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, November 18, 2006

James Baker's Iraq Study Group is a Fraud

Matthew Yglesias notes that James Baker's Iraq Study Group is a fraud, intended not to bring Bush back to reality but to provide more support for his fantasies:

Matthew Yglesias / proudly eponymous since 2002: The Commission: Via Jim Henley, a Guardian story shows once again that Democrats can't count on James Baker to solve the Iraq issue: "Mr Bush's refusal to give ground, coming in the teeth of growing calls in the US and Britain for a radical rethink or a swift exit, is having a decisive impact on the policy review being conducted by the Iraq Study Group chaired by Bush family loyalist James Baker, the sources said."

The Commission, in other words, not only won't change Bush's mind, but is changing its own mind to suit Bush's blinkered worldview. The idea that the enforcer sent down to Florida to help finesse the will of the electorate away in 2000 was going to be a big help to the Democratic Party always seemed like something to be skeptical about.

It's worse than that, Matt. The idea that the enforcer sent down to Florida to help finesse the will of the electorate away in 2000 was going to be a big help to the American people and the national interest always seemed like something to be skeptical about. Jim Baker regards his key role as backing up George W. Bush's fantasies rather than bringing him to reality.

More from the Manchester Guardian:

US plans last big push in Iraq | Special reports | Guardian Unlimited: "You've got to remember, whatever the Democrats say, it's Bush still calling the shots. He believes it's a matter of political will. That's what [Henry] Kissinger told him. And he's going to stick with it," a former senior administration official said. "He [Bush] is in a state of denial about Iraq. Nobody else is any more. But he is. But he knows he's got less than a year, maybe six months, to make it work. If it fails, I expect the withdrawal process to begin next fall."

The "last push" strategy is also intended to give Mr Bush and the Republicans "political time and space" to recover from their election drubbing and prepare for the 2008 presidential campaign, the official said. "The Iraq Study Group buys time for the president to have one last go. If the Democrats are smart, they'll play along, and I think they will. But forget about bipartisanship. It's all about who's going to be in best shape to win the White House.

The official added: "Bush has said 'no' to withdrawal, so what else do you have? The Baker report will be a set of ideas, more realistic than in the past, that can be used as political tools. What they're going to say is: lower the goals, forget about the democracy crap, put more resources in, do it."

What else do you have? Well, the Baker Commission could fulfill its mandate and tell the Congress the most important thing that could be done to improve the U.S.'s chances in Iraq, the Middle East, and around the world. If George W. Bush and Richard Cheney were to be removed from office, the situation would look so much brighter.

Here's Jim Henley

Jim Henley: Once More Into the Breach!: The "breach" being the President's ass, his head being what's going in "once more." Per the Guardian:

President George Bush has told senior advisers that the US and its allies must make "a last big push" to win the war in Iraq and that instead of beginning a troop withdrawal next year, he may increase US forces by up to 20,000 soldiers, according to sources familiar with the administration's internal deliberations.

Mr Bush's refusal to give ground, coming in the teeth of growing calls in the US and Britain for a radical rethink or a swift exit, is having a decisive impact on the policy review being conducted by the Iraq Study Group chaired by Bush family loyalist James Baker, the sources said.

Keep in mind that the ISG works for the White House. George Bush is its sole real customer, certainly not any pious abstraction like "the American people." The Repubs on the panel are going to bow.... Theoretically the Dems might not, but you have to consider the official Democratic Party's proven record of cowardice, befuddlement and dithering on the topic of Iraq. I figure at least some committee members will feel duty-bound to sign on to a "bipartisan"report that is, since it%u2019s what the President wants, in truth as partisan as reports get.

"The extent to which that [regional cooperation] will include talking to Iran and Syria is still up for debate," said Patrick Cronin, of the International Institute for Strategic Studies.

Translation: the President, and especially the Vice President, don't want to talk to Iran or Syria. At most they are willing to issue their preexisting and empty ultimata face to face rather than through the media.

Point three focuses on reviving the national reconciliation process between Shia, Sunni and other ethnic and religious parties. According to the sources, creating a credible political framework will be portrayed as crucial in persuading Iraqis and neighbouring countries alike that Iraq can become a fully functional state.

To the certain dismay of US neo-cons, initial post-invasion ideas about imposing fully-fledged western democratic standards will be set aside. And the report is expected to warn that de facto tripartite partition within a loose federal system, as advocated by Democratic senator Joe Biden and others would lead not to peaceful power-sharing but a large-scale humanitarian crisis.

bipartisan plan to install a junta or dictator. Iraq the Model! of covering your domestic ass politically. Which is important, because who wants everyone to see your ass when you've got a great big old head jammed up there?

Now, a field guide: The proposal clearly amounts to nothing more than avoiding the admission of defeat until it's time for the Bush Administration to leave office. No matter what Poppy and the family fixit man privately feel about the wisdom of starting the Iraq War or the idiocy of its prosecution, they will do everything to bail out their ward. He is their priority, not any quaint notion of the national interest. You've got to make the tough choices...

Here is General Abizaid saying that the "one big push" the Bushies are pushing for is simply stupid:

Informed Comment: Abizaid Opposes Withdrawal, Increase in Troop Levels: Here's how I interpret the contretemps Wednesday between Gen. John Abizaid and Republican Senator John McCain. McCain wants to send another division, about 20,000 US troops, to Iraq.

Abizaid told him:

  1. that would produce only a temporary improvement since the US doesn't have a spare division to send to Iraq for the long term and
  2. Increased US troop levels are counterproductive because they remove the incentive for the Iraqi government and army to get their acts together and fight the guerrillas and militias effectively and
  3. If Iraq is going to come back to better days, it will have to be primarily with Iraqi troops and
  4. Iraqi troops are not now doing the job, so if more US troops are sent to Iraq it should be as trainers and units available for joint patrols, not as independent combat troops....

Juan Cole comments:

[M]ost of Abizaid's arguments could also be deployed for a phased withdrawal, which he opposed.... What if it isn't just an increased US presence that would remove the incentive for Iraqi leaders to compromise and/or fight effectively? What if present troop levels do that? I say, let's take out a division ASAP (20,000 men) and make it clear that we're never putting a division back in to replace it. Then let the Iraqis try to fill the resulting vacuum themselves. Give them armored vehicles, tanks, helicopter gunships, and a nice wood-panelled room where they can negotiate with one another.... Such a phased withdrawal is not guaranteed to succeed. It has a better chance of succeeding than the current policy.

Econ 101b: Fall 2006: November 16, 2006: America's Current Account Deficit

Background reading: A false Cassandra:

Nouriel Roubini and Brad Setser (2004), "The US as a Net Debtor: The Sustainability of the US External Imbalances" (New York: Stern School of Business)

Econ 210a: Fall 2006: Memo Question for November 22

Memo Question for November 22:

An influential literature cites the scarcity of labor as a key factor in the emergence of the "American System of Production." How much of this argument (if any) survives Peter Temin's 1966 critique?

Milton Friedman, R.I.P.

Bad but not entirely unexpected news this morning:

Influential Economist Friedman Dies at 94 - By GREG IP: Nobel prize winner Milton Friedman, one of the most influential economists of the last century, died today. He was 94.

Mr. Friedman's Chicago School of thought stressed the virtues of unfettered markets. Mr. Friedman, a leading advocate of free markets, championed monetarism, the notion that the inflation can be regulated by the Federal Reserve's control of the money supply. He wrote extensively on the Great Depression and was an advocate of libertarian ideas such as the decriminalization of drugs.

Mr. Friedman died of heart failure after being taken to hospital near his home in San Francisco, his daughter, Janet Martell, said today. His wife Rose Friedman, who co-authored many of his books, survives him.

1912 — Born in New York.

1932-1933 — Receives bachelors degree from Rutgers University, masters degree from the University of Chicago.

1937 — Becomes a member of the research staff of the National Bureau of Economic Research, a post he would maintain until 1981.

1945 — With coauthor Simon Kuznets, publishes "Income From Independent Professional Practice," his doctoral thesis.

1946 — Receives doctorate from Columbia University and is hired to teach at the University of Chicago, where he serves as a professor of economics until 1976. Friedman would come to be seen as the leader of the Chicago School of monetary economics, which stresses the importance of the money supply as an instrument of policy and a determinant of the business cycle.

1951 — Wins the John Bates Clark Medal, which honors top economists under the age of 40.

1956 — "Studies in the Quantity Theory of Money" is published. In it, Friedman argues that increased monetary growth over the long run raises prices but has no effect on output. In the short term, increased money supply boost hiring and output.

1957 — "A Theory of Consumption Function" is published. Considered a landmark study, it tackles the notion, associated with John Maynard Keynes, that consumers adjust their spending to reflect current income, arguing instead that people's annual consumption is a function of what they expect to earn over the course of their lifetime.

1962 — "Capitalism and Freedom" is published. Friedman's key text on free markets, it argues in favor of floating currency exchange rates, an all-volunteer military, a negative income tax and education vouchers.

1963 — "A Monetary History of the United States, 1867-1960", co-authored with Anna J. Schwartz, is published. In a work that would become hugely influential in the field of monetary economics, Friedman and Schwartz used historical narrative and reams of supporting data to argue that steady control of the money supply is crucial in steering the economy. The book famously critiqued the Federal Reserve's performance during the Great Depression and the central bank launched a lengthy internal review of its policy-making after receiving a prepublication draft of the book. The Fed commissioned Elmus R. Wicker to write a rejoinder in hopes of deflecting some of Friedman's arguments.

