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, December 02, 2006

Annals of Game Theory: Deterrence, Signaling, and Idiocy

The two correct and useful applications of game theory to strategy that I know I learned from Nena and from Daniel Davies:

Daniel Davies: If a given real-world course of action appears to have nothing going for it other than a game-theoretic or strategic justification, it’s almost certainly a bad idea. Thus it is with that bastard child of deterrence, “credibility”....

The idea is that the war is costing huge amounts of money and lives with no real prospect of success and a distinct danger that it is making things much worse. However, to do the logical thing would send the signal to our enemies that we will give up if fought to a pointless bloody standstill. Therefore, for strategic reasons, we must redouble our efforts, in order to send the signal to our enemies that we will fight implacably and mindlessly in any battle we happen to get into, forever, in order to dissuade them from attacking us in the first place. It’s got the kind of combination of “counter-intuitive” thinking and political convenience that always appeals to the armchair Machiavelli, as well as to the kind of person who thinks it’s witty to describe things as “Economics 101.”...

What’s it like as a piece of game-theoretic reasoning?

Lousy. It is certainly true that one of the benefits of doing something stupid is that it... [would maintain] your reputation as an idiot. However, is the reputation of an idiot really worth having?... [N]o. If... being [thought] a belligerent idiot... was worth [it]... then everyone would want to get that reputation... [and] simply acting like an idiot [wouldn't] mean that you were one, in which case it would be impossible to establish a reputation as an idiot....

The point here is that... in game theory... a signal has to be a costly signal... a reputation in deterrence theory is something that is worth having, but not worth getting. People who use the word “signal”... don’t... realise that they are explicitly admitting that the costs... are greater than the benefits....

[Thus] it is very difficult for a democracy to establish this kind of credibility.... [A]lthough leaders are often idiots, democratic polities rarely are. It is very hard for a democratically elected leader to credibly commit to a policy of stupidity, because everyone else knows that it is highly likely that the electorate will not support it. I hasten to add that to take this obvious fact and turn it into a Dolchstosslegende, or to bemoan the lack of national vigour in the manner of Victor Davis Hanson is to get the analysis back to front. It is a good thing about democracies that they don’t in general do stupid things....

Furthermore... delivery has to be consistent with the brand; you can’t tell people to ignore part of your message. If it were true that by sticking it out past the bitter end, we were signalling that we were bitter-enders, then what other messages might we have been sending out over the last few years? In particular, what message does our behaviour since 2003 convey on such important topics as: whether or not we want to fight a war against the Islamic ummah? Or whether the best way to protect yourself against us invading you is to get nuclear weapons? Or whether we are reliable allies? Whether our public statements to the United Nations can be trusted? When you start thinking in these terms, you start really worrying about the reputation that we are actually getting.

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

Worst article on Social Security ever: M.P. Dunleavey, "Basic Instincts: Plan to Retire but Leave Out Social Security," New York Times (December 2, 2006).

For quite a while now I have found it to be the case for the Washington Post that whatever is new to me in it is probably not true, and what's true in it is stuff I already knew. The New York Times appears to be starting down the same road.

Friday, December 01, 2006

Curb Your Enthusiasm, Boys and Girls! (Why Oh Why Can't We Have a Better Press Corps? Economist Edition)

Matthew Yglesias peeks over the shoulder of Kevin Drum as he watches Jonathan Singer read the Economist's Lexington column. The column insults our intelligence. Matthew nails it, and calls bulls---:

Matthew Yglesias / proudly eponymous since 2002: A Little Perspective.... [I]n late 2004 and early 2005, the Democrats were in danger of shrinking to become a merely regional party. Now in late 2006, the GOP is once again in danger of shrinking to become a merely regional party.... [H]ysteria... nobody is going to become merely regional -- things will just sort of swing back and forth, with the Democrats maintaining a semi-permanent reservoir of strength in the Urban Archipelago and the GOP having a similar bastion in the South...

What Lexington wrote:

[ Lexington | A national party no more? |

]( The Republicans are in danger of being confined to the South: The Republicans are now engaged in a fierce debate... it is missing an important aspect.... Is the Republican Party in danger of shrinking to its southern base? And is it shrinking at exactly the same time that the Democrats are becoming a more national party?

The extent of the southernisation of the Republican Party is astonishing... all but wiped out in... the north-east... big losses in... the Mountain West.... The only place where the national tide had little impact was in the South.... [A] regional stronghold can become a prison.... [N]on-southerners have grown particularly impatient with the South's brand of in-your-face religiosity....

One should be wary of reading too much into the result of a single election.... But the Democratic advances were more than just a fluke.... The danger for the Republicans is that they will respond... by retreating to their heartland. The incoming Republican delegation will be more southern and more conservative than ever. It is hardly encouraging that the Senate Republicans have just reinstalled Mississippi's Trent Lott as one of their leaders...

Me? I remember that it wasn't all that long ago that the Economist proclaimed that George W. Bush was a political master, that the Republican Party was on its way to global dominance, and that America was becoming an ever more right-wing nation. The Economist, and especially its Lexington, were not the worst of the journamalistic clowns comparing George W. Bush favorably to Winston S. Churchill, but they were the most disappointing. You see, they knew better. And we knew they knew better. And they knew we knew they knew better. And we knew they knew we knew they knew better. But they kept on doing it.

I am bemused at the rapidity and... enthusiasm... with which Lexington appears to be switching gears. Why, on November 2 Lexington began a column by asserting that the Democrats' congressional leader was a political disaster. I call bulls--- on:

Nov 2 2006: NANCY PELOSI... made for caricature... the very embodiment of privileged liberalism... representative of a city, San Francisco, that, as far as most Americans are concerned, is synonymous with ageing hippies, lay-about trustfunders, aggressive beggars and gay parades. Ms Pelosi's public appearances do her no favours... she talks drivel... a mixture of robotic talking-points (the Republicans are guilty of “the politics of corruption”) and clumsy alliteration (the Democrats are a “great collection of idealism, intellect and integrity”). It's like listening to a cross between a Stepford wife and Jesse Jackson...

And back in March Brad Setser was calling bulls--- on:

Mar 27 2006: Brad Setser: The Economist's Lexington columnist needs to get out a bit more.... Rather amazingly, the only US public intellectuals... on... Lexington's radar screen come from the American right. The Neocon right and its pet idea (invading Iraq), the economic right and its pet idea (tax cuts), the Harvey C- Mansfield right and its pet idea (manliness). And the ubiquitous Charles Murray. Lexington could not find any public intellectuals (or ideas) from the center, the center-left or the left worthy of mention.... Or any one working on ideas to remake America's costly and increasingly dysfunctional health care system. Warmed-over proposals to provide high-income Americans with yet another tax deduction (health savings accounts) hardly count as innovative...

And back in January Brendan Nyhan was calling superbulls--- on:

Jan 10 2006: Brendan Nyhan: What is John Micklethwait talking about?... [offers] this ridiculous analysis: "As a result, a president who stormed back to power in 2004 with more votes than any previous candidate will spend a good deal of 2006 on the defensive." Using the number of votes as a metric of electoral success is ridiculous. (Ever heard of population growth?) By more standard metrics such as presidents' popular vote and Electoral College margins, Bush's re-election victory was one of the closest in history... "the smallest margin of victory for a reelected president since 1828."... Not exactly storming back to power...

And the previous November Henry Farrell was calling supersuperbulls--- on:

Nov 17 2005: The Democrats risk painting themselves as either opportunists (who turn against a war when it goes badly) or buffoons (too dim to question faulty intelligence when it mattered). They also risk exacerbating their biggest weakness—-their reputation for being soft on terrorism and feeble on national security.... Mr Bush... one big advantage: the charge that he knew all along that Iraq possessed no weapons of mass destruction seems to be a farrago of nonsense.... Mr Bush made... honest [mistakes] made for defensible reasons.... [H]e was not alone in thinking that, after September 11th, America should never again err on the side of complacency. More than 100 Democrats in Congress voted to authorise the war. But being right and being seen to be right are different things...

