A Warning Sign from Help-Wanted Advertising

The mysterious, vowelless Knzn is worried about the pace of help-wanted advertising:

Economics and...: US Job Market Jumps Off a Cliff: I wouldn't read too much into any one indicator, but... [b]etween February and May, help wanted advertising followed a steady downward trend, declining by over 12% in all...

Today's Hawkish Fed

Tim Duy's Fed Watch

Economist's View: Fed Watch: Still in the Game: The jobs report was mixed.... Yes, the headline reading of 121,000 net new hires in May argues for a pause at the next meeting. But the rest of the report argues for another 25bp. And, given last month's wave of hawkish rhetoric, caution suggests following the latter bet.... Some officials, convinced that economic growth is slowing and that inflation will settle down again soon, would really rather not raise the target this week for the 17th time in a row. Even those officials feel they have no choice because investors, shaken by recent inflation reports, fully expect them to do so....

But to blame the rate hike on investors "shaken by recent inflation reports" misses half the story--the policy half.... And while wages are up 3.9%, CPI headline inflation will post a greater y-o-y increase in June (the May number was 4.2%). In other words, real wages are down. Should we expect the Fed to hike rates when real wages are falling, or whenever they threaten to edge up? Is the goal to hold real wages constant? See Angry Bear for more on this criticism of Fed policy.

The Fed, I suspect, will not cozy up to these arguments.... I want to believe that the Fed will pause as they assess the magnitude of economic slowing. But I have been led down that road before, and am not ready to make that trip again. Instead, I suspect they will read this report as a sign that while the economy is slowing, the pace of activity remains strong enough to heighten inflationary pressures. True, we will get another employment report before the next FOMC meeting, as well as multiple reports on inflation, not to mention Q2 GDP as well as the minutes from the last FOMC meeting. And Fed officials may suddenly back away en masse from last month's inflation worries. But this employment report goes to the hawks.

Electricity in Baghdad

The Carpetbagger Report is puzzled:

Again with the electricity talk?: What's with the fascination among Republican leaders about electricity in Baghdad? Yesterday, during his Chicago press conference, Bush said:

"We occasionally are able to pop in with great success, like Zarqawi or 12 million people voting. But increasing electricity in Baghdad is not the kind of thing that tends to get on the news."

It's a mystery why Bush would want to draw attention to "electricity in Baghdad." It's an even bigger mystery why House Speaker Dennis Hastert and White House Press Secretary Tony Snow have been emphasizing the exact same point recently.

Look, supporters of the war don't have a lot of success stories to choose from; I get that. But this talk about electricity in Baghdad is misguided -- as recently as April, Baghdad residents received an average of four hours of electricity per day, compared to pre-war levels of 16-24 hours per day.

This might help explain why it's "not the kind of thing that tends to get on the news."

It's an interesting question. Does Bush actually think he should be proud of the record on electricity in Baghdad? Or does Bush just know that if he claims to be proud of it, the press will roll over and show its belly once again, and people will think there is something to be proud of?

Interesting question.

On Vox: Morning Coffee Videocast: Alan Furst's "Dark Star" and the Eve of World War II

In which I drink my morning coffee, hog Vox's bandwidth, and sing the praises of Alan Furst's Dark Star: a novel that really is like seeing Casablanca for the first time.

» Read more on Vox

The Administration Snookers Edmund Andrews

Last winter, Stan Collender wrote:

BUDGET BATTLES: Wolf! (01/17/2006): The Bush administration held a conference call with reporters last week to say that the 2006 deficit would be $400 billion or more. As the White House hoped, the media dutifully reported that number. But, as it almost certainly did not want, the media also reported that this latest Bush administration budget pronouncement should be treated with doubt, skepticism, and perhaps even outright contempt. The reason is that this president has a well-established history of overstating the deficit early in the year and then taking credit when it turns out to be lower than projected, even if it has done nothing to make that happen...

Today, the usually-reliable Edmund Andrews obligingly falls for the administration's trick:

Surprising Jump in Tax Revenues Is Curbing Deficit - New York Times: By EDMUND L. ANDREWS: WASHINGTON, July 8 -- An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief. On Tuesday, White House officials are expected to announce that the tax receipts will be about $250 billion above last year's levels and that the deficit will be about $100 billion less than what they projected six months ago. The rising tide in tax payments has been building for months, but the increased scale is surprising even seasoned budget analysts and making it easier for both the administration and Congress to finesse the big run-up in spending over the past year. Tax revenues are climbing twice as fast as the administration predicted in February, so fast that the budget deficit could actually decline this year...

Two things are going on: approximately $60 billion of real good news on the revenue side for the 2006 deficit, and an approximately $60 billion highballed overstatement by the White House last winter about what the deficit was likely to be. Yet Edmund Andrews treats all $120 billion as if it were genuine good news--generating a bunch of high fives in the White House press office.

Why does the White House lie all the time, about everything? Because the press corps lets them get away with it.

Two From Kevin Drum

Foreign policy? What foreign policy? I:

The Washington Monthly: THE END OF DEMOCRACY PROMOTION....Marc Lynch, after running down the evidence that the Bush administration has "effectively given up on democracy promotion" in the Arab world, makes the following observation:

On al-Arabiya last week, Hisham Milhem led a discussion on "Bush and democracy in the Arab world."....I was most struck by a remark by Amr Hamzawy. He pointed that the fact that most of the Arab media and political class were now discussing the "retreat" of American commitment to democracy demonstrates that at least at one point they were prepared to entertain the thought that there had been some credibility to that campaign. No longer, Hamzawy argued %u2014 America's turn away from democracy and reform had badly hurt its image and its credibility with this Arab political class....This seemed to be a well-received notion.

But that's really just a single piece of a broader, and even more remarkable turn of events: the Bush administration literally seems to have no foreign policy at all anymore. They have no serious plan for Iraq, no plan for Iran, no plan for North Korea, no plan for democracy promotion, no plan for anything. With the neocons on the outs, Condoleezza Rice at the State Department, and Dick Cheney continuing to drift into an alternate universe at the OVP, the Bush administration seems completely at sea. There's virtually no ideological coherency to their foreign policy that I can discern, and no credible followup on what little coherency is left.

As near as I can tell, George Bush has learned that "There's evil in the world and we're going to stand up to it" isn't really adequate as a foreign policy for a superpower but is unable to figure out anything better to replace it with. So he spins his wheels, waiting for 2009. Unfortunately, the rest of us are left spinning with him.

Foreign policy? What foreign policy? II:

The Washington Monthly: THE ONE PERCENT DOCTRINE.... I've been remiss in not blogging about Ron Suskind's The One Percent Doctrine.... Here's the situation right after 9/11: Al-Qaeda terrorists have just attacked the country; further attacks seem highly likely; our intelligence network is scrambling and nearly blind; we have good reason to believe that Osama bin Laden might be negotiating with Pakistani radicals to obtain a nuclear weapon; and credible reports suggest that al-Qaeda might also be on the road to manufacturing weaponized anthrax. What's needed at that point is firm action, and Suskind suggests that Bush and Cheney did a pretty good job of cracking heads during those scary first months -- especially so considering that those months were actually even scarier than most of us knew at the time.

But then the portrait starts to change. A year after 9/11, Bush and Cheney haven't adjusted their approach even though they know a lot more about the real threat than they did in 2001. Bush is still governing by instinct, Cheney is off in a world of his own, programs put in place during the initial emergency are continuing unabated, and political considerations -- often vicious ones -- are paramount in almost every area. Bush and Cheney are simply unable to adjust to a "long, hard slog," and the war on terror is treading water because there's no genuine, informed leadership from the White House. This arc is what makes reading the book worthwhile. It's not a hit job on Bush and Cheney. It's a portrait of two men....

The second point has to do with the "One Percent Doctrine" itself, the meaning of which is a little different than it seems at first glance. It originates with Dick Cheney, who explained early on that if a terrorist event had even a one percent chance of happening, "we have to treat it as a certainty in terms of our response." This is obviously a justification for taking a hawkish approach to terrorism, but Suskind says there's much more to it than that. After all, the Bush administration has obviously not reacted to every one-percent threat as if it were a certainty.... The single most defining characteristic of George Bush's personality is his belief in his own instinct and his corresponding disdain for serious policy analysis. For Bush, the One Percent Doctrine is tailor made. He is contemptuous of policy discussions, and the OPD is the perfect excuse to ignore them.

There's much more to the book, of course, and it's well worth reading, especially if you want to hear the story of the past five years from the point of view of George Tenet and other senior managers of the CIA.... But bewarned: if you take the threat of Islamic jihadism seriously, Suskind will not make you feel any safer. Quite the contrary...

I Think Joe Nocera Gets Ken Lay Wrong

Joe Nocera's take on Ken Lay and ENRON:

Even at the End, Ken Lay Didn't Get It - New York Times: THE tragedy of the former Enron chairman Kenneth L. Lay, who died yesterday at the age of 64, is... that, right up until the end, he never fully understood what he'd done wrong, or his own considerable culpability in his company's demise.... Andrew S. Fastow['s]... devious partnerships allowed Enron to disguise the truth of its financial condition and then sow the seeds of its destruction.... Jeffrey K. Skilling, too, played a greater role in Enron's collapse, since he was the company's hands-on leader, and set the tone that made greedy behavior and shady accounting standard operating procedure....