1964 — Serves informally as an economic adviser to Republican presidential candidate Barry Goldwater. Later, Friedman served as an economic adviser to Richard Nixon's 1968 presidential campaign, and to Ronald Reagan's 1980 campaign.

1967 — Serves as president of the American Economic Association.

1975 — Friedman makes a controversial trip to Chile, along with several other University of Chicago professors, where he meets with dictator Gen. Augusto Pinochet.

1976 —Is awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in economics for his work in the fields of "consumption analysis, monetary theory and history and for his demonstration of the complexitity of stabilization policy."

1977 — Becomes a senior research fellow at the libertarian Hoover Institution at Stanford University.

1980 — PBS airs the 10-part "Free to Choose," which is made into a bestselling book co-authored with his wife, Rose Friedman. The series and book were a robust defense of the couple's free-market economic beliefs.

1981 — Serves as a member of Reagan's Economic Policy Advisory Board.

1988 — Receives Presidential Medal of Freedom and National Medal of Science.

2002 — President Bush speaks at a ceremony honoring Friedman, celebrating his 90th birthday and recognizing his contributions to the study of economics.

Nov. 16, 2006 — Friedman dies of heart failure at a hospital near his home in San Francisco. He was 94.

There's a story that at lunch at the White House in 2002 he told George W. Bush exactly what he thought about Bush's unpaid-for tax cuts. We will miss him.

The Segregation Wing of the Republican Party

Joshua Micah Marshall hits the nail on the head:

Talking Points Memo: by Joshua Micah Marshall: November 12, 2006 - November 18, 2006 Archives: Nice to see that the segregation wing of the Republican Party can still muster a majority of votes in the Senate GOP caucus.

Duncan Black provides background:

Eschaton: Those who have been around for a long time remember what fun we had with Trent Lott back in the day. Hard to believe that was 4 years ago. I'm not sure whether the most amusing moment was hearing John Podhoretz say nice things about some blogger named 'Atrios' on NPR or Trent Lott going on BET and expressing his lifelong support for affirmative action. But, anyway, to remind us what that whole thing was about. At Strom Thurmond's birthday party, Lott said:

I want to say this about my state: When Strom Thurmond ran for president, we voted for him. We're proud of it. And if the rest of the country had followed our lead, we wouldn't have had all these problems over all these years, either.

...oops, corrected, that's actually what he said in 2002. What I had up earlier:

You know, if we had elected this man 30 years ago, we wouldn't be in the mess we are today.

Was what he said in 1980.

As does Obsidian Wings:

Obsidian Wings: Keep On Making Those Outreach Efforts, Republicans: Platform of [Strom Thurmond's] States' Rights Democratic Party, 1948:

4: We stand for the segregation of the races and the racial integrity of each race; the constitutional right to choose one's associates; to accept private employment without governmental interference, and to learn one's living in any lawful way. We oppose the elimination of segregation, the repeal of miscegenation statutes, the control of private employment by Federal bureaucrats called for by the misnamed civil rights program. We favor home-rule, local self-government and a minimum interference with individual rights.

5: We oppose and condemn the action of the Democratic Convention in sponsoring a civil rights program calling for the elimination of segregation, social equality by Federal fiatt, regulations of private employment practices, voting, and local law enforcement.

6: We affirm that the effective enforcement of such a program would be utterly destructive of the social, economic and political life of the Southern people, and of other localities in which there may be differences in race, creed or national orgin in appreciable numbers."

Strom Thurmond, 1948:

"There's not enough troops in the Army to force the Southern people to break down segregation and admit the Nigra race into our theaters, into our swimming pools, into our homes, and into our churches."

Strom Thurmond, 1948:

"There are forces at work in this country today which would lead our people down the same pathway to the total state that was traveled by the people of Germany, of Italy, of Russia. Harry Truman, Tom Dewey and Henry Wallace are birds of one feather. All three are kowtowing to minority blocs by advocating the so-called civil-rights program. This time they can not fool the people and especially the Democrats of the South. The Jeffersonian Democrats have spewed out of their mouths that mongrel outfit which captured our party at Philadelphia."

Strom Thurmond, 1948:

Nor was Thurmond any longer the 1948 Dixiecrat who had invited audiences to ponder working for a company or belonging to a union forbidden by law to discriminate against blacks. "Think about the situation which would exist," he said back then, "when the annual office party is held or the union sponsors a dance."

Nor was Thurmond any longer the 1948 Dixiecrat who, when it was revealed that he had invited the governor of the Virgin Islands to visit him without knowing that he was black, hastily explained, "I would not have written him if I knew he was a Negro. Of course, it would have been ridiculous to invite him."

Are You *Sure* I Belong in This Demographic?

This is definitely not my great-uncles' Financial Times.

Today's weekend FT comes with a large glossy 11" x 14" magazine-like object: Financial Times Christmas Unwrapped: How to Spend It Special Christmas Edition, containing prose like:

Chartering a jet for shopping in Paris or Milan or even New York is not as extravagant as you think, says Avril Groom: As recently as the turn of the millennium, the idea of taking a private plane to go shopping seemed nothing more than an outrageous indulgence of the super-rich.... Now such a trip would barely raise an eyebrow among the well-heeled and busy....


A long weekend in New York on Skyjet's Challenger, which takes 12 passengers, is about £7,000 per head which, given savings on shopping in the United States, the weak dollar, and the approximately £4,000 cost of a scheduled first-class flight, starts to look feasible to a big spender...

I often say that to understand the ads in the New York Times magazine you have to understand that they are aimed not at the average reader but at the average free cash consumption dollar of readers. But this is much more so:

Financial Times - Wikipedia, the free encyclopedia: How To Spend It magazine is a monthly magazine that usually gets published with the Financial Times Weekend Edition. The glossy large magazine has won the hearts of many Weekend Edition subscribers, with its high detail on the latest in the glitz and glamour of the high-life. Its articles mostly concern high quality products: yachts, mansions, apartments, designs, horlogerie, haute couture, automobiles, fashion advice and columns by important indivduals in the arts in gardening, food, the hotel business, and travel industries. It regularly themes its issues, such as "Travelling Unravelled", "A Passion for Fashion", "Superior Interiors", and its annual "Christmas Unwrapped". How To Spend It has won numerous prizes for being the best newspaper supplement of the year...

Friday, November 17, 2006

MaxSpeak, You Listen!: I LOVE THE EIGHTIES

Max Sawicky loves the 1980s: >[MaxSpeak, You Listen!: I LOVE THE EIGHTIES]( Murtha is to Abscam as McCain is to the S&L scandal: After McCain's election to the House in 1982, he and his family made at least nine trips at Keating's expense, three of which were to Keating's Bahamas retreat. McCain did not disclose the trips (as he was required to under House rules) until the scandal broke in 1989. At that point, he paid Keating $13,433 for the flights. >We are confident that Republican 80s aficionados will give equal treatment to this affair. See also Doug Ireland and Reason.

The Priority of Budget Balance...

Daniel Gross is puzzled:

Daniel Gross: November 12, 2006 - November 18, 2006 Archives: ALAN MURRAY ON DRUGS: In the Wall Street Journal today, Alan Murray writes a strange column. He acknowledges that the drug industry, abetted by Republicans in Congress, corruptly influenced the Medicare prescription drug bill in favor of Big Pharma.

The most conspicuous example of overreach was a line inserted in the Medicare Modernization Act of 2003 that prohibited the U.S. government from negotiating prices directly with drug companies. That prohibition was unnecessary; the law created a structure in which private insurers and health plans did the negotiating on the government's behalf.

But someone allied with the drug industry -- it's still a little unclear who -- insisted on making the implicit explicit, and in the process, created a campaign issue for Democrats.

But he doesn't think anything should be done about it.

As a result, the industry's big bet has now gone bad. Allowing the government to negotiate prices directly with drug companies has become Democratic dogma. And a few moderate Republicans are toeing the line as well.

That doesn't make it a good idea.

Truth is, drug companies can't really "negotiate" with the government, any more than a backwoods hiker can negotiate with a 900-pound grizzly bear.

With a market share of about 46%, the government would set drug prices, not negotiate them, and then establish "formularies" telling seniors which drugs they could use and which ones they couldn't. Would that make seniors feel better off? I doubt it.

For someone who frets a lot about the deficit, and about the need to cut entitlement benefits, this is a very strange argument indeed.

A Nomination for This Year's Stupidest Men Alive Contest

A correspondent nominates William Sjostrum, who trashes the excellent and thoughtful Ian Buruma's Murder in Amsterdam without having read it:

AtlanticBlog: November 2006 Archives: Theodore Dalrymple reviews Ian Buruma's Murder in Amsterdam: The Death of Theo van Gogh and the Limits of Tolerance. I have not yet read Buruma's book, so I cannot comment on its accuracy, but I find it interesting that Dalrymple tempers his praise for the book by criticizing its political correctness...

CBS's Dick Meyer Is a Journamalistic Skank

Dick Meyer, editorial director of CBS News, says that for twelve years he has been covering for the Republican leaders of the House of Representatives because informing his readers what is going on is "not something we [reporters] are supposed to do." He "apologizes":

Good Riddance To The Gingrichites, CBS' Meyer: GOP 'Chess Club' Ruled The House For 12 Years And Won't Be Missed - CBS News: This commentary was written by's Dick Meyer:

This is a story I should have written 12 years ago when the "Contract with America" Republicans captured the House in 1994. I apologize.

Really, it's just a simple thesis: The men who ran the Republican Party in the House of Representatives for the past 12 years were a group of weirdos. Together, they comprised one of the oddest legislative power cliques in our history. And for 12 years, the media didn't call a duck a duck, because that's not something we're supposed to do.