Not to mention this:

Nov 24, 2005: Dick Cheney may be hugely unpopular, but George Bush needs him badly...

And in March of 2005 I called supersupersuperbulls--- on the declaration that Wolfowitz's nomination to the World Bank was not a joke:

Mar 16, 2005: [Wolfowitz's] lack of experience... does not necessarily make him a bad candidate. Having served under Donald Rumsfeld... Mr Wolfowitz might... be well placed to bring radical change to an organisation sorely in need of it...

But the champion column on which supersupersupersuperbulls--- needs to be called, I think, comes from March 2003:

Jul 5 2003: Lexington: Hilary Clinton: Now the wronged woman herself... who in their right mind wants to be dragged back to Whitewater... Clintonia, that bitchy, chaotic house party where American politics summered in the 1990s?... George Bush... has done pretty well... fighting hard for his own team.... Mr Bush's capacity to elicit frenzied support from [his] core constituency.... [L]iberals can't lay a finger on Mr Bush... they are just too damn angry... read, say, Paul Krugman's columns in the New York Times and you are often left worrying less about the commander-in-chief than about the columnist-in-a-tizz.... Mr Bush: self-discipline.... There has been a palpable change in the White House's productivity: nobody was better at analysing a problem late into the night than Mr Clinton; but Mr Bush actually gets things done...

It is amusing that the Economist is unable to stammer out a proper apology for all this bulls---, like:

Notice to readers. This week's column about how the Republicans are in danger of becoming a regionalized permanent minority renders many of our earlier columns inoperative. They were all bulls---. We knew it or ought to have known it at the time. Readers wishing to apply to refunds should write to

It's Roubini Friday!

Nouriel Roubini's forecasts of imminent recession look better and better:

Manufacturing May Be Slowing, Fueling Forecasts for Fed Rate Cuts - By CHRISTOPHER CONKEY: December 2, 2006: Fresh data suggest the manufacturing sector is beginning to contract.... The Institute for Supply Management, an Arizona-based group of corporate purchasing managers, Friday said its index of manufacturing activity slid to 49.5 in November from 51.2 in October. Readings below 50 indicate contraction, and the decline ended a 41-month expansion among manufacturers.

"November was a defining month," said Norbert Ore, who oversees the survey and also serves as procurement director for paper manufacturer Georgia-Pacific Corp. "Since April we've seen a pretty consistent decline in the growth of manufacturing. Now we've moved into a no-growth position."... The bond market is pessimistic about the prospects for near-term economic growth and views inflation as contained. It expects the Fed to lower interest rates early next year in an effort to reignite the economy. Mr. Bernanke has struck a more sanguine note, saying the weakness is primarily confined to the housing market. In a speech earlier this week, he also reiterated the need to stand guard against inflation and suggested that rate cuts are unlikely in the months ahead.

Friday's data strengthened the gloomy outlook in the bond market and among other pessimists.... Futures-market traders, mulling the prospect of a manufacturing recession and slower economic growth, increased the probability that the Fed would cut interest rates by April to roughly 74% from 51% earlier in the day. And many economists lowered their outlook for economic growth this quarter after the ISM report's release. ...

Another worrisome sign for the economy surfaced Friday in a Commerce Department report on construction spending. According to the report, nonresidential construction fell in October for the second consecutive month, partially affected by a 3.1% drop in private manufacturing construction. Until recently, a surge in commercial construction had helped offset some of the pain caused by the downturn in residential construction. Residential construction retreated for the seventh consecutive month. Overall, construction spending fell 1% in October from September...

Econ 210a: 2006-2007: The Spread of Industrialization: November 29

Nov. 29. The Spread of Industrialization [DeLong]

The Five Karl Marxes:

Communist revolution is necessary and inevitable because...

The Technology Marx: is not a complement to but a substitute for labor, and so technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system cannot and will be seen to be unable to deliver the good society we all deserve, and it will be overthrown.

The Market Extent Marx: ...businessmen continually extend the domain of captalism, and competition from poor workers in newly-incorporated peripheral regions puts a lid on the wages of labor. Hence inequality grows in the core, and triggers revolution.

The Unveiling Marx: ...previous systems of hierarchy and domination maintained control by hypnotizing the poor into believing that the rich in some sense "deserved" their high seats in the temple of civilization. Capitalism unveils all--replaces masked exploitation by naked exploitation--and without its ideological legitimation, unequal class society cannot survive.

The Ideology Marx: ...although the ruling class could appease the working class by sharing the fruits of economic growth, they will not. They are trapped by their own ideological legitimation--they really do believe that it is in some sense "unjust" for a factor of production to earn more than its marginal product. Hence social democracy will inevitably collapse before an ideologically-based right-wing assault, income inequality will rise, and the system will be overthrown.

The Solidarity Marx: ...factory work--lots of people living in cities living alongside each other working alongside each other develop a sense of their common interest and of class solidarity, hence they will be able to organize, and revolt.

Who is the real Marx? Ah, grasshopper, not until you have learned not to ask that question will you be able to snatch the pebble from my hand...

Total Installed Steam Horsepower in Britain:

In 1800: the equivalent of seven SUVs
In 1870: the equivalent of the motor vehicles registered in Berkeley today...

Romney Appoints Non-Scientist To Stem-Cell Board

A reason to be unhappy with Mitt Romney:

Romney Appoints Non-Scientist To Stem-Cell Board | TPMCafe: By Eric Kleefeld: Mitt Romney, who's trying to cast himself as the true conservative alternative to John McCain and Rudy Giuliani, has appointed a little-known budget planner with zero science experience to a state board which doles out funding for stem-cell research and other biotech initiatives, the Associated Press reports. Romney's pick, Aaron D'Ella, was given the job of executive director for the Massachusetts Life Sciences Center at a salary of $125,000 a year, and no search for better-qualified candidates was undertaken...

The Long Run Is Knocking at the Door...

We have been expecting this. We have been expecting this for six years: a substantial fall in the value of the dollar "in the long run." Now the long run is knocking at the door.

Will it continue? And how fast will it proceed if it does? / MARKETS / Currencies - Dollar slides further on manufacturing data: Dollar slides further on manufacturing data: By Neil Dennis: A turbulent week for the dollar ended with further sharp falls after manufacturing activity in the US contracted for the first time since April 2003. The dollar plunged as low as $1.9847 against sterling and to $1.3348 against the euro on Friday after the Institute of Supply Management’s manufacturing index fell unexpectedly to 49.5 in November, from 51.2 in October. This signalled that manufacturing activity in the US contracted in November after more than three years of growth.

“The ISM index is likely to be alarming for the Federal Reserve given its dual mandate for both growth and inflation,” said James Knightley, at ING Financial Markets. “If the economy slows in line with the ISM, inflation worries will quickly dissipate with the prospect of rate cuts.” A run of weak US data this week has dogged the greenback, adding to a combination of bearish factors. The weak data has heightened expectations that the Federal Reserve will begin cutting US interest rates. This has led to concerns that high levels of risk, such as carry trades, which had hitherto supported the dollar, could be unwound.

The acceleration of dollar losses has amplified the chorus of central bankers talking about diversifying their reserves into other currencies, such as sterling and the euro. Benign inflation data on Thursday took away another crutch for the dollar, with many traders predicting that sterling would soon rise to more than $2.

The sharp dollar declines began last week as a number of central bankers, including the People’s Bank of China, raised concerns that their huge currency reserves could be at risk from the weak US currency. This reignited fears that central banks might be considering a significant shift away from exposure to the dollar.... “Carry trades are high risk, and even without a narrowing of interest rate differentials they might be unwound if investors start to anticipate greater currency volatility,” said Simon Hayley at Capital Economics. Over the week, the dollar fell by 1.7 per cent against the euro, to $1.3322, and by more than 2 per cent against sterling to $1.9798. The dollar’s fall against the yen, one of the most favoured carry trade funding currencies, was less marked, however, and it ended Friday at Y115.26, down 0.6 per cent on the week...

