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 23, 2006

I'm puzzled by McGrattan and Prescott, "Taxes, Regulation, and Asset Pricing"

A plea for help: Can somebody help me make sense of McGrattan and Prescott's argument?

McGrattan and Prescott, "Taxes, Regulation, and Asset Pricing": [Since World War II] the real before-tax return on the stock market should have been about 8 percent on average, as it was.

The real before-tax return on equity is the sum of three returns: the income return, the anticipated capital gain, and the unanticipated capital gain. The income return is the ratio of dividend to price. This ratio has been high, over 3 percent, for much of the postwar period because high tax rates have implied a low price of equity. Recently it has come way down and is now a little over 1 percent.

The anticipated capital gain is equal to the growth rate of productive assets, which was roughly 3.5 percent per year and is now down to around 3.3 percent.

The unanticipated capital gain is the growth in the price of equity due to unanticipated changes in tax rates. This growth rate has changed, falling from the range of 1 to 2 percent to 0 percent.

Adding these rates, we would expect an 8 percent (e.g., 3+3.5+1.5) real before-tax stock return in the early postwar period and, barring any further unexpected changes in tax rates, a return in the future that is a little over 4 percent (e.g., 1+3.3+0).

This raises the question, why was debt held if equity earned such a high return? In the early 1960s, over one-third of the 1.1 GDP of debt held directly or indirectly by households was held as pension and life insurance reserves. At that time, almost all of the assets held in these reserves were debt assets. The reason is that there were legal constraints imposed on fiduciaries to ensure sufficient liquidity for timely distributions and to ensure prudent investing.

A large amount of debt assets were also held directly by households for liquidity purposes. For some households in the early postwar period, debt assets were their main avenue for saving because transaction costs made holding a diversified stock portfolio infeasible.

An important corollary of our findings is that there is no equity premium puzzle in the postwar period. Mehra and Prescott (1985) found that the high return on equity relative to debt was puzzling because theory says that the premium for bearing non-diversifiable risk is small. Their finding lead many to conclude that growth theory cannot account for the historical facts concerning asset prices and returns, unless a fundamentally different preference ordering is assumed. We find that this is not the case once we take into account observed changes in taxes and regulations...

The way I see it, the return on equities re is equal to the sum of the dividend yield d and the capital gain g:

re = d + g

And the capital gain g can be divided into an expected component E(g) and an unexpected component g - E(g):

re = d + E(g) + (g - E(g))

McGrattan and Prescott say that this third component is 1.5% per year in the post-WWII U.S., due to unexpected reductions in taxes on capital income, and I understand that and why they say that and I agree that it is a reasonable estimate.

re = d + E(g) + 1.5%

McGrattan and Prescott then say further that E(g), the expected capital gains component, is equal to the rate of growth of real GDP, which is the sum of labor-force growth and the rate of growth of labor-augmenting productivity, which they say amounts to 3.5% per year. I agree that the sum of labor-force and labor-augmenting productivity growth is about 3.5% per year, and I agree that we can treat the U.S. economy as near enough to a steady-state with a constant capital-output ratio to say that the stock of productive assets is growing at that same 3.5% per year. But the growth rate of the stock of productive assets is not equal to expected capital gains. Capital gains plus net issues--call it ni--equals expected capital gains:

E(g) = ni + 3.5%

Which gives us:

re = d + ni + 5%

At this stage I am expecting McGrattan and Prescott to make an argument about why it has been the case that d=3% and ni=0% in the post-WWII economy. It doesn't come. Instead, they just assert that because d has been 3% "we would expect an 8 percent... real before-tax stock return" and "there is no equity premium puzzle in the postwar period."

This makes no sense to me. Suppose stocks had sold for half the value they actually have, so that dividend yields were 6% over the early post-WWII period. Would they then say that "we would expect an 11 percent real before-tax stock return" and "there is no equity premium puzzle"? That dividend yields have not been much lower than they were is not an explanation of but a feature of the equity premium puzzle.

If McGrattan and Prescott want to provide an equilibrium explanation for the 8% real return and claim that it is not puzzlingly high, then aren't they obligated to provide equilibrium explanations for all the pieces of it? We need to understand why the average dividend yield was 3% (rather than 6% with prices half their actual levels or 1% with prices three times there actual levels) if we are going to see this as an explanation rather than as an accounting identity: given that returns were so outrageously high and that capital gains were roughly 5%, dividend yields had to have been 3%. That's not an explanation of why returns were so puzzlingly high. That's a consequence

What am I missing here?

Competition for American Producers from High-Cost First-World Labor

Toyota Rising:

Toyota Could Become World's No. 1 Car Maker in 2007 - By YOSHIO TAKAHASHI and ANDREW MORSE December 22, 2006 12:12 p.m. NAGOYA, Japan -- Toyota Motor Corp. said Friday it aims to produce 9.42 million vehicles next year, a level that will likely vault it past struggling U.S. auto giant General Motors Corp. as the world's top car maker.

Toyota's new production targets represent a 4% increase from the 9.04 million vehicles the Nagoya-based company expects to produce in 2006. Indicative of Toyota's increasing reliance on foreign markets: Overseas production will jump 8% to 4.27 million vehicles, while domestic production will rise just 1% to 5.15 million vehicles.

GM, which hasn't released a forecast for next year's production, expects to build 9.18 million vehicles in 2006, up from the 9.11 million vehicles it produced in 2005.

Though widely expected, Toyota's official production plans highlight the diverging fortunes of the world's two truly global car companies. Toyota has ramped up production in North America, Asia and other parts of the world to take advantage of surging demand for its fuel-efficient passenger cars, such as the Camry and the hybrid Prius. It plans to open new plants in China, Thailand and Russia to meet demand for its cars.

Meanwhile, GM is in the midst of a painful restructuring after racking up a $10 billion loss last year. The Detroit-based company has already posted $3 billion in losses this year as sales of big sport-utility vehicles and trucks falter amid persistently high oil prices. The company plans to shutter more factories as part of its restructuring.

Sluggish Productivity Growth since Late 2005

Dean Baker is pessimistic about productivity:

Beat the Press: More Bad News on Productivity? Yet another quarter of weak productivity should raise some eyebrows. If we take 1.0 percent as the number for the 4th quarter (which is likely high)... this gives an average annual growth rate of just 1.3 percent over these 5 quarters. That compares to more than 3 percent from 2001-2005. But revisions will make the data look even worse.... [Perhaps] an average annual rate of productivity growth over these 5 quarters of just 1.0 percent, definitely cause for concern.

Not Many Managers Are Worth Paying 2%-and-20%...

Jeff Matthews clearly goes to more interesting Starbuckses.... Starbucksii... Starbuckiani than I do:

Jeff Matthews Is Not Making This Up: Since When Did "Hedge Funds" Stop Hedging?:

"Shorts? Listen, my previous fund got hammered on the short side." That is a quote from a fellow sitting at a table squeezed next to me in a major metropolitan Starbucks. The individual in question, who has a few grey hairs like yours truly, is marketing his fund to two younger men who--based on the sophisticated nature of their espresso drinks as well as the unsophisticated nature of their questions--appear to be fund-of-fund investors.

While I don't know the man with the grey hairs, I vaguely recognize him from company meetings in years past as a fellow hedge fund veteran. And what I find interesting about the whole thing is that, based on the quote above as well as snatches of conversation I can't avoid hearing from three feet away, he is quite vociferously playing down his reputation as a hedge fund guy who actually used to hedge his portfolio with shorts.

He is doing so for the purpose of talking up his current, non-hedged hedge fund to his audience, by which I mean the two fund-of-funds managers who, based on their questions thus far, I frankly would not let invest my dog Lucy's biscuit money, let alone the millions or billions of fund-of-fund money they appear to be investing on behalf of institutions seeking a slice of the hedge fund pie. I say this not to disparage fund-of-fund managers as an asset class, but when I hear one of these financial middlemen earnestly explain that "the problem with shorting is that your potential gain is limited to 100% while your potential losses are infinite"--as if that insight just occurred to him, and he had to pass it along before his flash of brilliance got lost in the ether--it does not reflect glory on his peers.

Now, what's the point of all this? you might well ask.

The point is that hedge fund managers appear to be shedding their short-selling identities in order to attract money, precisely at a time when markets are hitting new highs. I find this a fascinating, particularly now that Iraq has turned into a full-fledged civil war, whatever the euphemism of the day, while cost pressures are rising around the world and we've had a currency panic in Thailand, not to mention the forcible appropriation of multi-billion-dollar natural resources from public companies by a thug masquerading as an elected President in Russia, who not for nothing is probably the single most powerful person on earth. And since we know that what goes around, as they say, comes around, it seems to me that maybe now that grown men are eagerly disposing of their past life on the short-selling side of the hedge fund equation, we might be closer to a time when it could actually be worth looking for shorts rather than longs.

After all, if "hedge funds" don't hedge, they're not "hedge funds," are they?

Almost as hard to believe as the conversation overheard by Jeff Matthews is Sebastian Mallaby on hedge funds.

