Semi-Daily Journal Archive

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

Saturday, September 23, 2006

Why Oh Why Can't We Have a Better Press Corps? (Fred Hiatt and the Washington Post Strike Again)

That there have been no resignations-on-principle from the Post's editorial staff over this is one of the reasons that I give the Post ten years:

'Wash Post' Endorses Lieberman for Senate -- While Hitting War on Front Page: By E&P Staff: The Washington Post's editorial page endorsed Sen. Joe Lieberman for re-election in his third-party Connecticut U.S. Senate race on Sunday.... The Post... even asserted that Lieberman had been making "sharp criticism" of the president on the war for years -- likely a surprise to most Democratic voters in the state.

Just as the Post editorial page was endorsing... [Lieberman], the paper's front page... painted the war in the worst possible light. It opened, "The war in Iraq has become the primary recruitment vehicle for violent Islamic extremists, motivating a new generation of potential terrorists around the world whose numbers are increasing faster than the United States and its allies are eliminating the threat, U.S. intelligence analysts have concluded.

"A 30-page National Intelligence Estimate completed in April cites the 'centrality' of the U.S. invasion of Iraq, and the insurgency that has followed, as the leading inspiration for new Islamic extremist networks and cells that are united by little more than an anti-Western agenda. Rather than contributing to eventual victory in the global counterterrorism struggle, it concludes that the situation in Iraq has worsened the U.S. position, according to officials familiar with the classified document."

Proud to Be a Fellow-Citizen of Radley Balko's

Unfogged says "Radley Balko for Emperor!" Jim Henley has the extended version:

Radley Balko for Emperor: It looks very likely that Radley Balko has saved Cory Maye's life. I put it that way on purpose. In fact, it has taken dogged, pro bono legal work by Covington and Burling, the local efforts of the public defender and considerable generosity on the part of Radley's employer regarding how he's been spending his time the last few months. We should salute every one of those people. And to make Radley's employers especially happy, we should buy his book or at least download the PDF.

But all of those other people got involved because Radley Balko dragged this case into the public eye and kept it there. If there was ever a triumph of the fucking blogosphere moment, this is it. So much of what The BlogosphereTM crows about amounts to collecting scalps - hit pieces, gang stomps, ambushes. Getting people fired. Disgracing someone.

Here, instead, a guy who did not deserve to be killed but was going to be, will probably not be killed after all. His daughter will not be orphaned.

I'm very proud that Radley Balko is my friend.

Your cynical voice may be saying,"It's great that one black guy in the country interested enough rich white lawyers to get some eventual justice, but that's not a justice system worthy of the name." You'd be right. Based on his writing, I'm sure Radley would agree with you. The Maye case is a start. It needs to become the teachable moment about how far off track the criminal justice system in this country has gotten, and how much farther wrong it could go. Cory Maye got swamped by a perfect storm of liberty-destroying practices American law enforcement has adopted in the name of our wasteful, cruel and impossible "War on Drugs." Confidential informants, no-knock raids, police militarization. They all feature.

And it threatens to get worse. This week in "compromise" legislation the Senate gave the President authority to hide people away and torture them in the name of "fighting terrorism." Since 2001, every expanded "antiterrorism" power that Congress has granted to law enforcement has ended up being used by federal agencies against ordinary crime. Informal torture has been part of the drug war for a long time. Formal torture is coming as soon as some legislator figures pushing for it will let him appear "tough on crime," or as soon as some prosecutor decides it will help him get elected governor. Once the state can alternatively interrogate the Cory Mayes of the world into "confessing" to their crimes, there will be less of this fuss and bother about appeals.

For now, though, Cory Maye will, we think, live. It's a start.

Managing Authors

It must take a certain very rare, very saintly personality type to manage authors and still remain sane.

John Scalzi (who I keep confusing with, but who is a very different person from Cosma Shalizi), writes:

Whatever: Thoughts on The Last Colony: Then I went back to my office and wrote an e-mail to Patrick Nielsen Hayden, my editor, which went as such: "My main character was an annoying putz. I've pushed him down a well and you'll never meet him. I'll need a couple of extra months to finish the book." To which PNH's response, to his credit, was: "Fine"...

Storage Capacity Races Processing Power Races Communications Bandwidth...

Improvements in storage:

The March of Nanotechnology - New York Times: By DAN MITCHELL: Nanotechnology, the science of creating functional systems on the scale of molecules or smaller, could enable engineers to combine the functions of memory chips and disk drives on a device the size of a dime. Besides the instant boot up, systems that are in development today could enable desktop computers to hold 10 terabytes of data (10,000 gigabytes) or more, and future systems may be able to store data for as long as 100 years while eliminating the worry that the storage media will become obsolete, according to ComputerWorld. Some of these systems could be available today if the economics were right. Others will probably take another decade or so.

Researchers at I.B.M are working on several projects involving nanotechnology. One, called Millipede, is at what I.B.M. termed a "very advanced stage." This nanomechanical system is created by etching microscopic indentations -- each one about one-50,000th the size of the period at the end of this sentence -- onto a polymer surface, resulting in the ability to store the equivalent of 25 million printed pages in an area the size of a postage stamp...

Doux Commerce

Sources of large-scale social cooperation in the East African Plains Ape. Francois Marie Arouet's view:

Voltaire: Although the Episcopalian and the Presbyterian are the two main sects in Great Britain, all the others are welcome and live quite well together, while most of their preachers detest each other with about as much cordiality as a Jansenist damns a Jesuit.

Come into the London Exchange, a place more respectable than many a court. You will see assembled representatives of every nation for the benefit of mankind. Here the Jew, the Mohametan and the Christian deal with one another as if they were of the same religion, and reserve the name "infidel" for those who go bankrupt. Here the Presbyterian puts his trust in the Anabaptist, and the Anglican accepts the Quaker's promissory note. Upon leaving these peaceful and free assemblies, one goes to the synagogue, the other for a drink; yet another goes to have himself baptized in a large tub in the name of the Father through the Son to the Holy Ghost; another has his son's foreskin cut off, and over the infant he has muttered some Hebrew words that he doesn't understand at all: Some others go to their church to await divine inspiration with their hat on their head. And all are content. (letter 6)

Friday, September 22, 2006

The Childish Babbling of a Say...

Duncan Foley (2006), Adam's Fallacy: A Guide to Economic Theology (Cambridge: Belknap Press: 067402399).

Duncan Foley has worked a miracle. He has created in me--me! J. Bradford DeLong!!--something that I thought would never happen: the desire to say something good about Jean-Baptiste Say.

Foley has done this with a book that claims that Adam Smith holds to a:

P. 3: moral fallacy... urges us to accept direct and concrete evil in order that indirect and abstract good may come of it... [while] neither Smith nor any of his successors has been able to demonstrate rigorously and robustly [how].... Smith's rationalization... requires... wholesale denial of the real costs of capitalist development...

Let's read further. What are these real costs? Division of labor... Advantages of the division of labor... Detail and social division of labor... Division of labor and extent of the market... The Virtuous Spiral of Economic Development... "Say's Law." Ah. Here we are, on page 10: Foley comes to the first real cost of capitalist development about which Adam Smith is in "wholesale denial": technological unemployment:

P. 10 ff: The increasing division of labor with its consequent rise in labor productivity has at least one immediate negative effect: a reduction in the demand for labor in industries undergoing rapid rises in productivity. The reason for this is that the increases in the productivity of labor may run ahead of the widening of the market. Even though more units of the product are being produced and sold, if labor productivity is rising ever faster, fewer workers will be required to produce the output, and unemployment can result.

Smith acknowledges this effect... but argues, on the basis of reasoning that later came to be known as "Say's Law," that in the aggregate there cannot be a chronic excess supply of labor.... The reasoning... is... that the source of demand for commodities... is just the willingness of workers and the owners... to make their resources available for production. In real life, this potential demand can become effective only if money is available to finance the start-up of production.... Smith and his successors who reason on the basis of Say's Law are assuming that the financial system... is flexible enough... belie[ving] in the efficiency of the financial institutions of a capitalist economy.

This is Adam [Smith's] Fallacy in action. The immediate effect of increases in labor productivity is to impose costs (unemployment) on a group (workers) who are in a weak position to protect themselves from these costs. Ordinary moral reasoning would regard this as a bad thing. Smith offers the hope that some of these displaced workers will eventually find alternative jobs (though some others may not), and that lower prices of products will benefit consumers of products. Thus the direct, concrete evil of unemployment is instrumental to achieving the indirect, abstract good of lower prices...

Where should we start? He talks about "Adam [Smith]'s Fallacy," so I guess we should talk about "Foley's Follies":

Foley's Folly #1: The assertion that the costs of higher labor productivity are "direct, concrete" while the benefits of higher labor productivity are "indirect, abstract." Lower prices that give consumers higher real incomes are exactly as concrete and as direct as are income losses from unemployment. The best thing you can say about Foley's claims that these benefits are in some way "abstract" and "indirect" is to say that you could grow really good tomatoes if you spread his claims around their roots.

Foley's Folly #2: The claim that technological unemployment is the rule. More often than not, a rapid rise in labor productivity in an industry is associated not with a reduction but an increase in demand for labor in that industry. That was certainly the case in the steam-machinery-cotton complex in Manchester at the start of the industrial revolution, or the steel-rubber-gasoline-automotive complex in Detroit at the start of the twentieth century. That is certainly the case in the silicon-electronics-computers complex in Silicon Valley over the past two decades. I don't know where Foley's claim that technological unemployment is the rule in fast-productivity-growth industries could possibly have come from.