Thursday, November 30, 2006

Partha Dasgupta Makes a Mistake in His Critique of the Stern Review

Partha Dasgupta makes a mistake. This is a rare, rare, rare event. Dasgupta writes, criticizing the Stern Review: To give you an example of what I mean, suppose, following the Review, we set delta equal to 0.1% per year and eta equal to 1 in a deterministic economy where the social rate of return on investment is, say, 4% a year. It is an easy calculation to show that the current generation in that model economy ought to save a full 97.5% of its GDP for the future! You should know that the aggregate savings ratio in the UK is currently about 15% of GDP. A 97.5% saving rate is so patently absurd that we must reject it out of hand. To accept it would be to claim that the current generation in the model economy ought literally to starve itself so that future generations are able to enjoy ever increasing consumption levels...

In the "deterministic economy where the social rate of return on investment is, say, 4% a year" model that Dasgupta is using, the concept of "output" Y is Haig-Simons output--what you could consume and still leave the economy next year with the same productive capacity as it has this year. With that definition of output Y, with consumption level C, and with social rate of return on investment r, it is indeed the case that the growth rate g(Y) of a zero-population-growth economy is:

g(Y) = r(1 - C/Y)

Take the expression for the rate of growth of consumption g(C) as a function of the parameters δ and η:

g(C) = (r - δ)/η

And see that the assumed values for r, δ, and η give us a 3.9% per year growth rate of consumption. If you impose the steady-state requirement that the growth rates of consumption and output be the same, you do indeed get a 97.5% savings rate--that consumption is 2.5% of Haig-Simons output:

C/Y = .025

because with r=4% per year that is the only way to get g(Y)=3.9%

But suppose that you use a different concept of output--GDP--and say that productive capacity increases not just because you save some of GDP but also because of improvements in knowledge and technology g(A), so that:

g(Y) = r(1 - C/Y) + g(A)

with worldwide g(A) equal, say, to 3% per year. Then our g(C) equation still gives us a 3.9% per year total economic growth rate, but our g(Y) equation is then:

3.9% = g(Y) = r(1 - C/Y) + g(A) = 4%(1 - C/Y) + 3%

which gives us a savings rate not of 97.5% of Haig-Simons output but rather of 22.5% of GDP, leaving 77.5% of GDP for consumption.

A consumption-to-output ratio of 77.5% is far from absurd, and so Dasgupta's critique of Stern fails. His mistake is in failing to remember that in his model Haig-Simons output is very, very different indeed from standard reported GDP.

That being said, I agree with most of Dasgupta's major point: the action here is in the choice of the parameter η. I think it's appropriate to consider different ηs in the range from 1 to 5, and think the Stern Review should have done so.

(I'm also enough of a utilitarian fundamentalist to believe that the right value for δ is zero, and that Nordhaus's δ of 3% per year is unconscionable--it means that somebody born in 1960 "counts" for twice as much as somebody born in 1995, who in turn "counts" for twice as much as somebody born in 2020; somebody born in 1960 "counts" for 256 times as much as somebody born in 2160. That's not utilitarianism.)

Annals of Low-Quality Sociometry

People who are for some reason or other much too eager to believe that Black-White test score gaps are immutable and permanent, episode MMCCLXXIV:

The Washington Monthly: CLICK THE LINK....Here is a complete post from Andrew Sullivan last night:

The Black-White Test Score Gap: It isn't going away. Charles Murray and James Flynn debate why here.


The fact that Charles Murray thinks the gap isn't going away is hardly news, but does James Flynn agree? That would be dispiriting indeed.

But there's no need to give up hope. Here's what Flynn really said:

We analyzed data from nine standardization samples for four major tests of cognitive ability. These data suggest that Blacks gained 4 to 7 IQ points on non-Hispanic Whites between 1972 and 2002. Gains have been fairly uniform across the entire range of Black cognitive ability.

That sure doesn't sound like "it isn't going away" to me. Murray and Flynn aren't debating "why," they're debating "whether." And Flynn has the better of the argument.

The Iraq Study Group

Blake Hounshell gets it:

The Plan - American Footprints: Here's the nut of the Iraq Study Group's report, which comes out on December 6th:

Committee members struggled with ways, short of a deadline, to signal to the Iraqis that Washington would not prop up the government with military forces endlessly, and that if sectarian warfare continued the pressure to withdraw American forces would become overwhelming. What they ended up with appears to be a classic Washington compromise: a report that sets no explicit timetable but, between the lines, appears to have one built in.

As one senior American military officer involved in Iraq strategy said, “The question is whether it doesn’t look like a timeline to Bush, and does to Maliki.”

Of course, they have failed. It will look like a timeline to Bush, and like not-a-timeline to Maliki.

What the Iraq Study Group should have done, of course--if they wanted to serve their country--was to call for two things, immediately:

  1. The resignation of Richard Cheney.
  2. The appointment of a "national security czar," whose decisions Bush would rubber-stamp--no longer the "Decider" but the "Approver."

Wednesday, November 29, 2006

Cu'atyhv Ztyj'ansu Puevf Syblq E'ylru Jnu'anty Sugnta!

Chris Floyd is the shrillest creature who was, or is, or is to come. It's Tom Friedman's fault. It is a thing of beauty in its own way.

That is all. Words fail me else.

Do I Need This?

Is it worth it just to be able to say that I was the first on my block to have a terabyte of digital storage in my house?

LaCie - Big Disk Extreme with Triple Interface - USB 2.0, FireWire 400, FireWire 800: The LaCie Big Disk Extreme with Triple Interface delivers seriously impressive capacity while reaching never-before-seen transfer rates that are up to 50 percent faster than 1st regular generation FireWire 800 drives*. With FireWire 800, FireWire 400, and Hi-Speed USB 2.0 interfaces, this plug & play hard drive can help you share data among the widest range of user platforms. Achieve a transparent, built-in RAID 0 array without complicated configuration with its compact 5.25” 1U design. Use it to store presentations, archive image banks or pre-press files, or exchange audio/video projects. The combination of Extreme speed and huge capacity make it ideal for audio/video professionals working on large-scale editing projects or wanting to chain FireWire or iLink DV cameras.

It probably isn't even a real terabyte--that is, it's probably just 1,000,000,000,000 rather than 1,099,511,627,776 bytes.

Econ 210a: 2006-2007: Memo Question for December 6

What is Alexander Gerschenkron's view of the role of financial markets and institutions in economic development? How might he have modified it had he known about the four decades of development experience that now post-dates his article?

Tuesday, November 28, 2006

The Budget Process Gets More Deranged

Stan Collender:

BUDGET BATTLES : Punt, Pass And Kick By Stan Collender, Tuesday, Nov. 28, 2006: After the House and Senate passed their own versions of a FY07 budget resolution earlier this year, they made virtually no attempt to compromise and come up with a conference report. Instead of developing a budget plan, the leadership decided not to do anything. In other words, they punted.

Congress punted again on the budget after Labor Day when there was no push to get any appropriations other than Defense and Homeland Security to the White House before the election.... Therefore, it is hardly surprising that after the election Congress has again decided to punt. The decision apparently made by the House and Senate leadership last week not to consider any of the remaining FY07 spending bills is completely in line with what it has done all year.

Instead of trying to enact even some of the remaining appropriations, Congress will adopt a continuing resolution that will keep the government funded until sometime in January or February. In other words, the Republican leadership has decided to pass the budget decisions to next year's Democrat-controlled Congress.... [I]t still seems strange that rather than try to take advantage of their final days in power, congressional Republicans would pass the decisions to the other team.