I am reasonably confident that the rise of hedge funds has improved the price-discovery process and helped channel somewhat more capital to fund real investments in things that are truly valuable, I suspect that hedge funds today do not materially add to systemic market risk (although I make no forecasts about the future), I doubt that hedge fund investors are demanding sufficient transparency, and I find it overwhelmingly unlikely that the average hedge fund investor is getting value for the 2%-anfd-20% he or she is paying to hedge fund managers. Sebastian Mallaby, by contrast, says that he knows that hedge funds do not materially add to systemic market risk, that he knows that it would be a mistake to mandate more disclosure than hedge fund investors demand for themselves, and that he knows that hedge fund investors are getting a good deal from the managers who charge 2%-and-20%. How he knows all these things that I do not is unclear: he must have much, much better sources of information than I do, and have spent much more time thinking hard about the issues than I have (NOT!):

Rather than seeing hedge funds as sources of dangerous financial fires, in fact, it is more accurate to see them as the financial system's benevolent fire fighters....

[H]edge funds' unique fee structure... sophisticated investors who pay such fees do so voluntarily... believe that the returns they will receive will more than compensate.... The extraordinary earnings of the top hedge-fund managers reflect the workings of a daunting star system.... Only a few... come up with an insight into how a certain company or currency has been mispriced, see illogical discrepancies between the prices of sets of financial assets, and so forth. And those who do come up with such breakthroughs not only make fortunes for themselves and their clients... they shift market prices until the irrationalities disappear, thus ultimately facilitating the efficient allocation of the world's capital....

[H]edge funds are not precipice dwellers.... [H]edge funds hold a portfolio of positions and can go short as well as long... they can be less volatile.... [H]edge funds collectively do not so much create risk as absorb it....

Hedge funds can also reduce the danger that economies will overrespond to shocks. If a currency or stock market starts to plummet, the best hope for stability lies in self-confident, deep-pocketed investors willing to bet that the fall has gone too far.... [H]edge funds are rewarded for absolute returns, which allows their managers to engage in independent thinking....

[W]hat of the systemic risk that concerns regulators?... The nightmare scenario involves a host of hedge funds making similar bets... [that] turn out to be wrong, a fund could unravel, causing the others to unravel in turn -- and banks that could comfortably swallow the default of one or two funds might find themselves overwhelmed by the default of dozens.... Timothy Geithner... was not, however, saying that the nightmare scenario is likely.... [T]here has to be someone on both sides of each trade... you have to believe that one side of some risky bet is concentrated in a particular corner of the financial system.... The more hedge funds there are, the less likely it is that they will all be concentrated on one side....

Others call for more disclosure, which would allow lenders and regulators to gauge whether funds are crowding dangerously onto one side.... But periodic snapshots of a fund's positions might reveal little... even extensive disclosures can fail to reveal a fund's real risks.... Rather than forcing more disclosure, it would be better to allow the market to promote it...

Why Oh Why Can't We Have a Better Press Corps? (Wall Street Journal Edition)

Brad Setser watches the train wreck that is David Malpass as it tries to mislead the readers of the Wall Street Journal editorial page about the trade deficit:

RGE - Malpass on the US trade deficit...: Tis the season to be compassionate. And I guess that also applies to those who are allowed to grace the Wall Street Journal’s oped page.... One standard critique... brings together people who already agree to reinforce their pre-existing convictions... the Wall Street Journal oped page.... But I was still surprised by the Malpass WSJ oped -- an oped that strongly suggests that the US trade deficit reflects surging business investment in the US, financed by aging, slow growing Europe and Japan. Malpass writes:

the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.... The trade deficit is the mechanism allowing consumption and investment in the grow faster than in Europe and Japan. The issue for the U.S. is whether it's worth the interest costs. It's the same question facing a small business: Should it borrow money to expand the payroll, train employees, buy land and machines, conduct R&D, build inventory? Profit and credit-worthiness help make the decision...

Malpass is careful not to attribute the rise in the US current account deficit entirely to a surge in business investment. He talks of the increase in "consumption and investment" not of the increase in investment alone. But the analogy between a small business looking for external financing and the US isn't an accident either. Malpass very explicitly argues that the US external deficit doesn't reflect US profligacy....

[T]he US deficit doesn't stem from strong business investment -- and... hasn't been financed by Europe and Japan. Right now, businesses are saving more than they invest.... The US savings shortfall comes from the fact that the US government still spends more than it takes in.... Above all, though, the gap stems from households that don’t save....

And then there is the little matter of who is financing the US. Tis true that a decent chunk of the inflows financing the US must be coming from old, slow growing Japan. But... the rise in the US deficit since 2002 doesn’t primarily reflect a rise in Japan’s current account surplus. Nor does it reflect a rise in Europe's surplus.... The IMF’s data shows (see Table 1.2, p. 12 of Chapter 1 of the WEO) a huge surge in the current account surplus of the emerging world.... And whatever else you want to say about the world’s emerging economies, they aren’t growing slowly....

I don't think there is much doubt -- at least among informed observors -- that fast growing emerging economies are a key source of financing for the US. Nor is there much doubt that a large share of that financing comes... from central banks and oil investment funds....

One of the stereotypes about blogs is that they live in the realm of opinion, a realm divorced from the facts. I am pretty sure that isn’t a vice limited to the blogosphere.

Reporters for the news side of the Wall Street Journal firmly believe that readers make a sharp distinction between WSJ news and editorial pages, and that their good and reality-based work doesn't add credibility to the misinformation on the editorial page. I think that they are deceiving themselves.

Department of "Huh?"

More signs that Republican loyalty runs one way only:

Washington Wire - : With Friends Like These...: Republican House staff members who are losing their jobs in the aftermath of November's loss of control are hoping Democrats will re-extend the hand of largesse to them next month.

As the old Congress wound down in a scramble of post-election activity, incoming House Speaker Nancy Pelosi offered to pay two months'9 severance to staff members working on some committees and in House leadership offices. But her offer was scuttled -- by Republican lawmakers, who complained they didn't have the opportunity to study the proposal and look at costs.

The Senate already provides two months pay for displaced staff members. One of the affected House staffers said his comrades are mystified that a plan that would benefit employees of Republicans would be killed by Republicans: "We hope the Democrats revisit it." --Gary Fields

Friday, December 22, 2006

My Guess at the Unredacted Leverett-Mann Op-Ed

Flynt Leverett and Hillary Mann write:

What We Wanted to Tell You About Iran - New York Times: Flynt Leverett and Hillary Mann: HERE is the redacted version of a draft Op-Ed article we wrote for The Times, as blacked out by the Central Intelligence Agency's Publication Review Board after the White House intervened in the normal prepublication review process and demanded substantial deletions. Agency officials told us that they had concluded on their own that the original draft included no classified material, but that they had to bow to the White House. Indeed, the deleted portions of the original draft reveal no classified material. These passages go into aspects of American-Iranian relations during the Bush administration's first term that have been publicly discussed by Secretary of State Condoleezza Rice; former Secretary of State Colin Powell; former Deputy Secretary of State Richard Armitage; a former State Department policy planning director, Richard Haass; and a former special envoy to Afghanistan, James Dobbins...

Here is my guess as to how the full op-ed originally read:

The Iraq Study Group has added its voice to a burgeoning chorus of commentators, politicians, and former officials calling for a limited, tactical dialogue with Iran regarding Iraq. The Bush administration has indicated a conditional willingness to pursue a similarly compartmented dialogue with Tehran over Iran’s nuclear activities.

Unfortunately, advocates of limited engagement — either for short-term gains on specific issues or to “test” Iran regarding broader rapprochement — do not seem to understand the 20-year history of United States-Iranian cooperation on discrete issues or appreciate the impact of that history on Iran’s strategic outlook. In the current regional context, issue-specific engagement with Iran is bound to fail. The only diplomatic approach that might succeed is a comprehensive one aimed at a “grand bargain” between the United States and the Islamic Republic.

Since the 1980s, cooperation with Iran on specific issues has been tried by successive administrations, but United States policymakers have consistently allowed domestic politics or other foreign policy interests to torpedo such cooperation and any chance for a broader opening. The Reagan administration’s engagement with Iran to secure the release of American hostages in Lebanon came to grief in the Iran-contra scandal. The first Bush administration resumed contacts with Tehran to secure release of the last American hostages in Lebanon, but postponed pursuit of broader rapprochement until after the 1992 presidential election.

In 1994, the Clinton administration acquiesced to the shipment of Iranian arms to Bosnian Muslims, but the leak of this activity in 1996 and criticism from presumptive Republican presidential nominee Robert Dole shut down possibilities for further United States-Iranian cooperation for several years.

These episodes reinforced already considerable suspicion among Iranian leaders about United States intentions toward the Islamic Republic. But, in the wake of the 9/11 attacks, senior Iranian diplomats told us that Tehran believed it had a historic opportunity to improve relations with Washington. Iranian leaders offered to help the United States in responding to the attacks without making that help contingent on changes in America’s Iran policy — a condition stipulated in the late 1990s when Tehran rejected the Clinton administration’s offer of dialogue — calculating that cooperation would ultimately prompt fundamental shifts in United States policy.

The argument that Iran helped America in Afghanistan because it was in Tehran’s interest to get rid of the Taliban is misplaced. Iran could have let America remove the Taliban without getting its own hands dirty, as it remained neutral during the 1991 gulf war. Tehran cooperated with United States efforts in Afghanistan primarily because it wanted a better relationship with Washington.