I'm not talking about the policies of the Contract for America crowd, but the character. I'm confident that 99 percent of the population -- if they could see these politicians up close, if they watched their speeches and looked at their biographies -- would agree, no matter what their politics or predilections. I'm confident that if historians ever spend the time on it, they'll confirm my thesis. Same with forensic psychiatrists. I have discussed this with scores of politicians, staffers, consultants and reporters since 1994 and have found few dissenters....

The iconic figures of this era were Newt Gingrich, Richard Armey and Tom Delay. They were zealous advocates of free markets, low taxes and the pursuit of wealth; they were hawks and often bellicose; they were brutal critics of big government. Yet none of these guys had success in capitalism. None made any real money before coming to Congress. None of them spent a day in uniform. And they all spent the bulk of their adult careers getting paychecks from the big government they claimed to despise. Two resigned in disgrace. Having these guys in charge of a radical conservative agenda was like, well, putting Mark Foley in charge of the Missing and Exploited Children Caucus. Indeed, Foley was elected in the Class of '94 and is not an inappropriate symbol of their regime.

More than the others, Newton Leroy Gingrich lived out a very special hypocrisy. In addition to the above biographical dissonance, Gingrich was one of the most sharp-tongued, articulate and persuasive attack dogs in modern politics. His favorite target was the supposed immorality and corruption of the Democratic Party. With soaring rhetoric, he condemned his opponents as anti-American and dangerous to our country's family values -- "grotesque" was a favorite word.

Yet this was a man who was divorced twice -- the first time when his wife was hospitalized for cancer treatment, the second time after an affair was revealed. Gingrich made his bones in the party by relentlessly attacking Democratic corruption, yet he was hounded from office because of a series of serious ethics questions. He posed as a reformer of the House, yet championed a series of deforms that made the legislative process more closed, more conducive to hiding special interest favors and less a forum for genuine debate. And he did it all with epic sanctimony...

Dick Meyer is the editorial director of, based in Washington.

Words fail me. Words fail us all.

Comment on Christina Wang (2006), "Financial Innovations, Idiosyncratic Risk, and the Joint Evolution of Real and Financial Volatilities"

Financial Innovations and the Real Economy: A Conference Sponsored by the Center for the Study of Innovation and Productivity. November 16 & 17, 2006 Federal Reserve Bank of San Francisco.

Thursday 1:00 PM Introduction Janet Yellen 1:10 PM "The Transition to a High-Debt Economy" Campbell Hercowitz Discussants: Hurst Rogerson 2:25 PM "The Evolution of Income Volatility and Spending Responses at the Household Level" Dynan Elmendorf Sichel Discussants: Carroll Willen 4:10 PM "Good Behavior and Market Rewards: An Experiment in Understanding the Rules of a Credit Bureau" McIntosh Discussants: Boucher Mian Friday 9:00 AM "The Effects of the Structured Credit Markets on the Cost and Availability of Corporate Debt" Ashcraft Santos Discussants: Gilchrist Parlour 10:45 AM "Financial Innovation, Macroeconomic Stability and Systemic Crises" Gai Kapadia Millard Perez Discussants: Krishnamurthy Nelson 1:00 PM "Financial Innovations and Macroeconomic Volatility" Jermann Quadrini Discussants: Denhaan Primiceri 2:45 PM "Information Technology, Bank Deregulation, and the Joint Evolution of Borrower and Bank Volatility" Wang Discussants: DeLong Rosen

J. Christina Wang (2006), "Financial Innovations, Idiosyncratic Risk, and the Joint Evolution of Real and Financial Volatilities" (Boston: Federal Reserve Bank of Boston Research Department: November)

Abstract: This paper presents a model in which financial innovations explain three widely discussed stylized facts regarding trends in economic volatility over the past two decades. Aggregate volatility of real variables such as output has fallen. In particular, the covariance between firm and industry activities has declined, and so has employment volatility for the majority of firms. In contrast, the volatility of quantities of financial variables has increased at both the firm and aggregate level.

The model links these outcomes to a single hypothesized cause: advances in financial technology brought about by a declining cost of information processing. As a result, the marginal cost of external funds has likely declined, reducing the need for firms to smooth cash flows. Firms, trading off cash-flow vs. production smoothing, therefore have more incentive to smooth production. This explains why financial volatility may go up as real volatility goes down. Moreover, financial innovations have likely also altered the composition of volatility toward a greater share of idiosyncratic risk, by facilitating diversification and thus lowering the premium demanded on idiosyncratic risk.

At the margin, the cost advantage to projects with idiosyncratic returns reduces the covariance of financial as well as real activities across firms. Since variance and covariance of real quantities trend in the same direction, real aggregate volatility declines. But the net effect on financial variables is ambiguous and so can yield greater aggregate volatility. The paper then presents evidence that the share of idiosyncratic risk has risen in bank portfolios, indicating that the same has occurred for individual borrowers as well.

Comment on J. Christina Wang (2006), "Financial Innovations, Idiosyncratic Risk, and the Joint Evolution of Real and Financial Volatilities"

At night in the suburbs of San Francisco, some of us awake as the hills echo and re-echo with the howls of the coyotes that have fed well on Glenn Rudebusch's chickens. We then lie awake, worrying. We worry why the Great Moderation in the U.S. business cycle on the real side that we have seen since the mid-1980s has not carried a big reduction in financial-side variability with it. We toss and turn, worrying that the real-side volatility decline has been part good transitory luck and part statistical illusion, all because people in financial markets putting their money where their mouths were do not project the continuation of the Great Moderation into the future.

Christina Wang's paper lets us sleep more easily, even if the coyotes continue to prey upon the chickens of Federal Reserve Bank Vice Presidents. It teaches us an important and valuable lesson: a financial system that is doing a better job will be highly likely to have both higher financial and lower real volatility.

When a firm goes bankrupt and defaults on its debt, it may be because it has had bad luck, it may be because it was badly managed, or it may be because it suffered from moral hazard--took account of the fact that in the lower tail the losses are eaten not by the firm but by the bank that loaned it the money. Banks that have a hard time distinguishing between these possibilities will be averse to lending--charge a high interest rate premium on loans--to firms seen as having a high degree of undifferentiated idiosyncratic risk. Improvements in data collection and analysis that allow firms to differentiate will cause banks to fear undifferentiated firm-level idiosyncratic risk less, and charge lower interest rate premiums for such lending. Other things being equal, firms will smooth production more, and smooth cash-borrowing requirements less, seeking to squeeze out more productive efficiencies by taking on more financial risk. To the extent that improvements in data collection and analysis reduce banks' fixed costs of monitoring loans, other things being equal banks will do more to diversify away firm-level idiosyncratic risk.

When a bank goes bankrupt and defaults on its debt, it may be because it has had bad luck, it may be because it was badly managed, or it may be because it suffered from moral hazard--took account of the fact that in the lower tail the losses are eaten not by the banks' shareholders but by those who hold or guarantee its liabilities. Improvements in data collection and analysis by those to whom banks owe their liabilities will allow them to better classify banks, and so the cost to banks of portfolios with bank-level idiosyncratic risk will fall. Other things being equal, banks will be willing to take on more bank-level idiosyncratic risk.

Of course this function that Christina Wang identifies is the primary job--one of the primary jobs--of financial markets: to diversify away idiosyncratic risk, as was ably explicated by that notable predecessor of Lintner and Markowitz, William Shakespeare. As Shakespeare writes, Antonio, the Merchant of Venice, does not fear that the lower tail of his portfolio return distribution extends far enough down to the state in which his heart is cut out with a knife. Antonio he has a properly-diversified portfolio. The banker lending him the money uses the highest information technology of that day: wandering down to Venice's Grand Canal, loitering on the High Bridge, and gossiping. The banker concludes that Antonio has:

an argosy bound to Tripolis, another to the Indies; I understand moreover, upon the Rialto, he hath a third at Mexico, a fourth for England, and other ventures...

Here the analogy breaks down. Negative transitory systematic news does indeed provoke a crisis in Antonio's affairs, but he is rescued not by a competent, technocratic lender of last resort but by his bride disguised as a teenage judge.

Christina Wang hopes that starting sometime in the mid-1980s we took a jump toward the ideal financial world in which one of CAPM's cousins holds, in which idiosyncratic risk is not priced because it is properly diversified away, and in which as a result the real economy can grab for all the production-smoothing efficiency benefits without worrying about firm- or bank-level costs of default or illiquidity. This shift could drive a reduction in real-side volatility coupled with an increase or no change in financial-side volatility.

She has a nice theoretical costly-state-verification model of the effects of improved data collection and analysis technologies. She has a very interesting theoretical Dixit-Stiglitz-based three-period model of the joint determination of real and financial volatility. The key insight is a very good one: that production-smoothing has not just manufacturing-side and labor-side efficiency benefits but financial-side efficiency costs: only if banks are confident in their ability to monitor firms and large depositors confident in their ability to monitor banks will firms be able to easily and cheaply borrow the money they need in recession to enable a production-smoothing corporate strategy. The fact that times of recession are times when a firm's free cash is likely to be uniquely valuable and not to be best invested in building up inventories is a potentially powerful explanation of why we have, historically, seen the reverse of production-smoothing in the American economy. She has interesting empirical results that suggest that banks and firms have reacted to a likely information-driven fall in the cost of idiosyncratic financial risk to take on more of it. The theory is sound and convincing. The micro empirics are interesting and suggestive.

But how much can this channel add up to on the macro level? How, exactly, does ICT help bankers? Working for the original J.P. Morgan, Charlie Coster was on the boards of 88 railroads at the turn of the last century and died of overwork--Morgan is reputed to have recruited Coster's successor while they were together carrying Coster's coffin to its grave. What would today's ICT have done to increase Coster's contribution to Morgan's bottom line, exactly?