Still, it is hard to avoid the judgment that Mr. Lay was culpable for Enron's demise, though not necessarily for the crimes for which he was convicted six weeks ago. Fundamentally, the Enron jury found him guilty of lying about the state of the company from August to December 2001.... And he did lie, without question. It was during that time that Mr. Lay was finally confronted with Enron's mounting difficulties.... To face these problems squarely and publicly would have grievously damaged the company on Wall Street. So instead, Mr. Lay told the world that Enron's future never looked brighter. This was not the usual corporate spin. It was wishful thinking. And it was wrong....

[I]n the end, it was his desire to see things as he wished them to be, not as they really were, that was his fatal flaw. He never really had the judgment a good chairman or chief executive has to have. Here he is in 1987, for instance, confronted with clear evidence that some Enron traders were engaging in fraudulent behavior. He looks the other way because they are generating profits.... Here he is jetting off to India or Brazil or dozens of other places to help seal a deal to build an international power plant -- without the slightest sense of whether the deal makes any economic sense.... [H]e compounds his error by promoting Mr. Skilling to company president, without really thinking about whether his new president is up to the job.

And here he is a few years later -- and this may serve as the ultimate case study in wishful thinking -- urging the Enron board to approve a waiver of Enron's conflict-of-interest rules so that Mr. Fastow can set up his first partnership. Even now, one wonders -- what was he thinking?... [Fastow] was negotiating on each side of a transaction, as Enron sold assets to the partnerships in order to "make its numbers."

Mr. Lay genuinely thought that Mr. Fastow was doing the company a huge favor by taking on the partnerships. Even after the partnerships were exposed, he continued to defend Mr. Fastow's character, though it was clear to most others that the partnerships were inherently corrupt. More wishful thinking...

I think Joe Nocera is wrong. I think that we can be pretty sure what Ken Lay was thinking when he approved Fastow's waivers of the conflict-of-interest rules. Lay was asking Fastow--nudge, nudge; wink, wink--to do things to temporarily hide Enron's losses that would ruin Fastow's reputation and probably send him to jail if they came out. In return, Lay was allowing Fastow to greatly boost his own wealth through self-dealing. The shifting rationales for the waivers make that clear. At one moment, Lay is saying that ENRON has to grant the waivers because only with Fastow at the head of the partnerships will they be able to move fast. At the next moment, Lay is saying that ENRON won't be hurt by the waivers because Fastow's partnerships will get the assets only when they are the high bidders.

Cossacks work for czars. And it is when czars dismantle the checks-and-balances that monitor and supervise cossacks that you can be most certain that the cossacks are working directly for the czars.

Charles Wheelan on Tax Cuts

Charles Wheelan is a shrill critic of the Laffer Curve:

Debunking One of the Worst Ideas in Economics: The Naked Economist - Yahoo! Finance: Charles Wheelan, Ph.D.: In this column, I'm focusing on bad economics. In fact, I'm going to write about what I consider to be the two worst economic ideas... I'll skewer a favorite of the right in this column, and then a favorite of the left in my next piece. The Laffer Curve....

Neither the Reagan nor the George W. Bush tax cuts were "self-financing," as the Laffer disciples like to argue. According to The Economist -- my former employer and no bastion of left-wing thought -- the current Bush Administration's top economist, Gregory Mankiw, estimated that decreasing taxes on labor would generate enough growth to recoup only about 17 cents for each lost dollar; a tax cut on capital is better, paying for more than half of itself. Still, the bottom line from the Bush Administration itself is that tax cuts reduce Uncle Sam's take.

So why does Laffer's sketch on Dick Cheney's cocktail napkin rank near the top of my list of bad economic ideas? Because, when applied to the U.S., it's intellectually dishonest. The Laffer Curve offers the false promise that we can cut taxes without making any sacrifice on the spending side, and that's simply not true. It's the economic equivalent of arguing that you can lose weight by eating more.

Let me be perfectly clear: I'm not arguing that tax cuts are bad. I'm simply pointing out that we can't pretend that tax cuts won't require reductions on the spending side to balance the budget. In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending -- and maybe more! Do you think that's really possible?

This column should give you a hint of why economics is called the dismal science -- it's all about tradeoffs. We're the ones telling you that if you get more of something, you probably have to get less of something else.

Whether it's tax policy or dieting, you can't have your cake and lose weight, too, which is why America currently has huge deficits and a lot of fat people.

Making Globalization Win-Win in the Developing World

Ann Harrison looks at globalization and poverty in the deveoping world:

Ann Harrison: Globalization and Poverty: NBER Working Paper No. 12347 Issued in July 2006:

This essay surveys the evidence on the linkages between globalization and poverty. I focus on two measures of globalization: trade and international capital flows. Past researchers have argued that global economic integration should help the poor since poor countries have a comparative advantage in producing goods that use unskilled labor. The first conclusion of this essay is that such a simple interpretation of general equilibrium trade models is likely to be misleading. Second, the evidence suggests that the poor are more likely to share in the gains from globalization when there are complementary policies in place. Such complementary policies include investments in human capital and infrastructure, as well as policies to promote credit and technical assistance to farmers, and policies to promote macroeconomic stability. Third, trade and foreign investment reforms have produced benefits for the poor in exporting sectors and sectors that receive foreign investment. Fourth, financial crises are very costly to the poor. Finally, the collected evidence suggests that globalization produces both winners and losers among the poor. The fact that some poor individuals are made worse off by trade or financial integration underscores the need for carefully targeted safety nets.

The Labor Market Weakens a Hair

Not disastrous, but not good news:

Employment Situation Summary: Nonfarm payroll employment rose by 121,000 in June, and the unemployment rate was unchanged at 4.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to trend upward in several service-providing industries and in mining. Average hourly earnings rose by 8 cents in June.

Real wages continue to stagnate.

Pointer Loops

Surfing the internet, I come to Cosma Shalizi writing about the excellent Alan Furst:

Shalizi: Alan Furst, Night Soldiers: Just a simple country boy, sailing down the river for the NKVD.... I think this was his first novel, but can't quite tell, which is to its credit. (See also: earlier remarks on Furst.)

And I think, "Aha! A pointer to chase," and I do so:

Books to Read While the Algae Grow in Your Fur, July 2005: Alan Furst, Dark Star: I have nothing to add to Brad DeLong's remarks. Well, except that Furst reminds me of pre-war Ambler, only with some sex (which is not really an improvement), and a certain difference in tone which I can't help but feel comes from knowing how the war is going to go %u2014 at once a bit more ironic and a bit more complacent.

Well, that was quick.

:-)

Here's what I wrote five years ago:

Review of Alan Furst, Dark Star: Alan Furst (1991), Dark Star (New York: Houghton Mifflin: 0006511317).

When I talk to practically any of my undergraduates these days, I have a nearly impossible task to do when I try to convince them that the twentieth century has, after all, ended much better than it might have been. The half-full undergraduates talk of how wonderful and advanced our industrial civilization is, and how human progress to this point was nearly inevitable. The half-empty undergraduates talk about poverty in the developing world, inequality, and injustice, and seem deaf to the idea that the world we live in is much better than the world that we seemed headed for during the second quarter of this century. The Great Depression. Stalin's purges. World War II. Hitler's genocides--they have read about these, but they are not real, and the idea that for decades people thought that the forces headed by Stalin or by Hitler were the wave of the future (or the last chance to stop an even greater evil) does not penetrate below the surface.

So the next time I teach a course on the entire politico-economic history of the twentieth century, I think I may assign Alan Furst's novel Dark Star, for it does a better job than anything else I have read to catch the atmosphere of the days when Josef Stalin seemed to be the lesser of two evils--and it is a very fine novel besides.

This is not my judgement alone. Historian Alan Bullock calls Dark Star "a classic.... Furst brings to life better than most historians the world of fear in which so many human beings felt trapped." Reviewing it for Time, Walter Shapiro sees it as a "classic black-and-white movie that captures the murky allegiances and moral ambiguity of Europe on the brink of war.... Nothing can be like watching Casablanca for the first time, but Furst comes closer than anyone has in years." And a third reviewer calls it "exceptionally fine... Kafka, Dostoevsky, and le Carre..."

Andre Szara is an Old Bolshevik, a hero of the Russian Civil War, a Jew, an intellectual, a long-time foreign correspondent for Pravda--hence he moves about Europe with ease, from Paris to Ostend to Prague to Berlin--and an occasional helper of the Russian espionage services. He is not a happy man in his role of always echoing back to Moscow its latest propaganda line: "Once... he'd persuaded himself that... a sentence singing hymns to the attainment of coal production norms in the Donets Basin was, nonetheless, a sentence, and could be well rendered. It was the writer's responsibility in a progressive society to inform and uplift the toiling masses--word had, in fact, reached him that the number one toiler himself had an eye for his byline..."

Szara, however, has survived by teaching "himself discretion before the apparat had a chance to do the job for him." His pen remained uncooperative and "stubbornly produced commissar wolves guarding flocks of worker sheep or Parisian girls in silk underwear, well, then the great characteristic of paper was the ease with which it burned..." But now in the late 1930s his options and his room for maneuver are closing down. Hitler is in the saddle in Berlin. The English prime minister dismisses the countries of central Europe as faraway places of which the English know little. In Russia, Stalin has decided that the consolidation of his power requires purge upon purge--with Jews and Old Bolsheviks highest on the list. And a sinister NKVD general has decided to use Szara as a tool for his own purposes of exposing pre-revolutionary spies within the Communist Party and of increasing the pitifully small number of Jews fleeing Europe the British allow to settle in Palestine.