There is talk that this is actually a deliberate plan by some Republican fiscal conservatives in the Senate to strengthen their party’s budget credentials. By not voting for any individual appropriations and instead only going on record in favor of a continuing resolution with a spending level that is way below what will be approved in the individual bills, they supposedly believe that Democrats will be blamed for the increase in spending in the individual bills even though it likely would have been approved by a Republican majority anyway.... Their assumption is that the narrow Democratic majorities in both houses will make a veto override extremely unlikely, forcing Democrats to lower the appropriations while the White House and congressional Republicans get credit for forcing the reductions.

The Republican "punt, pass and kick" budget strategy points to a number of things happening early next year. First, there will probably be a big confrontation between the White House and Congress on the budget early in the year. The fighting and rhetoric could be vicious. No matter what spending levels are approved by the Democrat-controlled Congress, the White House and congressional Republicans will try to label them as excessive... this could easily be the first real battle between the new Congress and the White House next year.

Second... a government shutdown early next year is possible. The best way for Democrats to take away the advantage the veto will give the president will be to... combine the remaining FY07 appropriations into a single omnibus bill and to send it to the White House just hours before the continuing resolution expires.

That would force the White House either to agree with the spending levels or to take the blame for shutting down almost all federal domestic departments and agencies. That proved to be politically devastating in 1995 for a group of congressional Republicans who were far more popular, had a higher job approval rating and better fiscal credentials and spokespeople than the current administration. It's hard to imagine how a government shutdown in 2007 would turn out any better.

Third, the "punt, pass and kick" budget strategy is almost guaranteed to eliminate any possibility of increased political comity...

The Madmen in the Attic...

Here Mark Thoma watches Tony Giddens in the Guardian discourse on conditions for a "revival of sociology." I listen for a while, and then I want to sidle quietly away before I am noticed:

Economist's View: Did Economics Crowd Out Sociology?: A call to arms, by Anthony Giddens, Commentary, The Guardian:

All you sociologists out there! All you ex-students of sociology! All of you (if there are such people) who are simply interested in sociology and its future! I'd like to hear from you. We live in a world of extraordinary change, in everyday life, family relationships, politics, communications and in global society. We are witnessing, among other things, a return of the gods, as religion re-emerges as a major force in our societies, locally and on a worldwide level.... [W]hy isn't sociology again right at the forefront of intellectual life and public debate?...

I would suggest two main ones. First, sociology's star was dimmed by the rise of market-based philosophies from the early 1980s onwards. As a phase of government, market fundamentalism lasted some twenty years - roughly the period covered by the Reagan and Thatcher governments.... If markets settle most aspects of social life, including social justice, the scope of social factors - the prime province of sociology - is correspondingly reduced. The economic, as it were, predominates heavily over the social.

A second reason I would single out is the impotence many people feel in the face of the future. There are no longer utopian projects that would supply a source of direction.... [S]ociological thinking... was regularly stimulated by an engagement with those who wanted to change the world for the better. ...

What is the remedy...? Market fundamentalism is disappearing from the scene. The stage is set for a return to the social. After all, even the IMF these days gives social and political factors a significant place in development processes - and Mrs Thatcher is long gone....

The answer for me is a return to the style of thinking that originally drove the sociological enterprise. A little bit more utopian thinking might help too... We need more positive ideals in the world... that link to realistic possibilities of change...

I would be less alarmed by Tony Giddens if I were sure that he knew that of the two Bretton Woods institutions it is the IMF--the "Fund"--that is focused on international capital flows, reserves, and exchange rates; and that it is the IBRD--the "World Bank"--that is focused on development processes.

I would be less frightened of Tony Giddens if I believed he took the extraordinary reach and power of market exchange in our world to be something important and interesting to analyze, rather than something regrettable that we mention as little as possible now that Mrs. T. no longer lives in Downing Street, and that we deal with by boxing it up into obsolete Marxist categories.

And I might even be comfortable with Tony Giddens's having access to metal and not just plastic knives if there was less visible nostalgia for the days when so many sociologists were stooges in search of a... well, that's not fair. But let us roll the videotape, and remember just what the "utopian thinking" of the 1970s that Giddens sees as a source of energy for sociology really was--from The Capitalist World Economy that I was assigned in my junior year:

Immanuel Wallerstein, "Modernization: Requiescat in Pace": [Modernization theory] was unquestionably a worthy parable... manipulated by the masters of the world.... [T]he time has come to put away childish things... look reality in the face. We do not live in a modernizing world but in a capitalist world.... The problem for oppressed strata is not how to communicate within this world but how to overthrow it....

[O]nce capitalism was consolidated as a system and there was no turnback... the proletarianization of labor and the commercialization of land.... It will in fact only be with a socialist world-system that we will realize true freedom (including the free flow of the factors of production). This is indeed what lies behind Marx's phrase about moving from the 'realm of necessity into the realm of freedom'.

I do not intend here to preach a faith. Those who wish will believe. And those who do not will struggle against it. I wish rather to suggest an agenda of intellectual work for those who are seeking to understand the world-systemic transition from capitalism to socialism in which we are living, and thereby to contribute to it....

This then brings me to the fourth system based on a socialist mode of production, our future world government. We are living in the transition to it, which will continue for some time to come. But how are we relating to it? As rational militants contributing to it or as clever obstructors of it (whether of the malicious or cynical variety)?...

Monday, November 27, 2006

We Lie When George W. Bush Wants Us To--Dana Priest

Yep. That's what Washington Post reporter Dana Priest tells Chris Matthews she and the other writers for the Washington Post do. When George W. Bush's flunkies--"our elected government"--want them to avoid calling a spade a space, they call it a bouquet of flowers.

You see, Dana Priest thinks Iraq is in a "civil war." But she won't call it that in her prose for the Washington Post. Why not?


MATTHEWS: It seems to me the President's afraid that people will begin to think it is a civil war and not the way he wants to define it, which is we gotta fight them there before they fight us here.

PRIEST: Well, I think one of the reasons the President resists that label is because it equates almost with a failure of U.S. policy. I will say for the Washington Post, we have not labeled it a civil war. I have asked around to see why not or see what's the thinking on that and really our reporters have not filed that. We try to avoid the labels, particularly when the elected government itself does not call its situation a civil war. I certainly -- and I would agree with General McCaffrey on this -- absolutely the level of violence equals a civil war.

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

Depressed About Doha

Brown and Paulson for free trade. They depress Stefan Geens:

RGE - Salvaging Doha: Brown and Paulson have a go: Salvaging Doha: Brown and Paulson have a go Stefan Geens | Nov 27, 2006 A strangely depressing op-ed piece in the Wall Street Journal this morning: Two intelligent grown men -- U.K. chancellor of the Exchequer Gordon Brown and U.S. Treasury secretary Hank Paulson -- reduced to arguing for free trade from first principles in a bid to salvage the Doha round of trade talks from protectionists among their own ranks. They're eloquent, however:

Despite the successes of trade and liberalization, protectionist forces would have us believe that increased trade and openness hurt the U.S. and the U.K. Maintaining rules and regulations that inhibit competition may appear to be a measure of self-preservation for domestic workers and companies. It is, in fact, self-defeating.

Nations are linked by trade more closely than ever before. So protectionist policies do not work, and the collateral damage from these policies is high. We must have the education and assistance to minimize and soften the dislocations that come from trade. But we must not, in the name of jobs that are becoming uncompetitive and unsustainable today, eliminate more jobs and higher wages tomorrow.

This is so self-evident, and yet here we are in 2006 making arguments for something that should have been settled conclusively decades ago.

I Belong to No Organized Political Party

Matthew Yglesias says: can't we all just get along? In the process he confirms some of my fears.

Matthew Yglesias / proudly eponymous since 2002: Both/And Not Either/Or: With regard to the split between the Economic Policy Institute's populists and the Hamilton Project's centrists, I would hope that both sides of this debate would see that they need each other. On issue after issue, there's simply no way you're going to build a constituency, politically speaking, for Hamilton-style technocratic tinkering unless moderate Republicans and the business community see a credible risk of something more far-reaching happening. On trade, for example, if folks thing anger at the downside of these agreements really may cause the agreements to fall apart then suddenly you'll find its possible to do lots of stuff to mitigate downsides.