And how much of the Great Moderation in real-side economic volatility can this channel account for? Recall the size of the Great Moderation: a 40% fall in the standard deviation of the cyclical component of GDP, more or less the same however you choose to measure it. A fall in spite of the fact that technology and cost shocks have in all likelihood been quantitatively greater in the past ten years than in any other post-WWII decade save possibly the 1970s.

As Christina Wang says, her paper as written can't do the job. It can only do about a third of the job--although Doug Elmendorf said half last hour. The model as extended quite possibly could.

In this literature, the game that is being hunted is the positive correlation between production and inventory investment that we saw in the past. In a standard production-smoothing model inventory investment should be relatively high when production is relatively low, and sales are very low. Instead--back before 1985--inventory investment was high when production was high. This shift could be possibly traced to Christina Wang's mechanisms. But it can account, in my back-of-the-envelope guess, for not a 40% but a 15% decline in the standard deviation of the cyclical component, whatever that is.

The big game for this model--as Chistina Wang says in her conclusion--will, I think, come from applications of models like this to the household sector. It's not just firms that have benefitted from the application of information technology to credit screening. I have gotten three offers of VISA cards and two offers of what were described as "guaranteed low interest" home-equity loans so far this week. Plus the people behind the counter at my most local Starbucks have started asking me if I'm interested in a no-annual-fee Starbucks VISA that will come with $25 of free caffeinated drinks. I don't know whether they are doing this to everybody or whether there is something special in my file. The smoothing-out of household durables purchases will, I think, be an important part of the Great Moderation when we finally nail it down. And I think that's where the high returns from Christina Wang's model will come.

Last, the smoothing out of residential construction--if it indeed stays smoothed-out--may well turn out to be the heart of the matter. One branch of the conventional wisdom is that the smoothing-out of residential construction is a result of good luck that is about to end: that America's banks have been offered too much rice wine by the People's Bank of China, and have responded by lending like drunken bankers: $600,000 zero-down floating-rate loans to single-earner middle-class families buying three-bedroom houses in Vallejo, CA: and we will be sorry.

Christina Wang's paper suggests a second possible explanation. That recent residential investment financed by so-called "non standard" mortgage loans is a result at least in part not of the inebriation of the banking sector but of the ability to more finely calculate risk and return than was possible in the days when your mortgage had to be 30-year-fixed, 20% down, with amortization plus real estate taxes amounting to no more than 33% of last year's household income. That was an inadequate screen. What, really, are the current screens? How good are they? The application of models like this to residential financing may be the real big game here.

We Are Live at Salon, with an Obituary for Milton Friedman

J. Bradford DeLong (2006), "A Man Who Hated Government," Salon (November 16, 2006)

Also see:

Sam Brittan at the Financial Times: Salon (November 16, 2006)
Greg Ip at the Wall Street Journal:
Steven Pearlstein at the Washington Post:

J. Bradford DeLong (2006), "A Man Who Hated Government," Salon (November 16, 2006)

"Lord, enlighten thou our enemies," prayed nineteenth-century British economist and moral philosopher John Stuart Mill in his Essay on Coleridge "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength."

For every left-of-center American economist in the second half of the twentieth century, Milton Friedman (1912-2006) was the incarnate answer to John Stuart Mill's prayer. His wits were smart, his perceptions acute, his arguments strong, his reasoning powers clear, coherent, and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument.

General William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea, saying that he did not want to command an army of mercenaries. Milton Friedman interrupted him: "General, would you rather command an army of slaves?" Westmoreland got angry: "I don't like to hear our patriotic draftees referred to as slaves." And Friedman got rolling: "I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general." And he did not stop: "We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher" As George Shultz likes to say: "Everybody loves to argue with Milton, particularly when he isn't there."

Thinking as hard as he could until he got to the root of the issues was his most powerful skill. "Even at 94," Chicago economist and Freakonomics author Steve Levitt wrote on his website yesterday, "he would teach me something about economics whenever we talked" In this morning's New York Times, Chicago economist Austen Goolsbee quotes from Milton Friedman's Nobel autobiography:

Friedman said that when he arrived [at the University of Chicago] in the 1930s, he encountered a "vibrant intellectual atmosphere of a kind that I had never dreamed existed."

"I have never recovered."

His world-view began with a bedrock faith in people, in their ability to make judgments for themselves, and thus an imperative to maximize individual freedom. On top of that was layered a deep faith and conviction that free markets were almost always the best and most magical way of coordinating every conceivable task. On top of that was layered a powerful conviction that a look at the empirical facts--a marking-to-market of your beliefs to reality--would generate the right conclusions. And on top of that was layered a fear and suspicion of government as an easily-captured tool for the enrichment of cynical and selfish interests that sought to grab whatever they could. Suffusing all was a faith in the power of argument and the utility of reason. He was an optimist: people could be taught the truths of economics, and if they were properly taught then institutions could be built to protect all against the corruption and overreach of the government.

And he did fear the government. He hated government's and society's sticking their nose into people's private business. And he interpreted "people's private business" extremely widely. He hated the War on Drugs, which he saw as a cruel and destructive breeder of crime and violence. He scorned government licensing of professions--especially doctors, who heard over and over again about how their incomes were boosted by restrictions on the number of doctors that made Americans sicker. He feared deficit spending: cynical politicians could pretend that the costs of government were less than they were by pushing the raising of taxes to pay for spending off into the future. He sought to innoculate citizens against such political games of three-card-monte: "Remember," he would say, "to spend is to tax."

This did not mean that government had no role to play. Enforcement of property rights, adjudication of contract disputes--the standard powerful rule-of-law underpinnings of the market--plus a host of other government interventions when empirical circumstances made them appropriate: Mayor Ken Livingstone's congestion tax on cars in central London is Milton Friedman's. Friedman's negative income tax is one of the parents of what is now America's largest anti-poverty program: the Earned Income Tax Credit. And, most important, government had a very powerful and necessary role to play in keeping the monetary system working smoothly through proper control of the money stock. If there was always sufficient liquidity in the economy--enough but not too much--then you could trust the market system to do its job. If not, you got the Great Depression, or hyperinflation.

In his belief that the government was required to undertake relatively narrow but crucially important strategic interventions in order to stabilize the macroeconomy--keep production, employment, and prices on an even keel--Milton Friedman was in the same chapter if not on the same page as John Maynard Keynes, the economic giant of the previous generation whose doctrines and influence Friedman worked tirelessly to supplant and minimize. The Great Depression had convinced Keynes that central bankers alone could not rescue and stabilize the market economy. In Keynes's view, stronger and more drastic strategic interventions were needed to boost or curb demand directly. Friedman and his coauthor Anna J. Schwartz argued in their Monetary History of the United States that this was a misreading of the lessons of the Great Depression, which in Friedman's view was caused by monetary mismanagement or perhaps could have been rapidly alleviated by skillful monetary management alone. Over the course of forty years, Friedman's position carried the day. Federal Reserve Chair Ben Bernanke right now holds Milton Friedman's view, not John Maynard Keynes's, of what kind of strategic interventions in the economy are necessary to provide for maximum production, employment, and purchasing power, and stable prices.

Milton Friedman's thought is, I believe, best seen as the fusion of two strongly American currents: libertarianism and pragmatism. Friedman was a pragmatic libertarian. He believed that--as an empirical matter--giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results. It was not that he thought this was natural law--that markets always worked best. It was, rather, that he believed that places where markets failed were atypical; that where markets did fail there were almost always enormous profit opportunities from entrepreneurial redesign of institutions; that the market system would create now opportunities for trade that would route around market failures; and that government failure was pervasive--that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve.

For right-of-center American libertarian economists, Milton Friedman was a powerful leader. For left-of-center American liberal economists, Milton Friedman was an enlightened adversary. We are all the stronger for his work. We will miss him.

Wednesday, November 15, 2006

John Tierney: Department of "Huh?" (Why Oh Why Can't We Have a Better Press Corps? Department)

Josh Micah Marshall points us at John Tierney's final op-ed column:

Bring On the Seinfeld Congress - New York Times: After six years of libertarians reluctantly electing Republicans as the lesser of two evils, we've finally had enough. We've voted out big-government conservatism, and the result is the happy state of gridlock. For now, our work is done...

Back up. Tierney says that it was a swing of libertarians away from Republican to Democratic candidates that made Nancy Pelosi Speaker of the House? Is he psychotic? Delusional? Or simply totally cynical about how much c--- he can feed his readers?

Shame on the New York Times. It won't survive if it keeps employing people who lack either contact with reality or a desire to inform rather than mislead their readers.

DeLong Smackdown Watch...

Why oh why haven't I been reading Blake Hounshell regularly?

Whither Free Trade? - American Footprints: Brad DeLong scoffs at Jacob Weisberg's contention that "free trade is the real election casualty." The good professor says:

Normally, these days, Republican presidents are better on free trade than Democratic presidents. But George W. Bush is not a "normal" president. WCI is right that the appropriate response of other countries to Weisberg's spin is "hollow laughter."

But this is dodging the question...

Hoisted From Comments: "If you'd posted my whole story... it would be apparrent the article addresses your point [in the] 12th & 13th [para]grafs

The intelligent Demian McLean writes in about his story on James Glassman, the story that began:

James Glassman says his seven-year- old prediction that the Dow Jones Industrial Average will rise to 36,000 wasn't wrong, just early. Two years after Glassman and co-author Kevin Hassett published their theory, the Dow average had sunk 29 percent..."

and a few paragraphs later continues:

The Dow has since recovered.... The surge has improved some portfolios and may eventually do the same for the reputations of the authors, who stand by their forecasts...

