is: to maintain "orderly market conditions" and to talk the value of the dollar down gradually so that the world economy has time to rebalance itself.

Robert Reich's Blog: Paulson's Real Job: Paulson was brought in to accomplish one big thing. That's to oversee an orderly decline in the value of the dollar. By "orderly" I mean gradual. The Chinese and Japanese central banks don't want a run on the dollar because they have too many of them right now, and would lose their shirts. But they understand, as does the Bush administration, that the huge global imbalances represented by their giant export surpluses and our giant debts are already causing global investors to diversify their currency holdings out of dollars and into euros and other denominations.

It's only a matter of time before the dollar ceases to be the only "reserve" currency in which global transactions are undertaken, and before investors move substantially out of dollars. So the Chinese and the Japanese would like the dollar decline to be gradual, so they can move out as well without suffering major losses. Paulson understands the Chinese economy and has good contacts with top-ranking Chinese policy makers. He's the ideal man for the job. But will global investors give him time? Or will they turn into speculators, and rush to the door too quickly for the Chinese, Japanese, and the U.S. to keep the dollar relatively strong in the interim? That's the big question.

The U.S. has a strong need for the dollar decline to be gradual as well. If $800 billion a year of financing for home-equity loan-fueled consumption spending suddenly vanishes, then 8 million workers lose their jobs in construction, consumer services, and related industries and have to find jobs in export-oriented and import-competing manufacturing. That can be done if it happens gradually over five years. It can't be done if it happens all at once.

Can the dollar be talked down gradually? Consensus economic models say no: once market expectations are that the dollar will be sharply lower in five years, speculators will make the dollar sharply lower tomorrow.

Nevertheless, there is hope: consensus economic models say the dollar crashed three years ago.

Those Who Forget History...

Google News reports:

Your search - "Al Gore" 1993 "energy tax" - did not match any documents.

"Al Gore" 1993 "BTU tax" - Google News: Results 1 - 1 of 1...

"Al Gore" 1993 "carbon tax" - Google News: Results 1 - 1...

Brad DeLong's Website: Incentives for the Environment: John Tierney advocates taxes on energy use. However, it somehow slips Tierney's mind to praise Al Gore, who was the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993.

I observed that the New York Times's John Tierney was calling for a carbon tax, yet had neither the honor, the grace, nor the guts to remind his readers that Al Gore--the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993--had been ahead of him for two decades. Nor did Tierney have the independence of mind to remind his readers that back in 1993 Gore's BTU tax had been blocked by a combination of the oil lobby, the Republican congressional leadership, and a few feckless Democratic senators.

As I said last month:

Brad DeLong's Semi-Daily Journal: Why Oh Why Can't We Have a Better Press Corps? (John Tierney Edition): Would it have strained John Tierney's brain to tell his readers that Gore did propose a carbon tax back in 1993, got no backup at all from John Tierney and company, and lost? That the topic is "taboo on Capitol Hill" in large part because John Tierney and company gave Gore no backup when he tangled with the American Petroleum Institute a decade ago?

Indeed, the sweep through Google News above suggests that nobody--certainly nobody in the media--both remembers and wants to remind their readers of the history of this issue.

And this week John Tierney is joined in amnesia by the usually excellent Clive Crook:

WEALTH OF NATIONS: The Politics Of Global Warming (06/02/2006): Facing such huge but distant risks, the crucial thing is to think long term, the very thing that Washington does worst. An initially moderate carbon tax, an initially gentle scheme of mandatory caps on greenhouse-gas emissions, and an honest plan to promote long-term energy efficiency could nudge the economy with minimal disruption on to a path of much lower climate-change risk...

Who is in turn endorsed by Greg Mankiw:

Greg Mankiw's Blog: The Crook piece does a good job of summarizing where, to my knowledge, the majority of the economics profession is on the issue of global warming. Most economists I know would endorse:

1. Rejecting the Kyoto treaty,
2. Imposing a modest carbon tax.

I include myself in this consensus (although I do not hold myself up as an expert on the issue)...

How about it guys? A little bit of the history of this issue would greatly raise the level of the debate, wouldn't it?