If the elasticity of demand is low, rapid technological progress in one industry might be associated with a reduction in the demand for labor in those industries. But it would not be if the elasticity of demand is high. For Foley to say that this technological unemployment in low demand-elasticity industries is "one immediate negative effect" of the division of labor without also saying that technological employment in high demand-elasticity industries is "an additional immediate positive effect" of the division of labor--that's Foley putting his thumb on the scales in a foolish way.

Foley's Folly #3: The assertion that a belief in the theoretical truth of Say's Law--in the efficiency of financial markets--is necessary to support the claim that the market system is for the general good. Say's Law certainly does not hold anywhere in the short run. That's why we have the Federal Reserve--an island of central planning in the middle of our economy to try to ensure that even though Say's Law does not hold in theory in the short run, we can make a not too intolerable approximation to it hold in practice.

Foley's Folly #4: Duncan Foley's calling a belief in efficient financial institutions "Adam [Smith]'s Fallacy in action." Adam Smith was well aware of financial market failures and thought hard and carefully about them--witness II.2 of the Wealth of Nations. Giving real people's names to straw men of your own devising is impolite. That Keynes did it to Pigou and company is not an excuse.

Still worse, in my view, is Foley's Folly 5: It turns out that Duncan Foley doesn't believe that technological unemployment is the rule. Immediately after this song-and-dance about the "direct, concrete" costs that labor productivity growth generates via increased unemployment, costs that "ordinary moral reasoning would regard... as a bad thing," Foley writes:

Over long periods of time... something like Say's Law does operate... there is no long-term drift towards constantly increasing unemployment as a result of technological change...

Unless Foley wants to maintain--which I don't think he does--that in the absence of technological progress we would have steadily falling unemployment, what he is saying here is that unemployment is not higher as a result of technological progress. There is no cost to charge against the benefit of higher productivity. Technological unemployment is a non-issue. And I cannot understand why Foley raises it--let alone introduces technological unemployment as his first example in his book of the "real costs of capitalist development" about which Adam Smith is in "wholesale denial."

At this point, at the bottom of page 11, Foley seems to recognize that something has gone wrong. He immediately reverses course:

On the other hand, over shorter periods, the absorption of technologically unemployed workers into new jobs can be quite slow, creating real social, economic, and political problems. The stubbornly high unemployment rates in many Western European economies over the last three decades of the twentieth century are an example...

Which is Foley's Folly 6. I don't think I understand high Western European unemployment. But I do not think that the first-order cause of high Western European unemployment was rapid labor productivity growth. If high Western European unemployment were primarily technological unemployment, it would have been highest in the 1960s and early 1970s when European productivity growth was fastest, not in the less technologically dynamic 1980s and 1990s.

Foley does his readers no good service in holding up Western Europe since 1975 as an example of technological unemployment.

I must say that I thought that the day when I would have a good word for Jean-Baptiste Say would never come. But by the time I had finished page 11 of Adam's Fallacy, it had.

Amaranth Chief Expresses "Regret"

Now Amaranth's losses are up to $6 billion. - Amaranth Chief Expresses Regret In Conference Call With Investors: BY RANDALL SMITH: September 22, 2006 3:42 p.m.: Seeking to explain the loss of $6 billion this month, Amaranth Advisors founder and chief executive Nick Maounis expressed regret over the fund's ill-fated energy bet in a brief call with investors. In a 15-minute call that began at 2:00 p.m EDT today, Mr. Maounis said the past week's events "have been painful for all of us." He added, "We lost a lot of our own money this month. We lost even more of yours.... We feel bad about losing our money…and even worse about losing yours."

He said Amaranth traders had been surprised not only by adverse market moves, but also by the lack of ability to exit their losing positions. He said the fund had been subject to "a series of unusual and unpredictable events" that triggered "dramatic losses." And, he said, "the markets provided no viable means to exit."

Based in Greenwich, Conn., the hedge-fund firm is fighting for its survival after informing investors this week that it lost 65% of its assets, primarily at the hands of a 32-year-old natural gas trader. With investors fearing more losses and clamoring to withdraw their money, the fund has offloaded its energy portfolio to J.P. Morgan Chase & Co. and hedge fund Citadel Investment Group LLC and sold what it called a "a significant number" of other investments. It also is negotiating to sell at least a stake of itself to Citigroup Inc. Amaranth told investors in a Wednesday letter that the moves helped "avoid the termination of our credit" and a "forced liquidation by our creditors."...

Mr. Maounis told The Wall Street Journal on Aug. 29, less than three weeks before disclosing the losses, that Mr. Hunter's reputation for taking big, reckless bets was "greatly exaggerated." The fund had built "infrastructure around our traders so we can adequately assess risk," Mr. Maounis said then.... In today's call with investors, Amaranth CEO Nick Maounis said the fund plans to continue in business, but will eliminate energy trading from its trading strategies.

Through August, the Amaranth executive said, the fund had racked up more than $2 billion in energy and commodities trading profits. But once news of its $500 million losses "began to sweep through the markets" after September 14, he said, the "illiquidity" of the markets prompted two unsuccessful attempts to offload its natural-gas exposures in separate transactions.

Mr. Maounis said Ameranth is "evaluating" the redemption requests it has received, but gave no assurance about when such requests would be met. "We understand, of course, that the issue of redemptions is a high priority for you." And he vowed to contact investors individually over the next few weeks.

"We have no illusions about the difficulty of the road ahead," the Amaranth executive said. "We are determined to earn back your faith," he concluded, thanking listeners "for your time and patience."

Aren't these people paid extraordinarily high fees because they claim to know how asset prices and positions will react to the unexpected, and which positions in which markets can be exited easily in times of uncertainty and which cannot?

When Google Attacks!

Gordon deals with a Gmail crisis:

Gordon's Tech: Gmail spam filtering: A crisis with Gmail threatens all Google services: I posted this on Google Groups: Problem-solving (Update: 8 hours later, it's yet to appear on the the forum. It's good thing I'm not prone to paranoia ...).

My Google Gmail account is dying from dysfunctional spam filtering. That's bad enough, but the role of Gmail as the centerpiece of Google's identity management strategy means there are surprisingly widespread implications....

On a weekend 80% of my inbox is spam. During the work week 50-70% of my inbox is spam. My spam box has about 2000+ spam in it each month.

On the other hand, messages I send to myself using my authsmtp account using my return address are ALWAYS treated as spam. Based on my experiments I believe Google has blacklisted my personal domain - (see It's a personal domain that, like many others, has been faked in signatures by spammers for years. Google appears to be using a kind of blacklisting that is lowest form of spam control and hasn't worked for years. No serious ISP uses such a crude approach any longer....

My Gmail account is my Google digital identity. If I abandon it I walk away from Google checkout and a heck of a lot of other Google services....

But the crisis was resolved:

Gordon's Notes: Spam: blacklists are back, and the war may be turning: Thursday, September 21, 2006: I finally accepted that Google is a set of adaptive algorithms rather than a traditional corporation. That meant I could sit back and rethink things. Google was malfunctioning because I had redirected an unfiltered mailstream at Gmail, and Google seems to be effectively doing something I'd asked for years ago: selective filtering based on the managed reputation of an authenticated sending service. In this case Google was treating the 'sending service' as my redirector (which I don't think authenticates), rather than the distal source of the email. That meant acquired a reputation, from Google's perspective, as a really bad place.

Well, I can't be too mad if they're doing what I'd long urged everyone to do. It would have been nice if I'd known about it earlier, but them's the breaks. Don't do redirection to Gmail and expect it to like you for long. So I turned off all the redirects, forwarded from Gmail to my ISP (VISI), flowed and to VISI's Postini service, and finally dropped all my email lists. Lists are very 20th century, this is the age of subscription/notification (Atom/RSS). Good-bye lists. The world calmed down.

With all the lists gone, and postini churning away, it was interesting to see what spam got through. Lots of political solicitations... incredibly annoying newsletters... the domains were real.... Some had unsubscribe links and some of those even worked.... I've blacklisted 9 domains... and with postini and these few filters, my spam is gone...

Avadim Hayinu l'Pharaoh b'Mitzrayim

Josh Micah Marshall writes:

Talking Points Memo: by Joshua Micah Marshall: September 17, 2006 - September 23, 2006 Archives: The Post has a follow-up in Thursday's paper on the Allen 'I didn't know I was Jewish' saga. Staff writer Michael D. Shear interviews Allen's mom, Henrietta "Etty" Allen nee Lumbroso....

Lumbroso was raised as a Jew in Tunisia. But when she came to the US and married George's dad she pretended to be a Christian because she didn't think her husband's family would accept her and also because she didn't want her family to experience what she experienced in World War II. So she never told her family, until George confronted her about it last month. She admitted it was true. She said she was afraid he didn't love her anymore. But no, he said, "Mom, I respect you more than ever."...

At the debate a few days ago Allen said "My mother's French-Italian with a little Spanish blood in her. And I was raised as she was, as far as I know, raised as a Christian." That wasn't true of course. She'd already told him she was raised as a Jew. But that's okay because she'd sworn him to secrecy after the conversation in August.