Conversely, it's useful to populists for there to be a moderate left out there offering non-sweeping proposals for progressive change. Absent some kind of giant crisis, the odds of congress finding itself inspired to make a giant leap to social democracy are just incredibly tiny. I'm all for universal health care and most of the rest of this agenda, but while some folks are off building support for sweeping reform, it's good to have other people around slicing the salami thinner such that something could actually be achieved in the short run.

One area where the rubber really does hit the road here is the deficit. If Democrats take the view that first we must balance the budget, then we must bring the budget into surplus, and then we can institute new programs, the country is going to be stuck forever in the Reagan-Clinton-Bush loop where the time for new programs never comes. On fiscal responsibility, it takes two to tango, and insofar as the GOP doesn't want to dance, Democrats can't afford to take sole responsibility.

The most interesting part of this, for me, is the last paragraph. Matthew Yglesias is serving notice that, at least as far as he is concerned, Rubinomics is dead. Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But whatwe turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality.

We will try to argue for fiscal prudence and stability in the councils of the Democratic Party. But I fear this is a bellwether--that we will lose, because the choice will be presented as between (i) left-wing things that are good for the nation, and (ii) centrist things that simply enable another round of right-wing class war by the rich and their minions a decade hence.

Ah well:

Hige sceal þe heardra,
heorte þe cenre,
mod sceal þe mare,
þe ure mægen lytlað

The Tolkein Translation

Will shall be the sterner,
heart the bolder,
spirit the greater
as our strength lessens

Why Oh Why Are We Ruled by These Liars?

Duncan Black notices one:

Eschaton: Snap: Booby Woodward just called Laura Bush a liar (not with that word of course). Funny.... and the transcript just landed in my inbox:

LAURA BUSH, FIRST LADY: Andy Card, also went on television and said that's not true. And let me just say the one thing about that book: Those quote of mine, were in quotes, and the author didn't call me and fact check. And it just didn't happen.

KURTZ: Your response?

WOODWARD: Well, first of all, Andy Card, as you know, has gone on television and said the quotes are accurate. And that they did happen. And the first lady is saying that what she said and -- again, there is a way, and a habit they have in the White House of you write something and then they kind of pick it up one step, then they deny the version that they say you wrote.

Why Oh Why Can't We Have a Better Press Corps? (Thomas Edsall Version)

Matt Stoller is unhappy with Thomas Edsall:

MyDD :: Direct Democracy for People-Powered Politics: I've met Tom Edsall a few times.... I remember one time in particular at a press conference with Howard Dean; he pushed to get Dean to answer a question about Hillary Clinton, which of course Dean would not. This was just after Seymour Hersh had come out with an article about how the US was planning for a nuclear attack on Iran. I decided to ask Edsall about this scenario. Edsall said that he believes that we were going to nuke that country, and I asked him if he thought that might not be more important than trying to get Dean to slip up on Hillary. Edsall just sort of shrugged his shoulders, and said that it's not his responsibility to focus on that story because he's not an editor of the paper and doesn't make the choices about what to cover....

[I]f you need evidence that journalists in DC adopt the biases of their sources and eagerly sop up conventional wisdom, you need go no further than Edsall. Look at who he doesn't like in this article - pro-choice groups, unions, and minority rights groups.... Edsall of course didn't talk to a janitor who just got a raise in Houston, he didn't talk to a Goodyear worker losing his job, or a displaced New Orleans resident, or a NJ retiree with good pension and benefits because of his union. Edsall talked to his friends, and his friends know, they just know, how important better parking spots are. To these people, knocking labor unions just feels so right, doesn't it?...

[I]n Edsall's world, corporate media barons are part of the coalition of 'dominant', and unions are not. So even though the Republican Party was soundly repudiated at the polls in favor of a strongly populist Democratic Party backed by labor, and a touchstone abortion ban was popularly rejected in one of the reddest states in the country, Democrats have no choice but to reject unions and pro-choice groups, or they will face judgment at the polls...

More Stupidest Men Alive Nominations from National Review and the New Republic

A correspondent nominates Victor Davis Hanson for the Stupidest Men Alive contest for this from National Review--perhaps the last bit of psychotic Bush-worship ever:

The Corner on National Review Online: there really will come a time, believe it or not, when a future American President baffled and paralyzed by the latest insanity from the Middle East--whether an Iranian nuke or a Syrian invasion of Lebanon or another Middle East war or the usual assassination and killing of Americans--will ask former president George Bush II for advice, as a then fawning media will look back to his past "toughness" and "determination" when under fire.

Another correspondent nominates James Kurth for the Stupidest Men Alive contest for this from The New Republic--a deranged Godwin's Law violation that declares non-Shia Muslims to be Nazis:

James Kurth; Iraq: What Next? Disenfranchise the Sunnis: Baathist Iraq was often compared to Nazi Germany: Saddam was said to play the role of Adolf Hitler and the Baath Party that of the Nazi Party. A more accurate comparison, however, would analogize the Baath Party to the Waffen S.S., the Nazi Party's elite unit, and the Sunni Arab community to the Nazi Party as a whole, which eventually made up as much as 15 percent of Germany's population.

But, unlike their Nazi counterparts in Germany in 1945, the Sunni Arabs in Iraq in 2003 were not totally defeated, devastated, and demoralized by the time their government was toppled. Consequently, they were soon able to initiate and support a vicious insurgency...

I'm going to declare moral equivalence here.

Meanwhile, in Iraq

Impeach George Bush. Impeach him now. Juan Cole says the situation in Iraq is even worse than I had imagined:

Informed Comment: How bad the situation is in Iraq is suggested by this email I just got from a professional who used to be in Iraq but now is in a nearby country:

It is desperate in Iraq, worse then ever and there is no end in sight. I had lunch with [a former high ranking medical educator in Iraq] two days ago. [He]noted that Iraq no longer has neuro-surgeons, no cardiac surgeons, few pediatric doctors - they are all gone, killed or fled to neighboring countries like him. He was given seven days to get out or be killed. He is one of the lucky ones. He and his family have an opportunity for a new life in the US. But what about all the others. Where are they to go?

Another friend, a Sunni sheikh of the Shammar tribe noted to me that thousands of former officers are prepared to assault the G[reen] Z[one]. It is no longer a matter of can they do it, they are only mulling over the timing. The breach of the Green Zone security the other day was a test of their ability to get in, and not a real attempt at a coup, though it is reported as such.

Every Iraqi I talk to says unambiguously that the resistance attached to the former regime would take out the Shiite militias with barely a fight, but that the resistance will not commit wholesale revenge against the Shiite population. They just want to get rid of the "carpet baggers" from Iran.

And Juan Cole seems a little bit naive, writing:

Muqtada al-Sadr, the young Shiite nationalist cleric, is said to be afraid that he cannot constrain his Mahdi Army militiamen from taking revenge on the Sunni Arab community for Thursday's mass slaughter.

Hasn't Muqtada al-Sadr spent years building a situation in which he can ride a wave of murder to political power?

The Best of Spencer Ackerman Weekly: November 24, 2006 Edition

The best of Spencer Ackerman weekly:

toohotfortnr: But the hangman isn't hanging so they put you on the street: Anne-Marie Slaughter's piece in the Gigantic Self-Parody issue of TNR is among the more interesting ones. She takes a tour d'horizon and finds that Iran, Syria and Saudi Arabia are threatened by the Iraqi civil war.... [Here we have] a liberal-hawk's hawkishness undermining her liberalism, and then rebelling to subordinate her hawkishness within her liberalism. AMS contends... that we have a first-order interest in pulling out of Iraq and allowing the civil war to consume our adversaries instead of us. She finds this distasteful, and shameful, and not without some reason: civil wars are bad. But strategically, this is a hash.... If we have an interest in leaving, and not in staying, get the f--- out.... And if you're not comfortable doing what's in America's interests, shut the f--- up about foreign policy and national security.

