I'm not sure why y'all bother coming here; you might as well just go see the Volokh brothers, since I send you there every three posts anyway. But -- sigh -- go check out this terrific piece on employment at will. Tasty snippet:
This reasoning is, I think, quite sound, up to a point; indeed, as a matter both of kindness and good business planning, an employer should cut more slack to an employee who had done a great job for years. But the point of my original post was that not all unfair behavior is illegal, in the employment relationship or outside it.
I say it again: Not all unfair behavior is illegal. And our economy would be in real trouble if it was, because making unfair behavior illegal means making illegal any behavior that some jury will eventually find to be unfair. That would be some jury composed more of employees than employers, and some jury that -- because of basic human nature -- will sympathize more with the visible plaintiff who lost her job than with the coworkers or customers or stockholders who might be hurt by the plaintiff's (or other employees') lack of skill.
Meanwhile, Steve Chapman does a lovely job shredding Bush's mental health grandstanding:
Never mind his party affiliation. On this issue, Bush sounds like an old-fashioned Democrat, acting as though a pure heart is all you need to understand the wisdom of a bigger government role. "Americans with mental illness deserve our understanding, and they deserve excellent care," he declared.
It's fun to give people what they deserve if you don't have to pay for it. Many people run for office so they can play Santa Claus year-round with someone else's money. Regrettably, someone does have to bear the cost of more generous health insurance. The Bush plan is vintage Clinton: Give Washington the credit for doing good, but send the private sector the bill, and let someone else worry about the consequences.
Bush hasn't spelled out all the details of his approach, but the White House said his goal is "maximum parity" between coverage for mental and physical illnesses. The chief bill on Capitol Hill, sponsored by Sens. Pete Domenici (R-N.M.) and Paul Wellstone (D-Minn.), would compel equal coverage for all mental illnesses. Bush may not go that far, but he apparently will demand equal insurance at least for the most serious disorders.
Supporters of the tougher mandates assure us that the cost will be trivial--increasing current premiums by no more than 1 percent. But that still amounts to some $23 billion a year, and if there is any iron law in Washington, it's that health-care benefits always end up costing more than we are told by the politicians who approve them.
What the advocates fail to explain is why American businesses would refuse to provide something that is so cheap and yet so valuable. Employers don't have to provide any health insurance at all, and those that do are not acting entirely out of the kindness of their hearts. Most do it because they have to compete to attract and keep good workers. If mental-health coverage were something treasured by employees and easy to afford, you can be sure that businesses would be knocking each other down to provide it.
In fact, companies are not only declining to offer such broad coverage but resisting congressional efforts to force it down their throats. That suggests they don't believe mental- health "parity" is quite the free lunch it pretends to be.
Now whom should we believe: Managers whose company health and survival depend on their ability to tell the difference between money-losing and money-making ventures? Or politicians who can call on the Treasury to cover their every whim? In the end, the president and Congress don't worry too much about the cost--because they won't be paying it.
RETIREMENT INSECURITY. Seniors are headed for serious trouble. The Times reports that corporations that used to provide generous health benefits for retirees are cutting back dramatically. This follows a study released last week by the Economic Policy Institute showing that despite the recent unprecedented stock market boom and proliferation of 401(k) retirement plans, typical Americans now facing retirement will have to tighten their belts harder than previous retirees. More findings: More than 40 percent of households headed by someone between the ages of 47 and 64 will not be able to replace even half of their pre-retirement income once they stop working. Nearly 20 percent will have retirement income below the poverty line. How will they be able to afford health insurance? Do tell.
Well, if the retirees are over 65, they're getting it from Medicare. Or is it also our civic duty to fund early retirement for those who desire it?
Seriously, this is a big issue, though Tapped misses the story, which is this: there will soon be fewer than 2 workers in the work force for each retiree. No matter what law we pass against it, unless we radically increase either our birthrate or immigration (or implement a radically stepped up drive for euthanasia), we're going to have to cope with this sooner rather than later. Because simple math tells us that 2 workers cannot support retirees in the same lavish style as 3 workers currently do, unless those two workers are willing to curtail their own lifestyle -- or productivity takes a radical leap.
Privatisation, I hear you cry? Well, it's sure better than what we've got. Giving money to government destroys productivity; the bigger the share of your economy the government has, the slower your GDP grows. (Per-worker productivity in the EU is often higher than ours, but this is not because the government is efficient; it is because the government has made it uneconomical to employ lower-productivity workers, who are instead on the dole. The overall economy is still less productive.)
Investing money in the private sector, on the other hand, increases productivity (on average; not in every single instance. Take your silly inummerate arguments elsewhere, please). But that doesn't mean that if we invest more money in the private sector, we'll produce enough productivity to support retirees in the style to which they've become accustomed. And it doesn't matter whether that support comes from social security, bond interest, or dividends; retirees are using more goods and services than they're creating. It's a net loss to the economy.
What do we do about this? You know the answer. We're not going to get to retire, folks. We'll be working until we drop dead in the traces. So find something you like to do, baby, because you're going to be at it a loooooooong time.
Juan Gato is assembling a list of gun-rights editorials that all seem to be working from the same cheat sheet. Well, he can add one more: The Philadelphia Inquirer. And I think this is the cheat sheet.
A letter on the Second Amendment from the LA Times:
Thank you for printing the text of the 2nd Amendment, a careful reading of which resolves all controversy as to its meaning. Atty. Gen. John Ashcroft's interpretation mistakenly focuses solely on the second half of the amendment ("the right of the people to keep and bear arms shall not be infringed") and completely ignores the first half, which sets a clear condition upon that right ("A well regulated militia being necessary to the security of a free State").
The structure of the complete amendment makes clear that if the condition that is set out first is not met, then the consequent right has no foundation and ceases to exist; otherwise, why refer to a militia at all? Today, that condition is not met: a "well regulated militia" is no longer "necessary to the security" of a state, as we have a professional standing army. Since the amendment's "right of the people to keep and bear arms" is conditioned upon the need for a militia to maintain security, the fact that no such need any longer exists means that the right of the people to bear arms no longer exists, either.
I'm sure the NRA won't be persuaded; but then I'd like to know why its members believe the authors of the amendment commenced it with that reference to a militia "being necessary," instead of going straight to the right itself? Sloppy writing?
The writer, one Michael Hinckley, is both lexically and grammatically challenged. If we're going to deconstruct the text, we must first look at what the militia is. He's absolutely wrong that we no longer have one; the 1956 militia act says that we do, and we (at least those of us under 46) are it.
(Side note: could we take guns away from people over 50 based on this reading? Professor? Professor?)
He's also wrong about the text. The main clause of the text is "the right of the people to bear arms, shall not be infringed" (-2 for the unnecessary comma, Mr. Founding Father, and if I see an error like that again, you'll be spending two free periods a week over at the Reading Center).
Anyway. "A well regulated militia being necessary. . . " is a clause. It is not the main purpose of the sentence. Nor is it a conditional or subjunctive clause, which would imply that it restricts the action in body of the main clause. Mr. Hinckley states that it is a condition, but it is not; conditions are properly demarked with conditional statements, usually prepositional phrases, such as "in the event that" or "as long as", or simply "if". No conditional markers, no condition. The clause in question is a simple modifier of the main clause. Those against the Second Amendment always say, "well, if the Founding Fathers had wanted individual people to have guns, why didn't they make it explicit?" The answer being that they thought they did: the People are the entity that is not the state. Even if you wanted to talk about only letting the militia have guns, that militia would not be subject to state control; the States are a separate entity by the lexical logic of the constitution. But anyway (all right, all right, -1 to me for starting the sentence with a conjunction) I'm pretty sure that the Founding Fathers did know what a conditional phrase looked like, and could have used one if they'd chosen to. They didn't. Random speculation about all the things the Founding Fathers could have done, but didn't, is now over.
Now, I know that lawyers make more sophisticated readings of the text based on original intent and all that. That's not my territory. But when you begin to talk about English grammar, you'd better be prepared to defend your assertion. Mr. Hinckley falls far short of the mark.
But given that Mr. Michael Hinckley apparently has to wait for the LA Times to print the text of the Second Amendment, because he is unable to find a copy of it in the approximately 8 zillion locations in which such a thing is available, I was probably expecting too much from the letter in the first place.
Okay, the archives are getting ridiculous. Can someone tell me how to make each file go on one line? and while you're at it, how do I make my columns line up with my banner? I should probably note that I can't pay for this information with anything except my eternal gratitude, so unless it's an easy fix, don't stretch yourself.
I very much enjoyed this headline/blurb from the New York Times:
Two Paths for Khost: Warlord or Professor By BARRY BEARAK A battle of will between a warlord accused of killing 36 people and a sociology professor has emerged as an early test of Afghanistan's nationhood.
All right, I'm not saying I'd want to eat at the same lunch counter with one, and I sure as heck wouldn't want my sister marrying one of 'em. But If you prick a sociology professor, does he not bleed? If you tickle him, does he not laugh? If you poison him, does he not die? And if you are a warlord and you kill him, is he not just as dead as the other 36 people you killed?
An old joke: A farmer hears suspicious noises in his henhouse. "Who's there?" he calls out. "Nobody here but us chickens," replies the thief. Satisfied, the farmer goes back to bed.
That about sums up the behavior of federal regulators during California's electricity crisis. As I've been pointing out for more than a year, there is powerful circumstantial evidence that market manipulation played a key role in that crisis. Energy companies had the motive, the means and the opportunity to drive prices sky-high. And the crisis exhibited exactly the features you would expect if market manipulation was playing a big role: much of the state's generating capacity stood idle even as wholesale electricity prices went to 50 times normal levels.
An old joke: an engineer, a chemist, and an economist are stranded on a desert island with no food source but the ton of canned goods sitting on the beach. (Where'd it come from? I don't know. Doesn't matter to the story.) They are trying to figure out how to open it using only the sparse vegetation found around the island.
The engineer gets to work making a complicated catapault device to burst the cans on impact with the sagebrush.
The chemist gets to work trying to extract acid from the local plants.
The economist, meanwhile, sits on the beach. When the other two ask him what he's doing, he says. "The problem's very simple. First, we assume a can opener. . . "
That about sums up Paul Krugman's behavior in the California energy crisis. He's assuming the Bush Administration is guilty. He'll get around to finding the actual proof some other time.
"Energy companies had the motive, the means and the opportunity to drive prices sky-high"? This is evidence? Paul Krugman had the means, the motive, and the opportunity to plot the assasination of Andrew Sullivan, but I misdoubt he's put them into action. As for that idle capacity, unless I missed a memo, I'm assuming he's referring to the plants that went down for routine maintenance. Probably that generators were not particularly eager to get that capacity back online; I'm sure that they weren't after the state refused to pay. But the maintenance, was, in fact utterly neccessary; as the internet boom fueled consumption, the generators had run their plants flat out the previous summer without breaking for routine maintenance. Or so I'm told by people who ought to know. I'm also told that to the extent that plants were held idle, it was because there was insufficient transmission capacity for the power they could have generated. It was not part of some vast conspiracy to defraud the public -- if refusing to sell people something they want at the price they want to pay can be called "fraud".