Demian McLean writes:

[Brad DeLong's Semi-Daily Journal: Fair and Balanced Almost Every Day: James Glassman and Kevin Hassett Rear Their Ugly Heads Yet Again

`Dow 36,000' optimists unbowed | Chicago Tribune

]( Pardon the irony, Brad, but you're quoting a journalist out of context. If you'd posted my whole story, instead of editing it with ellipses, it would be apparrent the article addresses your point:

12th & 13th grafs:

With a 2021 deadline, Glassman's prediction of 36,000 would require the Dow to grow by 7.6 percent annually. ``When you consider the market has historically doubled every seven to 10 years, that's not really going out on a limb,'' said Barry James, who oversees $1.8 billion as chief investment strategist at James Investment Research Inc. in Xenia, Ohio...

The personal attack on me is curious, considering I e-mailed you before the story's publication, hoping to include your voice as a critic. I never heard back.

I have to disagree.

Half the people who remember anything from a story remember only the headline. Of those who read beyond the headline, they focus on and remember what comes first. Because journalists typically write in "inverted pyramid" style, readers interpret placement of facts and factoids in the lead as a signal that they are the most important things. And what proportion of readers get to paragraph 13 at all?

Journalists mislead their readers when they put things that should appear in paragraph 1 in paragraph 13, just as editors mislead their readers when they put things on page A23 that should be on page A1

My view is that Demian McLean simply should not have written the article: it misinforms his readers.

If he were going to write the article, he should not have begun it with "James Glassman says his seven-year- old prediction that the Dow Jones Industrial Average will rise to 36,000 wasn't wrong, just early": that adds to the misinformation. And he definitely should not have written "The surge [in the stock market] has improved some portfolios and may eventually do the same for the reputations of the author [Glassman and Hassett], who stand by their forecasts..."

With moderate power--the power to send things out over the Bloomberg wire--comes the moderate responsibility to take care not to misinform your readers.

A much better lead--if he had to write the story--a lead that did not misinform--would have been:

James Glassman and Kevin Hassett predicted back in 1999 that the Dow would reach 36,000 "very quickly," "perhaps in three to five years." It didn't. Now Glassman is predicting that the Dow will reach 36,000 by 2021. Glassman's prediction of 36,000 would require the Dow to grow by 7.6 percent annually. "When you consider the market has historically doubled every seven to 10 years, that's not really going out on a limb," said Barry James, who oversees $1.8 billion as chief investment strategist at James Investment Research Inc. in Xenia, Ohio...

Spillovers, Local Public Finance, and the Deductibility of State and Local Taxes

Things that make you go "hmmmm...":

Greg Mankiw's Blog: AMT Reform: The Washington Post reports that the new Democratic majority in Congress wants to focus on the Alternative Minimum Tax. The AMT is paid disproportionately by residents of Democratic states because those states tend to have high state and local taxes and the state and local tax deduction is disallowed under the AMT.

This raises the question: Is the state and local tax deduction justifiable in the first place? I think not. Suppose the residents of town A vote for high local taxes to finance, say, a municipal pool. The residents of neighboring town B keep taxes low, allowing people who so choose to join a private pool club. Because of the federal tax deduction, town A gets a federal subsidy at the expense of town B. This is neither equitable (it is violates the principle of horizontal equity) nor efficient (it encourages excessive provision of goods and services by states and localities over the private sector)...

When I took public finance from Richard Musgrave, the canonical examples on this question were somewhat different. They were things like:

  1. Suppose Town A votes for high local taxes to finance, say, more law enforcement officers, who arrest criminals making their getaways after committing robberies in Town B...
  2. Suppose Town A votes for high local taxes to finance, say, a better library, which inhabitants of Town B can wander into and use...
  3. Suppose Town A is discouraged from raising taxes to the level that provides the efficient level of public services because it fears that businesses will migrate across the border to Town B...
  4. Suppose Town A votes for high local taxes to finance, say, better schools which teach more things and, with Nash bargaining between workers and employers, raise the productivity and profits of firms in both Town A and Town B...
  5. Suppose Town A votes for high local taxes to finance a high-quality emergency room in its public hospital, which treats heart attack patients from Town B...
  6. Suppose Town A votes for high local taxes and spends the money on roads, which makes it easier for shoppers from Town C to get to Town B, and so boosts profits of and employment in retail stores in Town B...
  7. Suppose Town A votes for high local taxes to finance improvements to its parks, while Town B sells off its public lands in order to temporarily lower its taxes...
  8. Suppose Town A votes for high local taxes to provide free flu shots to all its inhabitants, reducing the risk that Town B inhabitants will catch the flu...
  9. Suppose Town A votes for high local taxes to buy an extra fire engine and more fire inspectors, thus reducing the risk that Town B will be immolated in a wildfire...
  10. Suppose Town A votes for high local taxes to buy and store emergency earthquake supplies that will be of use to Town B residents if the San Andreas lets go in a big way...

Plus there is the curious "the AMT is paid disproportionately by residents of Democratic states." I would have put it differently, and said that the AMT IS paid disproportionately by Republicans, many of whom live in states that usually give their electoral votes to the Democratic candidate.

The Grand Strategy of the Western Alliance

I should write something intelligent, supportive, and enthusiastic about Blake Hounshell's "The Old New World Order."

Assume I have done so [here] and go read his piece:

American Prospect Online - The Old New World Order: A revival of pragmatic liberal internationalism is what the world, and America, need now. By Blake Hounshell. Web Exclusive: 11.03.06

Remember Vietnam? It has been over thirty years since the last Marines made their ignominious helicopter exit from the rooftop of the U.S. Embassy in a Saigon on the verge of collapse. Last week, with barely any Americans noticing, the World Trade Organization (WTO) announced that after nearly twelve years of grueling negotiations and reforms, our former communist enemy had completed the necessary steps to go to the WTO's General Council on November 7 for an up-or-down vote on membership....

What should we think of Vietnam's journey? The country is by nobody's definition a democracy, though its abysmal record on human rights has improved somewhat in recent years. But its rapid growth (second only to China in Asia) has bettered the lives of millions of Vietnamese....

Recently here on TAP Online, Shadi Hamid and Spencer Ackerman debated what should serve as the lodestar of a progressive foreign policy vision. Hamid argued that the United States should make the promotion of democracy the centerpiece of its foreign policy, while Ackerman advocated that human rights take that role. Such questions will very likely become more relevant after Tuesday, if Democrats gain more power in Congress. But neither Hamid nor Ackerman offered the correct answer. As the small example of Vietnam helps to illustrate, the United States ought to be redirecting its energies toward renewing its strength and expanding the postwar liberal world order. Do that, and the rest -- democracy, human rights, liberal reforms -- will eventually follow...

Tuesday, November 14, 2006

The Bush Fiscal Policy Botch (Southern Ring of the Clown Show Department)

Max Sawicky is shrill:

25% OF WHA?
: 25% OF WHA? Professor Mankiw channels the finding of an "economist" at NRO... to the effect that tax cuts accounted for only "about a fifth" of the dizzying swing in projected ten-year deficits in 2001 from $5.6 trillion surplus to $2.9 trillion deficit. He ranks the impact of tax cuts behind "spending" and "changed economic and technical assumptions." Somebody in the comments kindly points out that interest, classified under "spending"... is actually an artifact of tax cuts as well as spending increases. This knocks the impact up from a fifth to a quarter.

Of the $2.9 trillion in spending, $1.6 is defense. The tax cuts are measured at $1.6 trillion. Now the changed economic and technical assumptions... mean that the original $5.6 trillion surplus projection was money that did not in fact exist.... The correct 2001 projection would have been a surplus of $2.1 trillion... so the swing is from plus 2.1 to minus 2.9, or $5T total.

Ergo by advanced mathematics as my econometrics prof used to say, the Bushist contribution to that $5 trillion swing is $1.6T from defense and $1.6 from tax cuts, or 64 percent, the wages of fiscal conservatism in our time, thanks in no small measure to the economic leadership of Professor N. Gregory Mankiw.

I would dispute Max's division. Of the $5 trillion ten-year swing in the deficit, $3.2 trillion--64%--is due to the Bush failure to properly fund the defense buildup--its insistence on cutting taxes even after it becomes clear that it wants to spend another fortune on defense.

The other 1.8 trillion--36%--is also the fault of the Bush administration: increases in other categories of spending above the 2001 projection baseline. Appropriate fiscal policy would have had us running a large surplus--a more than $2 trillion ten-year surplus--to prefund the expenditures that will be needed because of our aging population. No matter whether you think spending should be higher or lower than it currently is, every single fiscal policy move of this administration has carried us in the wrong direction, away from the surpluses we should be running right now, and collectively they have been a huge mistake. That tax cuts are not the overwhelming proportion of mistakes speaks not about the innocucuity... innocuousness... innocularity... whatever... of tax cuts, but of the magnitude of unfunded spending increases.

Resisting the Ideological Hegemony of Neoclassicism

I have fallen victim this semester to the ideological hegemony of neoclassicism, and taught my intermediate macroeconomics course--Econ 101b--with very little attention to issues of income distribution. It has been a grow-and-stabilize-the-GDP course almost exclusively.

Enough students are unhappy about this, however, that it looks like I will be adding a reading course on the distribution of income and wealth in America since 1929 to my spring teaching load.

Suggestions for things that we should read? Goldin and Margo, Katz and Murphy, Card and Lemieux, Saez, Gosselin-Moffitt-Gottschalk-Hacker, and what else?