But Tehran was profoundly disappointed with the United States response. After the 9/11 attacks, Tehran told Washington that they would assist the U.S. in overthrowing the Taliban government in Afghanistan, and this set the stage for a November 2001 meeting between Secretary of State Colin Powell and the foreign ministers of Afghanistan’s six neighbors and Russia. At this meeting in Bonn, Afghanistan's neighbors and the United States agreed to creat a broadly-based democratic and anti-terrorist government in Afghanistan. Iran went along, working with the United States to eliminate the Taliban and establish a post-Taliban political order in Afghanistan.

In December 2001, Washington and Afghan President Hamid Karzai urgently asked Tehran to keep Gulbuddin Hekmatyar, the brutal pro-Al Qaeda warlord, from returning to Afghanistan to lead jihadist resistance there. Iran agreed so long as the Bush administration did not criticize it for harboring terrorists. But, in his January 2002 State of the Union address, President Bush did just that in labeling Iran part of the “axis of evil.” Unsurprisingly, Mr. Hekmatyar managed to leave Iran in short order after the speech. The Iranian government explained that it had expelled Hekmatyar and allowed him to return to Afghanistan because the Islamic Republic could not be seen to be harboring terrorists.

In the course of the U.S.-Iranian dialogue over Afghanistan, U.S. officials laid particular stress on what Iran could do to help the Karzai government in Afghanistan by preventing Al Qaeda and the Taliban from using the Afghanistan-Iran border as a sanctuary. In response, Iran deployed additional security forces to its border with Afghanistan. U.S. officials, including Colin Powell publicly at the United Nations, exhorted their Iranian counterparts to continue to suppress the Taliban and Al Qaeda and to support the Karzai government. This demonstrated to Afghan warlords that they could not play America and Iran off one another and prompted Tehran to deport hundreds of suspected Al Qaeda and Taliban operatives who had fled Afghanistan.

Those who argue that Iran did not cause Iraq’s problems and therefore can be of only limited help in dealing with Iraq’s current instability must also acknowledge that Iran did not “cause” Afghanistan’s deterioration into a terrorist-harboring failed state. But, when America and Iran worked together, Afghanistan was much more stable than it is today, Al Qaeda was on the run, the Islamic Republic’s Hezbollah protégé was comparatively restrained, and Tehran was not spinning centrifuges. Still, the Bush administration conveyed no interest in building on these positive trends.

When Tehran sought a quid-pro-quo to strengthen its own security and offered to exchange captured Al-Qaeda leaders for a small group of senior commanders among the Mojahedin-e Khalq (MEK) cadres in Iraq, the administration refused to consider any such exchange, even though the MEK has been designated a foreign terrorist organization by the U.S. Department of State. The United States backtracked on a promise to disarm MEK troops, and canceled scheduled meetings with Iran, accusing it of harboring al-Qaeda leaders implicated in suicide bombings in Saudi Arabia.

From an Iranian perspective, this record shows that Washington will take what it can get from talking to Iran on specific issues but is not prepared for real rapprochement. Yet American proponents of limited engagement anticipate that Tehran will play this fruitless game once more — even after numerous statements by senior administration figures targeting the Islamic Republic for prospective “regime change” and by President Bush himself that attacking Iran’s nuclear and national security infrastructure is “on the table.”

Our experience dealing with European and Iranian diplomats over Afghanistan and in more recent private conversations in Europe and elsewhere convince us that Iran will not go down such a dead-end road again. Iran will not help the United States in Iraq because it wants to avoid chaos there; Tehran is well positioned to defend its interests in Iraq unilaterally as America flounders. Similarly, Iran will not accept strategically meaningful limits on its nuclear capabilities for a package of economic and technological goodies.

Iran will only cooperate with the United States, whether in Iraq or on the nuclear issue, as part of a broader rapprochement addressing its core security concerns. This requires extension of a United States security guarantee — effectively, an American commitment not to use force to change the borders or form of government of the Islamic Republic — bolstered by the prospect of lifting United States unilateral sanctions and normalizing bilateral relations. This is something no United States administration has ever offered, and that the Bush administration has explicitly refused to consider.

Indeed, no administration would be able to provide a security guarantee unless United States concerns about Iran’s nuclear activities, regional role and support for terrorist organizations were definitively addressed. That is why, at this juncture, resolving any of the significant bilateral differences between the United States and Iran inevitably requires resolving all of them. Implementing the reciprocal commitments entailed in a “grand bargain” would almost certainly play out over time and in phases, but all of the commitments would be agreed up front as a package, so that both sides would know what they were getting.

Unfortunately, the window for pursuing a comprehensive settlement with Iran will not be open indefinitely. The Iranian leadership is more radicalized today, with Mahmoud Ahmadinejad as president, than it was three years ago, and could become more radicalized in the future, depending on who ultimately succeeds Ayatollah Ali Khamenei as supreme leader. If President Bush does not move decisively toward strategic engagement with Tehran during his remaining two years in office, his successor will not have the same opportunities that he will have so blithely squandered.

Thursday, December 21, 2006

When Blogger Attacks!

From A Fire on the Deep:

Searching, probing. The Power had not bothered to sabotage... but that was no problem.... One more second... safety. The laser flickered on a failure sensor.... Its interrupts could not be ignored.... Interrupt honored. Interrupt handkler running, looking out, receiving more light... a backdoor into the... code... and the Power was aboard, with milliseconds to spare. Its agents--not even human-equivalent on this primitive hardware--raced through the ship's automation.... Cameras in the ship's bridge showed widening of eyes, the beginning of a scream. The humans knew, to the extent that horror can live in a fraction of a second...

The new version of Blogger appears to be reaching out across the Internet and crashing my copy of MarsEdit.

That is all.

Why Oh Why Can't We Have a Better Press Corps? (George F. Will/Washington Post Edition)

I don't know about you, but I cannot help but smell George F. Will's fear. Here he reveals his total ignorance of Benjamin Franklin, and of other matters:

Franklin did write an autobiography: George Will, who seems to be quite troubled lately with the blogging medium, devoted his column today to comparing us -- that is, literally people like you and me -- to 18th century pamphleteers. Apparently, we don't measure up well.

Richard Stengel, Time's managing editor, says, "Thomas Paine was in effect the first blogger" and "Ben Franklin was essentially loading his persona into the MySpace of the 18th century, 'Poor Richard's Almanack.'" Not exactly. Franklin's extraordinary persona informed what he wrote but was not the subject of what he wrote. Paine was perhaps history's most consequential pamphleteer. There are expected to be 100 million bloggers worldwide by the middle of 2007... none will be like Franklin or Paine. Both were geniuses; genius is scarce.... Most bloggers have the private purpose of expressing themselves for their own satisfaction. There is nothing wrong with that, but there is nothing demanding or especially admirable about it, either.... George III would have preferred dealing with 100 million bloggers rather than one Paine.

There are a great number of things wrong with this analysis, not the least of which is Will apparently having no real familiarity with the political blogs having the kind of impact that bothers him so much. (Honestly, can anyone name an influential political blogger who uses his or her site to share their life and personal experiences? And if not, why is Will troubled by the phenomenon?)

For that matter, why on earth would the number of bloggers have any relevance to the quality of individual writers?... [T]he light of blogging geniuses is no less bright because of their colleagues.

And as for Franklin's persona not having been "the subject of what he wrote," Will is aware that Franklin wrote one of the most celebrated autobiographies in American history, is he not?

No, I honestly don't think Will is aware of the existence of Benjamin Franklin's Autobiography. If he ever read it, he's forgotten all about it.

The Deficit: Fool Me Once, Shame on You; Fool Me Twice...

Paul Krugman says that he thinks that Democratic members of Congress should hold the deficit where it is, and not worry about reducing it: "Fool me once, shame on you; fool me twice..."

Democrats and the Deficit - New York Times: Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics -- the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit. The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it's now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics. And the lesson of the last six years is that the Democrats shouldn't spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt. Since the 1990s were an era of peace, prosperity and favorable demographics (the baby boomers were still in the work force, not collecting Social Security and Medicare), it should have been a good time to put the federal budget in the black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were transformed into an impressive surplus.

But the realities of American politics ensured that it was all for naught. The second President Bush quickly squandered the surplus on tax cuts that heavily favored the wealthy, then plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war. And you can even argue that Mr. Rubin's surplus was a bad thing, because it greased the rails for Mr. Bush's irresponsibility.

As Brad DeLong, a Berkeley economist who served in the Clinton administration, recently wrote on his influential blog: "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 what we 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.%" My only quibble with Mr. DeLong's characterization is that this wasn't just one man's class war: the whole conservative movement shared Mr. Bush' squanderlust, his urge to run off with the money so carefully saved under Mr. Rubin's leadership.

With the benefit of hindsight, it's clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let's not forget how Alan Greenspan, who posed as the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts -- even in the face of budget deficits -- once a Republican took up residence.

Now the Democrats are back in control of Congress. They've pledged not to be as irresponsible as their predecessors: Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money -- while taking great care to ensure that it is spent well, not squandered -- and let the deficit be. By spending money well, Democrats can both improve Americans' lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

Improving the Interface with Your External Brain Pack...