Yet federal officials, from George W. Bush on down, offered California nothing but sermons on the virtues of the free market. The Federal Energy Regulatory Commission, which is supposed to police these things, found no evidence of foul play. Essentially, FERC asked energy companies whether they were manipulating the market. "Who, us?" they replied — and that was that. My favorite FERC study found that power companies had the ability to exercise "market power," and that it would have been profitable for them to do so, but that there was no evidence that they actually had. Those power executives must be swell guys!
Amusingly, Krugman fails to mention that there's nothing FERC could have done, because all of this was legal. At least I'm amused.
The significance of the "smoking gun" Enron memos that came to light a few days ago is that they show exactly how swell those power executives really were. It turns out that Enron was indeed rigging the markets, with schemes that had smart-alecky nicknames like Fat Boy, Death Star and Get Shorty. Who said business isn't fun?
So the big problem with all this is that traders are wiseasses. If they'd just named their trading strategies after the 12 apostles, we could live with it, but movie titles -- can we give them the death penalty for transgressing on the sacred name of Tarantino?
These memos came to light despite FERC's evident determination to see no evil. (We now know that the Bush administration in effect allowed Enron to choose the commission's members.) As one California official put it: "FERC is like a parent who doesn't want to believe their teenager has gone bad. The memos are significant because they are like finding a diary in the kid's backpack saying, `I robbed the liquor store.' "
Physical reality: Ken Lay threatened one guy, who was subsequently axed. This guy was the head of the body. While this looks bad, I'm also seen enough firings to know that often what seems like a smoking gun is just a coincidence inflamed by an acrimonious imagination. What woman hasn't had at least one female colleague tell them that the reason she got the axe was clearly sexual discrimination -- rather than the gross incompetence we knew to be the actual cause?
Krugman Reality Lite (1/3 less facts than regular reality): Enron was allowed to choose the staff of the entire regulatory body, which we may infer was staffed entirely by the layabout cousins, ex-drug-dealing buddies, and third grade Sunday school teachers of Ken Lay.
The great risk now is that this will be treated purely as an Enron story.
. . . because though the New York Times staff has said Enron and Bush together so many times that they now sound like one word when they say it at cocktail parties, people seem to be curiously stubborn about waiting for evidence before they indict Bush along with Ken Lay.
That's wrong; Enron was mainly a trader rather than a power producer, and as such could have only limited impact on electricity prices. The bigger story involves market manipulation by a number of producers. The circumstantial evidence for that manipulation is overwhelming. And if no smoking-gun memos have yet come to light, what do you expect? The Enron story shows just how easy it is for companies to cover their tracks, especially when the regulators are in their corner. If Enron hadn't lost its clout by going bankrupt, you can be sure that we would never have heard about Fat Boy and Death Star.
What's the circumstantial evidence? That prices went high, even as capacity was offline. Well, a shrinkage in the supply would naturally cause a rise in price. . . oh, he means that the generators were manipulating things? But I thought this article was about how we should indict the traders, who had little generating capacity. . . Tarzan confused. Should we indict the traders because the generators took their capacity offline, and is making up obnoxious nicknames a felony or a misdemeanor? Or should we indict the generators because utility expert Paul Krugman thinks that their maintenance took too long?
But he does make a point I've been screaming about for days: Enron may have profited from the shortage of supply in the energy market, but they didn't raise prices (they conspired to sell above the price caps on in-state power, raising total cost, but not the actual price) and they didn't cut supply. That was due to a number of factors, all, I argue below, due to government's thinking it was smarter than the free market.
There is, however, one specific Enron angle here. I may have done Thomas White, secretary of the Army, an injustice. He ran Enron Energy Services, a division that — or so I thought — was mainly used as a way to generate phony profits, inflating Enron's stock price. But the division turns out to have had another role: to create phony energy transactions, inflating Enron's actual profits at the expense of the state of California. Why, exactly, is Mr. White still in office?
No idea, but to be honest, I'm not really that concerned that he's going to start arbitrage operations with the 7th cavalry.
What really annoys me in this story, however, isn't the behavior of the energy companies. It isn't even the behavior of the Bush administration — though the administration not only stood idly by while California was robbed of around $30 billion, it also shamelessly exploited the state's misery to promote its own, utterly irrelevant energy plan. (Now, of course, that same energy plan is essential to the war on terrorism.)
After reading Paul Krugman's column for months, his psychic powers are rubbing off on me. To wit: after I read the first paragraph, I knew that somehow, this was all going to be the fault of the Bush administration. I didn't know how, exactly: whether we'd find that George Bush was sneaking out of the White House at night to throw wrenches in the turbines down at Calpine, or whether maybe he and Ken had come up with the Nicknames of Evil while they were taking a break from figuring out how to run Enron into the ground. Of course, back then, at the beginning of the article, I couldn't have known how shamelessly evil the Bush Administration would turn out to be, shamelessly refusing to force other states in the area to sell power they needed for their own citizens to California, or nationalize the power companies. But I knew it was somehow the fault of the Bush administration.
No, what bothers me is the position taken by so many business and political commentators: that the California catastrophe says nothing about the risks of deregulation and the dangers of loving free markets too much. It was California's own fault, they say, for creating a "flawed" system — a wonderfully vague term that evades the necessity of explaining what really happened. In fact, the main flaw was that the system contained no safeguards against market-rigging.
And I'm sure that there will be a determined effort to ignore even these latest revelations. After all, why let facts get in the way of a beautiful, and politically convenient, theory?
It certainly says something about the risks of deregulation. It says that if people want to imagine that they can get something for free, they'll be in for a rude shock somewhere down the line.
Paul Krugman has railed against the "spot market". I assume he is not, in fact, proposing eliminating the spot market, as that would make the system -- well, let's just say, unless he's got an innovative plan I don't know about it, it would eliminate liquidity and make the system highly unstable. But the madhouse plan to buy all power on the spot market was the brainchild of the de-regulators, and Governor Davis could have eliminated the problem any time he chose by permitting long-term contracts. But no, Davis had to step in and do it himself, and being totally clueless about how to negotiate a power contract, stuck the state with permanently higher prices. California's woes are due to grandstanding, not the traders.
But what about the memos? Arnold Kling has actually read them, which is more than 99% of the people yelling about them have bothered to do. (Note for a later rant: my experience in actually reading The Bell Curve and then having long arguments about it with people who hadn't read the book.) And if you actually read them, he says, what they describe is rather commonplace arbitrage operations with rather lurid names.
Certainly, Enron profited from California; all the traders did. But the power suppliers, you notice, went broke, not the people of California who are still, last time I looked, refusing to pay for all the power they used. And though the market structure was brutally flawed, that says more about government than it does about Enron. Which is to say, that when government has the power to hand out goodies or declare what companies live or die, those companies will invariably try to influence the process in their favor.
Nor would you really want it any other way. If you're a responsible citizen who actually knows how a business works (and doesn't, let's not forget that; corporations are finely tuned machines only in comparison to their governmental alternative) you know that to actually let the labor, environmental, and consumer groups that want to set the rules for business to make those rules without any input from the firms involved would be a total disaster. So you have to let both sides be involved.
But we are not a perfect species. Think of all the different businesses that every state legislator is expected to know how to run: bakeries, foundries, steel makers, technology firms, gas stations, beauty salons, nightclubs, construction companies, car rental firms, oil refineries, insurance companies, chemical manufacturers, doctors, lawyers, dentists, airlines. . . and that's just a small fraction of highly regulated businesses that came to my head. Your legislator is expected to divine what regulations will work and which will be disastrous, and to know exactly how every line of the law he just wrote will be executed in practice. It's not possible. Sometimes he errs in favor of the activist groups; sometimes in favor of the business groups. But no matter how well intentioned he is he won't get it right every time, because that's not in human nature.
So you can't take the business influence out of making laws, you say; that's why we have regulatory agencies.
But regulatory agencies are no less prone to corruption than lawmakers. Look at where regulators go when they aren't being regulators any more: they go to work for the companies they regulate. This is utterly natural; if you've just spent 10 years being a utility regulator, that's what you know. It's go to work for the companies, or apply to air-conditioner repair school, and those schools often have waiting lists.
I had an interesting correspondance about this with one of my left-leaning readers. So make it illegal to work for those companies, said he.
I think that a permanent ban would violate the constitution, I pointed out. But anyway, if you did this, then no one but incompetents will work for the state; regulatory jobs don't pay well enough to attract top flight talent without the access to the private sector.
So raise the salaries, he said.
But most regulatory employees are civil service, I pointed out. You can't raise their salaries without raising the salaries of every other employee at their level in the state. And the ones that aren't would have to make more than the Governor to compete with private sector salaries. It would never get passed.
His response: change the civil service rules. And (I am not making this up) put the corrupt or incompetent regulators in place and then hope that at some undefined point in the future, the public would realize that they need to pay their regulators more to get good ones.
He's well meaning. But he's gotten so focused on his goal that he's ignoring all the other costs. If you know anything about government, you know that ripping out the civil service structure would be more expensive than giving everyone in the state their own generator and unlimited diesel to fuel it. And if you know that the regime you're proposing is going to be corrupt or incompetent, but you propose it anyway because of a dogmatic desire for regulation, how can we take that seriously?
Now, to be fair, Paul Krugman isn't a regulatory specialist and I'm not either; what I know I know through my dad, who deals with such issues as part of his job. And Paul Krugman certainly has better access to all sorts of journals and documents written by top-flight economists that I can't afford and don't have time to go to the library to look up. So there may be better economic arguments against deregulation than he's making. But that's my point: he's not making them. He's using scary names like Fat Boy and what have you. He occasionally throws in a technical term. But he doesn't actually explain the underlying economics. I know (Lord how I know) how hard it is to explain even basic concepts to a general audience. Nonetheless, this is inadequate. I was looking for the underlying facts on which he bases his argument; I found one. The capacity was idle while prices were high. Which has an explanation, the credibility of which neither I nor Krugman are qualified to check. He offers no other backup, such as statistical analysis, on which he would be qualified to comment. If he wants to hang this scandal on Bush, Enron, or the free market, where's the beef?
On the other hand, deregulation can work; Pennsylvania's is. So he clearly cannot say, unless he offers proof that the people in Pennsylvania are wrong and their deregulation isn't working, that it just doesn't work. California's was clearly FUBAR, but that would seem to me an opportunity to learn what doesn't work than to declare that deregulation is a failure. That's the whole point of de-regulation: you experiment, and then when you get it wrong, you do something better.
And at root, in my eyes, that was where California had a disaster, rather than a bump in the road to free markets. They thought they could get something for free. There were three basic ingredients for California's crisis which could have caused the crisis all by themselves, even if the traders hadn't profited, and they were all due to California's abandonning the principles of TANSTAAFL.
First, inadequate generating capacity. California is a huge importer of power, much of it from Canada (oops, Paul Krugman forgot to go after the evil Chretien administration for not stepping in to help California). California's peak loads are very close to total generating capacity in the area; if something goes wrong, (like the low reservoir levels that resulted in inadequate hydro supply in the Northwest) they are vulnerable. This insufficient redundancy has not been resolved, and long term contracts or no, if California doesn't get more capacity in the area, it will continue to be vulnerable to blackouts.