Diverting Tax Refunds into Savings

A good sign:

More Refund Options: Hoping to encourage Americans to save more of their tax refunds, the Internal Revenue Service said it will change its rules to allow taxpayers who opt for direct deposit of their refunds to divide the money among up to three financial accounts.... The change will allows taxpayers to put some of their refunds into a checking account, and some into a saving or retirement account. "Split refunds should encourage saving, and we hope it will dampen demand for refund anticipation loans," said IRS Mark W. Everson. The program will take effect in January 2007.

The next step is to top-off refunds deposited in IRAs--10% for the first $1000, 5% for the second $1000, $3.3% for the third $1000--and see if that changes behavior...

Martin Wolf Wonders about China's Future

Mark Thoma reads the excellent Martin Wolf in the FT:

Economist's View: The Mountains Are High and the Emperor is Far Away: Martin Wolf discusses the political and economic future of China and the growing tension he foresees between the goals of those in power and the goals of society:

China's autocracy of bureaucrats, by Martin Wolf, Commentary, Financial Times: What happens when a communist autocracy presides over a dynamic market economy? Do they live together happily ever after or does one destroy the other?... [T]hese questions. But they have been bubbling in my mind since I read S.E. Finer's illuminating discussion of the history of China's government. What emerges from this masterpiece is how much today's party-state is just another imperial dynasty in twentieth century guise.

Finer summarised the contrast between the ideology of the Ch'in state, which unified China 2,200 years ago, and of the Greek and Roman republics, which are the west's ancestors, as follows: "Collective and mutual responsibility, not individualism; authoritarianism, paternalism and absolutism, not self-determination; inequality and hierarchy, not equality before the law; subjects not citizens; duties not rights." Who, reading this list, can fail to recognise its continued relevance?... "The mountains are high and the emperor is far away." This well-known saying captures what so often happened. When the emperor was weak, it became difficult to reach decisions. Officials looked after themselves and their families. Infirmity of purpose, corruption and an inability to protect the empire itself ensued. Sooner or later the dynasty fell, to be replaced by another, often after a period of chaos.

Using the analytical machinery of political science, Mr Pei describes today's "dynasty" as being in just such a period of bureaucratic ossification. He points to the emergence of a "decentralised predatory state", in which officials feather their nests at the expense of the state, the economy and the people. ... Tension is growing, he suggests, between the state and the society.... Pei argues, persuasively, that China's gradualism... is as much a political as an economic strategy. Its aim is also to generate rents for those with political power or those whose support the powerful need....

One vast difference between what is happening to China today and what has happened to it in the past is evident: its dynamic economy. By offering its cheap, hard-working labour to the world and investing almost half of gross domestic product, China has managed to lift itself from age-old poverty. The society now emerging is increasingly urbanised, literate and open to the world....

I envisage four possibilities.... A democratic, law-governed society then emerges smoothly over the next few decades.... An autocratic superpower then transforms the political balance of the world.... China becomes a sad case of failed development.... [S]lowing growth generates political crisis. Turmoil ensues. But a democratic regime finally emerges.... The last possibility is far easier to imagine.

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

The Big Picture: How Cheap is the Market?

Barry Ritholz notes that the market is no longer terrifically expensive:

The Big Picture: How Cheap is the Market?: The answer might surprise you. It certainly raises some very interesting questions as to what cheap is, the importance of having a long term perspective. It also begs the question of how much patience long term investors have when it comes to thinking about various metrics. The question itself involves a combination of data analysis and opinion. To fully explore this issue, we will listen to two different perspectives on the subject: One says the S&P500 is cheap, the other asks, how much cheaper might it get?

For part one, we go to Eddy Elfenbein of Crossing Wall Street: Eddy observes "S&P 500 is now trading at just under 16 times trailing operating earnings. The P/E ratio hasn't been this low since October 1995." Note that he references actual trailing earnings. This is more accurate than using forward forecasts, which tend to be very wrong at key turning points...

The Debate Over the Estate Tax: "A Monkey in Intellectual Combat with Its Banana"

Over at the Washington Monthly:

The Washington Monthly: Guest: Steve Benen: THE WRONG GUY TO MAKE THE CASE....A Senate vote on a full repeal of the estate tax is slated for this week (probably Thursday), and as part of its coverage, the Washington Post ran dueling op-eds on the issue from Sebastian Mallaby and Sen. Jeff Sessions (R-Ala.). Readers can decide for themselves who makes the stronger case, but I think Ezra captured the heart of the debate when he noted that it's "a bit like setting a monkey in intellectual combat with his banana."