"This Doesn't Work"

Mahmoud Abbas joins the reality-based community:

Harry's Place: "This doesn't work": A brave speech-- in Arabic, to a Palestinian audience-- by Palestinian Authority President Mahmoud Abbas:

In the past, they said: "Under no circumstances will we accept a state, unless it includes all of Palestine, because Palestine is a land of Islamic endowment." Fine. This doesn't work. I can say: "We demand all of the land," and you will applaud me. This doesn't work. This doesn't work. This doesn't work. There is a reality -- either you acknowledge it, or you will get crushed.

Was Arafat ever that honest to Palestinians?

Modern Republicanism

Michael Gerson tries to complete the transformation of Republicans into ignorant, amoral swine. Here he is, writing in Newsweek on modern Republicanism:

Gerson: The Republican Identity Crisis - Newsweek Politics - Jan. 1, 2007 issue - My low point with the Republican Party came in the aftermath of Hurricane Katrina. In attempting to deliver benefits to victims, the administration found men and women who had never had a bank account; families entirely disconnected from the mainstream economy. A problem rooted in generations of governmentally enforced oppression--slavery and segregation--demanded an active response from government to encourage economic empowerment and social mobility.

Yet the response of many Republicans was to use the disaster as an excuse for cutting government spending, particularly the Medicare prescription-drug benefit for seniors.... [O]ne conservative think-tank sage urged: "The president needs to give up something he wants. Why not the AIDS program for Africa?".... Like all fundamentalists, the antigovernment conservatives preach that greater influence requires a return to purity--the purity of Reaganism. But the golden age of austerity under Reagan is a myth. During the Reagan years, big government got bigger, with federal spending reaching 23.5 percent of GDP.... But the Reagan reality is more admirable than the myth. He wisely chose what was historically necessary--large defense increases and tax reductions--over what was politically unachievable: a massive rollback of government....

As antigovernment conservatives seek to purify the Republican Party, it is reasonable to ask if the purest among them are conservatives at all. The combination of disdain for government, a reflexive preference for markets and an unbalanced emphasis on individual choice is usually called libertarianism. The old conservatives had some concerns about that creed, which Russell Kirk called "an ideology of universal selfishness." Conservatives have generally taught that the health of society is determined by the health of institutions: families, neighborhoods, schools, congregations. Unfettered individualism can loosen those bonds, while government can act to strengthen them.... Anti-government conservatism turns out to be a strange kind of idealism—-an idealism that strangles mercy....

The future of the Republican Party depends on which party it wants to be—-the party of purity, or the party of the governors. In that decision, Republicans should consider: any political movement that elevates abstract antigovernment ideology above human needs is hardly conservative, and unlikely to win...

Look again at what Gerson says: Reagan "wisely chose what was historically necessary--large defense increases and tax reductions." Large defense spending increases and tax reductions don't go together. In the short run they produce a fiscal boost to employment. In the medium run they produce slow growth as government deficits drain the pool of capital available for investment. In the long run they produce hyperinflation, as the failure of the government's resources to match its commitments leads to an effective default. Such an economic policy strategy is not "historically necessary." It reveals a lack of a moral compass, and either total ignorance about the requirements of good government or enormous cynicism--a belief that we can make a mess and somebody else, somebody responsible, will clean it up.

Greg Mankiw thinks that the study of economics makes people more conservative. Perhaps, perhaps not. But if it takes at all, it certainly doesn't turn them into modern Republicans. It tends, rather, to turn them into modern Democrats.

Ben Bernanke Says the Obvious

Ben Bernanke says that the low value of the renminbi is an "effective subsidy" to Chinese exporters. He doesn't say that it is also an effective subsidy to U.S. borrowers. Who is paying this subsidy? Ultimately the taxpayers of China. Brad Setser comments:

RGE - Bernanke: an effective subsidy; Treasury: not manipulation: Bernanke: an effective subsidy; Treasury: not manipulation

Brad Setser | Dec 19, 2006: Bernanke's comment didn't rub me the wrong way (more on that later), but it certainly hit a nerve elsewhere. I suspect the Treasury -- which wants China to appreciate as much as anyone -- wasn't among those who were not thrilled by Bernanke's choice of words. Not because they disagree intellectually. But because Bernanke's comment will be contrasted with the language in Treasury's foreign currency report.

Still, I don't think anyone will be surprised to see that the Treasury declined to find that China meets the technical requirements for being charged with currency manipulation. The language in the law about "intent" gives the Treasury a lot of wiggle room. Paulson telegraphed this pretty much from the day he arrived at the Treasury.

Plus, I doubt the Chinese would have hosted a Strategic Economic Dialogue if they thought they were going to be hit over the head to a "manipulation" charge. "Manipulation" would turn the "dialogue" into a "negotiation" real fast.

Max Baucus is probably right: The semiannual Treasury report ``is no longer a relevant tool to deal with currency issues,'' Senator Max Baucus said in a statement today. The Montana Democrat will be Chairman of the Senate Finance Committee, which oversees U.S. trade policy, when Democrats take control of the Senate in January.

``It's time for a new approach and new tools,'' said Baucus, who promised to work toward legislation that better addresses what he deems unfair currency policies of U.S. trading partners.

But finding new approaches and new tools won't necessarily be easy. Grassley-Baucus seems a bit softer than the likely mood of the new US Congress. Just a guess.

It's Time to Reopen the Stupidest Man Alive Contest...

Kevin Drum nominates Stanley Kurtz, for his declaration that it's the media's fault that we didn't believe it. You see, Kurtz says, if the media had lied to us, it would have confirmed our expectations, and we would have believed it. But because it told us the truth that we didn't want to hear, we didn't believe it:

The Washington Monthly: SELF-PARODY WATCH.... Stanley Kurtz is one of the guys on my permanent "ignore" list, but today's contribution to the public discourse is so obliviously unglued that it's worth passing along for its slapstick value alone. Several bloggers linked to this earlier, but I didn't really believe he had said what they said he said (did you follow that?) until I actually read it myself. Here it is:

Conservative distrust of the media's very real bias has inclined us to dismiss reports about problems in Iraq that are real.

In the end, I think the media bears fundamental responsibility for this. Had they been less biased -- had they reported acts of heroism and the many good things we have done in Iraq -- I think conservatives would actually have taken their reporting of the problems in Iraq more seriously. In effect, the media's consistent liberal bias discredits even its valid reports.

....It's a terrible shame that we've come to the point where our ability to believe news reports hinges on a those rare cases where the record shows freedom from liberal bias. The media has discredited themselves, making it tough to take them seriously even when they are right, and that has hurt us all.

So sad. The media's consistent refusal to pay more attention to repainted schoolhouses and instead focus on stuff like insurgent attacks, ethnic rivalries, collapsing infrastructure, ineffective government, and corrupt police forces has fooled us all. How were we to know that they hadn't just made all that stuff up?

The Terraforming Begins...

On a small scale, but it is a start:

BBC NEWS | Europe | Italy village gets 'sun mirror': Viganella marked its "day of the light" on Sunday: A sun-deprived village in the Italian Alps has come up with a novel solution to fix the problem - by installing a giant mirror. The mirror - an eight-by-five metre (26x16ft) sheet of steel - was placed on a nearby peak to reflect sunlight onto Viganella's main square below. The computer-operated mirror will now be constantly following the sun's path.

Viganella sits at the bottom of a steep valley, and surrounding mountains cut off direct sunlight during the winter.

"It wasn't easy," Village Mayor Pierfranco Midali told Italy's Ansa news agency.

"We had to find the proper material, learn about the technology and especially find the money," he said.

The project cost some 100,000 euros (£67,110) and was financed by the regional authorities and a bank. Viganella's problem is that it was built at the bottom of a very steep-sided Alpine valley, right up against the Swiss border. The southern side of the valley is so sheer that on 11 November the sun disappears and does not reappear until 2 February.

Not a single ray of sunlight falls on Viganella in the weeks in between.

"It's like Siberia," one of the village's nearly 200 residents has said...

Wednesday, December 20, 2006

How Low Can They Go? (Rudolph Giuliani Spin Edition)

The things people will do to burnish their reputation for the Republican Presidential primaries. Here Rudolph W. Giuliani, in his campaign biography, denies all knowledge of his two so-called "children" and of his two so-called "ex wives": Rudolph W. Giuliani was born in 1944 to a working class family in Brooklyn.... Italian immigrants... strong work ethic... equal opportunity.... Bishop Loughlin Memorial High School, Manhattan College... New York University Law School.... United States Attorney for the Southern District of New York... Chief of the Narcotics Unit at age 29. In 1975, Rudy was recruited to work in Washington, D.C., and was appointed Associate Deputy Attorney General and chief of staff to the Deputy Attorney General. In 1977, Rudy returned to New York to the private practice of law.

The Crime Fighter: After the inauguration of Ronald Reagan in 1981, Rudy was named Associate Attorney General.... United States Attorney for the Southern District of New York.... Mayor of the City of New York... overall crime was cut by 57%.... September 11th, 2001.... Giuliani Partners in January, 2002, quickly establishing the consulting firm as a leader in the fields of emergency preparedness, public safety, crisis management, energy and health care... “boutique investment banking”... Giuliani Capital Advisors... Bracewell & Giuliani....