Second, consumer price caps. Electricity is inelastic, but not that inelastic. San Diego saw a nice decrease in power usage because they raised the price to consumers. Remember, power is priced on marginal cost: the cost of the last (most expensive) unit generated to cover demand. Lowering demand even slightly can lower price greatly because the power company doesn't have to buy any more from the very high cost emergency sources they use to cover excess demand. In the rest of the state, meanwhile, people continued to run their air conditioners until the power went off. Why? It's the tragedy of the commons. If you don't run your air conditioner, and everyone else does, you're hot and miserable and the power still goes off. That's why the price signal is vital. But Gray Davis didn't want that price signal to go out -- so consumers got blackouts instead.
Incidentally, perhaps you should meditate on the fact that Krugman disbelieves every word from the energy traders and generators, while simultaneously swallowing everything said by the people from the Davis administration, who are every bit as desperate, if not more, to cover their asses.
And third, the insane plan to buy everything on the spot market. Why is this there? At the behest of the evil Enron lobbyists? Gosh, I have no idea -- I don't work for a California state legislator, and am not privy to their gossip. But Krugman doesn't know either. And I do know enough about government to know that if the legislators who passed the bill had had any inkling about what was going to happen, they wouldn't have passed it; they aren't that venal, and even if they were, they have a keen eye to their own interest, which does not include being ridden out of town on a rail by a crowd of angry power users. I know why they thought it would work: because they thought that power prices would continue to fall, even though they didn't understand too clearly the market forces that had made it fall in the first place, and could certainly have looked around and noticed that all the environmental and consumer regulations they were busy passing had left the state a little short on generating capacity. They wanted to make sure that the utilities would keep getting the best price; hence, the spot market, where the price would always be the freshest on the market. In other words, they thought they knew better than the free market, where no company tries to meet its full demand for any vital commodity on the spot market.
Blaming deregulation for California's woes is like blaming painting for Thomas Kincade. The way in which the deregulation was done was faulty; it allowed interest seeking traders to take advantage to their own profit. But if you think that the state will find a way to outlaw people and businesses seeking their own interest -- well, I refer you to every single worker's paradise. The best we can hope for is to harness that interest, and the best way we know how to do that is, yes, the free market. To paraphrase a famous quote: in California, deregulation was not tried and found wanting; it was found unpopular and left untried.
Update If you want to hear what a regulatory economist does have to say about California, check out testimony from Bill Hogan, who designed the Pennsylvania/Maryland/New Jersey scheme.
So I'm reading this Washington Post Editorial on "Justice and Guns" -- justice being the Department, rather than the concept, the statue, or the baseball player, any of which would probably made a more interesting editorial. But anyway. This phrase caught my eye:
The Justice Department traditionally errs on the other side -- arguing for constitutional interpretations that increase congressional flexibility and law enforcement policy options. The great weight of judicial precedent holds that there is no fundamental individual right to own a gun. Staking out a contrary position may help ingratiate the Bush administration to the gun lobby. But it greatly disserves the interests of the United States.
How delightful. May we assume now that the Washington Post will come out full force behind the traditional law enforcement activity of seeking to narrow Fourth Amendment rights in order to "increase congressional flexibility and law enforcement policy options"? Mmmm? Or argue that the "great weight of judicial precedent" in favor of separate but equal should have restrained Bobby Kennedy from pushing those nasty de-segregation cases?
Didn't think so. Of course the policy conforms to the administration's position on gun control (a position I, and a growing number of constitutional scholars, happen to think is the right one). But it's more than hypocritical, it's down right ridiculous, for the Post to chastise Ashcroft merely for choosing to have the organization he heads support stricter interpretations of some amendments than others, when in order to even make the argument, the WaPo has to do exactly the same thing.
There are some things that, in their own little way, give you a peek inside the life that someone else is living. For example, you can go to this website and realize that there are people who are genuinely filled with excitement to learn that the ACI 318-02 Structural Concrete standard is here at last!
KrugmanWatch teaser: this study finds that Paul Krugman effortlessly cruises to the top of the list for partisanship -- this from the business editorialist at Tom Brokaw's "centrist" Times. Tune in for the complete coverage later.
Professor Tinkler says that most people in America don't need a college education: we're using it to make up for the shameful holes in their secondary education. And, I might add, to give them four years to spend drinking and necking in a responsibility-free zone. But that's another rant.
Doug Turnbull doesn't post often enough, but when he does, it's gold -- like this post on game theory and the Palestinian strategy. Here's a taste:
the Palestinian strategy of maximizing the number of attacks also illustrated a failure of strategic thinking, because it assumed that the past form of the game (terrorist attacks followed by limited Israeli attacks) was the only form it could take. They didn’t see that Israel had a second option open to it, which was the large scale military assault on the territories. And the Palestinians foolishly escalated their attacks to the point that, even in a short term analysis, it was less costly to the Israelis to mount a full scale assault than it was for them to maintain the status quo.
I don’t have the numbers in front of me, but during the weeks of the recent Israeli military action, I think they lost something on the order of 50 soldiers killed, with only one smaller terrorist attack occurring during this period. In contrast, in the weeks leading up to the assault, the Israelis were suffering a deadly terrorist attack almost every day. So, amazingly, the Israelis were actually suffering fewer casualties during a full scale assault on well armed guerillas operating in fortified and booby trapped urban terrain than they were by remaining on the defensive. And this is just looking at it from the short term and ignoring the hoped for disruption of the Palestinians ability to plan and execute attacks in the future.
So where does this all lead? I’m not sure, because for game theory to have any predictive power, the players have to behave in a rational manner. And there’s pretty strong evidence that the Palestinians are no longer behaving rationally. Their goal is no longer to maximize their own utility, but instead to inflict maximum damage on the Jews, regardless of the cost. What started out as a possibly rational, if evil, strategy of terrorist attacks, has devolved. The ends that were being pursued (a Palestinian state) have been lost, and the means to achieve that end have become elevated into ends in themselves. The terrorism now serves no outside purpose—it has become its own justification.
Addendum: The above analysis becomes more complicated when you factor in the idea of information transfer and signaling of intentions--actions have value not just in their direct payoff, but also in their ability to influece the other player by showing them your intentions, in this case your willingness to pay a high price for victory. But that's not worth getting into right now.
The main problem with game theory is that it presumes largely rational players. The problem, I think, is that the internal politics of the Palestinians have rendered the conflict irrational -- a losing situation for everyone.
Will the people who ordered gear from my CafePress store please email me when you get it to let me know how it turns out? My baby doll t-shirt is on the way, but I want to know how people fared with the other logos.
The Wall Street Journal is reporting to day that the White House is proposing a major overhaul of the tax code.
My readers to the left of Joe Lieberman can pour themselves a cocktail and relax. Take heart, my rosy chums; this is not a sneaky way to get another tax cut. The proposal is touted as revenue neutral, meaning that it collects neither more or less money in taxes. Presumably, it will also leave the progressivity of the tax code mostly untouched; we won't suddenly try to get the nation's burger-flippers and nursing-home aides to stump up the entire multi-trillion dollar budget, nor attempt to hand the entire bill to Warren Buffet and Bill Gates. While individuals in a given income bracket may pay more or less, the overall structure should remain basically unchanged.
What they are proposing to do is radically simplify the tax code. If they can do it, bravo! The complexity of our tax code costs the people of this country a lot of money, while producing no more tax revenue to fund worthy projects such as paving over the Grand Canyon and turning it into a parking lot named after Robert Byrd. While most of these are outlined in the brilliant screed on abolishing the corporate tax that catapaulted Live from the WTC to fame and fortune in the blogosphere, I will outline a few of them here:
Costs of complianceBecause the tax code is so complicated, we have to hire accountants to tell us whether that trip to Bermuda was a legitimate business expense if we got a lot of good information for an op-ed on those little drink umbrellas that can accidentally stab you in the eye if your inebriated companions aren't careful. This accountant produces nothing of real economic value; his fees are a cost we pay because the tax code is complex. If we simplified, we wouldn't need to pay someone to tell us that you can't deduct the vacation until you actually write the Op-Ed, and the accountant could get a job doing something productive, like inventing a safety device for those little drink umbrellas.
Cost of avoidancePeople and corporations do a lot of things for no other real purpose than avoiding taxes. They pay people, who could otherwise be engaged in productive labor, to tell them how to do these things to avoid the most taxes, and they divert assets from productive uses to set up entities that meet obscure criteria. If we didn't have deductions for things like Qualifying Small Business Owned by Green-Haired Disabled Vet, we wouldn't have all this useless activity and we could all get back to our drinks.
Cost of litigationTaxpayers, intentionally or not, often interpret rules differently from the way the IRS does. When this happens, the dispute often ends up in court, which is extremely costly to society, what with lawyers, your lost wages, the expenses of running the courtroom, and the wages of the judge, bailiffs, court reporter, court clerk, and the reporter from your hometown newspaper hoping to snap a picture of you being hauled off to jail. The fewer rules, the less time we, as a society, spend arguing whether a lemonade stand on the front lawn is really a Qualifying Small Business, or your teal hair dye meets the statutory definition of "Green".
As you can see, simplifying the tax code is somthing we can all get behind. Except that we can't. I'll be awfully surprised if they manage it.
Why not? Look in the mirror, bud. Me? I hear you cry. I'm not a tax leech!
Hmm? What about that student loan deduction? How about your relocation expenses from last year? And the mortgage interest tax deduction you take year after year after year?
But those are good things, you're thinking, not like all those other, ridiculous deductions.
You're fading out. I guarantee that every single deduction, from farm credits to child care, has some solid citizens who firmly believe that it is only right and just that they receive a deduction for all the extra value they are providing for society by doing whatever it is the tax code is paying them to do. And don't try to distract me with tales of obscure deductions for running a copper mine in a federal economic disaster zone, or whatever; the more obscure and unjustifiable the deduction, the less it's costing us in terms of money and associated indirect costs. It's the big ones, like the mortgage interest deduction that causes Americans to buy bigger houses while producing pretty much the same home-ownership rate as Canada (and to be honest, I'm doing okay without owning a home; I'm not sure why I should be subsidizing the rest of you) that produces massive, and massively costly, structural and financial shifts in the economy.
Incidentally, I also guarantee that this post will generate a flood of emails from people receiving the three deductions I singled out, explaining why I'm wrong about this deduction, and why it, unlike the deductions the writers don't take, is utterly necessary to Our Future as a Democratic Nation. Which is the reason that the tax code won't be simplified. Any congressman who proposing cutting any of these deductions will get not only emails, but letters, candygrams, and irate phone calls from citizens who will make two things crystal clear:
1) [Insert favorite boondoggle deduction here] is vital to Our Future as a Democratic Nation. 2) Any congressman or senator who votes against [boondoggle deduction] should not expect the votes of Concerned Citizens for Subsidizing Boondoggles next election.
And the deduction will be left in. Pretty soon the "simplification" will succeed in removing one subsidy from some group whose members are all too sick to get to the phone, and it will fade into well-deserved obscurity. Or so I glumly foresee. But who knows? Maybe Bush, riding the tide of the Iraqi invasion, can pull it off. Maybe this time will be different.
Mamma's off; for those of you who pray, toss a couple my grandfather's way.