Behold Moqtada Sadr, the true ruler of what remains of Iraq. At present, Sadr is being challenged: the Sunnis have stormed his health ministry and bombed his stronghold. So now he's pulled rank on Nouri al-Maliki. His followers are threatening to walk out of Parliament if Maliki meets with Bush in Jordan as scheduled.

Smart move, Moqtada. Leaving Bush high and dry in Amman would stick a thumb right in the White House's eye -- the government that nearly 3,000 Americans have died for would be snubbing its benefactors. It's extremely hard to see how Maliki can acquiesce, which I gather is Moqtada's ploy. If Maliki calculates that he can't afford to snub the president, he will cut himself off from the rising Shiite power... does he insult the Americans or his own Shiites? Whatever Maliki does, he will forfeit what remains of his political profile, and will be revealed either as Moqtada's man, or Bush's.

Look to this as the start of the end of Maliki's tenure as PM. An overwhelming 74 percent Shiites want the Americans out within the year. If he goes to Jordan, the Shiites don't need to believe in Moqtada to see Maliki as the wrong man to deliver the end of the occupation....

What gives you the right to f--- with our lives: LII to LVII...

My Name is Rachel Corrie has been pretty roundly panned as poor theatre and tendentious politics.... [T]he young American activist who travelled to Gaza to stop Israeli demolition of Palestinian homes and was run over, perhaps accidentally, by a bulldozer. That said, this TNR review... James Kirchick, pretends not to know about a million and one things about how people view the Israeli-Palestinian conflict. For instance:

The selection of Corrie's writings on display never adequately explains why she would so determinedly seek out a dangerous place she knew little about, other than that she had a deep antipathy toward "injustice."

"Other than"! Is this so hard to understand? If one expresses despondence over injustice, it is not hard to see how that might lead one -- especially if one is a perhaps-fluffyheaded college student -- to be pissed off at Israel.... [T]his passage is idiotic:

[T]his adorable video is meant to convert your sympathy for Corrie into sympathy for her cause. How dare we ridicule such an precocious and idealistic young girl who now lies dead because of her devotion to world peace? What right do any of us have to question the cause for which Corrie gave her life?

Sorry, a------, but yeah, how dare you ridicule Rachel Corrie? What drives you to do so, aside from an adolescent impulse.... Kirchick attempts to turn Rachel Corrie into a suicide bomber.... [H]e says that Corrie has become a "Palestinian suicide martyr," knowing full well the implication of that term -- except, you know, she didn't commit suicide, nor did she murder anyone.... And he accuses others of eliding "intricacies"...

Seriously now: I'm a religious reader of the Weekly Standard's blog, written by Daniel McKievergan, largely because I find it amazing that someone so old and so wild-eyed insane can be so illiterate. And today, he doesn't disappoint, as he cheers the hiring of Marshall Wittmann to Joe Lieberman's communications team. Goody goody all around.... McKievergan really likes John McCain. And that's cool -- so does the Standard, so do lots of people.... [S]houldn't he have some kind of disclaimer saying he used to work for McCain? Seems, you know, pertinent...

New piece from The American Prospect about the Baker-Hamilton commission's implications for both the Iraq debate and the 2008 presidential contest:

[V]iewing Baker and Hamilton's work as primarily intended for a Bush administration unwilling to change its approach is a mistake. It's true that the day after the midterm victories by the Democrats, Bush accepted the resignation of Defense Secretary Donald Rumsfeld and replaced him with a member of the commission, his father's CIA director, Robert M. Gates. But the commission itself is under no such illusion that it will have much more than cosmetic impact on the administration. When I asked someone close to the Iraq Study Group if the group intends to save Bush from himself, the source laughed. The greatest utility Baker and Hamilton's report will provide, he suggested, is for Bush's would-be successors. In one fell swoop, the commission is likely to transform the nascent 2008 presidential primary fields. By blessing withdrawal, it will unite the Democratic Party -- and rip the Republican Party wide open, along its most volatile fault line...

Put me down on the side of Anne-Marie Slaughter, however. The proper grand strategy for the U.S. is not one of jockeying for advantage and causing trouble for our "enemies" by creating situations in which lots of hapless innocents get killed. The proper grand strategy for the U.S. is that of a hegemonic benevolent superpower seeking to spread peace and prosperity throughout the globe.

Hotel Iraq

Impeach George W. Bush. Impeach him now:

Unfogged: The crack in the dam is spreading quickly: Posted by Apostropher on 11.25.06: The news coming out of Iraq tonight is very, very bad.

Followers of the militant Shiite cleric Muqtada al-Sadr took over state-run television Saturday to denounce the Iraqi government, label Sunnis "terrorists" and issue what appeared to many viewers as a call to arms. The two-hour broadcast from a community gathering in the heart of the Shiite militia stronghold of Sadr City included three members of al-Sadr's parliamentary bloc, who took questions from outraged residents demanding revenge for a series of car bombings that killed some 200 people Thursday.

With Iraqi Prime Minister Nouri al-Maliki relegated to the sidelines, brazen Sunni-Shiite attacks continue unchecked despite a 24-hour curfew over Baghdad. Al-Sadr's Mahdi Army militia now controls wide swaths of the capital, his politicians are the backbone of the Cabinet, and his followers deeply entrenched in the Iraqi security forces. Sectarian violence has spun so rapidly out of control since the Sadr City blasts, however, that it's not clear whether even al-Sadr has the authority - or the will - to stop the cycle of bloodshed.

As noted here, if you've seen Hotel Rwanda, that opening sentence just made you shudder. Neighborhoods are forming their own militias and digging trenches across entry roads. People are panic-buying ammunition because everybody believes all hell is about to break loose. If al-Maliki goes to Jordan to attend the summit with Bush, his government is likely to fall.

And there we stand in the middle of it all, without the faintest idea what to do.

Is a Recession Imminent? (2006-32, 11/24/2006)

Two worth reading from the Federal Reserve Bank of San Francisco: John Fernald and Bharat Trehan: >[Is a Recession Imminent? (2006-32, 11/24/2006)]( The sharp slowdown in housing and the inverted yield curve have led to concerns that the odds of a recession have risen.... Our review of the evidence suggests two conclusions: First, recessions appear difficult to predict; second, while the probability of a recession over the next year may now be somewhat elevated, it does not appear to be nearly as high as the yield curve suggests.... >The yield curve is perhaps the best known of all the indicator models used to predict recessions.... [A] model developed by Wright (2006) that uses information on the term spread and the funds rate... estimates a 47% probability of recession over the next four quarters.... >There is reason to be skeptical about the current high estimate of the probability of recession, because the unusually low rates at the long end of the yield curve are not well understood.... >[T]he ability of the yield curve to forecast recessions is often attributed to the fact that the long-term rate reflects market expectations about future developments in the economy. But in that case, one would expect professional forecasters to have this information as well, leading to survey probabilities similar to those from the yield curve. At a minimum, forecasters should be incorporating information from the yield curve into their forecasts... And Michele Cavallo on the carry trade and the failure of uncovered interest parity: >[Interest Rates, Carry Trades, and Exchange Rate Movements (2006-31, 11/17/2006)]( The U.S. dollar has seen some remarkable swings.... Many observers have related these swings to what is known as the carry trade... investors in international financial markets... exploiting the existence of interest rate differentials across countries. >The use of this strategy by investors is puzzling, as the theory of interest parity conditions implies that it should not generate predictable profits.... [A]n investor borrows a given amount in a low-interest-rate currency (the "funding" currency), converts the funds into a high-interest-rate currency (the "target" currency) and lends the resulting amount in the target currency at the higher interest rate.... >According to economic theory, an investment strategy based on exploiting differences in interest rates across countries should yield no predictable profits.... [T]he difference in interest rates between the two countries [should] simply reflects the rate at which investors expect the high-interest-rate currency to depreciate.... In practice, however, investors in international financial markets do seem able to make profits through such strategies. In fact, market participants and commentators have often cited the carry trade as the source of several recent exchange rate swings.... >If the carry trade is a risky strategy, why are investors reported to use it extensively? The answer lies in the "forward premium puzzle."... Currencies that ... have a low interest rate... tend, on average, to depreciate, not appreciate.... [C]urrencies that... have a high interest rate, tend, on average, to appreciate, not depreciate.... >Burnside et al. find that, for the period from 1977 to 2005, the realized cumulative return to their [carry trade] strategy is very similar to that of investing in the S&P500 index... [with a] the lower volatility of its returns...