Nevertheless, picking Sessions to take the lead on this is an odd choice for Senate Republicans, especially in light of the Alabama senator's embarrassing background on the issue.

Federal troops aren't the only ones looking for bodies on the Gulf Coast. On Sept. 9, Alabama Senator Jeff Sessions called his old law professor Harold Apolinsky, co-author of Sessions' legislation repealing the federal estate tax, which was encountering sudden resistance on the Hill. Sessions had an idea to revitalize their cause, which he left on Apolinsky's voice mail: "[Arizona Sen.] Jon Kyl and I were talking about the estate tax. If we knew anybody that owned a business that lost life in the storm, that would be something we could push back with."

If legislative ambulance chasing looks like a desperate measure, for the backers of repealing the estate tax, these are desperate times. Just three weeks ago, their long-sought goal of repeal seemed within reach, but Katrina dashed their hopes when Republican leaders put off an expected vote. After hearing from Sessions, Apolinsky, an estate tax lawyer who says his firm includes three multi-billionaires among its clients, mobilized the American Family Business Institute, a Washington-based group devoted to estate tax repeal. They reached out to members along the Gulf Coast to hunt for the dead.

They found plenty of Katrina victims -- but none that was hit with the estate tax. For what it's worth, despite the hyper-wealthy conservative interests who have bankrolled this fight for years, it appears proponents of a full repeal are a few votes short. There's still an irresponsible "compromise" measure under consideration, but if things go as they should, this absurd initiative should be defeated by week's end.

"Setting a monkey in intellectual combat with its banana." That is good.

Note that things are no better on the right as you try to ascend the intellectual chain of being: estate-tax repeal advocates--Ed Prescott, Greg Mankiw, Jeff Miron--all talk about how some deficit-neutral combination of estate-tax repeal and other tax increases, or estate-tax repeal plus some combination of spending cuts would be a good deal. But that's not what's on offer, is it? They never make the case that the benefits to estate-tax repeal are bigger than the costs of adding another 0.4% of GDP or so to our long run fiscal gap.

Francisco Franco Is Still Dead...

Martin Peretz of the New Republic praises Francisco Franco!

The Plank: How ignorant that [Spanish] judge is of his country's bloody history, which could actually have been worse had the communists won [against Franco and his fascists]...

And Martin Peretz praises the prison of Guantanamo Bay, which is actually a much better thing than that bulwark of resistance to world communism that was Franco's Fascist Spain!

I know that some of my readers will agree with the observation the other day of a judge in Spain that Guantánamo is to be equated to 40 years of Spanish Fascism...

Or maybe he doesn't praise Francisco Franco after all? Maybe he doesn't praise Guantanamo either? It's all confusing!

[T]he observation... that Guantánamo is to be equated to... Spanish Fascism... means that George Bush can be equated with Generalissimo Franco. These may be tempting analogies for hysterics. But they are, by the same token, insane.

Few people can reach such heights of incoherent confusion in four sentences.

Jonathan Chait, John Judis, Noam Scheiber, Franklin Foer, Peter Beinart, and company, you've set up shop in a really bad neighborhood. Think of either cleaning it up or moving out. Think hard.

At the very least, stop Martin Peretz before he blogs again. Your reputation depends on it.

Bush's New Press Secretary: Let's Just Make Stuff Up

ThinkProgress writes:

ThinkProgress: Rice Drops White House Claim That Iraqi Prime Minister Was Misquoted About Haditha: On Thursday, Iraqi Prime Minister Nouri al-Maliki, was quoted saying the following about Haditha:

This is a phenomenon that has become common among many of the multinational forces. No respect for citizens, smashing civilian cars and killing on a suspicion or a hunch. It's unacceptable.

On Friday, White House Press Secretary Snow insisted that Maliki was "misquoted." Snow was unable to say exactly how he was misquoted, saying "it's a little hazy to me."

This morning on Fox News Sunday, Secretary of State Condoleezza Rice was asked about Maliki's comments. Rice said she had talked to Maliki directly about his remarks but did not claim Maliki was misquoted. Instead, she said he was "speaking to the concerns of the Iraqi people."

Impeach George W. Bush. Impeach him now.