In May of 2003, Rudy married Judith S. Nathan. Mrs. Giuliani is a registered nurse with an extensive medical and scientific background. She currently serves as Managing Director of Changing Our World, Inc., a national fundraising and philanthropic services company headquartered in New York. In the aftermath of the September 11, 2001 terrorist attacks, Mrs. Giuliani coordinated the efforts at the Family Assistance Center on Pier 94. She was also a founding member of the Board of Trustees of the Twin Towers Fund, which raised and distributed $216 million to over 600 families and individuals.

In 2006, Mrs. Giuliani was awarded New York University College of Nursing’s “Humanitarian Award” in recognition of using her nursing identity for humanitarian work and charitable endeavors as well as for being a powerful voice that enhances the visibility of nursing and elevates the profession. Also in 2006, Mrs. Giuliani received the “St. Francis Xavier Cabrini Service Award” from Mother Cabrini High School, an award honoring her commitment to young women and their education.

What Should We Be Doing About Global Climate Change?

There are lots of fake disputes over global climate change. Does carbon dioxide in the atmosphere act like a giant blanket warming the earth? (Yes.) Does uncertainty about global warming mean that we should delay action? (No.) Should we be spending a much bigger fortune than we are on research: research into carbon-neutral power technologies, research into carbon-sequestration technologies, research into albedo-increasing technologies? (Yes.) Should India, China, and company have to bear a substantial part of the medium-term burden? (No: the rich countries got to take an easy carbon emissions-intensive path to industrialization and riches; theirs is the medium-term responsibility for dealing with the problem.) Should we be building or blocking the formation of the international institutions that will manage our reactions to global climate change over the next several centuries? (The first.)

There is, however, one real dispute: what else, besides research, should we be doing over the next decade or two? We economists like to think of things in terms of prices. And when we economists see something going wrong in the sense of having destructive side-effects, we like to tax it. Taxing it makes the individuals who are undertaking actions feel in their wallets the destruction they are causing elsewhere. Maybe the action is still worth doing, and maybe not. Imposing a tax--imposing the right tax--on those who are, say, driving low-mileage SUVs is a way of harnessing the collective intelligence of humanity to deciding in which case the bad side-effects are a reason to stop. But it needs to be the right tax.

An SUV going ten miles in the city and burning a gallon of gasoline pumps about 3 kilograms--6.5 pounds--of carbon in the form of carbon dioxide into the atmosphere. Should the extra tax on this--and on all carbon emissions--appropriate for global warming be on the order of five cents a gallon, fifty cents a gallon, or a dollar fifty a gallon? Our views will change as we learn more, but at the moment whether the tax should be five or fifty cents a gallon hinges on a question of moral philosophy: how much do we believe that we owe our distant descendents?

Australian economist John Quiggin has a very illuminating discussion on his website The Stern Review on Global Climate Change (on the internet at which comes down more on the side of fifty cents a gallon, immediately, does so because they project that spending today to reduce carbon emissions is a very good investment for the future. If the world grows in per capita income at about 2% per year, a marginal expenditure of roughly $70 today in cutting carbon emissions would be worth it if it were to enrich the world of 2100 by about an extra $500 of year-2006 purchasing power, once all the damages to the world economy and environment from global warming, costs of adjustment, and so on are taken into account. This looks like a very good deal to Nick Stern and his team.

On the other hand, critics point out that the world today is poor: average GDP per capita at purchasing power parity today is roughly $7000. We expect improvements in and the spread of technology to make the world of 2100, at a 2% per year growth rate much richer than the world of today: $50,000 per capita of year-2006 purchasing power. We today can use the marginal $70 per capita, critics say, much more than the richer people of 2100 will need the $500 or so they would gain from not having to suffer from the effects of global climate change.

What critics don't often say is that the same logic applies to the world today. The U.S., Japan, and Western Europe today have average incomes of roughly $40,000 per capita. The poorer half of the world's population today have incomes of less than $6,000 per capita. The same logic that says that we today need our $70 more than the people of 2100 need an extra $500 also tells us that we ought to tax the world's rich in the OECD more and more to fund world development as long as each extra $500 in first-world taxes generates even as little as $70 in extra poor-periphery incomes. If we in the world's rich now are stingy toward the (likely to be much richer) future and want to leave them our environmental mess to deal with, we should be lavish toward our poorer brothers and sisters today. If we today are stingy toward our poorer brothers and sisters now, we should be lavish toward our descendents.

At least, that is what we should do if we want to fulfill our part of Edmund Burke's great worldwide social contract between the dead, the living, and the unborn. If we

Tuesday, December 19, 2006

Unclear on the Concept of a "Free Market"

John Derbyshire encounters the free market in health care, and recoils in horror. Via Kevin Drum:

The Washington Monthly: BEST IN THE WORLD, BABY, BEST IN THE WORLD.... From John Derbyshire over at The Corner:

CHRISTMAS PRESENT [John Derbyshire] My health insurer has just notified me, in a brief form letter, that my monthly premiums are to rise from $472.33 to $857.00 on January 1st. That's an increase of 81 percent. EIGHTY-ONE* PERCENT Can they do that? I called them. They sound pretty confident they can. Ye gods!

A conservative reader emailed this item to me with the following comment: "I've heard people say a conservative is just a liberal who's been mugged. Then maybe a liberal is just a conservative who suddenly got this in the mail."

You see, John, there is this thing called the "market." People who want to buy health insurance--that's you, John--look for people who want to sell health insurance, and when you find one and agree on a price you make a "transaction." This is a voluntary exchange. Both sides to do it. The health insurer has just told a customer that they want to charge you not $5,668 for next year but rather $10,284. If the customer doesn't like that price, the customer should look for another health insurer.

Now we liberals have lots of reasons and arguments for why we would not expect free markets in health insurance to work very well, and Derbyshire has just encountered one of them: it looks as if his particular health plan is entering an adverse-selection death spiral.

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

Yes, this morning we have a Washington Post trifecta of journamalism. E.J. Dionne, Anne Applebaum, and now this:

Peter Baker and Robin Wright talk about the thuds and screams inside the Topkapi Palace without ever telling us (a) which people inside the White House who know anything about military affairs are in favor of boosting troops in Iraq by 30,000 for an additional six months, or (b) what the advocates say those soldiers are supposed to do while they are there. Military planners are opposed, they say. "White House officials" are "aggressively promoting the concept." Ummm... Which "White House officials" please? Steven Hadley? Karl Rove? Josh Bolten? And why are they doing so?

If it is indeed true that nobody in the Roosevelt Room meetings who has commanded a company is in favor of this, then Baker and Wright should say so. If it is indeed the case that this has been stovepiped in from the AEI via Cheney's office and that the entire government is appalled (save for Condi Rice who is lying low because she doesn't want to disagree with wherever Bush comes out), then say so.

And if you won't clue us in to what is really going on, get out of the way and turn your column inches over to people who will:

White House, Joint Chiefs At Odds on Adding Troops - The Bush administration is split over the idea of a surge in troops to Iraq, with White House officials aggressively promoting the concept over the unanimous disagreement of the Joint Chiefs of Staff, according to U.S. officials familiar with the intense debate.

Sending 15,000 to 30,000 more troops for a mission of possibly six to eight months is one of the central proposals on the table of the White House policy review to reverse the steady deterioration in Iraq. The option is being discussed as an element in a range of bigger packages, the officials said.

But the Joint Chiefs think the White House, after a month of talks, still does not have a defined mission and is latching on to the surge idea in part because of limited alternatives, despite warnings about the potential disadvantages for the military, said the officials, who spoke on the condition of anonymity because the White House review is not public.

The chiefs have taken a firm stand, the sources say, because they believe the strategy review will be the most important decision on Iraq to be made since the March 2003 invasion. At regular interagency meetings and in briefing President Bush last week, the Pentagon has warned that any short-term mission may only set up the United States for bigger problems when it ends...

Why Oh Why Can't We Have a Better Press Corps? (E.J. Dionne/Washington Post Edition)

Shorter and smarter E.J. Dionne:

Every two years there is a crucial election that totally transforms the future of America!

Yes, that is smarter than what E.J. Dionne actually wrote. Ten years, Post, unless you repent:

E. J. Dionne Jr. - 'The Real America,' Redefined - When a nation alters its philosophical direction and changes its assumptions, there is no press release to announce the shift, no news conference where The People declare that they have decided to move down a different path.

Yet 2006 is looking more and more like one of history's hinge years, a moment when old ideas are cast aside, new leaders emerge and old leaders decide to speak in new ways. The changes in politics and culture are visible in the many sudden and outright reversals of the conventional wisdom....

It wasn't all that long ago that Democrats and liberals were said to be out of touch with "the real America," which was defined as encompassing the states that voted for President Bush in 2004, including the entire South. Democrats seemed to accept this definition of reality, and they struggled -- often looking ridiculous in the process -- to become fluent in NASCAR talk and to discuss religion with the inflections of a white Southern evangelicalism foreign to so many of them.

Now the conventional wisdom sees Republicans in danger of becoming merely a Southern regional party. Isn't it amazing how quickly the supposedly "real America" was transformed into a besieged conservative enclave out of touch with the rest of the country? Now religious moderates and liberals are speaking in their own tongues, and the free-thinking, down-to-earth citizens in the Rocky Mountain states are, in large numbers, fed up with right-wing ideology.