He's a truly amazing man. He grew up on a dirt farm in a little town in Upstate New York, with no electricity or indoor plumbing. He had to leave high school to help his father on the farm, but went back when he was nineteen to finish, which for the time was quite an accomplishment. He finished high school in the depths of the Great Depression, and with too many sons and not enough farm, considered himself very lucky to get a job as a grocery boy. He had that job until he was 26 years old, and supported my grandmother on it, though I can't imagine how. At 26, he turned around a money losing gas station owned by his boss in 3 months, then bought it from him a year later and never looked back.
But he's better known in the little town they live in for his unbelievable generosity of spirit. When my mother went back to her 25th reunion, the house was crowded with classmates who wanted to see Grandpa, who they remembered for always loaning them $5 of gas or a coke when they were short, and driving out to lonely country roads to repair a car when they needed it without asking how they were going to pay. He's 87 and still working at the station -- for free -- to help the fellow he sold it to get the business on its feet, and every winter you'll find him out there in the icy winds of the Rochester area, ringing a bell for the Salvation Army. My grandparents can still be found holding hands, and the only fight I've ever heard them have was over who was going to take the bed, and who the trundle, when they stayed with us; they were both trying to make the other one take the bed. My grandparents still live in the house they've owned since 1955, with the same furniture, and the last time I was up there, when we were talking about the World Trade Center victims, my grandfather looked around and said, "It just makes you think, there's so much more you could be doing for all the helpless people out there."
He's a shining example to me (and more often than not, a reproach) every day of my life.
I'm not normally a fan of Bill O'Reilly, but he's currently shredding a PLO representative, who answers every question about suicide bombers with a rant about Israel, into fine mulch. Bravo.
Everyone's got an opinon on Pim Fortuyn; it's lucky I don't have one, or I'd have to blog about it. I'm just sad that another human being's dead; not very profound.
But it did get me thinking about World War I and the assassination of Archduke Franz Ferdinand by a Serbian anarchist.
I've been reading a biography of Hitler and Stalin, and as I was reading about the roots of their power in the First World War, I went back to the question that I think has preoccupied every student of history when he comes to this tragic event: What the #@%!?
How did this fellow, who was by all accounts the mediocre offshoot of a declining lineage, with the charisma of a tax assessor and the intellectual wattage of one of those scented candles you buy for 99 cents at the drugstore, touch off a conflict that claimed 4 years and millions of young men's lives?
And the answer is, as it is to so many things, that it's complicated.
But there is one big factor: the appearance of countervailing "great powers" competing for hegemony in Europe and beyond. These powers jockeyed for position by means of treaties and interlocking economic agreements that guaranteed that when one went to war, many would. This of course made it more likely that war would occur; a small player, feeling threatened, felt all the big boys at his back and felt free to get belligerent. By the time the Archduke was assassinated, all this jockeying and treatying had produced an atmosphere in which the actual striking point was almost irrelevant; the tension was so high that it was almost guaranteed that something was going to set it off.
Which is funny, because now those who dislike American hegemony are arguing that what we really need is a return to the Great Powers model.
This of course sounds cute when applied to Europe, which can't be a Great Power until it gets a military; and although a recent article in the Atlantic argues that I'm wrong, I don't see Europe's governments eager to take on the social, economic, and political repercussions of providing a real national defense instead of expecting us to come bail them out if anything really bad happens. (That's not a cheap shot, by the way. Let's be realistic -- that's what Europe's current defense strategy amounts to.)
It sounds less compelling when applied to China.
And it sounds totally #@%!ing nuts when applied to Saudi Arabia.
We may be headed into a war in the Middle East. But it will be a war limited by the immense power of the US, and by the country's incredibly generous, historically unprecedented, ethos. Perhaps it is not safe for one nation to have so much power. Very little is safe in this world. Is it really safer to divide that power and hand it off to despots in order to see what they do with it? All so that we can pander to those who, without reason, fear the actions of a US that is, in all ways, more generous and evenhanded to its enemies than any nation that will follow?
So I'm looking through the Sharper Image catalogue, and I saw an item I don't understand: a remote controlled stand alone fan.
I mean, I love my TV remote. But how often does the weather change in your house that you need a remote control to change your fan to one of its three comfort speeds? More importantly, is the fan so powerful that you can feel the effects of the change from across the room?
And now for some unrestrained silliness from Jane Bryant Quinn:
Get ready for the next scary change in your company health insurance. Employers have squeezed almost all the costs they can from managed care. Now they’re working on ways to pass consumers the ball—and the bill. You’ll soon have to decide if you’re willing (or able) to pay extra money for the same quality care you had before.
Quinn, of all people, should know that when employers give their employees health care, they don't just go to the money tree in the back yard and pluck what they need to pay for it, nor do they trade favors with another firm that has a health care mine. If your employer's giving you health care, it's because they aren't giving you something else. That something is money in your paycheck. Those crafty employers have been passing the cost onto their employees for pretty much as long as they've been offering a health benefit.
Now, in fact health benefits are special, because they're tax deductible. It costs your employer the same amount to give you health insurance as it does to give you money, but when he gives you $100 worth of health care, you get $100 worth of health care. When he gives you $100 worth of money, you get $65 or less, after Uncle Sam is done rifling through it. So your employer can give you $65 worth of health care, and you'll be just as happy with it as you would with $100 worth of money. Presuming you want health care, and most of us do.
However, because the tax preferences skew the market, most of us are getting a lot more health care than we want. According to someone who does insurance benefits, the average employee gets between $3200 and $3800 worth of health insurance every year. That's for a single person. Now I want you to think back over all the medical services you've used over the past year. Assume $100 for a doctor's visit, $25 for a generic prescription, $90 for a top-of-the-line prescription, and if you've got something very exotic, well, you know how much it costs. Have you consumed $3800 worth of medical services? I have asthma that ain't improved by planting myself smack in the middle of a construction site 60+ hours a week, but I didn't consume $1000 worth of services.
But the young are subsidizing the old, and the healthy subsidizing the sick, I'm told, and the money will come back to me eventually. Let me ask you something: older workers make more money than I do. Why am I subsidizing them? And if I want to participate in a Ponzi scheme, I'm perfectly capable of finding an MLM or a chain letter on my own; I don't need my employer to do it for me.
BEHIND THIS new approach lies a sudden spurt in the cost of medical insurance. Employers are looking at increases this year in the 13 percent range, after 12 percent in 2001. There’s no relief in sight. Drug prices are soaring, big networks of doctors and hospitals now have the bargaining clout to win higher fees, the work force will soon begin to age and, yes, they’re gonna get high-tech care.
Employers simply won’t pay for all this
And as we've just noted, they in fact don't.
—but they’ve noticed that many of you can and will. When offered either an HMO or a PPO, 55 percent of employees take the PPO, which costs more but provides easy access to most doctors and treatments. So the next question is, will you go even higher to get convenience and choice?
Can you tell the Jane Bryant Quinn is staking out the anti-convenience and choice side of the argument? Boldest move I've seen since Abby Joseph Cohen founded Investors for Insider Trading.
You’ll face this question as soon as “tiering” is added to your company plan. It’s a system for charging different prices for different medical choices, and shows up already in most pharmaceutical plans. You might pay $10 out of pocket for a generic drug, $15 for an approved brand-name drug and $25 for other brand names. You can use any high-priced pill you want, but at your expense.
A few hospital plans—including Tufts Health Plan in Massachusetts and Premera Blue Cross in Washington state—are starting to offer tiered choices, too. Your co-payment might be low for a community hospital and high if you go to a prominent medical center.
Once that idea catches on, you’ll see tiered prices for doctors, too—with the better-known doctors becoming the Tiffany choice. Last month the Humana Health Plan of Ohio announced a new plan that gives workers access to three different groups of doctors, each one costing progressively more.
After tiering comes a whole complex of health-plan proposals, known in the business as “consumer-driven care.” I don’t hear consumers hollering for them, but never mind. They’ve become the very latest in free-market “choice” and “personal control.”
Horrors no, what next? This consumer is hollering for them, Jane Bryant Quinn. This consumer wants catastrophic coverage insurance so she can choose her own doctors while still insuring herself against catastrophic events like a car accident. But this consumer isn't allowed to have these choices, because the state of New York thinks that she shouldn't be allowed to have anything but a horrible HMO she doesn't want and can't afford. So now this consumer doesn't have any health insurance at all.
Consumer plans offer a menu of health-insurance options, each with different deductibles, co-pays, doctor groups and coverage limitations. You mix and match yourself. The more of your medical bills you agree to pay, the lower your monthly premium.
In one popular plan, your employer gives you a fixed sum of money for medical expenses—say, $1,000 a year. You pay any further expenses yourself until you reach a maximum—say, $2,000 a year for an individual or $4,000 for a family. After that, the employer pays. (Similar fixed-contribution plans exist today, but usually without as many choices.)
Taking another approach, Vivius in Minneapolis sells a plan that lets workers set up their own HMOs by naming the particular doctors they want in their network. Their monthly premium depends on how cheap or expensive those doctors are.
Consumer-choice plans come down to this: if you buy less coverage and stay healthy, you win. But if you or a family member gets more than a passing illness, you lose. Losers will grump. Winners will gloat. But to my mind, nobody wins when people play roulette with their health.
Okay, no one's playing "roulette with their health". The plans she's talking about could stick a consumer with as much as several thousand dollars in health bills in a year -- not chump change, but less than most of us are carrying on our credit cards. This is ridiculous hyperbole from someone who ought to know better, and does -- but doesn't care because she's out to make a point. Can anyone guess what that point is?
What’s more, we aren’t very good at assessing our future financial risk. Think of all those retirement savers who lost half their money when the stock market sank.
There I'll agree with you. But if we aren't prepared to let private individuals risk a couple of thousand dollars, we might as well appoint guardians pro-tem for the 99% of the nation that doesn't own a financial calculator.
The promoters behind consumer choice (start-up companies, such as Definity Health, Lumenos and HealthMarkets, along with such veterans as Aetna and Wellpoint) say that you’ll find it easy to select a plan. Just go to the Web, compare prices and coverage and presto, there’s the right one. But Web sites aren’t written for workers with low literacy levels. And even smart people rarely understand their plans.
And because HMO's are good, kind, well meaning companies, it doesn't matter right now -- but just let consumers get some choice! They'll ruin their lives!
What are some of the implications of tiering and choice?
Medical inequality. The well-to-do will get better health services than the middle class. Paul Ginsburg of the Center for Studying Health System Change in Washington, D.C., calls the HMO era “one of unusual medical equality.” We were all in the pot together. Now some will boil while others buy their way out.
That's why right now you can find Warren Buffett and Michael Jordan sitting next to you in the waiting room of your HMO. But if this plan passes, they'll take all the health care, and you'll have to make do with a couple of venereal disease pamphlets left over from the fifties.
Higher bills for the sick. Employers don’t want to make workers sore by cutting benefits directly. Instead, you’re being offered a clever way of “choosing” plans that cover less. Those who get sick will face higher costs. Premiums will rise on the more comprehensive health plans that middle-aged workers like.
Whereas, a much better plan is if those who aren't sick pay the bills for those who are, because those who aren't sick are going to have a strong interest in seeing that those who are get good health care. Like I have a strong interest in making sure you get to work on time when I'm driving in front of you during rush hour, looking for my exit.