Some more texturey details come through even in the carmelized narrative. As Shear writes "She said that she and the senator's father, famed former Redskins coach George Allen, had wanted [keep her Jewish ancestry a secret] to protect their children from living with the fear that she had experienced during World War II." Further down, there's a slightly different explanation.... Speaking of Allen's father, she says, "He didn't want me to tell his mother. At that time, that was a no-no, to marry outside the [Catholic] church."...

One of my failings as a reporter, when I was doing that as my full time gig, was my lack of sufficient cynicism: I remember back in 2001 sitting in the home of a retired ambassador and having him lie to my face. Of course, I didn't realize it then. I couldn't get my head around the idea he was just straight out lying to me....

I might be willing to believe that Allen's mother never told him her family was Jewish. I'm not silly enough to believe he didn't know. I've learned a few lessons.

For an "normal" California teenager like George Allen was once to sign up with the Confederacy is weird and creepy. For a half-Jewish California teenager to sign up with the Confederacy...

What's the Most Important Thing in Finance?

"What's the most important thing in finance?" J.P. Morgan was asked. "Character," he replied.

If indeed Amaranth was telling its investors one thing and doing another, it is so history: - Amaranth to Discuss Losses With Clients: By ANN DAVIS and HENNY SENDER: Fighting for its survival and the reputation of its managers, Amaranth Advisors plans today to answer questions from its clients, many of whom want to know if the Greenwich, Conn., hedge fund was saying one thing about its trading tactics and doing another.... For years, investors have accepted a trust-me approach from hedge-fund managers....

The hedge fund revealed this week that it lost about $6 billion this month, or 65% of its assets, primarily at the hands of a 32-year-old natural-gas trader working thousands of miles from its headquarters. With investors seeking withdrawals, it has unloaded its energy investments to J.P. Morgan Chase & Co. and hedge fund Citadel Investment Group LLC and is selling other assets while negotiating to sell at least a stake to Citigroup Inc.

For months, the energy-trading community had buzzed about extraordinary risks taken by the Calgary-based natural-gas trader, Brian Hunter. Yet Amaranth's founder and chief executive, Nick Maounis, repeatedly assured investors that Mr. Hunter and others in the fund were operating cautiously and making diversified bets. If anything, Amaranth executives said, it had cut back on risk.

Last month, representatives of private Swiss bank Union Bancaire Privée visited Amaranth.... The official said the bank "was told their risk taking was being reduced." Muirfield Capital Management... was given similar assurances.... On Aug. 29, less than two weeks before it disclosed the multibillion-dollar losses, Mr. Maounis said in an interview with The Wall Street Journal that the perception that Mr. Hunter was taking recklessly large bets was "greatly exaggerated" because he designed his trading strategies to limit big simultaneous losses.

Late Wednesday night, Amaranth told investors in a letter that the transfer of its energy portfolio and sale of other assets helped avoid a "forced liquidation."...

Its investors signed up for two main Amaranth funds that by their very name were supposed to be "Multi-Strategy."

In interviews in the weeks before this month's losses, several clients said they were comforted that energy trading wasn't Amaranth's sole business and that its other activities gave a financial cushion....

For its part, Amaranth can argue that it was no secret that energy drove its profits. And a person close to Amaranth says the hedge-fund firm's offering documents make clear to investors the high risks involved in energy trading. The fund explicitly credited the energy team for blowout profits in April and blamed energy trading for a $1 billion, or 10%, loss in May....

An investment adviser with clients' money in the hedge fund recalls questioning Amaranth managers about that loss.... Amaranth, he added, said the experience prompted it to reduce its use of borrowed money and other leverage for energy bets " as much as 50 or 60%."

There were some red flags. Mr. Hunter had taken control of about $4 billion of the fund's $9 billion under management after Amaranth's head of energy investing, Harry Arora, left in the spring. Mr. Arora had told the firm that while he liked some of Mr. Hunter's bets, he was uncomfortable with their size and concentration....

After a huge one-month energy gain earlier this year, investment-advisory firm Blackstone Group sent representatives to Mr. Hunter's Calgary offices to discuss his trading, a person familiar with the matter said. What they learned made them nervous, this person said, so Blackstone pulled all its clients' money out.

Later, UBP, the private bank, reduced its allocation to Amaranth's main multi-strategy holdings.... Mr. Hunter said in an interview with The Journal that traders exaggerated the size of his trades and that dozens of financial and commercial players are betting right alongside him.... Mr. Hunter hasn't returned phone calls this week...

Thoma on Varian on Galbraith and Hale

Mark Thoma reads Hal Varian who reads Galbraith and Hale:

Economist's View: Hal Varian on Inequality: The Right Place at the Right Time: Hal Varian examines of the driving forces behind changes in inequality in the late 1990s:

It is widely recognized that income inequality increased in the 1990s, but nobody knows quite why. Despite the lack of hard evidence, there are plenty of theories.... Two University of Texas researchers, James K. Galbraith and Travis Hale, added an interesting twist to this debate in a paper, "Income Distribution and the Information Technology Bubble."

According to Mr. Galbraith and Mr. Hale, much of the increase in income inequality in the late 1990s resulted from large income changes in just a handful of locations around the country... areas that were heavily involved in the information technology boom....

Santa Clara, San Mateo, San Francisco (all associated with Silicon Valley) and King County, Wash. (home of Microsoft).... If the per capita income in just these four counties had grown at the same rate as the average in the United States, income inequality across counties would have changed little in the late 1990s. In other words, only four counties drove most of the change across the 3,100 counties.

The findings by Mr. Galbraith and Mr. Hale offer something to all sides in the debate. Perhaps options grants and initial public stock offerings had a lot to do with income inequality. Changing compensation patterns for technology-related skills could also be significant. But the biggest point that I take away is a simple one: there's no substitute for being in the right place at the right time.

Stupidest Men Alive (Why Oh Why Can't We Have a Better Press Corps?)

"Stupidest Man Alive" is no longer sufficient. We must now refer to the financial writers at National Review as the Stupidest Men AliveTM. There are just too many of them.

I really do not understand why the culture, society, and foreign-policy people at NR--who do, sometimes, have things to say that they want people who are not on the Bush payroll to listen to--haven't risen up in revolt, for appearing cheek-by-jowl to the work of the Stupidest Men Alive destroys their credibility as well.

Mark Thoma watches Thomas Nugent self-destruct in an implosion of stupidity:

Economist's View: Thomas Nugent... questions the integrity of Thomas Piketty and Emmanuel Saez.... "(Is there a potential bias in these studies?)".... If he has evidence [which he does not: Saez and Piketty have been very careful, and are very good; I'd take even odds that at least one of them will do something to win the Nobel Prize someday], put it on the table....

[T]he... attack... on Krugman's presentation of inequality statistics... without basis. For example, [Nugent] whines:

[W]hat is the basis for his growing inequality assumption? Is he referring to levels of income? Wealth? After-tax income?

Well, if he'd check Krugman's Money Talks page for a section called "On Tracking Inequality" he might be enlightened. It's all there, including links to the original data. A simple email to Krugman would have straightened it out as well, but of course, that would undermine the attack squad effort....

Mark Thoma does not do Nugent justice. Here's a sample of the loony:

Thomas E. Nugent on Paul Krugmand and Inequality on NRO Financial: Some of Krugman’s inequality cohorts prefer to use median or average family income in presenting their arguments. But what further undermines any of these positions is that we have added millions of people to the list of employed, most of whom are at the lower end of the income scale. Being a math major, such additions would tell me that the traditional “average” income level would fall. Seven million new workers are better off than if they didn’t have a job. How do the redistributionists argue against that economic gain?...

Well, the "redistributionists" point out that the median household income has fallen. Increases in employment have come about overwhelmingly because the population has increased, not because a given American has a greater chance of finding a job. 64.4% of working-age adults had jobs in 2000. 63.1% of working-age adults had jobs today. That employment as a share of adults is only 98/100 of what it was in 2000 has played a big part in keeping the lid on most people's wages and salaries--supply and demand, you know--which has played a big part in widening inequality.

Here's another sample:

The Treasury reports that the majority of American families with incomes below $40,000 pay no income taxes at all today, while many in this group receive welfare subsidies. According to Krugman, “Now the rich are getting richer, but most working Americans are losing ground.” In a booming economy when global wealth is growing, I find it difficult to believe that “most” working Americans are losing ground, especially when many of them pay low or no taxes and employment is at record levels.

Yes, in a booming economy it would be difficult to believe that most working Americans are losing ground. So the fact that the best data we have makes it look like we are is something we should take seriously.

There is one interesting point. Thomaa refers to it here:

[Nugent's] overall point is to deny that there is widening inequality.... He actually claims inequality has [recently] narrowed:

During the first four years of the George W. Bush presidency, the income share of the top 1 percent fell slightly to 19 percent from 20.8 percent...

Here, however, Nugent is, I think, simply picking up a line from Greg Mankiw--who is, I think, simply wrong here. Greg wrote:

Greg Mankiw's Blog: New Data on Income Inequality: In today's NY Times, Paul Krugman calls attention to the update of the Piketty-Saez data on income inequality, although Paul describes the data differently than I would.Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000...

Take a look:

What I think: I can't be as optimistic as Greg is that the trend of rising inequality has come to an end. Where Greg sees an essentially flat trend from 2000-2004, I see numbers for 1998-2000 that were temporarily boosted by the dot-com bubble, and then a decrease in inequality from 2000-2002 as the bubble ebbed--a decrease that was then reversed in 2003-2004 as inequality rose again, and the gap between median salaries and productive suggests that inequality has continued rising since.