So Szara tries to keep from being killed either by his own Russian side, by the German espionage services, or just by accident when Nazis go hunting Jews in the night for sport. Rotten as the Soviet Union is, and tyrannical as Stalin may be, it remains true that Szara's side is the good guy. But what if that great hope sees Hitler not as his adversary but his ally?

And what business does Szara ultimately find himself in? As the sinister NKVD general puts it, there has to be a great lowering of sights. Szara was "...like all of us... in the paradise business. We got rid of the czar and his pogroms to make a place where Jews, where everyone, could live like human beings and not like slaves or beasts.... And yet... paradise slipped away. Because now we have a new pogrom, run, like so many in history, by a shrewd peasant who understands hatred.... What do I offer my associates? A chance to save a few Jewish lives.... Is it dangerous? Oh yes. Could you die? It's likely. Will your heroism be known to history? Very doubtful. Now, have I successfully persuaded you to throw everything you value in life away and follow this pecuiliar, ugly man over the nearest horizon to some dreadful fate?"

Highly, highly recommended.

Oh! What a Marvelous Thing Is a Competitive Free-Market System without Externalities!

Society Speaks to Jerome K. Jerome:

Epeus' epigone - Kevin Marks weblog: Jerome K Jerome explains emergent value: A preliminary response to Aaron

Diary of a Pilgrimage - Part I: What a wonderful piece of Socialism modern civilisation has become!--not the Socialism of the so-called Socialists--a system modelled apparently upon the methods of the convict prison--a system under which each miserable sinner is to be compelled to labour, like a beast of burden, for no personal benefit to himself, but only for the good of the community--a world where there are to be no men, but only numbers--where there is to be no ambition and no hope and no fear,--but the Socialism of free men, working side by side in the common workshop, each one for the wage to which his skill and energy entitle him; the Socialism of responsible, thinking individuals, not of State-directed automata.

Here was I, in exchange for the result of some of my labour, going to be taken by Society for a treat, to the middle of Europe and back. Railway lines had been laid over the whole 700 or 800 miles to facilitate my progress; bridges had been built, and tunnels made; an army of engineers, and guards, and signal-men, and porters, and clerks were waiting to take charge of me, and to see to my comfort and safety. All I had to do was to tell Society (here represented by a railway booking-clerk) where I wanted to go, and to step into a carriage; all the rest would be done for me. Books and papers had been written and printed; so that if I wished to beguile the journey by reading, I could do so. At various places on the route, thoughtful Society had taken care to be ready for me with all kinds of refreshment (her sandwiches might be a little fresher, but maybe she thinks new bread injurious for me). When I am tired of travelling and want to rest, I find Society waiting for me with dinner and a comfortable bed, with hot and cold water to wash in and towels to wipe upon. Wherever I go, whatever I need, Society, like the enslaved genii of some Eastern tale, is ready and anxious to help me, to serve me, to do my bidding, to give me enjoyment and pleasure. Society will take me to Ober-Ammergau, will provide for all my wants on the way, and, when I am there, will show me the Passion Play, which she has arranged and rehearsed and will play for my instruction; will bring me back any way I like to come, explaining, by means of her guide-books and histories, everything upon the way that she thinks can interest me; will, while I am absent, carry my messages to those I have left behind me in England, and will bring me theirs in return; will look after me and take care of me and protect me like a mother--as no mother ever could.

All that she asks in return is, that I shall do the work she has given me to do. As a man works, so Society deals by him.

To me Society says: 'You sit at your desk and write, that is all I want you to do. You are not good for much, but you can spin out yards of what you and your friends, I suppose, call literature; and some people seem to enjoy reading it. Very well: you sit there and write this literature, or whatever it is, and keep your mind fixed on that. I will see to everything else for you. I will provide you with writing materials, and books of wit and humour, and paste and scissors, and everything else that may be necessary to you in your trade; and I will feed you and clothe you and lodge you, and I will take you about to places that you wish to go to; and I will see that you have plenty of tobacco and all other things practicable that you may desire--provided that you work well. The more work you do, and the better work you do, the better I shall look after you. You write--that is all I want you to do.'

'But,' I say to Society, 'I don't like work; I don't want to work. Why should I be a slave and work?'

'All right,' answers Society, 'don't work. I'm not forcing you. All I say is, that if you don't work for me, I shall not work for you. No work from you, no dinner from me--no holidays, no tobacco.'

And I decide to be a slave, and work.

Society has no notion of paying all men equally. Her great object is to encourage brain. The man who merely works by his muscles she regards as very little superior to the horse or the ox, and provides for him just a little better. But the moment he begins to use his head, and from the labourer rises to the artisan, she begins to raise his wages.

Of course hers is a very imperfect method of encouraging thought. She is of the world, and takes a worldly standard of cleverness. To the shallow, showy writer, I fear, she generally pays far more than to the deep and brilliant thinker; and clever roguery seems often more to her liking than honest worth. But her scheme is a right and sound one; her aims and intentions are clear; her methods, on the whole, work fairly well; and every year she grows in judgment.

One day she will arrive at perfect wisdom, and will pay each man according to his deserts.

But do not be alarmed. This will not happen in our time.

The Worst Things in Life Are Really Cheap

The mysterious, vowelless Knzn takes on the opposite of the water-diamonds paradox:

Economics and...: This analysis raises the broader question of why good things generally seem to cost more than not-so-good things. I have several answers. First, to a large extent, the premise isn't even true. Most people, most of the time, would rather watch TV than eat tofu, and yet broadcast TV is essentially free (except for the amortized cost of the TV set) whereas tofu has a nontrivial cost. Second, many good things -- for example, the best Belgian chocolate -- are in fact supplied monopolistically.

But the main reason, I think, is this: it's not so much that good things are expensive as that expensive things are good. Gilbert in fact makes this point in his next sentence, but my reasoning is different than his. A basic premise of economics is the idea of diminishing marginal utility: the more you already have of something, the less additional happiness you get from an incremental amount. Things that don't cost much, we already have plenty of, so an additional unit is not that good. Things that cost a lot, we don't have much of, so an additional unit is very good. So, for example, why is going to a professional theatrical production better than going to a movie? Of course there are many who will say that the theatre is an inherently better art form, but for most people, I think, the answer is this: going to a play is better because we don't get to do it as often. In other words, theatre is better than cinema specifically because theatre is more expensive.

To put it another way, if it were expensive and weren't good, who would bother making any of it? We should expect to find things that are expensive and good, things that are cheap and not-very-good, things that are cheap and good, but not things that are expensive and not-good.

Peace for Mesopotamia

Jeff Weintraub reads Juan Cole and wonders what Muqtada al-Sadr's game is:

Jeff Weintraub: What is Muqtada al-Sadr's game?: "Note that Muqtada puts the US on a par with radical [Sunni] Islamists and with Baathists as undeserving of forgiveness or reconciliation."  I've never been quite sure what game Muqtada al-Sadr thinks he's playing by taking positions like these, but whatever it is, it looks risky and potentially self-destructive....

I find that many Americans assume that if a full-scale sectarian civil war breaks out in Arab Iraq, the Shiites are bound to win and slaughter the Sunnis, since the Shiites are a majority and the Sunni Arabs amount to only 15-20% of the population. I suspect this assumption has something to do with a characteristically American illusion that majorities always beat--and often oppress--minorities, whereas often it's the other way around. As a number of people have pointed out, it seems pretty clear that the Ba'athists & jihadis at the core of the Sunni Arab "insurgency" are convinced that if they can detonate full-scale civil war and panic the Americans into running away, they can decapitate the Shiites politically, crush them, and take over the country. (See, for example, here and here and here.) This may or may not turn out to be a disastrous miscalculation on their part--I hope we don't find out--but from their perspective it's not self-evidently crazy.

Muqtada al-Sadr, like the Sunni Arab "insurgents" and their political allies, has been calling for US troops to clear out. But what does he expect to happen next? Does he figure that it's safe to make these noises because there's no danger of the US actually leaving. Or does think that, if it comes to a straight-out fight between his "Mahdi Army" militia and the Sunni Arab "insurgents," he can beat them. I suspect that he probably does believe that ... and I also suspect that he's wrong. If it does come to a full-scale sectarian explosion, it may be that the Sunni Arab "insurgents" will lose in the end.... But my guess is that before that happens, they will be able to rub out Muqtada al-Sadr without much trouble.

As I say, I hope we don't get the chance to find out.

I think it's simple.

If there is no large-scale civil war, then Muqtada al-Sadr is the nationalist-religious candidate--the only major politician from the Party of Ali who did not coquette and collaborate with the foreign-Christian American occupation. That has got to be worth a lot.

If there is a large-scale civil war, Iran enters on the side of the Party of Ali. The Sunnis today have as much chance of winning an Iraqi civil war as the Maronites had of winning the Lebanese civil war of a generation ago.