Looking Forward to the Real-Side Adjustments When the Dollar Declines

Menzie Chinn from last August on how manufacturing matters:

Econbrowser: Does Manufacturing Matter? An Update: Here's the policy implication: If one needs to get the trade deficit to GDP deficit down from the 6 percentage points recorded in 2006q2 to say 2 percentage points, the implied 4 percentage points of adjustment will have to take place over either 12 or 39.5 percentage points worth of value added (in the tradeables sector).

We had better hope that the tradable share of GDP is closer to the 39.5 ppts., or that there is going to be a lot of labor that will be freed up from construction and nontradable services that can easily be reallocated to manufacturing, mining and tradable services with relatively low adjustment costs (realtors as computer code-writers!). The adjustment will be harder if rest-of-world demand (knzn's hope for defense against a recession) doesn't pick up the slack of declining US absorption.

In other words, those who said we should import and borrow as much as possible while prices of imports and interest rates were low were implicitly assuming the adjustment costs of reallocating resources across sectors were also low. Time will tell if they were right.

The Dollar Looks 40% too High, and Long Treasury Yields Look 200 Basis Points too Low

John Fernald and Bharat Trehan worry about the possibility of a recession:

Is a Recession Imminent? (2006-32, 11/24/2006): The sharp slowdown in housing and the inverted yield curve have led to concerns that the odds of a recession have risen.... Our review of the evidence suggests two conclusions: First, recessions appear difficult to predict; second, while the probability of a recession over the next year may now be somewhat elevated, it does not appear to be nearly as high as the yield curve suggests....

The yield curve is perhaps the best known of all the indicator models used to predict recessions.... [A] model developed by Wright (2006) that uses information on the term spread and the funds rate... estimates a 47% probability of recession over the next four quarters....

There is reason to be skeptical about the current high estimate of the probability of recession, because the unusually low rates at the long end of the yield curve are not well understood....

[T]he ability of the yield curve to forecast recessions is often attributed to the fact that the long-term rate reflects market expectations about future developments in the economy. But in that case, one would expect professional forecasters to have this information as well, leading to survey probabilities similar to those from the yield curve. At a minimum, forecasters should be incorporating information from the yield curve into their forecasts...

In my view, there is (some chance of) three things happening as a result of the fact that long-term U.S. Treasury interest rates are nearly 200 basis points lower than historical average patterns suggest they should be:

  1. U.S. short-term interest rates are about to fall by an expected 200 basis points or so--in other words, a recession is about to begin and the Federal Reserve will cut interest rates in response.
  2. Investors today are not nearly as averse to liquidity and price risk associated with holding long-term bonds, and as a result there has been a large permanent decline in the term premium.
  3. Investors believe in (1) or (2) or some chance of each, but they are wrong: there are huge amounts of money left on the table for people willing to short long-term Treasuries, go long short-term Treasuries, and wait for price relationships to return to normal.

Menzie Chinn worries about the possibility of a dollar crash:

Econbrowser: Will the Dollar Plunge? Would that Be So Bad?: One of the enduring oddities of the international economy is the willingness of foreign investors -- both private, official, and quasi-state -- to hold dollar assets despite the very low returns on such assets, even when comparing in common currency terms. It is this anomaly that Krugman disucusses in an academic paper asessening the possibility of a dollar crisis.

Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences? The answer to the first question depends on whether there is investor myopia, a failure to take into account the requirement that the dollar eventually fall enough to stabilize U.S. external debt at a feasible level. Although it's always dangerous to second guess markets, the data do seem to suggest such myopia: it's hard to reconcile the willingness of investors to hold dollar assets with a very small premium in real interest rates with the apparent necessity for fairly rapid dollar decline to contain growing foreign debt.

The various rationales and rationalizations for the U.S. current account deficit that have been advanced in recent years don't seem to help us avoid the conclusion that investors aren't taking the need for future dollar decline into account. So it seems likely that there will be a Wile E. Coyote moment when investors realize that the dollar's value doesn't make sense, and that value plunges.

The presumption that there is investor myopia means that median measures of exchange rate expectations might provide very inaccurate indicators of what will happen in the future. Right now, typical forecasts are for gradual dollar depreciation -- 8 percent over the next twelve months (in log terms) from November 17th, according to DeutscheBank. The USD/EUR rate is forecasted to depreciate by 5.3 percent. In contrast, the Economist reports JP Morgan forecast of zero USD/EUR depreciation over the next year from November 23rd.

Investor myopia might explain -- or at least is consistent with -- the finding that uncovered interest parity (UIP) doesn't hold. Indeed, the failure of UIP is one reason why the "carry trade" is so profitable [see Mike Rosenberg's (Bloomberg) discussion of the long standing nature of carry trade profitability at the end of this chapter]. Of course, in a portfolio balance model common currency returns need not be equalized. But the extent to which the rate of return on USD denominated assets is less than those on other assets is too large to be rationalized by standard portfolio balance models.

On the second question posed, Krugman is much more sanguine. Since balance sheet effects are not relevant (or more accurately, work to the benefit of the US via valuation effects), the dollar decline should have a net positive effect on aggregate demand via expenditure switching. This view is buttressed by the empirical work of Croke et al. (2005) as well as Freund and Warnock (2005).

He is a little less optimistic about avoiding a slump if the current strength of the dollar is due to investor myopia, and housing prices exceed those consistent with rationality and the transversality condition (for instance, if there is a bubble). A downward revision in both the relative market-to-book price (i.e., "q") of housing as well as the value of the dollar might induce a slump if the lags in adjustment to the exchange rate are longer than those to housing prices. My own view is that is likely to be the case.

Indeed, the lags to exchange rate changes are more likely to be longer, the harder it is to move capital and labor to the export sector. After the battering taken by the tradable sector over the past decade, I worry.

And Michele Cavallo worries as well about the carry trade and the failure of uncovered interest parity:

Interest Rates, Carry Trades, and Exchange Rate Movements (2006-31, 11/17/2006): The U.S. dollar has seen some remarkable swings.... Many observers have related these swings to what is known as the carry trade... investors in international financial markets... exploiting the existence of interest rate differentials across countries.

The use of this strategy by investors is puzzling, as the theory of interest parity conditions implies that it should not generate predictable profits.... [A]n investor borrows a given amount in a low-interest-rate currency (the "funding" currency), converts the funds into a high-interest-rate currency (the "target" currency) and lends the resulting amount in the target currency at the higher interest rate....

According to economic theory, an investment strategy based on exploiting differences in interest rates across countries should yield no predictable profits.... [T]he difference in interest rates between the two countries [should] simply reflects the rate at which investors expect the high-interest-rate currency to depreciate.... In practice, however, investors in international financial markets do seem able to make profits through such strategies. In fact, market participants and commentators have often cited the carry trade as the source of several recent exchange rate swings....

If the carry trade is a risky strategy, why are investors reported to use it extensively? The answer lies in the "forward premium puzzle."... Currencies that ... have a low interest rate... tend, on average, to depreciate, not appreciate.... [C]urrencies that... have a high interest rate, tend, on average, to appreciate, not depreciate....