I wish that income inequality has peaked. I think my wishes are vain.

Impeach George W. Bush. Impeach Him Now

The Iraqi army we have "trained":

First Draft - How Can We Stand Down If They Won't Stand Up?: Posted by Holden on Friday, September 22 @ 12:34:51 CDT: Wunnerful.

The U.S. needs roughly 3,000 more Iraqi forces to join the battle in Baghdad, but requests for the troops have not been met because Iraqi soldiers are reluctant to leave their home regions, the commander of U.S. forces in Baghdad said Friday.

OK: Dana Milbank Is a Valuable Asset

OK: Dana Milbank is still a valuable asset for the Washington Post--especially as he is sliding closer and closer to "The Daily Show" as time passes:

Dana Milbank - This Just In: The Iraq Study Group Has Nothing to Report - Former secretary of state James Baker and former congressman Lee Hamilton (D-Ind.) called a briefing yesterday to give a "progress report."... "We're not going to get into that today," Baker replied.... Hamilton became categorical. "We've made no judgment of any kind at this point about any aspect of policy with regard to Iraq."

A few minutes later, one of the organizers called out: "We have time for one or two more questions." "But no time for any answers," one of the reporters muttered. "This is pitiful," contributed one of the cameramen, as reporters' smiles escalated into audible chuckles....

As a general rule, it's a bad idea to call a news conference if you have nothing to say. It's worse if you announce that answers are urgently needed but then decline to provide any.... But no matter how urgent the situation in Iraq, the solutions will have to wait at least until Nov. 8 -- and possibly much later -- because of a more urgent consideration: domestic politics. We're "going to report after the midterm election," Baker announced.

Bill Jones of Executive Intelligence Review asked the obvious question. "The situation in Iraq seems to be degenerating from day to day" and may not be a "salvageable situation" by November, he said. "Shouldn't the urgency be propelled by developments in Iraq rather than the calendar here?"

Baker didn't think so. "We think it's more important, frankly, to make sure whatever we bring forward is taken, to the extent that we can take it, out of domestic politics," he said.

Baker, a troubleshooter for President Bush, said "We have said from Day One that we were going to report after the midterm election." In fact, Baker said on Day One -- the commission's launch on March 15, 2006 -- that "we have not set a time frame" and that "we may come forward with some interim reports."

The only thing the two would say yesterday is that they had met with lots of people, including several Iraqis.... "How much were you able to leave the Green Zone while you were in Baghdad?" a woman in the audience asked. Baker admitted that only one of the 10 members, former senator Charles Robb (D-Va.), left the capital's heavily fortified enclave.... "[W]e didn't want somebody to write a story that we were cowboyin' down there in Iraq" [said Baker]. And besides, cowboy Hamilton added, "we had a very brief period in Iraq."...

"The people of Iraq have the right to expect immediate action," Hamilton said. Providing, of course, they don't expect it from the Iraq Study Group.


MaxSpeak is now "Max Sawicky, Sandwichman, Barkley Rosser, Gar Lipow, and Jason Furman Speak":

Here's Jason:

by Jason Furman
: I can't believe Max has turned over the keys. I would be grateful but I suspect it's part of some diabolical plot. I agree with Jared, Matt Yglesias, David Leonhardt and myself that the debate over living standards is largely irrelevant. But it's not entirely irrelevant. Plus it's somewhat fun. So here we go again with more happy talk...

If You Owe Somebody a Trillion...

Treasury Secretary Paulson says: If we owed China $100 billion, we would have a creditor; but we owe China $1 trillion, so we have a partner:

Washington Wire: Paulson Unconcerned Over Build up of Chinese Forex Reserves: U.S. Treasury Secretary Henry Paulson downplayed any concern that China's massive reserves of dollar assets could give it undue influence over the fate of the U.S. economy. In an interview, Paulson dismissed some economists' concerns that China might dump its dollar assets, now approaching $1 trillion, or cut back sharply on its purchases -- moves that could theoretically send the dollar down and interest rates up.

"I don't see any one organization holding such a big percentage of our securities that I'm concerned," he said between meetings with senior Chinese officials. "And I really don't believe that foreign investors invest in U.S. securities because they're trying to do us a favor. They invest in U.S. securities because it's in their best interests to do so, and because of the confidence they have in the U.S. economy." --Michael M. Phillips

Fred Hiatt Is a Little Bit Worried

Could Fred Hiatt of the Washington Post finally--six years late--be getting... shrill? To write that "Mr. Bush will go down in history for his embrace of torture and bear responsibility for the enormous damage that has caused" would seem that way.

But Fred Hiatt doesn't have the ovaries to take the next, logical step, does he? Treaties are the "supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding." If Fred Hiatt does believe that Bush's embrace of torture has caused enormous damage, his editorial should have ended like this:

Impeach George W. Bush. Impeach him now.

The Abuse Can Continue - Congress will not -- as President Bush had demanded -- pass legislation that formally reinterprets U.S. compliance with the Geneva Conventions. Nor will the Senate explicitly endorse the administration's use of interrogation techniques that most of the world regards as cruel and inhumane, if not as outright torture.... The bad news is that Mr. Bush, as he made clear yesterday, intends to continue using the CIA to secretly detain and abuse certain terrorist suspects. He will do so by issuing his own interpretation of the Geneva Conventions in an executive order and by relying on questionable Justice Department opinions that authorize such practices as exposing prisoners to hypothermia and prolonged sleep deprivation. Under the compromise agreed to yesterday, Congress would recognize his authority to take these steps and prevent prisoners from appealing them to U.S. courts....

In short, it's hard to credit the statement by Sen. John McCain (R-Ariz.) yesterday that "there's no doubt that the integrity and letter and spirit of the Geneva Conventions have been preserved." In effect, the agreement means that U.S. violations of international human rights law can continue as long as Mr. Bush is president.... America's standing in the world will continue to suffer, as will the fight against terrorism....

Mr. Bush's commitment to "alternative" methods that virtually every senior officer of the U.S. military regards as unreliable, counterproductive and dangerous for Americans who may be captured by hostile governments. Mr. Bush wanted Congress to formally approve these practices and to declare them consistent with the Geneva Conventions. It will not. But it will not stop him either, if the legislation is passed in the form agreed on yesterday. Mr. Bush will go down in history for his embrace of torture and bear responsibility for the enormous damage that has caused.

Too little, too late. Hiatt has been carrying water for Bush for six years, and only now does it dawn on him that he's joined the bad guys.

Dan Froomkin Watches Journamalism in Action...

He writes:

Dan Froomkin - Bush vs. Reality - Bush vs. RealityBy Dan FroomkinSpecial to washingtonpost.comThursday, September 21, 2006; 12:34 PMOn the dominant issue of our time, the president is in denial.By most reliable accounts, three and a half years into the U.S. occupation, Iraq is in chaos -- if not in a state of civil war, then awfully close. But President Bush insists it's not so.He says the people he talks to assure him that the press coverage about how bad things are in Iraq is not to be trusted.You might think that the enormous gulf between Bush's perceptions and reality on such a life-and-death topic would be, well, newsworthy. But if members of the Washington press corps consider it news at all, apparently it's old news. They report Bush's assertions about Iraq without noting that his fundamental assessment of the situation is dramatically contradicted by the reporting from their own colleagues on the ground. And in the rare circumstances when they directly confront the president with observations that conflict with his own, they let it drop too quickly...

Today's example: Wolf Blitzer.

Dan notes some pushback from CNN Iraq correspondent Michael Ware--who is fast moving up the ranks of the Shrill:

Soledad O'Brien: O'Brien: "You heard what the president had to say, which is, essentially, the good news that out there is not getting reported. Have you found that to be true on the ground where you have been?

MICHAEL WARE, CNN CORRESPONDENT: "Oh, look, really, nothing could be further from the truth. I mean, the fact that, when President Bush talks about those living on the ground, and he cites General Casey and Ambassador Khalilzad, I mean, these are men who could not be more divorced from the Iraqi reality. They very much live within a bubble, be it physically within the Green Zone or be it within the bubble of heavy U.S. protection. And this is true even for their advisers and for the commanders and the American soldiers. I mean, they never take the uniform off. The Iraqi people can never talk to them unless through a filter. It's very different than living amongst them. And when people say not enough good news stories are being told, you ask an Iraqi family what it is that they're experiencing when their street -- the bodies of their neighbors are showing up on their streets. Their kids can't go to school, for fear of crossing sectarian lines. And the kidnapping and killings are just going on around them...

Impeach George W. Bush. Impeach him now.

And fire Wolf Blitzer. If he can't be a reporter, he shouldn't try.

Brad Setser on Similarities Between Amaranth and the People's Bank of China...

He writes:

RGE - Unintentional irony watch (hedge fund edition): Risk management standards do seem to be slipping. Davis, Sender and Zuckerman in the Wall Street Journal:

The risk models employed by hedge funds use historic data, but the natural gas markets have been more volatile this year than any year since 2001, making the models less useful. They also might not predict how much selling of one’s stakes to get out of a position can cause prices to fall.