A Community College Dean Looks at the Macroeconomic Situation, and Panics

Here we have yet another unhappy camper:

Confessions of a Community College Dean: In Which I Get a Little Panicky: I'm not an economist. Readers who actually understand economics are invited to explain why I'm off my rocker on this one.... [T]he U.S. is running nasty and increasing deficits at the government level, the household level, and the international level. We owe more to other countries than we ever have, and much of that debt comes from selling government securities to foreign central banks (esp. in Asia). Household debt is skyrocketing, and the interest rate increases of the last year or two are poised to nab anybody stupid enough to have taken out an adjustable-rate mortgage in the great housing boom of the last five or six years. The national debt grows apace, and has been refinanced over the last few years to progressively shorter-term loans, meaning that higher interest rates will hurt badly and quickly. Think of it as putting the national debt on an ARM, then watching interest rates go up.

Since we import most of our oil, and the price of oil keeps going up, our trade deficit is likely to keep increasing.... Plus we don't manufacture very much, so we don't export very much. We also borrow money for wars of choice, which themselves actually interrupt the flow of oil.... China is keeping its currency artificially low, to keep its exports cheap. Then it lends us the money to buy those exports. It underpays its own workers so that we can have cheap stuff. How long its own workers will stand for that is anybody's guess.... Since there are so many U.S. dollars flowing out of the country, their value is dropping on the world market.... The only way to entice foreigners to keep buying a depreciating currency is to raise interest rates to compensate for the depreciation. Raising interest rates kills the folks with ARMs, increases our national debt payments, and hurts the business climate....

Although productivity has been going up, real wages haven't. I know it's gauche to talk about income distribution, but there's no other way to explain....

So my question to my economics-literate readers: how are we not screwed? (That's the technical term.) If China lets the yuan float, we get inflation. If the Euro starts to displace the dollar as the denomination for international trade, demand for dollars drops and we get higher interest rates, eventually tipping us into a nasty recession.... If somebody manages to blow up a key pipeline or refinery, the sky's the limit.... I'm thinking I must be missing something really basic and wonderful that will reduce these concerns to nothing more than blips on the screen.... Please tell me why I'm wrong. I'll sleep much better if I can dismiss this as the ravings of someone who just needs a vacation.

No. You're not wrong. You're not raving. Nevertheless, the most likely scenario is one in which we come out of all of this OK.

What is this most likely scenario? It is of (a) gradual inflation in China and elsewhere (maybe 5% per year for five years), (b) gradual reductions in the value of the dollar (maybe 5% per year for five years), accompanied by (c) gradual interest rate increases in the U.S. so that the dollar decline never turns into a (d) sudden dollar crash.

If that is the case, then--gradually--U.S. housing prices deflate, construction and consumer spending fall, and imports drop. U.S.-made products become more competitive at home, and so manufacturing production and employment for domestic uses rises. The falling real value of the dollar leads to an export boom, which causes export manufacturing to boom as well. Over five years or so, we see a net of eight million jobs (relative to trend) in construction and consumer services (and supporting occupations) vanish, and eight million jobs (relative to trend) in manufacturing (and supporting occupations) appear. If the expanding sectors expand fast enough, we see a tight labor market that brings real wages back to their normal share of production. And moving an average of 1.6 million jobs a year from sector to sector--the U.S. economy can do that without any sort of uproar.

Of course, people are still likely to be unhappy with the process. Rising interest rates and rising import prices will make people feel poor--something in this process has to reduce Americans' total spending on consumption, investment goods, and government purchases from 107% of income to 100% of income, and whatever it is will crimp spending by making Americans feel poorer. But even so it is a "soft landing."

As I said, that's the most likely scenario. But there are other scenarios--the ones that you fear: stagflation, recession, financial crisis, oil shock, global depression, panic, revulsion, and discredit. The other scenarios become more probable every day.

You see, to achieve a soft landing requires that a huge number of people around the world watch the real value of their dollar-denominated assets melt away slowly for half a decade without ever being impelled to sell off the dollar-denominated positions in their portfolios. It could happen. It happened in the late 1980s, thanks to the Japanese central bank and the collected investors of Japan. It will probably happen again. It requires mammoth irrationality on the part of investors, and an extraordinary eagerness on the part of central banks to eat enormous losses on their dollar reserves. It is not a rational-expectations equilibrium. But it will probably happen.

But if it doesn't happen again--if there comes a day when the world's central banks and investors all decide that it is time to sell their dollar-denominated assets, then... Well, then we get to see how good a central banker Ben Bernanke really is. There is a really bad global equilibrium out there, which the world economy might jump to at any moment.

Harald Harsh-Measures

John Emerson once again on the meaning of Harald's byname, "Hardrada":

Brad DeLong's Semi-Daily Journal: All History Is Byzantine...: "Hardrada" translates as "hard counsel", probably the equivalent of "tough talk" or "harsh intentions" the like. Not Mr. Nice Guy.

Perhaps "harsh measures"? As in what John Yoo says the president has the power to order no matter what laws congress passes or treaties the senate ratifies?

Perhaps the hardest byname to translate well since Odysseus's.

Three Faces of Greg Mankiw

Yet another excellent post from Greg Mankiw. This time it's a three-sided cage match between Greg Mankiw, Greg Mankiw, and Greg Mankiw: Greg the Libertarian, Greg the Utilitarian, and Greg the Moralist:

Greg Mankiw's Blog: Why I hate gambling: My personal philosophy is about 50 percent libertarian, 40 percent utilitarian, and 10 percent moralist. The libertarian and utilitarian usually keep the moralist pretty well contained: they have a 9 to 1 advantage, after all. But reading a recent article in Slate from the wife of a professional gambler let the moralist in me escape...

Greg the Moralist:

My view is that there are three kinds of gamblers, all of which sadden me. First, there is the compulsive gambler. When I was growing up, the husband of one of my mother's coworkers lost all their money in a fit of compulsive gambling. This occurred just as their teenage daughter was getting ready to apply to college. The college savings, as well as all their other savings, were gone. Watching this experience has most likely colored my view of the activity more broadly.

Second, there is the recreational gambler. He spends, say, $20 a week on slot machines or lottery tickets.... [G]iven the availability of books, movies, plays, museums, checkers, chess, etc., it is an unfortunate reflection on a person's imagination when a scratch lottery ticket is the best diversion he can find....

Third, there is the professional gambler.... In some ways, this case is the saddest of all.... It is a shame that someone with so much inherent ability wastes it doing something of such little social value...

Greg the Libertarian:

None of this has much implication for public policy. The libertarian in me says people can waste their lives if they want...

Greg the Utilitarian:

The utilitarian points out that governmental attempts to suppress gambling are likely to be fruitless and would foster a large underground economy...

I'm tempted to jump in and head-butt the libertarian: If you were to ask a compulsive gambler if he really wanted to waste his life, he would probably say no: that the life he wound up with is not the life he really wanted. It is really hard for almost all of us to make good decisions, and 90% of doing well is finding institutions and situations in which the pressures are such as to make good decisions more likely.

On the other hand, Greg the Moralist slightly scares me: I buy the argument for the compulsive gambler and the professional gambler. Somebody good enough at calculating odds and reading situations to make money as a professional gambler should pick a segment that is positive-sum rather than zero-sum for the economy as a whole: he should go to Wall Street and become part of the global capital allocation mechanism.

I would certainly agree that lottery tickets are a very low-quality diversion, and that the computer game Civilization packs at least fifty times the diversion-per-buck of a scratch lottery ticket. (Indeed, I find it so powerful and diverting that I have no copies: There was a time when I had to decide whether to be a Civilization addict or an economics professor.) But I don't want to get onto the moralist's slippery slope any more than Greg Mankiw wants to get onto the regulator's slippery slope.

Greg Mankiw Explains Why Economists Favor Immigration

He does it very very well:

Greg Mankiw's Blog: Why Economists Like Immigration: With members of the House and Senate sparring over immigration reform, it is worth summarizing why most economists are sympathetic with the more welcoming approach of the Senate bill.

The study of economics leaves a person with two strong impulses:

The Libertarian Impulse: Mutually advantageous acts between consenting adults should, absent externalities, be permitted. The ability to engage in such trades is how people in free-market economies achieve prosperity. When the government impedes voluntary exchange, it prevents the invisible hand of the market from working its magic.

The Egalitarian Impulse: The market economy rewards people according to supply and demand, not inherent worth. Markets often fail to provide people the ability to adequately insure themselves against the vicissitudes of life and accidents of birth. We should, therefore, look for ways to help those who end up at the bottom of the economic ladder.

Most economists feel these two impulses to some degree. The difference between right-leaning and left-leaning economists is how strongly they feel each of them. Right-leaning economists have a stronger libertarian impulse, whereas left-leaning economists have a stronger egalitarian impulse.

Although some debates in economics come down to which impulse a person feels more strongly, on immigration the two impulses are reinforcing. The libertarian impulse says, let the American employer hire the Mexican worker, for it is voluntary exchange. The egalitarian impulse takes note that the Mexican immigrant is the poorest person involved in the situation, and he benefits from more relaxed immigration restrictions.

Here is a conjecture: Whenever a policy appeals to both the libertarian impulse and the egalitarian impulse, economists will offer a relatively united view, as they do on the topic of immigration.