Cost control. Here’s the brass ring that employers are reaching for. With these new plans, they can limit their annual contributions as health costs rise. Workers can cut their personal costs by shifting to less expensive doctors and hospitals. In theory, your choices could create more price competition—especially if plans posted the cost of specific medical services on the Web.
There’s another angle. When you have to pay more of the medical bill, you’ll presumably see doctors less often, fill fewer prescriptions and take fewer expensive tests. You’ll cut back on unnecessary procedures. (But you may cut back on necessary health care, too.)
You may. Can't let you do that. Far better to have you get someone else to pay for your unnecessary health care than ever risk that your judgement about what was necessary differs from that of Jane Bryant Quinn.
What’s the alternative? Open and contentious price increases, across the board. “Deductibles and co-pays would go even further up,” says Kenneth Sperling of the consulting firm Hewitt Associates. “Happy isn’t what we’re going to have.”
A better choice would be slimming down our immense private health-care bureaucracy and switching to a simpler single-payer system. That’s off the table today. We’re headed the opposite way.
I think that this may be the first time I've ever heard an apparently otherwise reasonable human being argue that the way to slim down bureacracy is to hand a project over to the government. Has anyone ever heard of any situation in which this was the case?
More importantly, Bryant seems to be relying heavily (though she doesn't say so; I'm guessing) on the belief that Europe's lower health care costs will translate directly here. But there's no reason to think that, for several reasons. The first is that we spend more per-capita on drugs here, because we spend more on R&D. Europe is free-riding on our drug innovations by forcing drug makers to either sell the drug close to marginal cost, or have the government break the patent and get no money at all. America's providing a massive subsidy to the rest of the world; if we stop doing R&D, we either don't get new drugs, or the other nations have to pick up the slack. It could be a tragic standoff where no one is willing to do beneficial research because of the fear of theft.
Moreover, American doctors can't be paid as little as they can in Europe, because there are other lucrative alternatives for bright science majors. Europe's moribund pharmaceutical and medical technology industries don't offer nearly as much competition for talent; hence the service can pay doctors less.
What's true of drugs is also true of medical technology, though not to the same extent.
What Jane Bryant Quinn is really proposing is that most of us get less health care so some can have more. But there are not going to be magic cost savings from handing over our health care industry to the government; the government is what created the current mess in the first place, by divorcing the person getting the health care from the person paying for it. It is an utterly predictable result that the person getting the health care spends a lot of time trying to get as much of it as possible, while the person paying for it tries to keep them from getting any.
What is not a result of this system is the fact that we can't have all the health care we want. We can't have all the porsches we want either. Limitations are a fact of life, not the machinations of evil Corporations.
But if these “consumer-driven” plans push enough workers into corners, interest in universal coverage might rise again, says Paul Fronstin of the Employee Benefit Research Institute in Washington, D.C. Combining a national system with competitive private plans and individual choice would look something like, er, the Clinton plan. (But don’t say that aloud.)
It would look something like, er, nothing that's even remotely plausible. (But don't say that aloud).
I love this article, which says that "last minute snags" have delayed the end to the Church of the Nativity seige. The "snag"? They reached an agreement to exile many of the terrorists to Italy. But it seems not to have occurred to anyone to consult Italy about this.
Bruce Moomaw, who is on a crusade to convince me that Krugman is an honest economist, writes a couple of letters about Krugman's most recent column:
Take a look at www.nytimes.com/2002/05/07/business/07ENRO.html . Documents just reluctantly released by Enron itself to the FERC now prove that it was methodically forcing up electricity prices in California just as he said, using exactly the techniques he described. And you wonder why so many of us don't trust businessmen and the wealthy?
I don't trust them either -- not any farther than I can spit a rat. But I don't trust the vast swath of my neighbors who think it would be nice if more of my money were in their pocket, or if I dressed/prayed/voted/spoke/worked/volunteered/ate/drank/excercised/wrote the way that they think I ought to, or that they, by virtue of their degree in communications from Chico State, are qualified to run a Fortune 500 company or tell Jack Welch how to do same.
The only thing I trust is that people look first to their own interest as they perceive it. I do not trust that these perceptions are always accurate, nor that they are always nice. But I do trust that the market, far better than the government, harnesses these perceptions to the common good. The market gives us cell phones. The government gives us the DMV.
I trust that as long as the government has the power to hand out goodies, people and corporations alike will flock to the government to discover ways that they can get more than their fair of same. I therefore wish to restrict the government's ability to hand out goodies to situations where the government is, in fact, the only agent that can provide the service, and the service is of benefit to the rest of society. The government is probably the only agent that can force 100 million Americans to stump up their pocket money for a crucifix immersed in urine, but that doesn't mean it should.
I am not shocked and hurt that Enron gamed the system; companies, like people, do bad things, and it is the liberal misunderstanding of what libertarianism really advocates that allows them to pump up their own sense of moral righteousness by telling each other that libertarians are just shills for corporations who believe that big business can do no wrong. I think the first, rather than the last, government program that should be ended is corporate welfare.
But I also know that corporate welfare is complicated. It is often a payoff to companies for accepting some other onerous regulation that the labor or environmental constituency desires; no payoff, no environmental reg you want. The labor lobby thinks it would be just fabulous if we could shut down the power of industry, essentially, to comment on what regulations affect them; this would let unions make policy essentially in a vacuum -- damn the torpedos, full speed ahead! The business lobby feels the same about the unions. I feel the same way about both lobbies -- they're rent seekers. This horse trading is essentially a dirty business no matter whose side you're on, which is why I'd like to see as little of it as possible.
I don't trust the companies; I trust the market to restrain those companies. And usually, not always, it does a pretty good job. More importantly, it's the best system we've yet found. When the government gets involved, it generally fixes the problem only by introducing new, equally large problems, because it generally seems to assume that it can outlaw self-interest, a losing proposition. And it always introduces rigidity into the market it regulates. Like Democracy, the only virtue of free markets is that they work much better than any other system we've tried.
But the fact that California did a half-assed job of regulation is no more an indictment of free markets than Thomas Kincade is an indictment of painting. Last time I looked, Pennsylvania's de-regulation was doing just fine.
Also, take a look at his column in the same issue -- www.nytimes.com/2002/05/07/opinion/07KRUG.html -- on how America's rural areas are using our warped electoral structure in the Senate to extort money on a wholesale basis from its urban areas. You hardly need to be an economic genius to see that -- it's obvious that it would occur in any nation where 16% of the population elects half the Senate -- but it's nice to see somebody beside myself point out the fact that American democracy was born with a seriously deformed limb. Once again, Bruce, I'm not shocked to see anyone acting in naked self-interest, and anyone who's watched Robert Byrd's bid to pave the state of West Virginia in one shining slab of asphalt shouldn't be surprised by this.
But it's also a bit simplistic. Half the congress is proportional; it's hardly an opportunity for rampant theft. As usual, it's more complicated. The direct subsidies often flow to the "red states", but the tax subsidies and regulatory burdens that make our lives better on the coast fall more heavily on them (that mortgage interest tax deduction isn't worth nearly so much on a $65,000 ranch house in Kansas as on Paul Krugman's Princeton split-level palace; the subsidy flows back.) Military bases don't count as a subsidy; California's got a lot more than North Dakota. Etc. The math isn't as simple as "they get more block grants".
Moreover, I know everyone on the East Coast spends much of their time fantasizing about how nice it would be to just outvote those hicks in the sticks once and for all so we can turn Alabama into New York, but with scenery and funny accents, but if we tried, the sticks would probably secede. And since they're the ones sending their sons and daughters to defend the coasts we live on, we'd probably have a hard time getting them back. The Williams Lacrosse Team isn't going to make much of a showing against the 82nd Airborne.
(from the second email)
Your pretty predictable response to the new revelations about Enron fixing California's power prices will be that, if alifornia hadn't stupidly written a deregulation law that forbade long-term contracts with power companies, Enron & Company wouldn't have been able to do this. Ah, but there's the rub. To quote Krugman's Feb. 18, 2001 Times column: "Whose idea was it to prevent long-term contracts anyway? In 1999, some of the major [California] utilities petitioned for the right to sign such contracts. Consumer groups, which initially had qualms, eventually supported the bid. But the regulators turned the request down, largely because any change in the rules to allow such contracts was fiercely opposed by, you guessed it, the generators." (By the way, while digging that one up, I discovered that he openly confessed his supposedly scandalous connection with Enron all the way back in the Jan. 24, 2001 column.)
Crystal ball's a little fuzzy, Bruce. Once again, I am relentlessly unsurprised that businesses seek advantage by lobbying; only that there is anyone out there silly enough to think that when the government has the power to decide whether a company will live or die, that company won't try to affect the process. Or that if we refused to allow companies to speak and let the labor, consumer, and environmental activists run things, the outcome would be preferable. California could have had a power market like New Jersey's Insurance market.
Not to mention, I've said time and time again that I don't think Krugman was tainted by his association; only that it makes it awfully hard to argue that George Bush was.
Here we have a perfect example of another serious problem with libertarian capitalism: it tends to self-destruct. The established rich buy elected politicians with campaign funds and thus rig the laws in their favor, allowing them to both swindle lesser folk and strangle potential new competitors in the cradle -- and the process amplifies itself through positive feedback. Liberals aren't the only ones who think this: the same idea is set forth in the July 8, 1991 National Review by none other than Charles Murray, who thinks it will probably inevitably cause all democracies to self-destruct in this century to be replaced by "South American-style" upper-class dictatorships, which may be the only stable form of human society. I disagree, but the problem is very real.
This is a patently ridiculous notion on many levels.
First of all, the "libertarian capitalism tends to self destruct" argument is usually based on the 1930's, which wasn't the self-destruction of libertarian capitalism, but the self-destruction of the post-WWI currency regime and the poor agricultural policies of the previous 50 years. Neither of which is libertarian. (For the record, I'm strongly in favor of a stable, government issued currency. But that's not the point.) If you're going to argue that capitalism inevitably self-destructs, I suggest you do some studying on the way that markets work and the potential causes of breakdown, as well as taking a strong dose of economic history, before you start the argument. I suggest buying the textbooks for your local college's basic and advanced Micro and Macro economics, their International Economics course, their Money and Banking or equivalent course, and then grabbing some good economic history such as Milton Friedman's A Monetary History of the United States, and of course reading classics such as The Wealth of Nations and Keynes' General Theory. That'll make a good start.
Second of all, if the rich are swindling the rest of us, they've picked a funny way to do it, by paying 85% of the taxes in the country.
Politicians, like everyone else, act in their own self-interest. No matter how much money Bill Gates gives Tom Daschle or Trent Lott, neither of them is going to sell him Iowa for a game preserve. Politicians first and foremost enact laws that get them elected, which is to say laws that are supported by a majority of voters. The amount of "gifts" to the rich and corporations is equalled by the "gifts" to consumer groups, environmentalists, labor groups, Green Haired Lesbian Mothers with Breast Cancer, etc. The fact that you support the latter causes more than the former makes the laws written at their behest no better or worse for society on an objective basis. But both sets of explicit payoffs are very small, because otherwise the public notices and unelects whoever voted for it. It's miniscule compared to entitlements. That farm bill you hate, for example, is wildly popular even in non-farm states.