The models broke down because this year has been more volatile than any year since 2001? That isn’t so long ago, except in hedge fund time... I suspect Mr. Geithner won’t be happy if stress tests -- and risk management models -- don’t look a bit further back. 1998 might be a relevant data point. Certainly for anyone betting on emerging markets, the yen/dollar (or the yen/ euro, since the dyanmics of an unwinding carry trade are similar) or the Treasury market. 1998 also might be a relevant data point for a few commodity markets. Mr. Geithner also wants – I suspect – those lending to hedge funds to assume that liquidity will dry up when their clients need it the most. Getting out when you don’t need to is easy. Getting out when you absolutely have to is hard. Especially if you have a large concentrated position...

That lesson may be relevant for another set of institutions with large positions. A few central banks might also want to ponder the impact large, sustained purchases can have on market dynamics. Davis, Sender and Zuckerman, again.

According to natural gas investors who traded alongside Amaranth, Mr. Hunter repeatedly used borrowed money to double down on his bets. Buying more futures contracts of the kind his fund already owned supported their price by increasing demand, propping up paper gains, these traders say. But the support only lasted so long as Amaranth and its lenders were willing to spend cash to buy more contracts. Such trades may also have masked growing weakness in market fundamentals.

Substitute dollars, Treasury bonds and Agency bonds for “futures” and “contracts,” and substitute the PBoC (and a few others) for Amaranth...

China is making a huge bet that Stephen Jen and Friedrich Wu are right, and the RMB isn’t really undervalued (and the dollar and euro are not overvalued against the RMB). It is betting that the RMB wouldn’t really rise if it stopped buying. That is a rather large gamble though.

Especially since Chinese productivity is growing faster than US productivity (see the graphs on p. 13 of Feng Lu’s presentation), so a key “fundamental” is moving against China’s financial position...

I think Fan Gang at least understands as much. Yu Yongding as well. And Zhou Xiaochuan.

The Politburo and the State Council? I am not so sure.

The Politburo and State Council may understand it. They may be thinking as follows: "We grow at 8% per year as long as we can keep export-led industriallization going. When export-led industrialization stops and we have to substitute domestic-demand-led industrialization, our growth rate is likely to fall to 5%. Thus each year we keep this juggling act going raises China's GDP--permanently--by about RMB 500 billion a year, an increment to the present value of China's total national wealth of RMB 10 trillion. To keep the juggling act going requires that we spend RMB 3 trillion a year buying dollar-denominated securities that will be worth only RMB 2 trillion when we sell them. That looks like a benefit-cost ratio of 10:1. So let's keep juggling as long as we can.

That maybe what they are thinking in the Politburo and the State Council.

Hoisted from Comments: Intellectual Garbage Cleanup: Gene Epstein Edition

Two comments where I feel their pain:

Brad DeLong's Semi-Daily Journal: Intellectual Garbage Cleanup: Gene Epstein Edition: It's like reading the rantings of a crackpot who think's he's proved Einstein was wrong. --hack | September 22, 2006 at 10:53 AM

i cannot for the life of me figure out what epstein is trying to say here, although i like hack's explanation of why i can't figure out what epstein is trying to say here. --howard | September 22, 2006 at 11:28 AM

As I said, Tyler Cowen did a really bad thing when he didn't deep-six the free copy of Econospinning that they sent him. And Barrons is doing a really bad thing in not retiring Epstein. It's too sad to be funny.

Hoisted from Comments: Amaranth and Blackstone

Crank writes:

Brad DeLong's Semi-Daily Journal: What's the Most Important Thing in Finance?: Talk about character:

After a huge one-month energy gain earlier this year, investment-advisory firm Blackstone Group sent representatives to Mr. Hunter's Calgary offices to discuss his trading, a person familiar with the matter said. What they learned made them nervous, this person said, so Blackstone pulled all its clients' money out.

It takes quite a bit to suggest pulling out because of a huge gain.

And Ian Whitchurch replies:

To steal a line out of Iain M. Banks... that's what separates the sophisticates from the simians.

My respect for Ian Whitchurch, and for Blackstone, is at a high point. Everyone else seems to have gone to New York after a big loss, and been soothed by Nick Maounis, who told them that the situation was under control, that risk had already been reduced, and that risk-management protocols were--despite appearances--sound and in place.

Blackstone sent people to Calgary after a big gain, and what they learned them caused them and their clients to flee in haste in the middle of the night.

A general rule: if you have to pay a stiff fee to get out of an investment, that makes it more and not less important to act on your belief that you should be out of this investment

Intellectual Garbage Cleanup: Gene Epstein Edition

Sigh. There are so many more fun things I could be doing than intellectual garbage cleanup. But somebody has to do it, if only to give people doing Google searches a chance.

Today we have the unpleasant task of looking again at Gene Epstein of Barrons.

In our last episode, New York Times ombudsman Danny Okrent claimed that Paul Krugman was "blending numbers from the household survey and the establishment survey -- apples and oranges -- ... to make a more vivid political point about Bush (5/25/04)" by combining Establishment Survey estimates of payroll employment with a number "140,000 new jobs each month needed to keep up with the growing population... that... only appeared in the household survey."

Okrent's attack was false. Krugman's 140,000 per month number of new payroll jobs needed to keep up with growing population did not come from the household survey. It came from combining Census estimates of the growth rate of the adult population with the current level of payroll employment from the establishment survey. No blending. No mixing and matching. No apples and oranges. Apples only.

Okrent was simply wrong.

And he has never had the ovaries to admit it.

Gene Epstein of Barrons wrote a book, Econospinning, in which he joined Danny Okrent in virtual self-immolation. I wrote to tell him he was wrong, and why.

Now Epstein is back for a second encounter with the self-poured virtual gasoline and self-lit virtual match.


Econospinning: I quote the sentence from [Krugman's] May ‘04 column that leads up to the “math” Krugman would have us do: “And employment is chasing a moving target: It must rise by about 140,000 a month just to keep up with a growing population.” I then comment: That could only come from the Household Survey because it both explicitly and implicitly refers to measures that only the Household Survey covers. The measures implicitly referred to in the statement--which explain the link between “employment” and the “growing population”--include unemployment, labor force, and that huge negative category, not in labor force.... [Those] terms are all Household Survey measures....

DeLong reveals that... payroll employment comes from the Employment Situation Report’s Establishment, not Household, Survey. But... readers of Krugman’s column are not expected to read his mind, what he means by “employment” in what he actually wrote is unclear. While he could mean payroll employment... he could just as easily mean the somewhat different measure of employment in the Household Survey.... Krugman has just referred to... Establishment Survey figures... you would think he means payroll employment....

But... these statements are preliminary to the “math” he would have us “do.”... The confusion... [is] further compounded by the sudden use of the term “full employment,” which is also a Household Survey concept. Look it up in the glossary of Paul Samuelson’s well-regarded economics text... you find it refers to “that level of employment at which no (or minimal) involuntary unemployment exists.” Since that kind of “employment” is measured in the Household Survey, those of us who could not read Krugman’s mind could not reject that interpretation of what he meant....

[H]is figure of “about 140,000” necessarily refers to the expected growth in the labor force [and not to growth in payroll employment]. We can infer this from an example DeLong himself gives.... [Bush's] [Economic] Report [of the President] does make it clear from the context that the “employment” being referred to is payroll employment. But otherwise notice... references to the “labor force” and “unemployment rate” that come directly from the Household Survey....

The point, then, is that Krugman’s use of that term “employment” was ambiguous....

Maybe DeLong is hung up on the difference between a number literally being drawn from a survey--as the figure of 288,000 was literally drawn from the April ’04 Establishment Survey--and a figure like 140,000, a projection of growth in the labor force, which is not literally drawn from the Household Survey, but does refer to that Survey.... Nowhere does [DeLong] mention that the Current Population Survey (CPS) is conducted by the Census Bureau as a joint effort between that agency and the Bureau of Labor Statistics....

[I]f that data is about the labor force, to say that it doesn’t come from the Household Survey is rather like saying that Bill Clinton was never really “alone” with Monica [Lewinsky].

What can one say? Other, that is, than that this is really embarrassing to watch. To call this incoherent is an insult to all the incoherent people in America.

Thursday, September 21, 2006

Global Inequality Trends

Greg Mankiw directs us to Xavier Sala-i-Martin:

Greg Mankiw's Blog: Inequality Trends: Here is an excerpt from a research paper by Columbia University economist Xavier Sala-i-Martin:

All indexes show a reduction in global income inequality between 1980 and 1998. We also find that most global disparities can be accounted for by across-country, not within-country, inequalities. Within-country disparities have increased slightly during the sample period, but not nearly enough to offset the substantial reduction in across-country disparities. The across-country reductions in inequality are driven mainly, but not fully, by the large growth rate of the incomes of the 1.2 billion Chinese citizens.

Unless Africa starts growing in the near future, we project that income inequalities will start rising again. If Africa does not start growing, then China, India, the OECD and the rest of middle-income and rich countries diverge away from it, and global inequality will rise. Thus, the aggregate GDP growth of the African continent should be the priority of anyone concerned with increasing global income inequality.

From Xavier's point of view, African development is now global job #1.

Impeach Alberto Gonzalez. Impeach George W. Bush

Do it now:

ThinkProgress: Attorney General Gonzales defended U.S. actions that led to a Canadian citizen being falsely imprisoned, rendered to Syria, and tortured. "Well, we were not responsible for his removal to Syria," Gonzales said. "I'm not aware that he was tortured."... [A] Justice Dept. official later "backed away" from Gonzales's remarks.