I would add a third impulse: the cosmopolitan impulse. Economists tend to think that foreigners are people, and thus that their well-being counts. From the economist's point of view, increasing immigration is a hell of a powerful global economic development policy. The most you can say for restricting immigration is that it is an extremely costly and relatively ineffective domestic anti-poverty policy.

And then, of course, there is George Borjas, who is (a) an economist who is (b) not in favor of immigration from Latin America.

Nightmarish

Well, that is a movie that is going to give me nightmares:

Conspiracy: On January 20, 1942, 15 men gathered in a villa on the outskirts of Berlin for a clandestine meeting that would ultimately seal the fate of the European Jewish population. Ninety minutes later, the blueprint for Hitler's Final Solution was in place. Adolf Eichmann prepared 30 top-secret copies of the meeting's minutes. By the fall of the Reich, all had disappeared or been destroyed--except one...

Question: How close is Kenneth Branagh's Heydrich to the real Heydrich? How close is Colin Firth's Stuckart to the real Stuckart?

All History Is Byzantine...

John Emerson writes:

Brad DeLong's Semi-Daily Journal: Who Was the Fourth Wife of Leo the Philosopher?: In a different age the Byzantine chroniclers Benedikz and Blondal failed to mention that when Araltes left the royal guard, he returned home to become King of Norway, only to die in 1066 during his attempt to also become King of England. (Wherever those two mysterious places were, up North somewhere by Thule.)

But Harald Hardraed did get seven feet of English ground.

I Pity the Poor Fool...

Apple's iTunes store is selling episodes of the A-Team.

This could become expensive.

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

John Tierney "celebrates" the Fourth of July by saying that the Emancipation Proclamation and the 13th, 14th, and 15th Amendments were bad for the Blacks:

Disunited States of America - New York Times: On Independence Day, would we all be happier with even more independence? What if government of the people meant that the Red people in the South and the Blue people in the North had a border between them?... [N]owadays Northerners have their own reason to lament. The South is gaining seats in Congress at their expense, and four of the last five presidents have come from the South.

If the South were a separate country, Northern liberals wouldn't be ranting at George W. Bush and Pat Robertson.... Southern conservatives wouldn't have to fight for moral values against godless Yankees.... Politics in both countries might be less partisan, even civil. I realize this prospect sounds farfetched, but it's not crazy to imagine that the South could have become independent....

[T]he optimistic scenario of Jeff Hummel... [who] believes slavery would have collapsed quickly if the South had been allowed to peacefully secede and the North had simply stopped returning runaway slaves. Unable to stop slaves from escaping, Hummel argues, the South would have been forced to abandon the system, and freed blacks could ultimately have been better off than they were during the Jim Crow era.... I side with Hummel's optimism...

Most people think that having rights and property is better than not having rights and being property. But not Tierney.

To the Forestphone, Commissioner Gordon!

Henry Farrell writes:

Crooked Timber: A rather important political development in Italy. Marco Mancini, the second-in-command of SISMI, the Italian intelligence agency has been arrested, along with his former boss, General Gustavo Pignero, for his part in the extraordinary rendition/kidnapping of Abu Omar. The NYT also has a piece on this, but its focus is on the magistrates' decisions to issue arrest warrants for four Americans who were allegedly involved. It seems to me that the SISMI part of the story is the more important one. There's no prospect that the US is going to comply with warrants issued against its agents, but there is a real possibility of substantial political repercussions from the SISMI arrests...

I want to learn more, so I surf on over to the website of Robert Waldmann, and find that there is nothing yet. (Wald-mann = Forest-man.) Alas!

Who Was the Fourth Wife of Leo the Philosopher?

One of the funniest moments of my life came when my father, bored with asking the normal questions of my sister as she studied for her Byzantine history test, asked her "Who was the fourth wife of Leo the Philosopher?"

Without batting an eye or hesitating a second, my sister came back with "Zoe Black-Eyes," of course. Which was followed by great laughter, and general agreement that she already knew and had studied far more than enough for any conceivable Byzantine history test.

This is by way of enthusiastically recommending Lars Brownworth's Twelve Byzantine Rules lecture series--even though, by my count, he is only up to 4.5 rulers so far.

The sad thing is that Brownworth doesn't have time to tell some of the greatest of the stories of Byzantine history. As he gallops through the reign of Justinian, he doesn't have time to detail how Procopius of Caesarea, one of our major sources, is both the most obsequious of hagiographers and the most viciously unbalanced of slanderers--and of the same people, his boss Belisarius and Emperor Justinian. Nor does he have time to detail how, after leaving the employment of the Emperor Zeno in his service he had risen to the apex rank of Magister Militum per Orientalem, the (completely historical) Theodoric the Ostrogoth takes a detour and winds up in the Nibelungenlied, settling accounts for the murder of Seigfried by capturing Seigfried's murderer Hagen when Kriemhild sics Attila the Hun on her Burgundian relatives.

But very, very well done.

Morning Coffee Videocast: A Primer on the Federal Reserve

Morning Coffee Videocast: A Primer on the Federal Reserve:

Hollywood

As William Goldman said, nobody knows anything. And people are hard-wired to see and act on patterns that may well not be there:

Meet Hollywood's Latest Genius - Los Angeles Times: Then again, in 6 months he could be a loser. Box-office success is more random than you may think. By Leonard Mlodinow: [A]re the rewards (and punishments) of the Hollywood game deserved, or does luck play a far more important role in box-office success (and failure) than people imagine? We all understand that genius doesn't guarantee success, but it's seductive to assume that success must come from genius. As a former Hollywood scriptwriter, I understand the comfort in hiring by track record. Yet as a scientist who has taught the mathematics of randomness at Caltech, I also am aware that track records can deceive.

That no one can know whether a film will hit or miss has been an uncomfortable suspicion in Hollywood at least since novelist and screenwriter William Goldman enunciated it in his classic 1983 book "Adventures in the Screen Trade."... With each passing year the unpredictability of film revenue is supported by more and more academic research. That's not to say that a jittery homemade horror video could just as easily become a hit as, say, "Exorcist: The Beginning," which cost an estimated $80 million, according to Box Office Mojo, the source for all estimated budget and revenue figures in this story. Well, actually, that is what happened with "The Blair Witch Project" (1999), which cost the filmmakers a mere $60,000 but brought in $140 million—-more than three times the business of "Exorcist." (Revenue numbers reflect only domestic receipts.)...

Last year was a big year for Brad Grey... of Paramount.... Viacom [had] applied the usual strategy: ax the studio head and bring in a new guy.... Grey's next moves were described in the trades as a "sweeping revamp" and "massive makeover."... Grey rebuilt the studio... presented it to the press as a hipper, edgier film company cleansed of the outmoded thinking that had weighed down Paramount's bottom line. And now, under Grey and his wise helmsmen, Paramount's ship is making its way. At least that's what they like to believe... [but] look at the events that led to the situation Grey was hired to fix.

When Viacom Chairman Sumner Redstone bought Paramount Pictures in 1993, he inherited Sherry Lansing as studio chief.... [U]nder Lansing, Paramount won best picture awards for "Forrest Gump," "Braveheart" and "Titanic" and posted its two highest-grossing years ever. So successful was Lansing that she became, simply, "Sherry"—-as if she were the only Sherry in town. But Lansing's reputation soon plunged.... [Why? T]he short answer... 11.4%, 10.6%, 11.3%, 7.4%, 7.1%, 6.7%.... [T]hose six numbers represent the market share of Paramount's Motion Picture Group for the final six years of Lansing's tenure between 1999 and 2004.... How could a sure-fire genius lead a company to seven great years, then fail practically overnight?...

Lansing had been praised for making Paramount one of Hollywood's best-run studios, with an ability to turn out $100 million hits from conventional stories. But when her fortune changed, the revisionists took over. Her penchant for making successful remakes and sequels became a drawback. She was now blamed for green-lighting box-office dogs such as "Timeline" and "Lara Croft Tomb Raider: The Cradle of Life."... But can she really be blamed for thinking that a Michael Crichton bestseller would be promising movie fodder? And where were all the "Lara Croft" critics when the first "Tomb Raider" film took in $131 million in box-office revenue? Even if the theories of Lansing's shortcomings were plausible, consider how abruptly her demise occurred. Did she become risk-averse and out-of-touch overnight?... Postdiction is less impressive than prediction. But as the final chapter of Lansing's career shows, postdiction is how Hollywood does business.

Academic research provides an alternate theory of Lansing's rise and fall: It was just plain luck.... [I]n Lansing's case there's already evidence that she was fired because of the industry's flawed reasoning rather than her own flawed decision-making.... Paramount's 2005 films (and even half of 2006's) already were in the pipeline when Lansing left the company.... With films such as "War of the Worlds" and "The Longest Yard," Paramount had its best summer since 1994 and saw its market share rebound to nearly 10%.... [H]ad Viacom had more patience, the headline might have read, "Banner year puts Paramount and Lansing's career back on track."...

Arthur De Vany, recently retired professor of economics.... De Vany likes to illustrate the oddities of the film business by comparing films to breakfast cereal. If breakfast cereals were like films... our typical cereal breakfast would consist of a product we had never before tried, and very well might not like, but bought because we heard about it from friends or read of it in the newspaper cereal section. That's precisely how films behave in the marketplace. If we hear good things, we go and perhaps tell others; if we hear bad things, we stay away. It's that process—-the way consumers learn from others about the expected quality of the product—-that De Vany found is the key to the odd behavior of the film business today. Economists call it an "information cascade." "People's behavior is simple," De Vany says, "but in the aggregate it leads to a complex system, a system bordering on chaos."...