Recession? A Point for Nouriel Roubini

Over the Bloomberg wire:

Retail Sales Are Lower, but Beat Expectations - New York Times: Sales fell 0.2 percent after a revised 0.8 percent decline in September, which was twice as large as originally reported, the Commerce Department said yesterday. Purchases excluding gasoline rose 0.4 percent last month.

"This shows consumers are hanging in there but not showing outsized exuberance," said Anthony Chan, chief economist at J. P. Morgan Private Client Services in New York. "It paints a picture of a moderating economy."

Economists expected retail sales to fall 0.4 percent in October, matching the previously reported decline in September.

Sales excluding autos fell 0.4 percent after a 1.2 percent drop. Sales excluding autos were projected to decline 0.2 percent after a previously reported drop of 0.5 percent...

Seasonally adjusted, retail sales in October were 1% lower than in August. Retail sales excluding autos were 1.6% lower in October than they were in August.

This is not very good news.

British History 101

What I have been listening to:

British History 101 on Thu, 09 Nov 2006: St. Thomas Becket, Archbishop of Canterbury killed 29 December 1170. Tue, 07 Nov 2006: A correction to the Guy Fawkes special. Thu, 02 Nov 2006: Guy Fawkes' Day: Remember, remember, the Fifth of November! Fri, 27 Oct 2006: Lady Godiva: In this week's episode, we take a look at the fair Lady who gave rise to the name of one of the world's most delicious candies! Fri, 06 Oct 2006: Her Majesty Queen Elizabeth II: This week, we take a look at the United Kingdom's current monarch. Thu, 21 Sep 2006: Abdication of Edward VIII

Queen Elizabeth II's uncle - and a shameful one at that! Fri, 08 Sep 2006: Magna Carta. Thu, 31 Aug 2006: Hadrian's Wall. Fri, 18 Aug 2006: The Battle of Dunkirk. Fri, 11 Aug 2006: Boudicca's Revolt. Sat, 05 Aug 2006: The Battle of Trafalgar. Fri, 28 Jul 2006: The Battle of Hastings...

Econ 101b: Fall 2006: November 14, 2006: Yield Curve

The yield curve and the bond market conundrum:

Most recent Federal Reserve Press Release (October 25, 2006): The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent...'s Living Yield Curve is excellent: PEOPLE TALK ABOUT interest rates going up and going down as if all rates moved together. The rates on bonds of different maturities behave quite independently of each other, with short-term rates and long-term rates often moving in opposite directions.... The yield curve is what economists use to capture the overall movement of interest rates.... Plot today's yields for various maturities of U.S. Treasury bills and bonds on a graph and you've got today's curve... the line begins on the left with the shortest maturity -- three-month T-bills -- and ends on the right with the longest -- 30-year Treasury Bonds.

Jim Hamilton of UCSD is a little less worried about the "inverted yield curve" than he used to be: To the extent that the decline in the yield spread does represent a fall in the term premium, and if indeed a fall in the term premium itself does not signal an economic slowdown, it means that the current negative yield spread does not have quite as bearish a connotation as the historical correlation between the yield spread and output might otherwise suggest.... [R]ecent week-to-week moves in the yield spread... have been dominated by news about the real economic outlook, with prospects for slower economic growth translating into lower expectations for future short rates and a lower yield spread. Insofar as that's the case, the recent pitch into negative territory must still be regarded as worrisome. But just how worrisome? Slower than normal growth still looks to me like a safe bet. On the other hand, the negative growth characteristic of a recession is a little less likely than I regarded it before studying the latest research...

Treasurys rally after tame PPI, retail sales - MarketWatch: The benchmark 10-year Treasury bond was up 13/32 at 100-16/32, while its yield sank to 4.5620%.... The 2-year note was up 3/32 at 100 9/32, yielding 4.718%, keeping the yield curve inverted. The 30-year bond gained 24/32 to 97-14/32, yielding 4.653%, an 8-month low...

The Pigou Club: Egalitarian Utilitarianism

Mark Thoma attempts to lead Greg Mankiw's Pigou Club off in a different direction:

Economist's View: Pigouvian Redistribution: There has been a lot of support lately for the ideas that Arthur Cecil Pigou (1877-1959) set forth in his book The Economics of Welfare. Pigou held the chair of political economy at Cambridge (succeeding Alfred Marshall) and was the leading neoclassical economist of his day. The book is an attempt to provide a theoretical basis for government intervention to improve social conditions. His introduction of Pigouvian taxes is part of that effort.... [O]ther ideas from his book... [include this] argument for redistributing income from the rich to the poor....

[I]t is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants, to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus leads securely to the proposition: Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view, will, in general, increase economic welfare.

This conclusion is further fortified by another consideration. Mill wrote: "Men do not desire to be rich, but to be richer than other men. The avaricious or covetous man would find little or no satisfaction in the possesion of any amount of wealth, if he were the poorest amongst all his neighbours or fellow-countrymen." More elaborately, Signor Rignano writes: "As for the needs which vanity creates, they can be satisfied equally well by a small as by a large expenditure of energy. ... In reality a man's desire to appear 'worth' double what another man is worth, that is to say, to possess goods (jewels, clothes, horses, parks, luxuries, houses, etc.) twice as valuable as those possessed by another man, is satisfied just as fully, if the first has ten things and the second five, as it would be if the first had a hundred and the second fifty."

Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necessaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests...

Monday, November 13, 2006

Economic History Seminar November 13, 2006: William Sundstrom

He comes up from Santa Clara to talk about: >William Sundstrom (2006), "The Geography of Wage Discrimination in the Pre-Civil Rights South" (San Jose: Santa Clara University). >>*Abstract:* Before the civil rights movement of the 1960s, the pay gap between African-American and white workers in the south was large overall and quite variable across locations. Using 1940 census data, I estimate the white-black earnings gap for men across separate county groups called "state economic areas," adjusting for individual differences in schooling and experience. I show that the gap was significantly greater where blacks were a larger proportion of the workforce, plantation institutions were more prevalent, more of the population was urban, and white voters exhibited more segregationist preferences. These results are consistent with descriptive evidence that discrimination in southern labor markets operated through discrimination in job assignments, which prevented black workers from acquiring skills on the job and also depressed wages through a crowding effect.

Vietnam Today: America's Grand Strategy at Work

Our "soft power" at work:

Vietnam: The South Has Finally Won - Newsweek: International Editions - Hanoi's communists won the Vietnam War, but southern-born reformers are leading an economic boom as the country opens up to the world: By Michael Hastings and George Wehrfritz: Grainy black-and-white photos show thin men riding bicycles along streets devoid of cars. A prominent chart tracks paltry monthly rice allotments to every category of Vietnamese, even communist cadres. Assorted ration cards and food stamps fill a display case... the painful decade after North Vietnam's communist armies toppled the U.S.-backed government in Saigon in 1975. An introductory message describes the period as one of "inappropriate socioeconomic management." That's an understatement: from 1975 to 1986, Vietnam's rulers oversaw a disastrous experiment in Stalinist collectivization, herded thousands of Southern capitalists into labor camps and unleashed an exodus of boat people across the region. The human suffering was immense.

The government calls the show "Hanoi Life Under the Subsidy Economy, 1975-1986." But a sexier title would be "How the South Won the War." The Vietnamese capital portrayed in the exhibit bears scant resemblance to the bustling present for one simple reason: Hanoi is now playing by Saigon's rules. Economic reforms pushed by Southern entrepreneurs have fueled an economy that's grown nearly as fast as China's over the last decade. Manufacturing jobs are plentiful, and the national poverty rate has plummeted from 57 percent in 1993 to about 18 percent today....

Hanoi credits the turnaround to policies known simply as doi moi, or "renovations," launched with great fanfare in 1986. In fact, local leaders in Saigon, now known as Ho Chi Minh City, began testing the new approach years earlier by tapping an ethnic-Chinese business class that Hanoi viewed as ideologically suspect. Those officials later rose to national prominence, even as local entrepreneurs helped build a globally competitive, export-led economy funded mainly by foreign investment. Foremost among the forward-thinking southern leaders was Vo Van Kiet, who became deputy premier in 1986 and helped launch doi moi. He served as prime minister in the 1990s. "The official history of Vietnam's reforms doesn't include this first chapter," says Pham Chanh Duong, a key businessman from that era. "We gave [Hanoi] a practical example for the reforms they enacted in 1986, but nobody dares talk about that."

The conquered South led the economic charge in part because it had experience with colonial markets and benefited from America's wartime infrastructure of roads, highways, airbases and ports. Over the past decade, though, the North-South divide has narrowed. Hanoi has improved its own roads, rails and ports to such an extent that light manufacturing now flourishes there and in nearby Haiphong. And the importance of opening the economy, once pushed by southerners, has become accepted wisdom in the capital. "There are a lot of stereotypes about the North and South having different points of views," says Minh Vu, a senior economic adviser to Prime Minister Dung, noting that the regional divide no longer plays a great role in shaping policy.