And here it is. The Justice Department now claims that when Gonzales said "we," he meant not "the Bush administration" but "the Justice Department"--and says that Gonzales was wrong:

On Wednesday, a Justice Department spokesman said Mr. Gonzales had intended to make only a narrow point: that deportations are now handled by the Department of Homeland Security, not the Department of Justice. The spokesman, Charles Miller, said the attorney general forgot that at the time of Mr. Arar’s deportation, such matters were still handled by the Immigration and Naturalization Service, which was part of the Department of Justice. “He had his timeline mixed up,” Mr. Miller said. Asked why Mr. Gonzales appeared to cast doubt on the Canadian finding that Mr. Arar had been tortured, Mr. Miller said, “I wouldn’t go beyond what he said.”...

Wednesday, September 20, 2006

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

Yes, it's yet another example of journamalism from that inferior bird-cage liner that is the Washington Post. I thought Josh Micah Marshall must be exaggerating David Broder's latest column for effect. But David Broder's column tonight really is that bad:

Talking Points Memo: by Joshua Micah Marshall: September 17, 2006 - September 23, 2006 Archives: Shorter David Broder: Bush is a lawless president at war with the constitution. Also, Gore and Kerry, who opposed him, are know-it-alls I don't like. Hopefully Republican moderates and Lieberman can all get reelected so the country can be saved.

Can't see why anybody pays for it, even now. Suggestions as to why anybody might pay for it would be welcome.

So: a contest: what have you learned in the past month from the Post that you couldn't have learned more reliably at the same or lower price elsewhere? What have you learned that you didn't have to verify before you could trust it?

Jason Furman Weighs in

He writes:

  1. I agree with Jared that the 30-year debate is a distraction. Worse than that, it lets Bush off the hook by making the last six years look like a continuation of a long-standing trend rather than something peculiarly bad. This was the point I tried to make in my TAP posting.
  2. I've never had a problem in the past making arguments about growing inequality and the minority of the gains going to the bottom 80 percent of Americans. I don't see why we need to make a levels argument to communicate this essentially relative point.
  3. I agree with Dean that we're far from certain about the magnitude or meaning of new goods bias, variety bias, outlet substitution bias, or quality bias.
  4. But I'm quite certain about upper-level substitution bias in the CPI. And unless someone tells me otherwise, I assume 0.34 percentage point per year is a reasonable estimate for it -- based on the first five years of the C-CPI-U. If we had a backcasted version of this we should all use it for intertemporal comparisons.

The Housing Slide Is Here. Can Recession Be Far Behind?

Jim Hamilton creeps toward the position that there will be a recession:

Econbrowser: Watching housing slide: The Census Bureau yesterday released August data for housing permits and new housing starts, both of which confirm that we are in the midst of a significant housing downturn. Permits for new construction fell 2.4% (logarithmically, seasonally adjusted) at a monthly rate during August, which puts them 24.7% (logarithmically) lower than August 2005. Housing starts were down 6.2% for the month and 22.0% for the year.

The 2006 decline is already substantially worse than what we saw in either the 2001 recession or the 1994 "soft landing."... It is hard to find an example of a decline of this magnitude that wasn't associated with a recession.... For a really convincing example of declines of this year's magnitude that did not produce a recession, I think you have to go back 40 years to 1966-67. That also turns out to be how far back you have to go in order to find a negative yield spread (as measured by the 10-year minus 3-month Treasury rate) that wasn't followed by recession....

My main question is how long it will take the same people who were sniping at Bernanke for not tightening enough now to start hollering that he went too far.

The Meaning of CPI Bias

Dean Baker and Jared Bernstein:

Dean Baker argues that new good bias in the Consumer Price Index has only a small effect on our estimates of the lifestyles of the poor and working--as opposed to the lifestyles of the rich and famous, where it has a bigger impact:

Beat the Press: Middle Class Living Standards: Changing the Yardstick: The story on middle class living standards over the last quarter century is pretty bleak.... [M]any of those arguing that living standards actually have been increasing rapidly go behind the data and argue that the consumer price index (CPI) overstates the true rate of inflation.... David Leonhardt presents this case today based on the anecdotes of Robert Gordon, a member of the notorious Boskin Commission, and one of the leading proponents of this view. As the Boskin Commission's primary opponent, I can't let this one slide.

This issue raised in the column is the question of "new goods bias," the idea is that some goods enter the market initially at very high prices, but then the price drops rapidly in their first years on the market. The bias results from the fact that the consumer price index (CPI) does not include the new product until after its period of rapid price decline, therefore missing large prices declines that would lower the average rate of inflation. This would have been more of a problem in prior decades....

I always thought that the claims about the size of new goods bias were probably overstated, but insofar as it exists, it is primarily something that leads to an overstatement of the CPI for rich people. The example of the snow blower that Leonhardt highlights in his column is probably a good one to illustrate the basic issue.... The key question is how many people bought snow blowers in the fifties when they were clumsy and expensive? Probably not many, and those who did were mostly rich people who could afford expensive toys. Most of the drop in snow blowers' prices took place before the middle class began to buy them. This drop provided a gain to those who already were buying snow blowers, but it provided zero gain to those who found them too expensive to be worth their money....

During the Boskin controversy people often cited the example of the cell phone, which managed to slip through the cracks until the mid-nineties (97, if I remember right).... I once debated an economist... asked him how much this oversight led to an overstatement in the cost of living for the half of the population that still didn't own a cell phone.... [R]emembering economic theory, he gave the correct answer "zero."

Of course, the cell phone was an extreme case... but in general the story of new goods with big price declines not being picked up in the CPI was a story that affects the cost of living of the rich... not an issue that affects middle class living standards.

Jared Bernstein argues that our knowledge of the size of the bias is shaky, and that it is a distraction from more important debates:

That Distracting Living Standards Debate: Jared Bernstein

Let us now discuss David Leonhardt’s article this AM in the NYT, specifically, the adjustment to the CPI that changes flat male median real earnings into a real growth rate of around 27%

The argument in the paper focused on the “new goods” bias in the CPI: the problem of not incorporating new goods into the index until they’ve fallen a lot in price (thus missing the price decline). Dean Baker raises good questions.... I just wanted to raise a few other points....

3) There is a false degree of certainty to these bias adjustments.... Jack Triplett notes: "...what I liked least about the Commission Report was exactly what made it so influential — its guestimate of 1.1 percentage points of bias."...

That does not mean living standards have deteriorated. Living standards comprise many different aspects of life, from health advances to cheaper gadgetry.... But... this middle-class debate... I fear it’s a distraction.... [R]ight now, those of us who seek a different set of policy responses to the big challenges we face... would be better off talking much more about that agenda, and not arguing over whether the middle class is better off relative to 30 years ago.

That argument also sets an incredibly low bar. Real GDP... per-capita, [up] something like 90% [over the past three decades).... [T]he more important points are a) anyway you cut it, the middle-class was reaping much more of the benefits of the growing economy years ago than they are now, and b) as the structure of the economy and job market has changed, the distributional institutions—-unions, minimum wages, fiscal policy, full employment-—far less operative today.

Finally, as Leonhardt sort of suggests, it's a political distraction to have this debate about the 30-year record. The last six years are where all the political action is: we've had stellar productivity growth, but the real median household income of working age families is down 5%, $3,000 in 2005 dollars (2000-05). This is an incredible indictment of the current economic regime (and of YOYO economics--see yet the elites are scratching their heads wondering why people don't get how great they're doing.

I am in broad agreement with Robert Gordon on the potential size of CPI bias, with Jared Bernstein on our lack of knowledge of how large it really is, and with Jared Bernstein again that a big CPI bias should not make us feel happy about the income distribution. And I tend to weigh in against Dean Baker on the size of CPI bias, against Bob Gordon (or at least against Mike Boskin) on how certain we are of our estimates, and with all three (i.e., all except Mike) that America would be a better place with more social democratic policies. Moreover, the bigger CPI bias, the more social democratic we should be.

Think about it. If there is 20% of CPI bias in the past 30 years, then median male real earnings have risen by 30% instead of the 10% in official statistics. But real national income per capita has risen by 125% rather than by 90%. A country that is so phenomenally more productive than the country of the mid-1970s should be able to do a much better job at providing an economic environment in which all Americans can have greatly improved income security, education for their children, and leisure time, as well as a much greater share in the rises in real material standards of living of which the rich have grabbed the lion's--no, much more than the lion's, the tyrannosaurus's--share.

Why Oh Why Can't We Have Normal Republican Politicians?

Wonkette says what she thinks about Senator George Allen:

George Allen's Poor, Over-Worked Flacks Convince Him to Stop Denying the Jew Thing - Wonkette: That’s basically what we get out of today’s Post story on Allen’s belated embracing of his heritage.... [Y]ears after he was first asked and a month after the Internet learned about it, George Allen is willing to admit this much: His maternal grandfather was Jewish. This would be the one who was in a Concentration Camp for reasons that Senator Macaca, well, lied about (but it was a totally Spock kinda lie — Grampa Lumbroso was almost certainly an “Allied sympathizer,” as the Allies were the ones who didn’t want to gas him).... A couple more thoughts, and an excerpt from sister Jennifer Allen’s hilarious book....

The Post:

He insisted, through a press secretary, that his mother was raised a Christian.

We don’t know if that’s true (she does appear to have gone to Catholic school, but Etty Lumbroso Allen was married by a justice of the peace at a “Jewish friend’s house,” because, for some reason, a Catholic ceremony wouldn’t work for her). Jennifer Allen’s memoir does have this anecdote, though:

I’d only been to church once. Throughout the service, Mom gave a continual play-by-play.