Only a few months ago, it was widely thought that accusing opponents of wanting to "cut and run" in Iraq would be enough to cast political enemies into an unpatriotic netherworld of wimps and "defeatocrats."

Now the burden of proof is on those who claim that fighting in Iraq was a good idea and that the situation can be turned around....

How durable are these changes? In both politics and culture, the side that thinks it's losing usually accommodates itself to the ascendant order. My hunch is that we will be seeing many new claims to moderation and social concern on the right and many fewer fake NASCAR fans on the left.

Thailand Experiments with Capital Controls

The first day doesn't go that well:

Thailand Lifts Investment Controls: Financial News - Yahoo! Finance: Thai government is lifting controls on foreign investment in stocks after the market plunged nearly 15 percent on Tuesday, rattling regional bourses amid worries about a repeat of the 1997 Asian financial crisis.

Finance Minister Pridiyathorn Devakula said that the controls -- announced just a day earlier -- would remain on foreign investments in bonds and commercial paper as part of central bank's measures to stem the surge of speculative investment in the Thai baht, which had risen to a nine-year high versus the dollar on Monday.

Investors dumped stocks in Hong Kong, India, Indonesia, Malaysia, South Korea and the Philippines amid contagion concerns that the plunge might to spread through the region and trigger the kind of slump that enveloped Asia nearly ten years ago.The Stock Exchange of Thailand's benchmark SET Index closed down 14.8 percent at 622.14, after plunging as much as 19.5 percent earlier.

It was the market's biggest one-day drop ever, and brought the benchmark index to its lowest since October 2004. The hardest hit sectors were banking, energy and telecommunications.The plunge came after the Bank of Thailand late Monday announced its toughest measures yet to clamp down on speculative inflows that have lifted the Thai currency, the baht, to a nine-year high of 35.09 to the dollar.

The measures said that starting Tuesday, all banks were required to hold in reserve for one year 30 percent of capital inflows that aren't trade- or services-related, or repatriation of Thai residents' investments abroad. Also, foreign investors must pay a 10 percent penalty unless they keep funds in the country for a year.

Effectively, the central bank's rules meant that if a foreign investor allocated the equivalent of 100 million baht to the Thai bond market, the investor could only buy 70 million baht of bonds, while the remainder would be withheld by the central bank, earning no interest.

If the investor wanted to withdraw the money in less than a year, only two-thirds of the amount withheld would be returned, an effective 10 percent tax on the initial investment amount.The moves spooked international investors, who viewed the measures as drastic and dimming the allure of Thai stocks.

David Cohen, chief of Asian economic forecasting for Action Economics in Singapore, said the worries may be unfounded because the situation in Thailand now is fundamentally different from the events surrounding the 1997-98 Asian financial crisis. The big problem ten years ago was currency weakness; now, it's currency strength...

Monday, December 18, 2006

The Civil War in Iraq Corcyra

For some reason, both the New Republic and the Weekly Standard rejected this forecast of civil war in Iraq account of the civil war in Corcyra when it was submitted to them back in 2003:

Thucydides 3.82-83, U. of Saskatchewan: So savage was the factional strife that broke out -- and it seemed all the worse in that it was the first to occur. Later on, indeed, all of Hellas (so to speak) was thrown into turmoil, there being discord everywhere, with the representatives of the demos wanting to bring in the Athenians to support their cause, while the oligarchic factions looked to the Spartans. In peacetime they would have had no excuse nor would they have been prepared to summon them for help, but in the midst of a war, the summoning of outside aid readily offered those on both sides who desired a change in the status quo alliances that promised harm for their opponents and, at the same time, benefit for themselves.

Many harsh events befell the various cities due to the ensuing factional strife -- things which always occur in such times and always will occur, so long as human nature remains the same, although with varying degrees of violence, perhaps, and differing in form, according as variations in circumstances should arise. For in peacetime, and amid prosperous circumstances, both cities and individuals possess more noble dispositions, because they have not fallen into the overpowering constraints imposed by harsher times. But war, which destroys the easy routines of people's daily lives, is a violent schoolmaster, and assimilates the dispositions of most people to the prevailing circumstances.

So then, affairs in the cities were being torn apart by faction, and those struggles that occurred in the latter stages of the war -- through news, I suppose, of what had occurred earlier in other cities -- pushed to greater lengths the extravagance with which new plots were devised, both in the inventiveness of the various attempts at revolt and in the unheard-of nature of the subsequent acts of retaliation.

And people altered, at their pleasure, the customary significance of words to suit their deeds: irrational daring came to be considered the "manly courage of one loyal to his party"; prudent delay was thought a fair-seeming cowardice; a moderate attitude was deemed a mere shield for lack of virility, and a reasoned understanding with regard to all sides of an issue meant that one was indolent and of no use for anything. Rash enthusiasm for one's cause was deemed the part of a true man; to attempt to employ reason in plotting a safe course of action, a specious excuse for desertion.

One who displayed violent anger was "eternally faithful," whereas any who spoke against such a person was viewed with suspicion. One who laid a scheme and was successful was "wise," while anyone who suspected and ferreted out such a plot beforehand was considered still cleverer. Any who planned beforehand in order that no such measures should be necessary was a "subverter of the party" and was accused of being intimidated by the opposition. In general, the one who beat another at performing some act of villainy beforehand was praised, as was one who urged another on to such a deed which the latter, originally, had no intention of performing.

Indeed, even kinship came to represent a less intimate bond than that of party faction, since the latter implied a greater willingness to engage in violent acts of daring without demur. For such unions were formed, not with a view to profiting from the established laws, but with a view toward political advantage contrary to such laws. And their mutual oaths they cemented, not by means of religious sanction, but by sharing in some common crime.

Fair proposals offered by the opposing faction were accepted by the party enjoying the superior position in a guarded fashion, not in a truly generous spirit. More concern was placed on exacting vengeance from someone else than on not suffering a wrong yourself in the first place. And if ever oaths of reconciliation did come about, having been exchanged in the face of some temporary difficulty, they remained in force only so long as the parties possessed no resources from any other source. The one who was quicker to seize the opportunity for some daring outrage, if ever he saw his opponent off his guard, took more pleasure in taking vengeance in this way than if he had done so openly, considering this method to be safer and thinking that, by getting the upper hand through deceit, he had won in addition the prize for cleverness. And indeed, most people accept more readily being called clever, when they are knaves, than being called fools when they are honest: the latter they take shame in, whereas they preen themselves on the former.

The cause of all of these things was the pursuit of political power, motivated by greed and ambition. And out of these factors arose the fanatical enthusiasm of individuals now fully disposed to pursue political vendettas. For the leading men on both sides in each city, employing fine-sounding phrases and advocating either equality before the law for the masses (in the case of the democrats) or the moderate rule of the best men (in the case of the oligarchs) made a show of serving the common good but in fact engaged in competition for personal advancement. Competing in every possible fashion to get the better of their opponents, they went to the farthest extremes of daring and executed even greater acts of vengeance, not limiting themselves by the demands of justice or the interests of the city, but only by their whims at any particular moment. In their efforts to gain power either through the use of trumped up lawsuits or by force, they were always ready to pursue the political vendetta of the moment. The result was that neither side was wont to pay any regard to personal integrity: those who succeeded in accomplishing some act of malice under cover of some fine phrase were the ones to gain general approval. By contrast, those citizens who chose the middle course of moderation perished at the hands of both factions, either for their failure to join in the struggle or due to envy at the fact that they were surviving amid the general chaos.

Thus moral degeneration took hold throughout Hellas due to such factional strife, and that simplicity of character common in former times -- of which a concern for honor had formed the greatest part -- became an object of mockery and disappeared. People were ranged against one another in opposite ideological camps, with the result that distrust and suspicion became rampant.

For there was no means that could hope to bring an end to the strife -- no speech that could be trusted as reliable, no oath that evoked any dread should it be broken. Everyone, when they had the upper hand, reckoned that there was no hope of any security by means of promises or oaths, and so concentrated on taking precautions not to suffer any injury rather than daring to trust anyone.

And, for the most part, those of more limited intelligence were the ones to survive: in their fear regarding their own deficiencies and their opponents' cleverness, lest they might be defeated in debate (e.g. in a political trial) or be forestalled in laying some plot by their opponents' cunning, they turned to action right away with a boldness born of desperation.

Their opponents, overconfident in their assurance that they could anticipate the plots of their less intelligent antagonists, and feeling that they could attain their ends by cunning rather than by force, tended to be caught off guard and so perished.

Jared Bernstein Writes in on Alan Reynolds

Hoisted from comments:

Grasping Reality with Every Limb: Brad DeLong's Semi-Daily Journal: Intellectual Garbage Collection: The Unreliability of Alan Reynolds: The problem with Reynold's critique is that he latches on to a few correct points about the limitations of the IRS SOI data, then he:

  • ignores the work others have done to correct these problems;
  • way overstates the bias from these problems;
  • ignores other data that do not suffer from these problems; *having ignored all the inconvenient evidence to the contrary, misleadingly concludes there's no inequality problem.

He's not nuts. Some changes in inequality as measured by the IRS SOI data (the main source for Pik&Saez) are induced by income shifting due to tax changes. But while that can explain a spike in one year to the next, it doesn't explain longer trends in income concentration found in that and every other data set we have.