Third of all, you clearly don't know anything about Charles Murray. He isn't worried that we'll become a South American style oligarchy because the rich will buy votes; he's worried because he thinks that the poor are too stupid and poorly socialized to be functioning members of society. The rich votes he dislikes are the ones for the welfare system, which he sees as depriving the poor of the opportunity to live a life of proud self-reliance.
Now, I don't know anything about politics, practically, but it seems to me that Tom Daschle is playing a very dangerous game by allowing the Democrats to block any Republican nominees.
I assume that he must be much more confident of his chances come fall than I am; it's not that far to Labor Day, and boy, if he loses, the Republicans are going to unleash a whole vat of whup-ass for payback. And by letting Leahy hold up all the nominees until November, he's lost any right to complain to the conservative or moderate voters.
And instead of voting down those nominees now, he's going to end up with them in place if he loses. The gerrymandering that's been going on in every state, making for very few competitive House districts, seems to me to make sure that the Dems aren't going to take the House; Daschle has no possibility of seizing enough power to actually push legislation through.
But I guess that explains it, really; his upside for playing it straight is pretty damn limited.
But his current strategy means that if he loses, he's gonna lose big.
Love this treasure from John Judis in the New Republic:
Not long ago, the Enron scandal seemed destined to become the Bush administration's Whitewater. One reason it hasn't is that the Democrats and the media haven't turned up a smoking gun showing that the Bushies tried to bail out Enron.
I think I'll try one:
Not long ago, the death of Buddy seemed destined to become Clinton's Bonnie Lee Bakely. One reason it hasn't is that the Republicans and the media haven't turned up a smoking gun showing that the Clintonites hired a hit man to run over Buddy with an unmarked car.
In mid-February the White House Council of Economic Advisers (CEA) put out one of the several documents it generates each year. Under the headline "PRESIDENT BUSH'S 2001 TAX RELIEF SOFTENS THE RECESSION," the two-page report argued that without last year's tax cut, the economy would have shrunk much faster than it actually did. The study went on to make a few pro forma comments about "[increasing] the incentives for saving," and "reducing an important impediment to ... the overall accumulation of wealth," before noting that the tax cut would continue to work its magic in the coming months. "[B]y the end of 2002," the report concluded, "the President's tax relief will have helped the private sector to create 800,000 more jobs."
On its face, this was nothing out of the ordinary. Economists--particularly those employed in Washington--run these estimates as a matter of routine. But there was something curious about the CEA report: Nowhere did it contain so much as a hint as to the study's methodology--no statistical appendix, no footnotes about assumptions, not even a phone number you might call to request that information. In fact, the closer you looked, the less "economic" the report appeared. Logical contradictions stuck out like a sixth finger, among them the suggestion that the tax cut, which by definition dramatically decreased national saving (i.e., the surplus), was at the same time increasing saving.
Ummm. . . the money we give the government only increases national saving if we, y'know, save it. Which is not what the congress was planning to do with that surplus.
Moreover, as one grows tired of saying, the loss of this year's surplus is mostly the fault of the recession and 9/11, not the Bush Tax cuts, which, at $600 a taxpayer, were hardly adequate to the task. The Bush tax cut is responsible for the loss of our never-never surplus in the out-years, but not this year's.
However, what was sent out of the tax cut was saved, as I believe your magazine complained at the time; there was the standard silly Keynsian belief picked up in the one economics course most reporters took in college that government spending is magically stimulative, an idea not currently held by most reputable economists. It is held by the economists in the Bush administration, to their eternal shame, but since it's also held by the editorial board of the New Republic, that hardly helps the argument.
And some of the language sounded oddly political, like the suggestion, right out of a George W. Bush stump speech, that the tax cut had "strengthened families." As William Gale, a senior fellow at the Brookings Institution who served on CEA in the first Bush administration, recalls, "[T]he report ... was basically an assertion, not an analysis. If there was an analysis, it was nowhere to be seen."
The Council of Economic Advisers issued a document which bolstered the administration's position? Oh my God -- what next? Will the Pentagon issue papers that support the Bush Administration's defense policy? Where will the madness end?
A cynic might ask why anyone should be surprised. After all, CEA serves the president and as such its priorities and research agenda are set by the White House. "Life in the political world is different from academia," concedes Harvard economist Jeffrey Frankel, who was a member of the Clinton CEA and worked on the staff of the Reagan CEA. And yet, for most of its 56-year history, CEA has been notable for the lack of politics in its work.
Three words: John Kenneth Galbraith.
The Council is composed almost entirely of academic economists, on one- or two-year leave from universities, whose sole mission is to provide the president with objective economic advice. While bureaucracies like the Treasury, Commerce, and Labor Departments employ highly competent economists of their own, CEA is "the only group of economists in the government that doesn't have some agency ax to grind," as Nixon CEA Chairman Herb Stein famously quipped.
As a result, CEA economists are widely viewed in economic policy circles as scrupulously nonpartisan. In a 1992 article excerpted on the CEA website, former Reagan CEA Chairman Martin Feldstein wrote that "[t]he tradition of professionalis[m] is so strong that even in a presidential election year the CEA chairman appoints members of the staff for the coming academic year with the clear understanding that they will continue to serve even if the party in power loses the presidential election."
So the CEA is traditionally non-partisan because. . . a former CEA Chairman wrote a puff piece about the council on the agency web site? Where did Scheiber go to journalism school? Where's the "Nixon is Not a Crook" expose?
And over the years CEA officials have been fiercely protective of their independence. Though a pro-business conservative himself, Feldstein quickly found himself out of favor with the Reagan White House for advocating deficit reduction and publicly supporting the Fed's tight monetary policy. Feldstein reportedly so infuriated Reagan Treasury Secretary Don Regan that Regan instructed members of Congress to "throw away" CEA's annual economic report.
Sorry, I misunderstood; the CEA is non-partisan because it gets into internicene warfare with other parts of the administration, a practice unheard of in partisan agencies like State or Defense.
All of which is to say that if the Bush administration were using its CEA to put an academic imprimatur on political decisions of questionable economic merit, it would be very big news indeed. Former Jimmy Carter CEA Chairman Charles Schultze once succinctly described CEA's mission as pushing decisions "as far as possible in the direction of sanity." If CEA is no longer pushing, there may be few limits on how far in the direction of insanity this administration will go.
I'm pretty sure they're not going to nationalize the coal mines or tell Bush we should peg the dollar to the Argentinian peso. You may not like the tax cut. You may believe, as I do, that it has little effect on the economy. But the fact that the CEA has endorsed (not for the first time) a questionable or erroneous report, does not foretell The End of Capitalism As We Know It.
For years CEA was pretty much the only game in town for serious economic analysis.
Except for, like you know, the Treasury and the Fed and stuff.
But starting in the 1970s economists began cropping up in all corners of government. In response, recent presidents have tended to rely on a single entity to collect all the economic advice being offered. In the first Bush administration, this entity was called the Economic Policy Council (EPC), and was essentially managed from the Treasury Department. But having run on campaign themes like, "It's the economy, stupid," Bill Clinton needed a higherprofile body, and so he moved the EPC into the White House and renamed it the National Economic Council (NEC). All of a sudden CEA had a rival--and an intensely political one--in its own backyard.
For much of the Clinton administration that rivalry never materialized. According to White House lore, Clinton CEA Chair Laura Tyson recognized the potential for conflict early on and worked out an informal arrangement with Robert Rubin, the first NEC head, to defuse it. "There was agreement about the relative size and relative makeup, and the difference in mission," Tyson says. As former Eisenhower aide Bradley Patterson explained it in his book The White House Staff, Tyson sought "to maintain CEA's long-standing reputation as the purveyor of hard, factual economic data-- gathered, analyzed, and distributed without any bending to political considerations or the need for `spin.'"
So the problem isn't that the CEA issued a bad report -- it's that it's treading on the NEC's turf. And we know that things like that didn't happen in the famously amicable Clinton administration because -- why, because Laura Tyson says so.
Remarkably, that arrangement more or less held up even after Tyson and Rubin left their respective positions. And because it did, CEA remained largely apolitical. That's not to say its arguments always held sway. Janet Yellen, Clinton's third CEA chair, recounts a discussion with NEC over a graph in the president's 1998 annual economic report that noted an alarming number of personal bankruptcies despite otherwise solid economic news. Yellen ultimately removed it after asking herself, "Is this really important? Does it really matter? ... We're not adding something untrue, but removing something marginal." But more often CEA stood its ground. For example, the Council convinced the Clintonites to adopt a market-based approach to key elements of the Kyoto Protocol. And it helped limit the president's protectionism on steel. Yellen recalls, "I told President Clinton protecting steel would cost about eight hundred thousand dollars per year per job ... [and] he's probably thinking, `Give me a break; I've got unions and senators and congressman from steel states breathing down my neck.'" In the end, though, the economists largely prevailed. "He didn't do nothing, but not nearly as much as Bush," says Yellen.
It wasn't long after the inauguration of George W., however, that the divide between the politicos at NEC and the economists at CEA broke down altogether. While the campaign's top economic adviser, Lawrence Lindsey, was quickly installed as NEC director and assistant to the president for economic policy, CEA lacked a chairman for more than a month. So Lindsey began filling the void. "Lindsey came and started to tell us he'd like to work with CEA really closely, that he would like us to start a weekly memo to him," says one former staff member.
This posed a big problem. After all, not only was Lindsey in a political job, but he was the primary author of Bush's tax cut and had earned a reputation as something of an ideologue. "We started to feel like, `Hey, he's acting like he's our boss. Gee, this doesn't feel right.' No one knew what to do about that," adds the staffer.
In the meantime, rumors swirled. Some feared the White House was planning to consolidate NEC and CEA. "After [Lindsey] became head of NEC, we were concerned about him having joint custody. Justifiably," recalls another economist. Others heard--and the press reported--that the administration was having difficulty finding a CEA chair because Lindsey's prominence within the administration would inevitably mean taking a back seat. And Lindsey did little to deflect these suspicions. At an early meeting with the CEA staff, for example, he allegedly referred to himself as the "de facto CEA chair." (Lindsey confirms through a spokesman that he convened the meeting but doesn't remember using the phrase.) One former CEA economist was so concerned she "got in touch with John Taylor [rumored to be a candidate for the CEA chairmanship] and he gave me a little pep talk.... He said, `Yes, it's right for you to worry about working with [Lindsey].'"
Oh, how delightful -- spiteful anonymous quotes! That's solid economic reasoning for you!
I can't tell, aside from the fact that Noam Scheiber doesn't like Larry Lindsay, why it is that we're supposed to be so afraid of unifying the agencies. At least from what I read, it sounds like the NEC is a show-piece Clinton threw up to make it look like he was doing something about the economy; hardly a compelling argument for keeping them separate.
Now, I'm told that Larry Lindsay's not a very good economist. But he's certainly not the Enemy of Freedom and Decency Scheiber makes him out to be.
In many ways Lindsey was more a symptom of the problem than its underlying cause. From the beginning of his presidency, Clinton essentially cast his lot with Wall Street, betting that if he reined in the deficit, bond traders would reward him with lower long-term interest rates. In other words, Clinton's entire economic strategy hinged on winning credibility in the financial world, which made it vital that respected, mainstream economists play a prominent role in his administration.