Burnside et al. find that, for the period from 1977 to 2005, the realized cumulative return to their [carry trade] strategy is very similar to that of investing in the S&P500 index... [with a] the lower volatility of its returns...

The message appears to be that the dollar's value is out-of-whack--too high--because nobody expects it to decline by a lot in the near future, and that expectation means that demand for dollar-denominated securities is high because U.S. interest rates are higher than interest rates in Japan and Europe. One again, it looks like there may well be lots of money left on the table.

A conversation in London:

Trader: We have to take off this short-dollar position. We have no edge in predicting exchange rate movements, and it is costing us 1/2 a percent of the leg every quarter. We need to show good short-term results to keep our investors, and this isn't helping.

At which point the fund's principal says one of two things:

Principal: You are right. Liquidate...


Principal: A, grasshopper. The fact that people like you are coming to people like me telling me that we must take off this short-dollar position is the reason that we must keep the position on...

A Question

When the two children and the dog are fighting over who gets to sit on the family room heating vent on Sunday morning, is this a sign that we have set the thermostat too low?

Social Security Reform

The Economist hopes for a grand bargain on Social Security reform:

Ingredients of a grand bargain? | Free exchange | So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg outside the government pension system. As part of their schtick on dealing with "middle class anxiety", Democratic wonks have all kinds of ideas for getting ordinary Americans to save more. Some stem from the insights of behavioural economics (such as automatically enrolling workers in 401(k) plans unless they explicitly choose to opt out). Others involve restructuring tax subsidies towards the less affluent by, for instance, replacing today's system of tax-deductions with a limited government match. A paper for the Brookings Institution's Hamilton Project by Bill Gale, Jonathan Gruber and Peter Orszag lays out the details.

If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise. One option: combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan. You can find all the details over at Vox Baby but it is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense.

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see. After 2000 Bush was interested in--well, it was never clear what Bush was interested in, for different advisors said very different things, and Bush never proposed a plan.

But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.

Running with Scissors

Edward Scissorhands -- the ballet. Highly recommended.

It does add whole new dimensions of meaning to the phrase "running with scissors."

Duncan Black Nominates Brad DeLong for the Stupidest Men Alive Contest

National Treasure Duncan Black writes: >[Eschaton]( **No.** Look, people who advocate adding "personal accounts" to Social Security are just stupid people. Really, just morons. There's no reason to do it. There's no reason to take any part of Social Security contributions and put them in a little fund account with my name on it. >If you think some Social Security contributions should be invested in the stock market (I don't) to raise returns overall, then it can be stuck into an index fund or managed by a fund manager or whatever. I still think that's a bad idea, but there's a rationale for it. There's no rationale for dividing that up into millions of individual accounts. There's no rationale for letting individuals "control their own money" by letting them choose across some finite number of managed funds. Social Security is a lovely program which works just fine and really needs no changes other than extraordinarily nonurgent tweaks to the tax formula at some point. >And, no, there's no need for modest benefit cuts. There's no need for means testing it. There's no need for any of these things The Serious People like Bob Kerrey want to do. There's no need to strike a "grand bargain" which combines some stupid things with some smart things because there's no need to do so. Leave it alone. >There is no problem with the Social Security system. People who continue to argue that there is - and that the problem can be "solved" with the magic private accounts fairy - either have broken brains or are attempting to push an agenda for ideological reasons or for personal enrichment for themselves and their kind. I would, to defend myself, say: First, there is a chance--a 40% chance by 2050, and an 80% chance by 2100--that the Social Security system as currently structured will be in a deep financial hole someday. It would be best to make small changes to guard against this first possibility and then probability now rather than waiting until the changes have to be big. So there is, I think, a powerful argument for raising taxes a little--i.e., uncapping FICA so that it hits all wage-and-salary income and a good deal of in-lieu-of-salary income. And there is a powerful argument for cutting benefits a little--i.e., indexing the retirement age to some function of life expectancy so that Social Security benefit years do not go up one-for-one as life expectancy increases. And there is a powerful argument setting up automatic non-political mechanisms to keep the system in whack whether things turn out to be better or worse than we currently expect. Second, there is a chance--I think a 70% chance--that half or nearly half of Americans are drastically undersaving. A forced saving plan thus seems to me to be a good idea. Third, the poorer half of Americans have essentially no investments in equities, a historically very high-return asset class. So tax an extra 2% of wages and salaries. Match it one-for-two with money raised from uncapping FICA. And invest it in the U.S. government's Thrift Savings Plan. That seems to me to be good public policy and to be an attainable political bargain. Or simply sit Diamond-Orszag-Liebman-MacGuineas-Samwick in a room until they all come out (ideally, alive). I'll sign on to whatever emerges.

Why Oh Why Can't We Have a Better Press Corps? (Sebastian Mallaby/Washington Post Edition)

A reason why I don't think the Washington Post will last a decade: the opening of Sebastian Mallaby's column:

Sebastian Mallaby - A Fix for Social Security? - How Personal Accounts Could Please Both Sides: By Sebastian Mallaby: Monday, November 27, 2006; A19: The next six months could be a productive time for economic policy.... The [Bush] administration, now led by a practical Treasury secretary with the heft to sideline ideologues, may be willing to make concessions.... The most interesting debate will revolve around retirement.... Top administration officials... no longer regard "privatization" -- the diversion of payroll taxes into personal accounts -- as the starting point for negotiation. The solvency of Social Security, not a desire to promote an "ownership society," is their main concern...

The most important thing about Mallaby's opening is that he has no idea whether what he is saying is correct or not.

Sebastian Mallaby does not know whether or not the Bush administration's decision makers are more concerned with Social Security's solvency than with promoting an "ownership society": he does not know who the Bush administration's real decision makers are. Sebastian Mallaby does not know whether or not Treasury Secretary Henry Paulson has the "heft to sideline ideologues": Paulson will certainly try, but O'Neill and Snow tried before him and failed. Sebastian Mallaby does not know whether the Bush administration will be willing to "make concessions" on economic policy issues like Social Security reform: the Bush administration probably does not know itself, yet.

Mallaby hopes that all of these will be the case. And he hopes that by confidently asserting that they are the case, he increases the likelihood that they will become the case. So he confidently asserts that they are the case while still clueless about whether what he is writing is right or wrong.

Respect for your readers? Take care to inform your readers? Don't claim that things are true when you have no idea whether they are true or not?

That's not the business Mallaby is in.

Sunday, November 26, 2006

The Dollar Moves Downward / MARKETS / Currencies - Markets rocked by sharp slide in dollar: By Neil Dennis and Chris Giles in London and Ralph Atkins in Frankfurt Published: November 24 2006 20:08 | Last updated: November 24 2006 20:08: A sharpening slide in the US dollar unnerved global markets on Friday as investors sought to protect themselves from the possibility of sustained dollar weakness.

As US markets were closing on Friday , the euro stood at a 19-month high of $1.309, up 1.2 per cent, while sterling gained 0.9 per cent to a 1½-year peak of $1.9333. The yen climbed 0.5 per cent to ¥115.66....

The euro’s strength could put the European Central Bank under fresh political pressure not to raise interest rates again after the expected quarter percentage point rise to 3.5 per cent on December 7.

The dollar has now fallen this year by more than 10 per cent against the euro and 12 per cent against sterling. Some economists suggest the greenback has further to slide given a weak economic outlook in the US, and the prospect of interest rate cuts there next year....

The gaping US trade deficit, the near certainty of a December rise in eurozone interest rates, rising expectations of a cut in US rates in the spring and wariness about borrowing in yen to finance investments in the US all continued to weigh on the dollar, analysts said.

These concerns were heightened by comments from Wu Xiaoling, deputy governor of the People’s Bank of China, indicating her unease at the rapid build-up of $1,000bn of reserves in China. She said Asian foreign exchange reserves were at risk from the dollar’s fall, although she stopped short of indicating that China was about to stop adding to its pile of reserves...