Also, analysts at IRS have worked hard to try to deal with some of these shortcomings. Take a look at this paper--the figures and tables clearly show an increase in inequality since 1988 income measures that correct for some of the inconsistencies.

I won't belabor the CBO points others have made, other than to say that these data go the furthest towards addresses all the concerns raised by Reynolds. Sorry if these tables don't align correctly--I just pasted them in from excel.

They show real household income changes, since 1988. 2000 was an economic peak and the year before the bursting financial bubble took a big bite out of high incomes (large capital losses), so you see more inequality if you stop there. But I've include the latest CBO year too--02-03--to show that the old pattern is returning.

Pretax        1988-2000  1988-2003  2002-2003
Bottom fifth     15.6%      9.6%      -1.3%
Mid fifth        11.2%      7.5%      -0.4%
Top fifth        35.3%     19.0%       2.3%
Top 1%           68.4%     25.1%       5.9%

Posttax       1988-2000  1988-2003  2002-2003
Bottom fifth     17.7%     13.7%      -1.4%
Mid fifth        12.9%     13.1%       0.7%
Top fifth        30.9%     20.0%       3.9%
Top 1%           60.4%     22.1%       8.2%

Source: CBO

You simply can't write about this stuff in good faith and leave all this information out, unless you're trying to push an agenda that's dependent on misleading.

DeLong (2006), "Aftathoughts on NAFTA"

J. Bradford DeLong (2006), "Aftathoughts on NAFTA" (U.C. Berkeley Center for Latin American Studies)

Economist's View: Varian: Recalculating the Costs of Global Climate Change

Economist's View: Varian: Recalculating the Costs of Global Climate Change: Varian: Recalculating the Costs of Global Climate Change Hal Varian takes on the issues surrounding The Stern Review on the Economics of Climate Change, in particular, the controversial issue of choosing a social discount rate: Recalculating the Costs of Global Climate Change, by Hal Varian, Economic Scene Commentary, NY Times: The Stern Review on the Economics of Climate Change ... became front-page news because of its striking conclusion that we should immediately invest 1 percent of ... global gross domestic product ... to reduce the impact of global warming. The British report warned that failing to do so could risk future economic damages equivalent to a reduction of up to 20 percent in global G.D.P. These figures are substantially higher than earlier estimates.., and environmental economists have studied the 700-page report to try to figure out why the numbers are so large. Recently two noted economists, William D. Nordhaus of Yale and Sir Partha Dasgupta of the University of Cambridge, have written critiques of the Stern report that try to solve this puzzle. ... The two critiques emphasize different but related aspects of the Stern Review%u2019s economic model. Mr. Nordhaus%u2019s major concern is with the Stern Review%u2019s choice of the %u201Csocial rate of time discount,%u201D the rate used to compare the well-being of future generations to the well-being of those alive today. ... Some very intelligent people have argued that giving future generations less weight than the current generation is %u201Cethically indefensible.%u201D Other equally intelligent people have argued that weighting generations equally leads to paradoxical and even nonsensical results. The Stern Review sides with those who believe in a low discount rate, arguing that the only ethical reason to discount future generations is that they might not be there at all ... The report assumes that the probability of extinction is 0.1 percent per year. For all intents and purposes, this implies a social rate of discount that is effectively zero, implying almost equal weight to all generations. The report ... also makes an extreme choice when specifying the relationship between consumption and welfare. These choices together imply that a 1 percent reduction in consumption today is desirable if it leads to slightly more than 1 percent increase in the consumption of some future generation, even though, in the model, future generations will be much wealthier than the current generation. Given these assumptions it is easy to see where the large numbers come from. Unchecked global warming will certainly make future generations worse off to some degree. If we add up these losses over all time using a zero social discount rate, we get a large sum: a dollar a year over a million years is a million dollars. Mr. Nordhaus examines a model of climate change that is similar to the one used in the Stern Review but with a 3 percent social discount rate that slowly declines to 1 percent in 300 years rather than the 0.1 percent discount rate used in the Stern Review. In his model, the welfare of future generations is given less weight than the current generation%u2019s welfare. He finds that preventive measures like a tax on carbon emissions are certainly required. But they are of a much smaller magnitude than those recommended in the report. ... So, should the social discount rate be 0.1 percent, as Sir Nicholas Stern, who led the study, would have it, or 3 percent as Mr. Nordhaus prefers? There is no definitive answer to this question because it is inherently an ethical judgment that requires comparing the well-being of different people: those alive today and those alive in 50 or 100 years. Still, we may at least ask for consistency... Forget about global warming and consider the much simpler problem of economic growth. How much should we save today to bequeath to future generations if we really believed in a 0.1 percent social discount rate and the other assumptions built into the Stern model? The answer, according to Sir Partha%u2019s calculation, is that we should invest 97.5 percent of what we produce today to increase the standard of living of future generations. Sir Partha%u2019s stripped-down model leaves out uncertainty, technological change and population growth, but even so, such a high savings rate is totally implausible. It is even more implausible given that future generations will be much richer than those now living. According to Mr. Nordhaus, the assumptions used in the Stern Review imply that per capita yearly consumption in 2200 will be $94,000 as compared with $7,000 today. So, is it really ethical to transfer wealth from someone making $7,000 a year to someone making $94,000 a year? As these examples illustrate, the choice of an appropriate policy toward global warming depends heavily on how one weighs the costs and benefits it imposes on different generations. ...

Gordon's Notes Rents a Car

The struggle over price discrimination continues:

Gordon's Notes: Car rental: enter gold number, price jumps $200: The 'arms race' of modern pricing continues apace. I priced a personal 5 day van rental twice on Travelocity - once with no loyalty number added and again with the loyalty number.The price of loyalty, was a $200 increase. Yes, I would pay Avis for the joy of being a loyal customer.

To their credit Travelocity listed Avis twice after I entered my registration number, once at the disloyal price and again at the inflated loyal price.These days it is increasingly foolish to do any price negotiation directly with a travel related vendor.

Why Is TV so Low-Quality?

Back when there were only three networks and TV was entirely advertising-supported, this made a lot of sense:

Marginal Revolution: Why is TV so often stupid: Why is TV so often stupid:

TV is not vulgar and prurient and dumb because the people who compose the audience are vulgar and dumb. Television is the way it is simply because people tend to be extremely similar in their vulgar and prurient and dumb interests and wildly different in their refined and aesthetic and noble interests.

That is from David Foster Wallace. Here is the link, from Ben Casnocha.

You see, network TV made money not by providing the maximum value to watchers, but by providing advertisers with the maximum number of eyeballs. The two are not the same.

Now, however, we have cable, and hundreds of channels. So things should be changing. But I see no signs that they are.

Matthew Yglesias / proudly eponymous since 2002

Matthew Yglesias / proudly eponymous since 2002:

Kinder, Küche, Kirche For a while now I've been seeing sporadic publications by someone named Josef Joffe. His views always seem kind of crazy. But only kind of. And since he lacks clear-cut affiliations with crazy institutions, I tend to think maybe he's not as crazy as he seems. But then I see another article and I think "how crazy is this guy?" But, here he is, the editor of Die Zeit in Germany and, frankly, I don't think of Continental newspaper editors as likely candidates for padded cells. This virtually uncritical review of Mark Steyn's book in The New York Sun is, however, the last straw. The man's 'round the bend -- as much if not more so than Steyn himself: If the Europeans have thrown in the generative towel, Mr. Steyn plows ahead, the Muslims have not. They are lean, mean, and super-fertile, and they are thrust forward by a mighty sense of moral superiority as they look down on the decadent, libertine, and slothful West. Again, Mr. Steyn has a point. There is a lassitude about Europe that stands in stark, possibly tragic contrast to its glorious past — when its adventurers roamed the four corners of the globe as conquerors, when it produced everything, from the Renaissance to the fax machine, that makes up Western civilization. Honestly, what is one to say? There's a long and, frankly, not especially distinguished tradition of this sort of thing. You may recall that as far back as The Great Gatsby sensible people were satirizing this as blowhard Tom Buchanan recommends Rise of the Colored Empire by "this man Goddard," a reference to Lothrop Stoddard's forgotten non-masterwork The Rising Tide of Color. Actual arguments about economics and international relations tend to go missing here as we try and blend together anxiety about the changing social role of women with anxiety about the changing ethnic composition of society and serve it up as a tale of foreign menace and western decline. The next step, which Steyn already seems prepared to take, is to start castigating the broad population for its weak-kneed unwillingness to see the necessity of drastic measures from whence it's a short step to the need to abrogate democracy, etc., etc., etc.

Impeach George W. Bush

Impeach Richard Cheney. Impeach George W. Bush. Do it now:

Former U.S. Detainee in Iraq Recalls Torment - New York Times: The detainee was Donald Vance, a 29-year-old Navy veteran from Chicago who went to Iraq as a security contractor...