Oh, this is just priceless. Let's look at Clinton's powerful program of deficit reduction (click the link -- you'll need to see the graphic to follow what's below)
The beginning Clinton years, one will note, are characterized by a reduction in the annual budget deficit. Does anyone know why this is, class? Yes, Timmy, that's right -- the recession that Clinton ran against had just ended during the administration of George Bush I. The economy was on an uptick for reasons totally unrelated to Clinton's economic policies, which you may remember, centered for the first year and change around nationalizing 1/8 of the economy. Now I've worked on Wall Street, and I'll tell you, there's nothing that gives you street cred there faster than a good, solid nationalization plan.
As you can see, the budget curve recovers during the first two Clinton years at pretty much exactly the same rate that it dipped for the last two years of the Bush Administration -- a symmetrical return to the mean budget deficit. Now, who can tell me where the inflection point is in the curve, where the dramatic shrinking of the budget deficit begins? Yes, Martha? That's right -- in 1995, when the Republican congress took over on an aggressive deficit-reduction plan. The Democrats have back-dated Clinton's interest in financial markets to two years before it occurred -- the precipitating event being the public's indication that it would be happy to unelect anyone who didn't support reducing the budget deficit.
Why would they do this, you ask? Why, because they had an understandable desire to take credit for the 90's boom. Now, very few serious people think that the president, Republican or Democrat, has much effect on the economy. But there was that fabulous economy, coinciding so neatly with Clinton's reign, that the Democrats naturally sought to associate the two more deeply in the public's mind. First they tried to tell people that it was the astounding faith people on Wall Street had in Big Bill; then, when everyone stopped laughing and wiped the tears out of their eyes, they decided it was because Clinton had reduced the debt.
This is -- ahem -- ridiculous. The effect that reducing the debt had on interest rates was fairly trivial, especially since that other demi-god, Alan Greenspan, got busy raising the rates just as quickly as any debt purchases lowered them. Paying down the debt was a good idea for other reasons, but the "reduced national debt = prosperity" equation is as dumb as the "lower taxes = prosperity". If there were a magic bullet, folks, we'd all be megamillionaires. Clinton had nothing to do with the prosperity; neither Bush caused the recession; Reagan arguably helped some because he was starting from a stagnant, highly regulated and inflationary base, but he didn't remake America either. America did that. That's why this hysteria about the president's national adviser is so idiotic.
Of course, Dems could point to something Clinton did do -- NAFTA -- but that certainly wouldn't explain the 90's boom the way they want to, and anyway, it makes the unions nuts.
Bush, on the other hand, came into office having hitched his fortunes to a massive supply-side tax cut. But because supply-siders take it on faith that lowering marginal tax rates will trigger economic growth, establishing credibility among economists was much less of a concern.
All of which explains why the CEA staff was relieved when Columbia economist Glenn Hubbard was finally appointed to be the Council's chair. Though a committed supply-sider like Lindsey--and a devout proponent of the tax cut-- Hubbard was at least highly regarded as an academic. As one CEA economist puts it, "At least he was talking the same language as the senior staff."
But Lindsey continued to exercise considerable influence even after Hubbard's arrival, parceling out and supervising many of the Council's projects. As another CEA economist describes it, "In the current environment NEC functions as workload manager--distributing projects and watching projects.... NEC is more integrated in the work." And Lindsey's primary method for distributing and watching projects was the CEA chief of staff, Diana Furchtgott-Roth, a former colleague of his from the American Enterprise Institute (AEI), who had spent her career advocating for conservative economic causes and who once served as an economist at the American Petroleum Institute, the lobbying arm of the oil industry. Former CEA economists say Furchtgott-Roth exercises enormous authority over substantive issues. "Diana's job is very much taking what she hears in her meeting with Larry Lindsey each morning and turning it into CEA analysis," explains one former colleague. (According to Hubbard, Furchtgott-Roth attends the daily NEC staff meeting.) Another complains, "She [has] a blatantly political agenda," and recalls that Furchtgott-Roth once directed him to poke holes in work another agency had already done because "Larry Lindsey said ... they did this analysis incorrectly." (Furchtgott-Roth says through a spokesman that she has no recollection of the exchange.) "If you're looking for a villain, she's it," says the economist.
Because the last thing you want the CEA to do is check whether the agencies are getting the economics right.
By most accounts, the power Furchtgott-Roth wields is unprecedented. The CEA chief of staff under Clinton was little more than an administrative position and almost never exercised authority over analytical questions. Many CEA chiefs of staff don't even have backgrounds in economics. According to Tyson, "The chief of staff when I was there was not involved in the substantive agenda.... It was representing institutional issues." "In the past, I remember getting direction from members," reflects another former CEA staffer. "In this case, we also got direction from the chief of staff. That was new." But even more troubling is Furchtgott-Roth's role in representing a political adviser like Lindsey rather than Hubbard, her ostensible boss. Peter Orszag, who worked in Clinton's CEA, says flatly: "In my experience at CEA, it would have been highly unusual for the chief of staff to represent the interests of anyone other than CEA. That was what the chief of staff did."
Hubbard seems to have responded to Lindsey's influence not by digging in his heels, like many of his predecessors, but by making CEA more political itself. One of his early acts as CEA chairman, say former employees, was to ask senior staff to identify the economic literature that showed a strong correlation between economic growth and tax cuts. "He had me talk with macro modelers like [well-known conservative] Allen Sinai to try to get more concrete empirical analysis that supported it," says a former CEA economist in charge of tax policy. On one occasion, Hubbard came across a report by the conservative Heritage Foundation that he found promising, and he asked for a more credible source that made a similar argument. "Hubbard was interested in it," the economist recalls. "But he said, `No one's going to believe this.' So he sent me off looking for other sources of information." (Hubbard has no recollection of the episode.)
Now why is it that Scheiber couldn't find a single person willing to speak on the record? Are they all so afraid of the VRWC? Or are they all angry Dems taking cheap shots? Someone in Washington want to answer that?
Another CEA staff economist recounts a similar experience while working on Social Security. Hubbard had become interested in a short article by AEI Fellow Kevin Hassett comparing the returns under a hypothetical private pension system to actual returns under Social Security. Eager to make use of the analysis, Hubbard asked the staffer to reexamine Hassett's work to see if it checked out. When he did, the numbers proved misleading--the economist notes that Hassett's argument broke down "quickly once you worked past its carefully constructed example"--and Hubbard declined to recommend them for use elsewhere in the administration. But neither did he call attention to the shortcomings in the privatization argument. Instead, Hubbard simply tried a different approach: He dispatched another CEA economist, Jeffrey Brown, to help author the Bush administration's Social Security report, which made the case for privatization not on the basis of financial returns but on overtly political grounds like the value of individual choice. (Hubbard recalls a short, nontechnical piece he co-authored with Hassett for AEI, but not the incident in question; he confirms having assigned Brown to the Social Security task force.) In principle, one could defend the value of having an economist like Brown work on the report. Yet once CEA had discredited the economic rationale, it's not clear how much a CEA economist could contribute to a commission set up to propose privatization.
Of course, as Orszag points out, working at CEA means "there's always a tension between being relevant and being academically pristine." But usually this results in CEA economists and members agonizing over whether they're comfortable with an argument the administration favors--and respectfully disagreeing when they're not. Orszag, for example, recalls the Clinton administration's efforts to link free trade with job growth, whereas the real benefit lay not in adding jobs but in replacing them with better ones. "CEA was always very reluctant to say trade is good because it creates jobs, even though it was the rhetoric of other agencies and the president," he says.
Okay, call me crazy, but at least at Chicago, that's not a controversial position. If CEA doesn't want to make basic theoretical statements, how useful are they as advisers? What the hell do they do all day?
At the current CEA, however, these distinctions are almost never made. Instead, the basic operating assumption is that CEA's position is the administration's position--regardless of the underlying economics.
Perhaps the most glaring instance of this, former CEA officials say, was Hubbard's performance during last fall's stimulus debate. The original House bill, which the president supported, was by all accounts laughable. Even the president's own Treasury secretary, Paul O'Neill, referred to it derisively as "show business." Academic economists tended to see its numerous longer-term measures--a repeal of the corporate alternative minimum tax, a three-year-long tax break for investment--as exactly wrong for the short-term economic problems facing the country. Hubbard had even endorsed that logic himself in a 1996 academic paper. Nonetheless, he spent the fall defending a similar proposal and criticizing rival ones, often suspending the laws of economics to do so. In December CEA released the intellectual forebear to the February study--a two-page report asserting that the stimulus bill's business tax provisions "address[ed] the fundamental source of economic weakness over the past year." One month earlier Hubbard had dubbed it "a major fallacy to praise new [Democratic] spending plans as `stimulus'" in a Washington Post op-ed, which one former CEA member says "was just a joke." "This is no one's economics," the former member says. "It's not even right-wing economics.... If an undergrad wrote that, you'd give the statement and the logic behind it a D."
Would any one economic decision have come out differently had the Bush CEA been more independent? It's impossible to say. An assertive CEA might have objected to the Bush energy plan's near-exclusive emphasis on supply-- citing the potentially larger gains from reducing demand--or to the stimulus plan's long-term giveaways. But even if it had, an administration bent on rewarding the business interests that helped elect it probably wouldn't have backed down. Even former Clinton CEA officials concede they spent a lot of time being ignored.
Is there any evidence at all for the accusations in this article? It's impossible to say.
On the other hand, there has been at least one instance where the White House was genuinely torn between economics and politics: the internal debate over steel tariffs, which, by all accounts, was agonizingly close. To his credit, Hubbard--like his predecessors in other administrations--opposed steel tariffs as economically counterproductive. But the reason some of those predecessors succeeded in blunting the political urge toward protectionism was their prestige as independent economists. By the time this spring's steel decision came along, Hubbard had already undermined that independence. And once you've lost your independence as an economist, you're just another political adviser--which means you might as well not be there at all.
Yes, that's right -- Clinton said, "this guy's an independant economist, therefore I will let myself get unelected". Bush didn't have that integrity. The integrity to do what's right, no matter what the polls say. That's why when we think of Clinton, the I-word shines next to his name in our heads.
Last week wasn't good for Oracle Corp. The software company's shares hit a 52-week low on worries that its sales might fall short of forecasts, and it became engulfed in a growing political controversy in California.
This week could bring even more bad news.
New market-share numbers scheduled for release as early as this week from well-regarded industry-research firms are widely expected to show that Oracle, the current and longtime leader in the database market, is likely losing share to cheaper database alternatives from rivals International Business Machines Corp. and Microsoft Corp.
A chorus of analysts, who didn't wait for a confirmation, lowered their profit and software sales forecasts last week for the Redwood City, Calif., company's crucial fiscal fourth quarter, which ends May 31 and is typically its strongest.
Many doubt that Oracle will be able to post the 50% jump from the previous quarter in software-license revenue that it had projected. They also raised concerns that customers are buying cheaper versions of the company's database software, which may result in lower-than-expected revenue, and that the company may be losing market share. As Betsy Burton, an industry analyst with Gartner, sums up: "Oracle is in a pressure situation."
That's for anyone who thinks that the reason Oracle is prodding the government to go after Microsoft is Larry Ellison's ideological committment to fair, open competition.
Initial guess is down because of the lackluster unemployment numbers that came out Friday. At 6%, they indicate that we aren't out of the woods yet.