The procession of the priest: "Here comes the hypocrite."
The collection plate: "Here come the vultures."
The forgiveness of sins: "Here comes the guilt."

We kinda like Etty Allen.

The Fed's Pause Continues

Mark Thoma writes:

Economist's View: The Fed Leaves Target Rate Unchanged at 5.25%: The key differences from the last Press Release are:

  1. They have dropped the word "gradual" from their description of the cooling of the housing market.
  2. They see energy prices as moderating. The statement no longer mentions energy prices as a potential cause of slower growth, but energy prices are mentioned as a reason to expect inflation to moderate.
  3. Just like last meeting, the vote wasn't unanimous - Jeffrey Lacker dissented.
  4. The Committee notes, as it did last meeting, that inflation risks remain and further rate moves will depend upon how these risks play out. It does not mention risks to economic growth explicitly as it does with inflation, but housing is mentioned as a growth moderating factor.

Good luck, Ben and company...

Marginal Notes on Pierre-Olivier Gourinchas's Presentation of Golosov, Tsyviniski, and Werning

Golosov, Tsyvinski, and Werning, "New Dynamic Public Finance: A User's Guide"

  • This is a very useful paper.
  • Emmanuel Saez is even more of a genius than I had thought.
    • The Mirrlees (1971) don't-tax-the-richest result is a very local result
  • The Mirrlees optimal-tax formula trades off three consierations:

    • Desired redistribution--social marginal weights...
    • Higher taxes lead to substitution effects away from effort somewhat counterbalanced by income effects towards effort. Hicksian elasticities are what matter.
    • The shape of the income distribution--weighing the distortion caused by the marginal rate at income level y against the concentration of income above y from which you raise revenue
  • Golosov, Tsyviniski, and Werning

    • Two periods
    • Unobservable skill shocks
    • Aggregate shocks as well
    • Government observes earnings but not skills
  • Distortions
    • Consumption-labor wedge at t=1
    • Consumption-labor wedge at t=2
    • The intertemporal wedge
  • No aggregate uncertainty, no skill shocks, then...
    • Perfect smoothing over time--i.e., no taxes on capital income
    • Labor tax wedge that solves static Mirrlees problem
  • With skill shocks...
    • Planner wants to encourage effort in period 2 by those who get positive skill shocks--which means it would want to find some way to reduce their savings, which means there will be taxes on capital in period 2...
    • Time consistency problems...
    • Double deviations; once you deviate from the optimal labor supply, you may well want to deviate from the optimal savings plan as well...

It is very nice to have, thanks to Golosov, Tsyviniski, Werning, and company, a model that says that you want to tax capital because you don't want the highly-skilled and productive programmers of Google retiring in their 30s because they are wealth-satiated...

Hoisted from Comments: Intergenerational Transmission of Inequality

David Levine writes:

Brad DeLong's Semi-Daily Journal: The Baltimore Public School System: The best recent estimates are by Bhash Mazumder (a recent graduate of UC Berkeley economics dept.). He finds an intergenerational correlation of earnings of 0.6, at which pace about 36% of inequality would last two generations...

0.6: a big number or a small one?

Farthing, by Jo Walton

Farthing: A very good novel about the coming of fascism:

Making Light: Three days in Montreal: Posted by Patrick at 09:56 PM: We're back from the little convention Jo Walton threw to celebrate the publication of her latest novel Farthing, which is scarily good and disquietingly pertinent and you should all buy and read it right away.

The convention itself was as much fun as any small con I've ever been to, with a full program of panel discussions deftly engineered to keep conversation flowing at all hours. Jo is a woman with a talent for having interesting friends and getting them talking with one another. For me and Teresa, as for many of the several dozen attendees, the other star attraction was the city of Montreal. I'd been there once before, for a World Fantasy Con in a hotel on a boring downtown block, but on this visit I quickly realized I'd barely had an inkling of what an interesting place it is...

The Libertarian Remnant Camps in the Wilderness

Watch Jim Henley discuss issues with his flock of many of the few remaining honest libertarians:

Jim Henley: the President put torture back in the news, campaigning for a bill to make torture okay so long as the President meets the strict requirement of deciding to torture someone. Some Senators have squawked. Colin Powell has decided to try to reconstitute some shred of the dignity his stint as Secretary of State forfeited and a bunch of retired servicemembers remembered that they took an oath to defend the Constitution and a much better nation than one where, as Eugene Robinson writes, "the president of the United States of America, persists in demanding that Congress give him the right to torture anyone he considers a 'high-value' terrorist suspect. The president of the United States. Interrogation by torture."

On one level, it's hard to figure out how this got started.... Everyone knows that he'll slap a "signing statement" onto any supposed compromise legislation that comes to him and he and his underbosses will do whatever they wanted to do in the way of torture in the first place. Why bother proposing legislation? One possible reason is to provide some cover against international legal jeopardy....

[T]he really depressing theory, which I'm not the first to advance. The White House is picking a fight with Congress over torture because the White House thinks it will help the President (and his party's) standing with the voters. What makes the theory depressing is, it may be right. And what I want to know is, how do you like your blue-eyed boy, government power, Mr. Managerial Liberalism?

I'm not blaming liberalism for the Bush Administration.... I'm not saying that taxation is torture is the holocaust. I'm saying... you go to the polls with the electorate you have, not the one you might wish to have.... [O]ur country's more successful political party plausibly believes that appealing to the country's worst instincts is the key to maintaining power. To the extent they're right, I want that government to have as little power and prestige as possible. The Bush Administration is uniquely awful, but it didn't come out of nowhere, and what gave rise to it will persist.

Impeach George W. Bush. Impeach Him Now

From the Whiskey Bar:

Whiskey Bar: Sailing to the North Pole:

European scientists voiced shock today as they viewed pictures which showed Arctic ice cover had disappeared so much last month that a ship could sail unhindered from Europe's most northerly outpost to the North Pole . . .Perennial sea ice -- thick ice that is normally present year-round and is not affected by the Arctic summer -- had disappeared over an area bigger than the British Isles, ESA said.Vast patches of ice-free sea stretched north of Svalbard, an archipelago lying midway between Norway and the North Pole, and extended deep into the Russian Arctic all the way to the North Pole, the agency said in a press release.

"This situation is unlike anything observed in previous record low-ice seasons," said Mark Drinkwater of ESA's Oceans/Ice Unit.

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

Josh Micah Marshall says that he is confused about the state of Bush's torture bill:

Talking Points Memo: by Joshua Micah Marshall: September 17, 2006 - September 23, 2006 Archives: I've been on Justin Rood's case to find me more information about the state of the negotiations over the president's torture bill. But the Times piece left me inclined to cut him some slack since the Times reporters don't seem to have any idea what's going on either... couldn't get much sense of how much the president has conceded... or whether the events of the last 36 hours makes a compromise more or less likely.

The Post, on the other hand, paints a decidely bleaker picture... portrays a legislative clock rapidly running out on the president's plan to ram through torture and tribunal legislation to bludgeon the Democrats with in time for the November election. "Yesterday's actions significantly dimmed prospects that Congress can complete its national security agenda before adjournment."... The Post piece even includes the telling and somehow touchingly feeble threat from Bill Frist that he, the Senate Majority Leader, may lead a filibuster against the Warner-McCain-Graham bill in the Senate...

I think Josh accurately characterizes the Times story: Kate Zernike tells us what she knows, and tells us she doesn't know that much. It's a useful story--except for stray garbage quotes from majority leader Boehner. She's on the whitelist.

The Post story, on the other hand--well, I have long puzzled over just what business Washington Post reporters Charles Babbington and Jonathan Weisman think they are in. They don't just "include," they headline and lead with Frist's filibuster threat:

Dissidents' Detainee Bill May Face Filibuster - Senate Majority Leader Bill Frist signaled yesterday that he and other White House allies will filibuster a bill dealing with the interrogation and prosecution of detainees if they cannot persuade a rival group of Republicans to rewrite key provisions opposed by President Bush. Frist's chief of staff, Eric M. Ueland, called the dissidents' bill "dead"...

But they then provide little context and no explanation.

Are there 40 Republican senators inclined to support the Bush torture bill rather than McCain-Warner? Of those 40, how many would be willing to risk nothing passing rather than McCain-Warner? Of those, how many will think that they have to live in the same Capitol as Warner and McCain next year--while Bill Frist will be gone? These are the immediate questions readers are asking themselves after reading Babbington and Weisman's lead. And they make no effort to answer them.

A news story that leads with a filibuster threat has a whip count--or various senators', staffers', and observers' thoughts about what a whip count would show--in paragraph two. Babbington's and Weisman's doesn't.

Four paragraphs down they do write:

Frist (R-Tenn.) acknowledged that a majority of the 100 senators back the rival group on military commissions but that there are not enough to block a filibuster, which requires a super-majority of 60...

But that's "Frist acknowledged." Is he right? Babbington and Weisman don't lift a finger to give us a clue. That's not a whip count. They don't have one.

Why not? I don't know. But it is clear that what they are doing isn't news-as-we-know-it. It's something else. And Josh is, I think, making a mistake in putting Babbington's and Weisman's article on the same plane as Zernike's. She's interested in informing us readers. I don't think that's the game that Babbington and Weisman are playing.

As one Washington hand put it, "It seems as if nearly everyone in the Washington Post newsroom has forgotten why they became journalists in the first place." I give it a decade.