Liars, Charlatans, and Republican Legislators

Yes, Mark Thoma gets shriller and more firmly based in reality with each passing day:

Economist's View: A Gathering of Liars and Charlatans:I will be glad when this nonsense ends. Government hearings should not be "a gathering of liars and charlatans, sponsored by those industries who want to protect their profits." This is Daniel P. Schrag, professor of earth and planetary sciences at Harvard and director of the Harvard University Center for the Environment recounting his recent experience testifying before the Senate Committee on Environment and Public Works:

On a swift boat to a warmer world, by Daniel P. Schrag, Commentary, Boston Globe: I am a climate scientist and an optimist. This may seem like a contradiction, with all the talk of scorching heat waves and bigger, deadlier hurricanes. But it's not. Let's be clear: I am not a skeptic on climate change. In my earth science courses, I teach that burning fossil fuel is raising atmospheric carbon dioxide to levels not seen on Earth for more than 30 million years. In public lectures, I show pictures of what would happen ... if half the Greenland Ice Sheet melted, asking people to imagine abandoning New Orleans and Miami. I tell people that, unless we take action to reduce emissions, the question is not whether this is going to occur, but when.

Yet I am an optimist because I believe we can fix the climate change problem. We can deploy the technologies to meet our energy needs while slashing carbon emissions: plug-in hybrids, windmills, carbon sequestration for coal plants, and even nuclear power....

Unfortunately, I am a little less optimistic today than I was a couple of weeks ago, before testifying at the Senate Committee on Environment and Public Works. It was Senator James Inhofe's last hearing as chair of the committee, and the focus was on media coverage of global warming. I was invited by the Democratic staff to counter arguments that global warming is a hoax perpetrated on the American people by scientists like me....

I still hoped I could help educate our lawmakers -- maybe not Inhofe, but perhaps some of the others.... [G]lobal warming is not a partisan issue. America should lead the world and capitalize on an extraordinary business opportunity as we invest in new energy technologies, I said. Then I watched in horror as Inhofe's witnesses spouted outrageous claims intended to deceive and distort. Two were scientists associated with industry-funded think tanks. They described global warming as a "mass delusion" among the scientific community, sowing confusion by misrepresenting the ... data... They even recommended burning as much fossil fuel as possible to prevent another ice age....

Some senators defended the integrity of the scientific community, including Barbara Boxer.... But... no one stood up and called this hearing what it was: a gathering of liars and charlatans, sponsored by those industries who want to protect their profits. Later that day, Inhofe... [claimed] that I "agreed" with him that the Kyoto Protocol "would have almost no impact on the climate even if all the nations fully complied." In fact, I had interrupted him during the hearing to object to this claim....

Taking the first step without government isn't feasible - if it was, why haven't we taken it already? Voters sent a message in the last election -- we'll see if Congress and the rest of government hears it.... The assault on the science underlying global warming is ongoing. For example, this is from Friday's American Spectator:

The Gore Who Stole Christmas, by Rob Bradley, American Spectator: The... science behind rapid, disruptive global warming scenarios is murky at best.... [P]eer-reviewed studies dispute virtually all the tenets behind climate alarmism.... [T]hese scares du jour may go the way of yesterday's alarms over global cooling, the population bomb, and mineral-resource exhaustion. Nonetheless, one part of these scare stories is genuinely frightening: the heavy-handed government intervention that advocates always look to as the source of salvation. Yesterday's foes of the free market were socialists, communists, and Keynesians. Today's are greens who want government engineering to "stabilize" the climate and ensure "sustainability."...

Keynesians... those awful people who brought us things like Social Security, Unemployment Compensation, and macroeconomic stabilization policy. And all those government regulations about polluting the air and rivers those commies put into place are such an inconvenience for business. It was so much better when they didn't have to care.

I am not anti-market. When there is market failure and markets are broken, they need to be fixed. I want markets to work efficiently and that requires some mechanism to force economic agents to internalize the costs they impose on the environment.

People who deny this basic point, or refuse to acknowledge the science that would justify such actions, should not promote themselves as advocates for well-functioning, efficient markets.

Why Oh Why Can't We Have a Better Press Corps? (Yes, It's Another Fred Hiatt of the Washington Post Edition)

Fred Hiatt--the man who has done more than anybody else to destroy the credibility and the honor of the Washington Post with his mendacious and obsequious toadying to George W. Bush--appears to finally realize that George W. Bush and his dwindling band of flatterers don't have all the answers:

Fred Hiatt - A New Mideast, or Wishful Thinking? - [T]hings get a bit more complicated than Rice in her fluency makes them sound, because the forces of moderation -- the "mainstream actors," as she calls them -- are hardly all democratic, and the fruits of democracy are hardly all moderate. The good guys, in her view, include dictatorships (not her word) such as Egypt and Saudi Arabia, while democratic victors include extremist actors such as Hamas in the Palestinian territory and Moqtada al-Sadr in Iraq.

It grows even more complicated when Rice attempts to fit the neat strategic frame of moderation vs. extremism over the mess her administration has helped create in Iraq. Rice says the United States must encourage Shiite, Sunni and Kurdish leaders of the "more moderate center" to work together and to isolate and move against their respective militias. But what if those parties see each other as the enemy, and each value their own militia or terrorists as means of pressuring the other?

Rice is determined to see "real advantages for the United States" in the mess of today's Mideast -- a "new and much more favorable strategic context in the Middle East."... But is she seeing something that Baker and Hamilton missed -- or something that isn't there? The administration's credibility for such visions is near zero, and justifiably so, given its record of wishful thinking. Rice... [said that Bush had] understood even [before the invasion of Iraq] that the democracy-building alternative would be difficult.

But then why did they not share that with the public? And why did they fail so abjectly and repeatedly to prepare for the difficulties? Why, even now, does the president seem to be re-creating the conditions for the infighting that plagued his first term, hiring a defense secretary who seems much closer to Baker than to Rice in his view of the world?

You can't help but be impressed as you listen to Rice discourse on how the region has changed and why the old approaches won't work. You feel less certain, when she's finished, that she or her boss have come up with any alternatives that will.

He hasn't yet shed all of his obsequious toadying tics. I know a great many people who can help but be impressed, and are not, by listening to Condi Rice discourse. And almost all of his questions should be statements.

But the signs are there. After seven years of total denial of reality, Fred Hiatt is showing the first signs of becoming shrill. Only the first signs, but it is a step.

My January Starts to Fill Up

Thursday, January 11, from 4-5:30 in Evans 608-7:

Department of Economics, University of Michigan: Yuriy Gorodnichenko: "Endogenous information, menu costs and inflation persistence"; "Reduced rank identification of structural shocks in VARs"; "Using firm optimization to evaluate and estimate returns to scale"; "Monetary Policy When Potential Output Is Uncertain: Understanding the Growth Gamble of the 1990s."

Do Unto Others...

John Quiggin and Hal Varian are discussing the Stern Review on Global Climate Change and the pure rate of time discount in my email inbox:

Hal Varian: Stern is advocating levying a $70 tax on today's generation to transfer $940 to a future, much wealthier, generation. This is exactly the opposite of the experiment you suggestion. Given the absence of time travel, the relevant transfers are all of from the present to the future.

John Quiggin: At the margin, it's the same question. If you oppose paying $70 now to transfer $940 to wealthy people in the future, you should support taxing wealthy people $940 now to pay $70 to poor people, unless you specifically discount the utility of future generations simply because they are in the future. I'm not saying that this is an implausible preference, just that it indicates the kinds of trade-offs that are involved.

Hal Varian: Here is my problem with 0 social rate of time discount. Suppose I believe that it is ethically neutral to transfer $1 from Brad DeLong to John Quiggin. Furthermore, John and Brad are indifferent between $1 now and $1.10 next year. Should it not be the case that it is ethically neutral to take $1 from Brad DeLong now to give John Quiggin $1.10 in the future? In general, if I discount my own future consumption and I should "treat others as myself" doesn't that mean that I should discount other people's future consumption (just as I do my own)?

My view--which I admit may well be wrong--of this knotty problem is that we are impatient in the sense of valuing the present and near-future much more than we value the distant future, but that we shouldn't do so. Our habits of mind of preferring a bird in the hand to two in the bush come from a time when life was nastier, more brutish, and definitely shorter, and that if you went into the bush to try to get the two birds you might well not come out.

The fact that we want to apply a pure rate of time discount much greater than the risk of extinction to problems of planning for the far future is, I think, a flaw in our reasoning.

So I come down with John rather than with Hal on this one.

Sunday, December 17, 2006

Scent Trails

But you would need a much longer neck to follow scent trails at speed:

3quarksdaily: A team of neuroscientists and engineers, led by Noam Sobel of the University of California, Berkeley, and the Weizmann Institute of Science in Rehovot, Israel, decided to test this conventional wisdom.

The team first laid down a 10-metre-long trail of chocolate essential oil in a grass field (the scent was detectable but not strong or overpowering). Then they enlisted 32 Berkeley undergraduates, blindfolded them, blocked their ears and set them loose in the field to try to track the scent. Each student got three chances to track the scent in ten minutes; two-thirds of the subjects finished the task. And when four students practiced the task over three days, they got better at it.

Next, the team tested how the students were following the trails. They counted how many whiffs of air each student took while tracking the scent trail, and tested the effect of blocking one nostril at a time. The scientists found that humans act much like dogs do while tracking a scent, sniffing repeatedly to trace the smell's source. They didn't do so well with one blocked nostril, suggesting that the stereo effect of two nostrils helps people to locate odours in space...