If hits are so hard to predict, why does it often appear that certain people, at certain times, have a hot hand? The work of former UC Berkeley professor Daniel Kahneman helps explain this.... Not only are people bad at recognizing random processes, they also are easily fooled into thinking they are controlling them....

Although economists and psychologists have no problem understanding Hollywood's randomness, Hollywood executives, not surprisingly, are generally less convinced.... One Hollywood executive who spoke up against De Vany's work in the late 1990s was Frank Biondi, who ran Universal. Biondi thought he had it figured out. After running the numbers, he concluded that the industry was not as chaotic as it appeared. Films that cost more than $40 million had the highest return on capital, he said... "impact movies."... Two years of impact movies later, with depressed film earnings and no relief in sight, Biondi was fired....

Old style seat-of-the-pants executives also object to the randomness theory. White-haired seventysomething Richard Zanuck... ran production at Fox and then briefly ran the studio until some major dogs... crippled the studio financially and led his dad to fire him.... In Zanuck's case, as in Lansing's, his bad streak ended.... The films he developed before he got canned... won best-picture Academy Awards—-1970's "Patton" and 1971's "The French Connection."... A few years later, Zanuck became the man responsible for Steven Spielberg's 1974 feature debut, "The Sugarland Express," as well as Spielberg's 1975 follow-up, "Jaws" (which took in $260 million on a budget of about $7 million). Did he feel "Jaws" would be a hit of historic proportions? "We didn't have any idea," he says. "We bought it from a manuscript, and the book became a bestseller while we were still doing the film"...

Lieberman and Accounting for Options

Michael Froomkin reminds us of yet another moment when Joe Lieberman was the bad guy:

Discourse.net: Lieberman + Bad Accounting = BFF: [M]ore than anybody else in America, Joe Lieberman is responsible for some of the worst corporate abuses during the recent tech bubble and for the current growing options backdating scandal. The Connecticut media has noted this, but not the national media, and it is real important.... [I]n 1993 Lieberman saved amazingly bad accounting for when a company pays an executive with stock options instead of cash. This caused options to flourish. Options make an executive more concerned with short-term fluctuations in her company's stock price than in running the company well....

In 1993, the Financial Accounting Standards Board (FASB) was set to fix the accounting rules for compensatory stock options.... Cash compensation is an expense. Giving an executive a piece of the company for nothing dilutes the value of the stock for the other shareholders every bit as much as paying cash, but no expense was booked. There were a few weak technical arguments in favor of the old rule.... FASB rejected these arguments. Along comes Joe Lieberman! Reflecting the cost of options on financial statements will hurt high-tech companies.... Lieberman pushes through a Sense of the Senate resolution that Congress would disband FASB if they require expensing of stock options. FASB caved. PBS has a nice discussion of all this online at Lieberman v. FASB

Just this year, FASB began requiring expensing of stock options. The Republic did not fall. FASB was able to hide behind residual post-Enron public distrust of corporate executives and Europe adopting options expensing to finally get things right 13 years later.

One can wonder how much better American business would have been run for the last 13 years were it not for Joe Lieberman.

Grammar vs. Rhetoric in the Writings of Noam Chomsky and Steven Poole

To set the context, here is the thoughtful and conscientious Russell Wvong:

Noam Chomsky: A Critical Review: There's a February 26, 1970 letter to the New York Review of Books by Samuel Huntington, with a response by Chomsky, which gives an example....

To the Editors:

In the space of three brief paragraphs in your January 1 issue, Noam Chomsky manages to mutilate the truth in a variety of ways with respect to my views and activities on Vietnam.

Mr. Chomsky writes as follows:

Writing in Foreign Affairs, he [Huntington] explains that the Viet Cong is "a powerful force which cannot be dislodged from its constituency so long as the constituency continues to exist." The conclusion is obvious, and he does not shrink from it. We can ensure that the constituency ceases to exist by "direct application of mechanical and conventional power...on such a massive scale as to produce a massive migration from countryside to city...."

It would be difficult to conceive of a more blatantly dishonest instance of picking words out of context so as to give them a meaning directly opposite to that which the author stated. For the benefit of your readers, here is the "obvious conclusion" which I drew from my statement about the Viet Cong:

...the Viet Cong will remain a powerful force which cannot be dislodged from its constituency so long as the constituency continues to exist. Peace in the immediate future must hence be based on accommodation.

By omitting my next sentence--"Peace in the immediate future must hence be based on accommodation"--and linking my statement about the Viet Cong to two other phrases which appear earlier in the article, Mr. Chomsky completely reversed my argument. http://www.nybooks.com/articles/11044

Chomsky's response includes the following remarkable sophistry:

...I did not say that he "favored" this answer but only that he "outlined" it, "explained" it, and "does not shrink from it," all of which is literally true. http://www.nybooks.com/articles/11044

I am not a fan of the works or the politics of Sam Huntington. But nobody deserves to be misrepresented as Chomsky misrepresents him.

---

With this context set, I note that over at Crooked Timber, the Chomsky wars continue. Steven Poole enters the lists not as a Chomskyite by as an anti-anti-Chomskyite, trashing Peter Beamont with a deceptive and unfair low blow:

Steven Poole: Chomsky's critics too often mix concrete observations with wild, unfocused accusations -- exactly, indeed, what they accuse Chomsky himself of doing.... Peter Beamont...

[W]hat I find most noxious about Chomsky's argument is his desire to create a moral -- or rather immoral -- equivalence between the US and the greatest criminals in history. Thus... Chomsky claims: "Professions of benign intent by leaders should be dismissed by any rational observer. They are near universal and predictable, and hence carry virtually no information. The worst monsters -- Hitler, Stalin, Japanese fascists, Suharto, Saddam Hussein and many others -- have produced moving flights of rhetoric about their nobility of purpose."

Plainly, Chomsky's use of the superlative "worst", in calling Hitler, Stalin and Saddam etc "the worst monsters", is *grammatically* doing the opposite of creating an "equivalence" between them and other leaders. To note uncontroversially that there is one point of comparison between all leaders -- they profess benign intent -- is not to assert an overarching "equivalence" between them...

Is it? Is Beamont committing "wild, unfocused accusations"? Let's try out an English sentence:

• Peter Beamont and Josef Goebbels are both human beings.

The grammar is as Steven Poole asserts it is: my sentence asserts one point of comparison--human-ness--between Peter Beamont and Josef Goebbels, but is grammatically silent on other points, and on "overarching 'equivalence'."

But there is another channel of meaning here besides the grammar of the sentences, a rhetorical channel, one having to do not so much with what the sentences themselves say but with why they say them, and thus with what the sentences say about our beliefs about the world and about right action in the world.

Why would a speaker choose to bring Josef Goebbels to mind, if all the speaker wanted to do was to assert that Peter Beamont is a human being? No speaker would do so--unless he or she had some other point to make besides the point that Peter Beamont is a human being. Rhetorically, one thing that the bringing of Josef Goebbels to the minds of the audience does is to assert that there are additional valid points of comparison between Beamont and Goebbels--points of comparison that the speaker expects the audience to seek out, and reflect upon.

Peter Beamont would be right to be pissed off at anyone who wrote "Peter Beamont and Josef Goebbels are both human beings.

Chomsky is playing the same game in the paragraph quoted up high that I am playing in my sentence: a grammatical denial accompanied by a rhetorical assertion. And Steven Poole is playing a different game--that of pretending that the grammatical level of meaning is the only one, that the rhetorical level of meaning simply does not exist. Peter Beamont, by contrast, is a straightforward guy, reading Chomsky's words and receiving the messages transmitted through both channels. For which Steven Poole trashes him. Unfairly. As Poole knows well--hence the "grammatically" weasal-word in the Poole passage I quoted.

The Pelican Puzzle

One would think that one would see, over time, roughly equal numbers of pelicans flying north and south along the Pacific coast. But no. In the past two years I have seen 1,256 pelicans flying north, and only 245... no, 246 pelicans flying south.

Clearly, there must be a pelican source in the south. And a pelican sink in the north. I wonder what they could be...

Cliff House

The renovations of San Francisco's Cliff House have been completed. The grill where you could get execrable hamburgers is gone. The gift shop where you could buy plastic crabs and cheap China-made cookie jars in the shapes of Victorian Painted Ladies is gone.

In their places are:

• A very, very tasteful (and much more expensive) giftshop.
• Restaurants that serve dishes with names like:
  • Bouillabaisse "Thai style."
  • Pan-Seared Day-Boat Scallop Salad. (How you pan-sear a day boat is something that I will never know.)

Is this progress?

Wonders of International Trade

Wonders of international trade. Belle Waring's recipe calls for coarse polenta--that is, corn mush--that has been incompletely ground by preindustrial stone-grinding technology in Oregon, 10,000 miles away from her kitchen, by the Bob's Red Mill company and then shipped by containership all the way across the Pacific to Singapore.

How much does Bob's Red Mill coarse stone-ground polenta cost in Singapore, anyway?

John & Belle Have A Blog: Fried Shrimp: I invented these last month, and each time I cook more, and each time at the end of the meal John starts looking around the kitchen vainly. "Did we eat them all?"