Sunday, November 12, 2006

Brad DeLong's Semi-Daily Journal: Global Imbalances in Historical Perspective

>[Brad DeLong's Semi-Daily Journal: Global Imbalances in Historical Perspective]( LOSING OUR MARBLES IN THE NEW CENTURY? THE GREAT REBALANCING IN HISTORICAL PERSPECTIVE Christopher M. Meissner Alan M. Taylor Working Paper 12580 Abstract: Great attention is now being paid to global imbalances, the growing U.S. current account deficit financed by growing surpluses in the rest of the world. How can the issue be understood in a more historical perspective? We seek a meaningful comparison between the two eras of globalization: "then" (the period 1870 to 1913) and "now" (the period since the 1970s). We look at the two hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present. We consider two of the most controversial and pressing questions in the current debate. First, are current imbalances being sustained, at least in part, by return differentials? And if so, is this reassuring? Second, how will adjustment take place? Will it be a hard or soft landing? Pessimistically, we find no historical evidence that return differentials last forever, even for hegemons. Optimistically, we find that adjustments to imbalances in the past have generally been smooth, even under a regime as hard as the gold standard. 2 The unending feedback of the dollars and pounds received by the European countries to the overseas countries from which they had come reduced the international monetary system to a mere child’s game in which one party had agreed to return the loser’s stake after each game of marbles—Jacques Rueff, 19611 A remarkable amount of attention is now being paid to global imbalances, the growing U.S. current account deficit financed by growing surpluses in the rest of the world, most notably in the Asian “dollar bloc” and among the oil exporters. The talk is no longer confined to obscure academic and policy debates. With insufficient space in his weekly columns to devote to the issue, the Financial Times’ Martin Wolf launched a web site stating that “what is happening is extraordinary”; David Warsh considers the almost obsessive focus on the issue justified, since global imbalances constitute “the most exciting economic story of our times.”2 Exciting and extraordinary it may be, but a relentless focus on trends from the recent past, on the current announcements of each quarter’s balance of payments data, or on naive extrapolations into the future has left one important perspective rather neglected: how can the issue of global imbalances be understood in a more historical perspective? To address this question, we seek a meaningful comparison between past and present experience. We focus on the two eras of globalization: “then” (the period 1870 to 1913) and “now” (the period since the 1970s). We look at the special position in the global macroeconomy of the hegemons in each era: Britain then, and the United States now. And adducing historical data to match what we know from the contemporary record, we proceed in the tradition of New Comparative Economic History to see what lessons the past might have for the present. Although such an exercise in quantitative economic history could range far and wide, in this paper space limitations permit us only to look at what we consider two of the most controversial and pressing questions in the current debate. First, are current imbalances being sustained, at least in part, by return differentials? And if so, is this reassuring? If the U.S. can always earn some kind of “privilege” of this sort, then the degree of required adjustment will be reduced. Or, putting it another way, for any given trajectory of trade imbalances, we know that the current account and debt implications will look much more favorable or sustainable if such privileges persist. If not, any difficulties will be that much more pronounced. Second, how will adjustment take place? Will it be a hard or soft landing? It is possible, again, that adjustments will happen smoothly. Depending on the extent to which expenditure shifts rather than switches, countries might avoid dramatic real exchange rate movement. If up and down shifts are coordinated across countries, or if switching is unhindered by trade policies or other frictions, then global demand might hold up, and recession avoided. The fear is that adjustments might be much more abrupt, demand large changes in real exchange rates, lead to politically awkward realignments of trade, and cause recession for one or more players in the game. If such a hard landing is likely, then policymakers face the challenge of devising suitable countermeasures. 1 On the source of this quotation, see the comment by John Helliwell. 2 For Warsh on Wolf see For the Wolf forum see For up to the minute discussions see For a recent overview, see Eichengreen (2006). 3 Confronting these two questions, what insights can we take from the past? Summary To summarize our findings, on the persistence of privilege we find: o Among G7 countries today, the United States is not unique in being able to enjoy a “privilege” in the form of higher yields earned on external assets relative to yields paid on external liabilities. For the U.S. this has been worth about 0.5% of GDP to the U.S. in the years 1981 to 2003. Similar privileges are detectable for Japan and the U.K. France and Germany appear to have no privilege. Canada and Italy have negative privilege, or penalty. o In the years 1870–1913, the previous financial hegemon, Britain, enjoyed a similar yield privilege, also amounting to about 0.5% of GDP. o Measured as a differential in rates of yield, the U.S. privilege has been steadily declining since the 1960s, when it stood at around 3% per annum on all capital. It is now close to 1% per annum. Indirect measures may differ, and even the direct measures are subject to error. But if this trend continues, the U.S. will lose its privilege. o Direct and indirect evidence on rates of yield for Britain in the past also suggests small and declining rates of yield privilege from the 1870s to 1910s, a similar pattern. o For both the U.S. now and Britain then, declining rate of yield privilege meant that for a given leverage and a given composition of assets and liabilities, the income due to privilege (as a fraction of GDP) would have to shrink. In part this was offset either by expanding leverage (in the U.S case today) or by shifting composition to riskier assets with higher returns (in both cases). These shifts may not be able to proceed without limit. o It is often suggested that the U.S. might lose privilege if the net debt position grows too large. We find that rate of yield privilege has been correlated with the deterioration of the net external asset position in the postwar era. o In the historical British case, leverage and indebtedness were not an issue. British net external assets roughly equaled gross external assets, and Britain became a very large net creditor. But a net credit position did not preclude a loss of privilege, suggesting that even if the U.S. could reverse its net debt position, this would not protect its privilege automatically. o Rather, British experience suggests that over time, financial hegemons operating in a globalizing world face other pressures that squeeze privilege. Emerging markets mature and offer less outlandish risk-reward combinations, so the benefit of being a “loan shark” diminishes; the world becomes less risky as a whole; at the same time other rival financial centers emerge which can compete for lucrative business with the financial pioneer. o Most of these perspectives bode ill for the persistence of privilege. But if we add capital gains to yields we can estimate a total return privilege for the U.S. According to indirect estimates, total return privilege has risen since the 1960s. It also appears to have been steady in the 1980s and 1990s. Growing valuation effects have offset falling yield differentials, keeping up a total return privilege. It is unclear what mechanisms are driving these opposing trends. o Looking at indirect evidence on total returns on the U.K. domestic and foreign portfolio 1870–1913, we also find a total return differential, but one that is very volatile over successive decades, and with very little systematic privilege overall. o The large capital gains earned by the U.S. in the last 10 to 15 years are due to neither sustained price effects nor sustained exchange rate effects, both of which are close to zero on average; the effect is largely due to “other” capital gains. These remain a mystery, and until we understand them better, simple extrapolation of these trends may be ill advised. On adjustment we examine the behavior of current accounts and the processes associated with current account reversals for a broad sample of countries between 1880 and 1913. We attempt to verify whether there are any differences between the capital exporters like Britain, France, Germany, and the Netherlands, other core countries that import capital, areas that had recently been settled, also known as British offshoots (i.e., Australia, Canada, New Zealand and the United States), and less developed peripheral nations. Throughout we compare our findings to those from Edwards (2004) from the thirty years between 1970 and 2001. In particular we look at: summary statistics regarding the size of current accounts and incidence of reversals; the ability to sustain current account deficits or surpluses; connections between current account reversals, exchange rate movements and financial crises; patterns of movement of macroeconomic aggregates in the wake of large current account reversals including the growth effects of reversals. o We find that more developed countries and the offshoots were able to run higher current account deficits more persistently, and that these countries had very different patterns of adjustment. o In particular their current account reversals were generally associated with smaller real exchange rate fluctuations and less adjustment in the government surplus. o Overall, we do not find overwhelming evidence that current account reversals had negative consequences for the aggregate growth of income per capita in the core or periphery. (Although many reversals involved serious crises that surely did have major distributional impacts.) o Moreover, we are able to test some modern hypotheses with the historical data in ways that have not previously been done. We assess whether openness to international trade, financial and institutional development and currency mismatches played a role in adjustment. o We find little evidence that currency mismatches, openness to international trade or the level of institutional and financial sophistication (proxied very roughly by higher income per capita) altered the severity of output losses associated with reversals in the nineteenth century. o Nevertheless we do find some evidence that core Western European countries and the offshoots had lower growth losses in the adjustment process. Some countries even managed to see income rising in the face of reversals because previous investment was so productive. This offsets the negative growth experiences of other countries in the periphery leading to the finding that current account reversals were not systematically associated with output losses in this period.

Brad DeLong's Semi-Daily Journal: Can Courts Correct the Flaws of Shareholder Democracy?

>[Brad DeLong's Semi-Daily Journal: Can Courts Correct the Flaws of Shareholder Democracy?]( Can Courts Correct the Flaws of Shareholder Democracy? Gretchen Morgenson hopes to see courts doing for shareholders what shareholders cannot seem to organize to do for themselves: The Shot Heard Round the Boardrooms - New York Times: Gretchen Morgenson: IN his ruling last Thursday requiring Richard A. Grasso to return as much as $100 million in compensation to the New York Stock Exchange, Justice Charles E. Ramos opined colorfully and unequivocally that Mr. Grasso had breached his fiduciary duties by failing to disclose how mountainous his pay had become during his years as the Big Board's chairman.... Courts have been reluctant to wade into compensation issues in the apparent belief that directors and the shareholders who nominally oversee them can better manage such matters. But shareholders have been unable or unwilling to effect boardroom change, and compensation excesses have become alarmingly common. That seems to be changing; Justice Ramos's decision is the second indication of such a shift. The first was a decision last year by Leo E. Strine Jr., a vice chancellor in the Delaware chancery court, to reject a settlement in a shareholder suit brought against directors and officers of the Fairchild Corporation. The plaintiffs had contended that Fairchild, an aircraft parts distributor, had excessively compensated its chief executive and certain of his family members and other top executives. The settlement to be paid to shareholders -- with a monetary value of $2.9 million -- was inadequate, the judge said, because it did not do enough to protect shareholders. The court told lawyers for the parties to adopt "real structural protections that may involve a real infusion of some backbone into the board."... While Vice Chancellor Strine did not weigh in on the merits of the plaintiff's case, his ruling indicates a measure of sympathy to complaints about outsize executive compensation that had not been evident previously.... Justice Ramos's ruling refutes some of the more common arguments for why executives should be held blameless when pay goes through the roof. For example, Mr. Grasso argued that it would have been improper for him to advise the board and its compensation committee about the size of his retirement account. "Not only does nothing preclude Mr. Grasso as C.E.O. from making sure that the committee had all of the information it needed to make an informed decision, it was his affirmative fiduciary duty," Justice Ramos ruled. And to Mr. Grasso's argument that he did not know the size of his retirement plan... Justice Ramos said: "That a fiduciary of any institution, profit or not-for-profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care."... "After slogging through dozens of depositions and countless documents, it came down to a simple proposition," said Avi Schick, deputy attorney general. "Grasso took more than $80 million in pension benefits that were not disclosed to the board as they were accruing. The message to Grasso and directors everywhere is also simple: you must make full disclosure, you must operate with full transparency and you will be held fully accountable"... ---- >>[MarsEdit: Easy weblog editing](

Willful Ignorance in the White House: Why Oh Why Are We Ruled by This Disconnected-from-Reality [Unprintable]?