Tuesday, September 19, 2006

Why Oh Why Can't We Have a Better Press Corps? (The Problem of Easterbrook Revisited)

That half-evolved mammal Platypus writes:

Brad DeLong's Semi-Daily Journal: More Sabbath Theology Blogging: The Problem of Easterbrook...: I long ago stopped reading Easterbrook columns because it became clear to me after the first few that he not only lacked a basic understanding of the principles of science but was too incompetent to recognize his ignorance. What amazes me is that Slate, TNR and the Washington Post continue to present him as their in-house science expert. Don't their editors realize the corrosive effect this has on their reputation? Easterbrook's scientific illiteracy is easy for readers to see. If the editors of these fine publications either can't recognize it or don't care, then how do they expect the public to trust their judgment on anything else they publish?...

They don't think of it that way. The fact that Easterbook's writing is "lively" and "provocative" and that he is a member of the appropriate social networks is sufficient reason to publish him as a "science writer." The fact that this has an effect not just on how good their operations are at delivering accurate information but also on how the scientifically-literate regard their operations as a whole--I don't think that's something that enters Weisberg's (or Foer's) mind at all.

Annals of Financial Legerdemain: Natural Gas Futures and the Mystical Power Grain of the Aztecs

The Economist writes about hedge funds and others: The industry is splitting in two--and investors are gambling on the expensive bit: IT HAS never been easier to pay less to invest. No fewer than 136 exchange-traded funds (ETFs) were launched in the first half of 2006, more than in the whole of 2005.

For those who believe in efficient markets, this represents a triumph. ETFs are quoted securities that track a particular index, for a fee that is normally just a fraction of a percentage point.... No longer must investors be at the mercy of error-prone and expensive fund managers.

But as fast as the assets of ETFs and index-tracking mutual funds are growing, another section of the industry seems to be flourishing even faster.... "[A]lternative asset investment" (ranging from hedge funds through private equity to property) grew by around 20% in 2005, to $1.26 trillion. Investors who take this route pay much higher fees in the hope of better performance. One of the fastest-growing assets, funds of hedge funds, charge some of the highest fees of all....

If the fee paid to the fund manager increases, the return achieved by the average investor must decline. After fees, hedge-fund returns this year have been feeble. From January 1st through to August 31st, the average hedge fund returned just 4.2%, according to Merrill Lynch, less than the S&P 500 index's 5.8% total return.

So why are people paying up?... That such fees endure might suggest investors can identify outperforming fund managers in advance. However, studies suggest this is extremely hard.... [E]ven where you can spot talent, much of the extra performance may be siphoned off into higher fees.... And yet investors may be willing to gamble, despite the higher fees, because they desperately need high returns.... Peter Harrison, chief executive of MPC, a fund manager, says that American pension funds have analysed their liabilities. "They need more than 6% to make up the shortfalls in their funds. Whether they earn alpha or not, they have to roll the dice and try to get it."...

[I]nvestors will probably keep pursuing alpha, even though the cheaper alternatives of ETFs and tracker funds are available. Craig Baker of Watson Wyatt, says that, although above-market returns may not be available to all, clients who can identify them have a "first mover" advantage. As long as that belief exists, managers can charge high fees.

And its writing is followed by the near-implosion of Amaranth. Which raises the threshold question, "Why in the Holy Name of the One Who Is would anybody invest in a fund named after the mystical power grain of the Aztecs?"

A Hedge Fund%'s Loss Rattles Nerves - New York Times: By GRETCHEN MORGENSON and JENNY ANDERSON: Amaranth Advisors, based in Greenwich, Conn., made an estimated $1 billion on rising energy prices last year. Yesterday, the fund told its investors that it had lost more than $3 billion [i.e., 30%] in the recent downturn in natural gas and that it was working with its lenders and selling its holdings "to protect our investors." Amaranth's investors include pension funds, endowments and large financial firms like banks, insurance companies and brokerage firms. The Institutional Fund of Hedge Funds at Morgan Stanley was an investor in Amaranth; as of June 30, it had a stake valued at $124 million....

[L]ast week, Charles H. Winkler, chief operating officer at Amaranth, had met with prospective investors at the Four Seasons restaurant in Manhattan and reported that his fund was up 25 percent [$2.5 billion] for the year, according to a meeting participant. Days later, rumors began circulating that Amaranth was losing money in one of its natural gas bets, a trade that had generated enormous profits for the fund in recent years. Late in the week, the fund's traders began dumping large stakes in convertible bonds and high-yield corporate debt, securities that could be sold without disrupting the market.

Mr. Winkler did not return a phone call seeking comment.

The scale of Amaranth's losses -- and how quickly they appear to have mounted -- was the talk of Wall Street yesterday.... Amaranth's woes are largely the result of a decline in [futures] natural gas prices that began [sic; should be "begins"] in December [2006], well before the spring months of March or April [2007] when they typically fall off. Amaranth's biggest stake was a combination bet on the spread between natural gas futures prices for March 2007 and those for April 2007. Amaranth had often bet that the spread on that so-called shoulder month -- when natural gas inventories stop being drawn down and begin to rise -- would increase.

But instead the spread collapsed. In the last six weeks, for example, the spread between the two futures contracts ranged from $2.50 at the end of July to around 75 cents yesterday....

The natural gas market is exceptionally volatile, making it an ideal playground for hedge funds that thrive on wide price movements in securities. Natural gas prices are subject to more severe swings than oil, in part because gas cannot be stored easily....

Amaranth was founded six years ago by Nicholas M. Maounis, a former portfolio manager who had specialized in debt securities at Paloma Partners, another large hedge fund.... In his letter to investors, Mr. Maounis, 43, wrote: "In an effort to preserve investor capital, we have taken a number of steps, including aggressively reducing our natural gas exposure."

Amaranth has additional offices in Houston, London, Singapore and Toronto and employs 115 traders.... Its energy portfolio has been overseen by Brian Hunter, a trader who joined the fund from Deutsche Bank in 2004 and conducts trades from his hometown of Calgary, Alberta. Mr. Hunter made enough money at Amaranth in 2005, an estimated $75 million to $100 million, to place him among the 30 most highly paid traders in Trader Monthly magazine....

Last week, in a speech in Hong Kong, the president of the Federal Reserve Bank of New York, Timothy F. Geithner, said greater attention needed to be paid to the margin requirements and risk controls in dealings with hedge funds...

The Fund of Hedge Funds at Morgan Stanley presumably sent a dozen people to do due diligence at Amaranth before it invested its bit of a billion in Amaranth. It's unclear what more Tim Geithner and his people could do. And Amaranth's problems are not related to exposure to systemic or systematic risk.

What did go wrong with Amaranth? If the numbers reported are correct, Amaranth lost $5 billion in less than two weeks.

Natural gas is traded in contracts of 10 billion BTUs--the rough equivalent in energy of 1700 barrels of oil. (One BTU is the amount of energy to raise 1 pound of water 1 degree fahrenheit.) Natural gas is priced in dollars-and-cents per million BTUs. So Morgenson and Anderson's fall in the spread from $2.50 to $0.75 is a reduction of $17,500 per contract. To lose five billion requires that you have been long 290,000 March and short 290,000 April contracts--a notional principle equivalent to three days' worth of the world's total energy consumption.

My suspicion is that there was a "valuation issue." That Amaranth was such a big player in this market that the current spread was simply what Amaranth had made its last trades it. And so if its traders wanted to make it look good on any particular day, all they had to do was buy a little more March gas at a higher price and sell a little more April gas at a lower price, mark their total positions to the market in which they are price setters--and voila! Big profits!

Whether the people doing this knew what they were doing--and whether their bosses knew what they were doing--and whether this is what they were doing--these are all open questions.'

But Nicholas Leeson's $1 billion loss betting on NIKKEI derivatives has now been eclipsed.

The world uses about 1 quadrillion BTUs of energy a day.

It Be Madness. But Is There Method in It?

David Frum thinks that there is method to the American madness in electing unknown governors to the presidency:

AEI - Short Publications: The American presidency is the supreme executive job on planet Earth. And American voters not unreasonably tend to demand executive experience from job applicants. If you look at the list of the winners of presidential elections since 1900, you'll notice that they tend to reach the job in very similar ways.

  1. They served as vice president to a popular president. (Theodore Roosevelt, Calvin Coolidge, Harry Truman, Lyndon Johnson, Richard Nixon, George H.W. Bush.)
  2. They earned a record as a successful governor. (Theodore Roosevelt, Woodrow Wilson, Calvin Coolidge, Franklin Roosevelt, Jimmy Carter, Ronald Reagan, Bill Clinton, George W. Bush.)
  3. They achieved some huge success in command of some vital mission for the United States. (William Howard Taft as the first governor general of America's new Philippine colony; Herbert Hoover as the chief administrator of the food program that saved millions in Europe from famine after the First World War; Dwight Eisenhower as commander in chief of the Allied forces in Europe in the Second World War)...

Of the last four, only Clinton used his gubernatorial skills to good effect in the presidency. (Carter and Bush are "disappointments," and what people who like Reagan like about Reagan has little to do with his tenure as the last social-democratic governor of California.) It's more likely--I think--that governors (a) have a base of people who like them to work for them, (b) have a base of people who like them to contribute money to them, and (c) don't yet have many enemies among the Washington press corps.

I'm less optimistic about the health of our current system.