• 1 1/2 lb shrimp
• 2 T teriyaki sauce
• 6 cloves garlic, minced
• 1 c coarse polenta (the Bob's Red Mill stone-ground one is nice, and if you live in Singapore you can get it at Tanglin Mall!)
• 2 T flour
• salt, pepper, cayenne pepper
• vegetable oil for deep-frying

1. Take the heads off the shrimp, peel them leaving the last section and tail on, and butterfly them. Let them marinate with the teriyaki sauce and garlic in the fridge for 40 minutes or whatever.

2. Put polenta, flour, salt, pepper, and cayenne in a bag and mix. Take the shrimp out of the fridge. Heat oil in a dutch-oven over high heat until it gets rilly, rilly hot. Let's say, until a bluish haze starts to form over the oil and a cube of bread put in is well-browned in 30 seconds.

3. Drain any extra liquid off the shrimp, and then put them in the bag with the polenta. Shake to coat. You can fry them all in one batch. I'd say it takes 1-2 minutes. More like 1 minute. Take them out with a skimmer and put on brown paper. EAT. Try not to burn your fingers too much.

Sauce:

This is pretty flexible, you could put whatever. Substituting Greek-style yogurt for part of the mayo is nice.

• 3/4 c mayonnaise
• juice of 1 lemon (or limes)
• 1 T dijon mustard
• 4-5 chopped cornichon pickles, or go for sweet and put drained hot dog relish, also nice
• 2-3 serrano chilis, chopped into extremely thin rounds on the diagonal
• salt and pepper and chili flakes
• chopped fresh herbs, such as chives, cilantro, sweet basil, flat-leaf parsley
1. Make like Sir Mixalot.

This is really very tasty and I recommend it to you all. It would be a nice party snack, though I don't know how it would hold up keeping warm in the oven. All fried things are good party foods, but all fried things are best eaten right away; it's like some kind of paradox, man. Its the big nubbly bits of fried corn grits that make it good...

---

And here's Bob:

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At this point, I have to channel the loa of Friedrich Hayek, and marvel at the wonders of the market--that, like a god, knows that in Singapore there is demand by Belle Waring for Red Mill stone-ground coarse polenta, and that diverts bags of the stuff to be carried by truck, train, containership, and porter to her local store. How wise is the market! How its information dwarfs that of any conceivable electro-mechanical-electronic-positronic-gluonic brain!

Paul Krugman Was Shrill...

Mark Thoma directs us to Paul Krugman in happier times, when things were better managed and he could honorably focus his time on... other issues than the incompetence, mendacity, malevolence, and disconnection from reality of George W. Bush and his administration:

Economist's View: "There are Some Core Beliefs That are Wrong in This Administration": This is an interview with Paul Krugman that took place a little over twelve years ago. It's a reminder that being a Democratic president doesn't save you from Krugman's critical eye. It also has a very familiar ring to it:

CNN News, March 25, 1994: This [Clinton administration] is an administration which, despite all of the advice from economists who really know something about it, has decided that foreigners are our problem, that competition with Japan, competition with the Third World, outsiders are responsible for our jobs problems, that getting tough with the rest of the world is the priority, not dealing with our own domestic problems.... The reason we have a trade deficit is... we don't save enough. That's a domestic problem.... [T]o a large degree, foreigners are doing us a favor by lending us money which is the other side of our trade deficit....

We have... some real arguments with the Japanese... the Japanese are not lovable. I wish that they... would behave better, but it's a little bit like saying "look, my neighbor's annoying me, so I'm gonna start trashing his back yard. I'm gonna kill his dog."... [W]e're taking what is really a sort of third rate dispute with Japan and making it the centerpiece of our economic policy....

We can get into a situation where we start retaliating against the Japanese, they retaliate against us. The Europeans say yeah, we'll do that too... it would be really damaging to the world economy and especially to smaller countries.... [I]n this administration no one dares say a word against exports [and their promotion]. Exports have become God....

[Clinton's] done some good things, and there are some very good economists in the administration, but there are some core beliefs that are wrong in this administration and some key people who were put in their positions because they shared those core beliefs who are doing a lot of damage...

We Stand on the Shoulders of Giants

Frederick Douglas, 1852:

What to the American slave is your Fourth of July?: I answer, a day that reveals to him, more than all other days in the year, the gross injustice and cruelty to which he is the constant victim. To him, your celebration is a sham; your boasted liberty, an unholy license; your national greatness, swelling vanity; your sounds of rejoicing are empty and heartless; your denunciations of tyrants, brass-fronted impudence; your shouts of liberty and equality, hollow mockery; your prayers and hymns, your sermons and thanksgivings, with all your religious parade and solemnity, are to him mere bombast, fraud, deception, impiety, and hypocrisy--a thin veil to cover up crimes which would disgrace a nation of savages. There is not a nation on the earth guilty of practices more shocking and bloody, than are the people of these United States, at this very hour.

Go where you may, search where you will, roam through all the monarchies and despotisms of the old world, travel through South America, search out every abuse, and when you have found the last, lay your facts by the side of the every-day practices of this nation, and you will say with me, that, for revolting barbarity and shameless hypocrisy, America reigns without a rival....

Fellow-citizens, I will not enlarge further on your national inconsistencies. The existence of slavery in this country brands your republicanism as a sham, your humanity as a base pretense, and your Christianity as a lie. It destroys your moral power abroad; it corrupts your politicians at home. It saps the foundation of religion; it makes your name a hissing and a byword to a mocking earth. It is the antagonistic force in your government, the only thing that seriously disturbs and endangers your union. It fetters your progress; it is the enemy of improvement; the deadly foe of education; it fosters pride; it breeds insolence; it promotes vice....

Allow me to say, in conclusion, notwithstanding the dark picture I have this day presented, of the state of the nation, I do not despair of this country.... While drawing encouragement from the "Declaration of Independence," the great principles it contains and the genius of American Institutions, my spirit is also cheered by the obvious tendencies of the age. Nations do not now stand in the same relation to each other that they did ages ago. No nation can now shut itself up from the surrounding world and trot round in the same old path of its fathers without interference.... A change has now come over the affairs of mankind. Walled cities and empires have become unfashionable. The arm of commerce has borne away the gates of the strong city. Intelligence is penetrating the darkest corners of the globe.... Oceans no longer divide, but link nations together. From Boston to London is now a holiday excursion. Space is comparatively annihilated. Thoughts expressed on one side of the Atlantic are distinctly heard on the other.... No abuse, no outrage whether in taste, sport or avarice, can now hide itself from the all-pervading light.

The Law and Economics of Self-Dealing

What is it really like being a minority shareholder? A new index:

The Law and Economics of Self-Dealing: Simeon Djankov, Rafael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer: NBER Working Paper No. 11883: Issued in December 2005: We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the commonly used index of anti-director rights.

"Objectivity" in Public Journalism and Public Policy

Matthew Yglesias writes:

TAPPED: AGAINST OBJECTIVITY. [Do] we need The New York Times?... [I]f it were to transform itself into a feisty Guardian-style paper and prompt the creation of a counterpart rightwing national broadsheet, I think that would be good. After all, ideology need not be the enemy of quality....

[I]t's useful to distinguish between two ideas Mike sort of runs together -- non-partisan and non-ideological. Partisan journalism as practiced by, say, Fred Barnes or (frequently) Fox News is pretty deplorable. Ideological journalism, on the other hand, tends to be interesting and informative even when you disagree with it. Oftentimes, ideology and partisanship overlap, but not always. Reason is rigidly ideological but not at all partisan since it espouses an ideology no political party that ever hopes to win elections would touch with a ten-foot pole.

On a loosely related note, Mike observes that sometimes he laughs when he hears "that so-and-so reporter is a tool of the Bush administration when I know that so-and-so's personal views aren't that far away from mine. But such criticism means, from so-and-so's perspective, that he or she is doing his or her job." That strikes me as an oft-crippling problem for neutral reporters who tend to respond to complaints about their work with the observation that since conservatives don't like them and liberals don't like them, they must be awesome truth-tellers. Well, maybe. Alternatively, maybe they're doing lots of bad work and pissing everyone off. Or maybe they're rigidly adhering to an elite consensus that is no less ideological than what the left or right are pushing. Or maybe they get complaints from both sides but one side is right and the other is wrong...

Let me say that the problem with the New York Times and the Washington Post--and so many of the others--today is not that they are "objective" but that they are not competent. The news pages of the Wall Street Journal are "objective" and they are very competent indeed. And the foreign, non-"objective" press--well, most of it is simply dreadful. That part of it which is partisan is totally dreadful. That part of it which is ideological is greatly mixed. Maybe being ideological gives you some innoculation against the diseases from which the American papers suffer. But maybe not.