Hoisted from Comments: Barkley Rosser:

Brad DeLong's Semi-Daily Journal: Fair and Balanced Almost Every Day: Stupidest Men Alive Nominations: Josh Bolten: Is Bolten any stupider than Rove himself or Bush for that matter? What struck me the most listening to Bush's press conference when he dumped Rumsfeld was how clear it was that he really was surprised at the GOP losing the House. I mean, it is one thing before an election to go around being optimistic and saying you will win, just as he said he was going to keep Rumsfeld on, and all that. But it is now clear that he and Rove (and Bolten also apparently) really were drinking seriously self-delusional kool-aid.

I have gotten a Republican friend of mine all upset by saying the most dangerous thing about Bush is his willful ignorance. This business of apparently really believing they would keep the House is an extremely striking example. If there is anything that might come out of this election in terms of improving the executive's performance, I hope it will be that Bush will get out of his cocoon a bit more, preferably a lot more, maybe even read a newspaper from time to time?

Mark "Karl Rove Is Beloved" Halperin Receives a Nomination (Why Oh Why Can't We Have a Better Press Corps?)

The view in the reality-based community has always been that, with Ralph Nader spotting Rove 3 percentage points in the 2000 election, and with a "war" being worth roughly 5 percentage points for the incumbent's vote share, it's not a sign of real genius to eek out squeaker elections. There has been a debate within the reality-based community as to whether people like Halperin who celebrate Rove's genius are simply cynically sucking up to a favored source or really have drunk the koolaid.

Duncan Black nominates Mark Halperin for the Stupidest Men Alive contest, and reminds us of what may well be the worst piece of political journalism published in an American newspaper in 2006:

Ace of Base: By MARK HALPERIN: George W. Bush and Karl Rove... [ask:] Why do things differently when you like the results you have been getting? In the 2002 and 2004 national elections, the president and his top political adviser won by margins provided by conservative voters who shared the White House's view that the country should continue to move right.... [T]he Bush-Rove model animates the Republican Party's election strategy for 2006.... [The] view... [that] a campaign that appeals to moderates, one waged from the center, is the only way for the [Republican] party to maintain control of the House and Senate.... probably won't work.... [T]he Republicans... best chance is to stick with the old, base-driven Bush-Rove electoral strategy.

Why?... America is a polarized country, one where there are fundamental divisions worth fighting over.... The goal is to accumulate just enough power to use the energies and passions of the base to effect ideological change... even if -- sometimes especially if -- those changes might be at odds with majority public opinion. For the Republicans, this brand of politics works because the United States in many ways remains a fundamentally conservative nation.... Republican politicians, therefore, have the advantage of being able to proudly announce what they really think. They can go on offense....

If you have any doubts about the confusion of the Democrats, just look at the party's midterm strategy.... [T]he core of their enunciated message... has in recent elections been a recipe for defeat. Such equivocation is the kind of themeless pudding that does not match up well with the conviction of the White House message....

[T]he G.O.P. base is coming home -- and just in time. Base support is headed toward 90 percent, just about where it was before the 2002 and 2004 elections. The speeches the president gave about national security leading up to the fifth anniversary of 9/11 re-engaged the base and raised his overall approval rating to around 40 percent. He also has shifted the debate back to his favored playing field: national security.... Bill and Hillary Clinton... the couple's visibility seems to be energizing the Republican base as well....

As in 2002 and 2004, the Democrats have been baited into a heated discussion on terrorism and Iraq, blocking out debates that would be more favorable to their cause, like Social Security, the economy and gas prices. The Clintons have whipped up Democrats into a frenzy to fight back, but on Capitol Hill and on television they are largely fighting back on Republican terrain.

This is exactly what happened in the last two elections: Mr. Bush and Mr. Rove fired up the base on national security, taxes and social issues and found a way to win a majority of the electorate, even as they lost the allegiance of a majority of the country over all. The national security debate, the visibility of the Clintons and the momentum the Republicans gain from Mr. Bush's rising poll numbers -- all of these echo previous election cycles...

And yet another, from last week:

By Mark Halperin: [O]ur Rove thesis--the emphasis, for those who want to understand the world, should be on "genius" and not "evil" (as in "Rove is an evil genius").... Democrats, Republicans, and the Jacob Weisbergs of the world can pick nits all they want with Rove--that Bush isn't the most successful president ever, that Rove can't walk on water, that Bush lost the popular vote in 2000, and that they both have made plenty of political and policy mistakes. All of that is true. The reality is, though, that Bush and Rove, as a team, have never lost to Democrats, and their wins in 2002 and 2004 defied the odds in many ways. If Democrats win a big victory next Tuesday, it will be interesting to hear Rove's explanation. But for goodness' sake... people who live in Bethesda, Chevy Chase, and Manhattan should understand that in much of red America, Rove is beloved and respected, and they should ask themselves why that is...

I think these settle the debate.

Republicans Eat Their Young!

Dana Mlbank's "Washington Sketch" sketches Washington D.C. on Wednesday, and watches Bush say that he was making a change in response to what the voters said--firing Rumsfeld--that he was going to do anyway, "win or lose":

Dana Milbank - The Thumpees Try Their Luck at the Blame Game - President Bush had many explanations for what he called the "thumping" his party took on Tuesday, but the most creative was the notion that his chief strategist, Karl Rove, had spent too much time reading books.

"I obviously was working harder on the campaign than he was," the president said at yesterday's East Room news conference. The reporters laughed. The Architect, who had challenged Bush to a reading contest, wore a sheepish grin and stared at his lap....

The president, who started his appearance with an admission that "I share a large part of the responsibility," went on to blame everybody else.... [C]orruption: "People want their congressmen to be honest and ethical, so in some races that was the primary factor."... Mark Foley, whose name remained on the Florida ballot: "People couldn't vote directly for the Republican candidate."... [B]allot rules. "You could have the greatest positions in the world... but to try to get to win on a write-in is really hard to do."... [B]ad luck: "If you look at race by race, it was close."... Donald Rumsfeld, by firing him as defense secretary.... And, not least, he blamed the uncomprehending voters: "I thought when it was all said and done, the American people would understand the importance of taxes and the importance of security. But the people have spoken, and now it's time for us to move on."...

Democratic National Committee Chairman Howard Dean, the party's bantam rooster, barely waited until sunrise to start crowing. In a morning news conference at the National Press Club, he stood with hands in his pants pockets and used the word "extraordinary" nine times and "huge" 12 times.... Republicans were equally determined to show their disunity. While Dean spoke, conservative leaders held dueling news conferences in other rooms at the press club. Their theme: Blame the party, not us. "This was not a repudiation of conservatives," said Pat Toomey, a former GOP congressman. "It was a rejection of the Republican Party." At the rival conservative event across the hall, Richard Viguerie was condemning "the failed big-government policies of President Bush."

GOP officials pointed the finger elsewhere. On Fox News, Republican National Committee Chairman Ken Mehlman said the party's vaunted turnout operation works only "in the very close races." Rep. Tom Reynolds (N.Y.), who led House Republicans' campaign efforts, said more Republicans could have won -- if they had acted more like him. "Just take a look at my race," he suggested....

Bush was trying to tone down the rhetoric from the campaign, when he said the Democratic "approach comes down to this: The terrorists win, and America loses."... But he seemed unsure how much to concede.... He said he was "making a change" at the Pentagon to respond to the voters, but he also said he was going to sack Rumsfeld "win or lose."

And Michael Grunwald:

Republicans' Angry Factions Point Fingers At Each Other - After minutes upon minutes of soul-searching, Republicans are now in recrimination mode. And the GOP's various factions all agree: This wouldn't have happened if the party had listened to us.... [M]oderate Republicans quickly concluded that the party needs to be more moderate. Conservative Republicans declared that it should be more conservative. Main Street is angry at Wall Street, theo-cons are angry at neo-cons, and almost everyone is angry at President Bush and the GOP congressional leadership.... Rumsfeld and... Hastert... agreed to step down.... Frist (R-Tenn.) had already decided to leave Congress, but GOP insiders said Tuesday's debacle should eliminate him from presidential contention in 2008.

By day's end, Republican fingers had pointed at every conceivable Republican scapegoat: ex-representative Mark Foley of Florida and his scandal-plagued colleagues, Republican National Committee Chairman Ken Mehlman, presidential adviser Karl Rove, even Sen. John McCain of Arizona.... GOP lobbyist Ed Rogers.... "Look, bad policy and bad politics makes for bad elections."