Reasons Not to Buy TIPS, Parts I Through V

The mysterious, vowelless Knzn worries that two years from now the Federal Reserve will wish it had stopped raising interest rates several months ago:

Economics and...: The Inflation Conundrum: I'm a two-handed economist today, and the hands are about to come to blows. My "rational economist" hand is waving in the air declaring, "We have every reason to believe that inflation is not an issue over the longer horizon, and only highly risk-averse investors should be buying TIPS." My "faithful quantitative analyst" hand is pounding the table exclaiming, "The inflation rate is up! Past inflation predicts future inflation! Buy TIPS!!" Blog readers will probably be hearing more from the rational economist hand, because rational economics makes better reading than regression coefficients. Here's the case:

1. Oil, the biggest contributor to rising prices thus far, is traded in a speculative market. Therefore, its price should be approximately a random walk.... At any particular point in time, our best guess should be that the oil bull market has run its course....
2. Rent, the newcomer on the inflation scene, is being pushed up by rising interest rates.... [R]ents... should eventually stop rising. Considering the dramatic amount of residential construction activity over the last few years, the longer-term fundamentals for rents are probably a bit bearish.
3. Labor, the major component of costs, shows no signs of being a source of inflationary pressure right now. If anything, the labor market is still quite weak. (I know this point is controversial, but personally, even my quant hand is convinced.)
4. Ben Bernanke, as the new kid on the block and facing circumstances that put his inflation-fighting credibility to a dramatic test, has every reason to prefer erring on the hawkish side rather than the dovish side.
5. The dollar, if it comes under severe selling pressure in the near future, is likely to do so only because of a disinflationary downward turn in US economic growth. Under such circumstances, foreign central banks will still have incentives to support the dollar aggressively...

"Yeah, yeah, yeah," says the quant hand, "I'm already taking the weak labor market and the tight [so far] Fed into account, and I still say, buy TIPS."... I'm just making sure I don't hold my hands too close to my face, or I might get caught in the middle of something ugly.

Dr. Bartlett Diagnoses the Democrats' Dilemma

It is in all of our interest--all those who want to raise the level of the debate, at least--to read, cite, and carefully respond to the writings of Bruce Bartlett, who:

• is smart.
• is thoughtful.
• is brave--braver than all the rest of us who have never managed to get ourselves fired for writing what we believe.

Such bravery should be rewarded with wide-scale intellectual influence, if only to make future bosses hesitant about firing intellectuals who tell political-inconvenient truths. So how about it guys?

Today I want to comment on what Bruce Bartlett thinks is the problem with us Democrats: that we have too few cowardly and cynical careerists in our ranks, willing to say anything to get themselves or their patrons elected:

The Democrats' dilemma -- The Washington Times: By Bruce Bartlett: From what I read on the blogs these days, most Democrats believe that their party's single biggest problem is that it is not tough enough. Their solution is to be ever more shrill and hysterical in attacking Republicans. As a Republican, I think this is wonderful. It just makes Democrats look like kooks, and forces moderates to vote Republican.

Actually, I think the Democrats' biggest problem is simple ineptness -- they just aren't very good at coming up with politically attractive ideas and marketing them effectively.... The fact is that a lot of people who get into politics don't really have any ideology. They could just as easily be Democrats or Republicans, because they don't have anything in particular they want to accomplish in terms of policy. They just like the spotlight, or the thrill of running for office or want a nice line on their resume.

When such people first decide what party to join, they are not concerned about where they would feel most at home philosophically. Rather, their only concern is which party will give them the best chance of winning.... This helped the Democratic Party enormously because those whose only interest is winning tend to be better at it than ideologues.... [T]hose without any ideological baggage will simply tell voters whatever they want to hear and strive to do so in the most engaging way possible.

Ideologues find these people revolting. They are viewed as nothing but prostitutes -- selling their votes to the highest bidder -- who don't believe in anything except winning.... At one time, almost all those who just want to win and don't stand for anything were Democrats.... These people helped the Democrats in various ways. They provided the marginal votes to keep control of Congress, presented a more attractive public face for the party than the dour ideologues and helped shape and craft its program and message in ways that voters responded positively toward for decades....

The prostitutes' switch from the Democratic Party deprived it of potential winners and effective strategists. The party was left only with those who view any deviation from the party line as heresy. Such people don't know how to win and don't really want to. They would rather die for principle than settle for half a loaf. That's the Democrats' problem today.

As one of the very few people in Washington brave enough to get himself fired for saying what he thinks, Bruce Bartlett's views have to be weighted heavily and must be treated with great respect. But I think his diagnosis is wrong. Markos Moulitsas, after all, likes Mark Warner. Mark Warner is Joe Lieberman with a human face--his policy differences with Lieberman aren't that big. (They are, however, important: Lieberman coquettes with Likud's annexationist fantasies, has drunk the koolaid on Iraq, was worse than missing-in-action during the 1995 Social Security debate, and has displayed a pathetic eagerness to help Wall Streeters report phony accounting numbers. Warner doesn't.) Hillary Rodham Clinton hasn't been a liberal ideologue since at least the day in December 1994 that she called Dick Morris and told him to come help her husband.

Democrats face structural problems. Democrats tend to be more urban than Republicans--which means that the natural state of the Senate would be to have about 60 Republicans and 40 Democrats. Democrats' commitment to African-Americans means that they have acquiesced and encouraged a gerrymandering process that tends to create two solid-Republican house seats for each house seat created that is likely to elect an African-American. These cannot be reversed, or at least the Democrats cannot reverse them without losing their soul and ceasing to be real Democrats--just as the Republicans sold their soul to Richard Nixon's southern strategy and are no longer Republicans: certainly Seward, Lincoln, Teddy Roosevelt, Dewey, and Eisenhower would have a very hard time being Republicans today.

But even with these disadvantages, Democrats are very competitive. And as an attendee at too many meetings of Democrats I can assure Bruce Bartlett that the Democrats' problem is *not* a lack of cowardly and cynical careerists willing to say anything to get elected. No no no no no... That's not our big problem.

Democrats' big problem, I think, springs from the fact that a lot of people have a false image of today's Republican Party. Bruce Bartlett, for example, votes Republican because he still imagines that Republicans are in essence the party of fiscal conservatism and small government. If only we could get him and others to wake up and smell the coffee...

Twelve O'Clock High...

This morning I saw a flight of about twenty-five turkeys--perhaps five full-grown adults and twenty juveniles--pass overhead at a height of fifty feet.

First time I've ever seen that. A flock of turkeys. Flying. Twenty-five. Fifty feet up.

Admittedly, they cheated. They launched themselves from the hilltop where the cell phone towers are, and lost about 150 vertical feet as they flapped by overhead on their way down to the spring in the middle of the blackberry thicket.

Nevertheless. Big birds.

Unhedged Funds?

Brad Setser worries about the degree to which hedge funds speculating in emerging market debt are really hedged:

Roubini Global Economics (RGE) Monitor: Levered long/ long funds: An anonymous partner at a mid-sized London hedge fund expressed something I was trying to say a couple of weeks ago fair better than I could have. From the Financial Times:

"A lot of managers have gone from being long-short funds [funds that make bullish and bearish bets on stocks] to being long-long funds with leverage, which removes the whole point of hedge funds offering protection in the event of a downturn," said a partner at a mid-size hedge fund in London....

Until May, a rising tide was lifting all boats. And punishing shorts. So there was a temptation to become a long/ long fund. Or to find proxy hedges that didn't cost you an arm and a leg. The one that I am most familiar with... went like this:

• Buy the local currency debt of an emerging economy with a high coupon.
• Don't hedge the currency risk. That cost you.
• Instead buy insurance against the risk that the country would default on its foreign-currency denominated debt. That meant holding a credit default swap -- i.e. buying credit insurance.

This trade isn't a secret. Joanna Chung... in the FT:

Mohammed Grimeh, global head of emerging market trading at Lehman Brothers, said: "Over the last few months, as credit spreads tightened, hedge funds have been moving to illiquid local instruments that offer a higher risk and reward but they are also buying CDS protection against overall country risk."...

It isn't hard to see the logic.... Turkey was paying a 12% coupon... on its local currency debt at the beginning of the year. Insurance against a default on Turkey's dollar bonds cost maybe 200 basis points. You were hedged -- sort of. And the whole trade had a nice carry. A real nice carry. After all, you were holding a rather overvalued currency and needed some compensation for the risk.... [T]he long was on local currency debt and the short was on external foreign currency debt.

The hedge even has worked in Turkey. Sort of. A contract insuring against the risk of default on Turkey's foreign currency debt is worth a lot more now than it was in January... both the Turkish lira and Turkish lira bonds are worth a lot less now than they were then too.... [W]hy do I say that there was something strange about the hedge? Simple: The hedge implicitly assumes that correlations that held in the past would hold in the future, even though conditions change. And in this case, two conditions were changing:

• First the scale of foreigners' local currency exposure was growing, big time. That changes the country's incentives.
• And second the amount of sovereign foreign currency debt was falling, big time. Still is. Chris Mewbourne of Pimco thinks repayments will top new issuance this year. So the stock of external debt is falling absolutely, not just relative to sovereign reserves. That is why insurance against the risk of default is cheap.... [N]othing prevents the folks from selling more insurance than there are bonds. Delphi showed us that. Selling insurance (off the balance sheet) is another way to get an easy yield pickup....

The backward-looking correlations work. And why worry too much about the possibility that the conditions that gave rise to those correlations have changed?... I suspect that a lot of folks scrambled to find hedges for previously unhedged positions over the past two months -- and to shore up their proxy hedges. But I am reading market tea leaves, not speaking from direct knowledge. And I do still wonder about the robustness of some of the hedging strategies used by players in the credit markets of advanced economies in truly adverse conditions...