Now, it isn't as bad as it seems, because unemployment is a lagging indicator; it typically peaks well after the recession troughs. Nonetheless, things aren't pretty out here in employment land -- and it's hardest on knowlege workers and new grads, who have traditionally fared better than manufacturing workers; that's why you're seeing very few of the sob stories in the papers about Joe Blow who worked at International Paper for 450 years until his Evil Corporate Overlords decided he was "surplus labor", and more hysterical stories about how the economy may end forever, because now the people being laid off are people the reporters actually meet at parties.
So what does it all mean? Hey, if I knew that, I wouldn't have to work for a living. But I think the coming demographic crisis in all industrialized nations is transforming the economy in ways we can't yet imagine. I think it's the motor behind more of the 90's boom than previously suspected; I think it will cause some hard problems down the road, and I think that the point where we have to tell our elders to head down to McD's and fill out a job application may be closer than we think.
But other than that, my crystal ball's a little cloudy today. Go watch CNBC instead; they're always very confident.
The investment banks are in trouble. The evidence that the research analysts were used as little more than a sales vehicle has been mounting. And now the Wall Street Journal uncovers evidence that such usage was written into the analyst contracts:
The wording in the Wall Street analysts' contracts is clear and to the point:
In one, the analyst is offered 1% to 3% of "the firm's net profit per transaction ... with a cap of $250,000" for investment-banking deals he helps bring in. In another, the contract provides "banking-related compensation" to an analyst thinking about jumping ship. And an "inter-office memo" calls for a bonus of 8.5% of revenues for an investment deal that "the analyst is clearly instrumental in obtaining."
For years, Wall Street firms have denied directly linking analysts' pay and the stock-and-bond deals they generate. While investment-banking work was always tracked in some way, such considerations were never hard and fast when determining analysts' compensation, executives said. There were no formulas to calculate year-end bonuses, and never would an analyst receive compensation for helping the investment-banking team win a specific deal, they said.
But The Wall Street Journal has reviewed documents -- including proposed contracts given along with job offers to unidentified analysts -- demonstrating that such links were more direct than anyone was letting on. Not only did these contracts and documents contain specific provisions for analysts to be paid based on banking business, they often laid out in specific terms what type of deals would benefit analysts the most and exactly how much analysts could earn on a deal-by-deal basis.
Of course, when a screw up is this big, you know the government's involved somehow; in this case, because the government regulation of the market forbids investment banks from selling high quality information to clients who are willing to pay; they have to distribute any information they find equally, turning research from a profit center to a loss leader. And what do you do with a loss leader? Why, use it to bring in sales, of course.
And not sales by the brokerage clients; electronic competition has cut margins to the bone there. Instead, they used it to prop up sales in the lucrative investment banking market, where margins are enormous and profits allowed plenty of runoff to the hungry research analysts.
Now, I'm not saying that companies should be allowed to sell higher-quality information to their high-roller clients. I don't have an opinion. Turning the stock market into a closed society wouldn't make the world a better place; on the other hand, as usual, the regulation imposed has fixed one problem only by imposing another. But if the regulation forbidding the sale of such information to their clients is left in place (and I don't see any way that it will be removed), then I think that banks should be forced to dump their equity research staff. (Sorry, equity research friends!) The banks are going to want to make up that hefty overhead some way, and any way they do so will involve convincing the uneducated little guy in their brokerage division to buy something he shouldn't.
The question came up on my blog as to whether a 747 loaded with fertilizer could cause a nuclear incident if crashed into a plant.
It came up as the result of an Aviation Week editorial, which I haven't seen, which says that apparently it wouldn't be too hard to get a commercial airliner and crash it into a nuclear plant. (Don't get any ideas, you terrorists among my readers!)
But the editorial writer doesn't seem to know much about farming -- I'm told that since Oklahoma, and especially since 9-11, it's harder to get hundreds of pounds of fertilizer (filling a 747 would take thousands of pounds, I mote). People are more likely to notice that your "farm" is in the middle of a subdivision. The IRA gets theirs from farmers; but I don't think there are a lot of farmers in, say, rural Iowa with connections to an International Terror Group.
No matter, because J. Bowen is on the case: even if they managed to do it, it probably wouldn't breach the core.
Welcome to the Virtual Neural Net, where we're all just a little bit smarter every time we log on.
So I took the beast (picture in the FAQ over there) to the Riverside Dog Walk for Cancer. It's a doggy event, complete with hordes of vendors giving away stuff for free to the dogs, hoping their owners will come back for more. (This one probably will; turns out Finnegan loves doggy ice cream).
Well, we're walking along the esplanade in Riverside Park, when suddenly Finnegan decides he needs to -- go. In front of one of the tents they've got set up to register people. No problem; I'm digging for a plastic bag when this housewife from hell stiletto-minces across the grass to say "Can you please not let him do that here?"
I maintained my presence of mind, which is to say that I didn't guffaw uproariously. "You do know that this is the Dog Walk for Cancer?" I asked. "And that we're on the grass? In the park? Or did you think we were going to take him to the potty?"
She didn't kick me. But I imagine the temptation was strong.
I think he's going to give George Bush a run for his money in '04; he's awfully charismatic. But he wasn't too successful at the bob'n'weave on the tax issue; if the Dems want to criticize the tax cut, they're going to have to come out and call for a repeal. Russert nailed him to the wall for criticizing the cut, then saying he wouldn't do anything about it. The last thing Edwards can afford to do is be seen as a hypocrite.
I get the most interesting email. Andy Freeman emailed me the link to this article, provocatively entitled "US Dollar Hegemony Has Got to Go", and asks the following question:
The author doesn't like "US dollar hegemony". If I accept his arguments about the consequences of that hegemony, I can understand his dislike.
However, his plan to eliminate it seems somewhat odd. One of the key points is to: > promote the application of the State Theory of Money (which asserts > that the value of money is ultimately backed by a government's > authority to levy taxes)
I'm a peasant. I think that the value of money is that other people will give me things that I want if I give them money. I think that said other people have, for the most part, the same belief. We do trust that govt won't simply print the stuff willy-nilly and that it won't take everything, but that's a long way from the above.
How will I behave differently under the above theory, and what will happen to the money function that I've got now? Or, is he simply snorting froot-loops?
He also argues: > This is easier done than imagained. The starting point is for > the major exporting nations each to unilaterally require that > all its exports be payable only in its currency, so that the > global finance architecture will turn into a multi-currency > regime overnight.
I'd imagine that the current currency market (including hedges and the like) could accomodate a lot of that without too much pain (and that pain might be felt most by folks who are currently the victims of the dollar hegemon). However, at some point, it looks like there's a benefit to cheating, to letting the other guy take the pain. I think that's possible because I can't think of many goods that don't have a large number of sources. (Oil is the obvious exception.)
Of course, unlike Liu, I'm not a chairman of an eponymous "New York-based investment group", so what do I know?
Yes, indeed, it's easier done than imagined. We'd have to see the carnage to believe it. Currency hedges could pick up some of the slack bu tnot all of it, because of the breakdown in liquidity at the margins. For this system to work, capital accounts and current accounts would have to be balanced all the time, or so I mote; which is to say that money going between from country A to country B for trade goods would have to exactly equal the money going from Country B to country A for same. The same would have to be true of investment money. Goodbye, liquidity! Goodbye, trade! But perhaps I'm missing something.
Monetary economics is complicated, because money behaves at times like a store of value, and at times like a good, and its supply is subject to some very odd machinations. So at the level that you need to function, Andy, your assertion about money is correct. At the level at which Greenspan has to function, it's too simplistic. But I don't need to understand the law of gravity to know that it hurts when a rock drops on my head, either.
The State Theory of Money is also simplistic. Though some of its more sophisticated permutations aren't. But the way that he's using it, to advocate, essentially, dismantling our international trade apparatus and replacing it with something different (something that looks, I think, like the top-down planning of the southeast asian economies) is putting too much water in a bucket that won't hold it. The fact that the government usually (although not always) creates the money supply doesn't mean that the government should control what's done with it, any more than the government should control our internal commerce because it built the roads on which we ship our products.
At least I think that's what he's advocating; I can't exactly tell. I think this is because he doesn't want to come right out and say what he's advocating, because then we'd throw the paper across the room screaming "Faugh!!!". But perhaps I'm just reading it wrong. Thoughts from the economics peanut gallery?
Now, the basic premise of the article isn't particularly controversial, which is that by using the dollar as a substitute currency, and denominating many types of transactiosn (such as oil trades) in dollars, the rest of the world is essentially making the US a huge interest-free loan.
But, oh, what he does with it!
Yesterday, I said that economists try to avoid making recommendations that rip out a system that's working okay and substituting something untried. That's what Liu is asking us to do. In other words, yes, he's snorting froot-loops.
He's an interesting chap, this fellow, the head of an investment group that isn't mentioned on the web, except once on a gold-bug site, once on a site that sells his book, and once on, of all things, a marxist-leninist mailing list. His economic model is -- ahem -- odd: he tells us that "Within limits and within reason, unemployment hurts people and inflation hurts money. And if money exists to serve people, then the choice becomes obvious."
Money yes! People no! Keynsians have Got to go!
(Excuse me; us uber-capitalists have to cut loose once in a while).
He gets to this point with a juxtaposition of Keynsian and Monetary economics that is ten or fifteen years out of date. According to the current model, which tracks historical data better than either Keynes or Milton Friedman, the problem with trying to inflate your currency to combat unemployment is that you get the unemployment anyway, 18 months down the road. At which point you have to inflate further. . . this is what we did in the 1960's and 1970's. There isn't a moderate path other than the one we're pretty much on; try to get less employment with more inflation, and eventually you have to pay the piper.
I'm guessing the author, Henry Liu, is a trader, because he seems to know global money and financial asset markets at all, but to be entirely uninterested in other sorts of markets. He decries the crippling effect of dollarization on developing economies, but forgets to mention the crippling effect non-dollarization can have on economies. Exhibit one, Argentina.
Here's his solution to the devastation he asserts we're about to undergo:
No single economy can profit for long at the expense of the rest of an interdependent world. There is an urgent need to restructure the global finance architecture to return to exchange rates based on purchasing-power parity, and to reorient the world trading system toward true comparative advantage based on global full employment with rising wages and living standards. The key starting point is to focus on the hegemony of the dollar.
To save the world from the path of impending disaster [italics mine -- ed.], we must:
First of all, I'm going to make the bold prediction that we are not headed towards disaster, at least not because of the looming crisis of dollar hegemony, which is what people call that interest free loan everyone else has been making us.
promote an awareness among policy makers globally that excessive dependence on exports merely to service dollar debt is self-destructive to any economy;
The problem isn't the exports, Henry; it's the money they borrowed to spend on the Robert Mugabe Memorial Palace and Hydro-Electric Plant.
promote a new global finance architecture away from a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US;
Fine, but who's going to bell the cat? Oh, wait, we are
promote the application of the State Theory of Money (which asserts that the value of money is ultimately backed by a government's authority to levy taxes) to provide needed domestic credit for sound economic development and to free developing economies from the tyranny of dependence on foreign capital;
restructure international economic relations toward aggregate demand management away from the current overemphasis on predatory supply expansion through redundant competition;
I think that he's promoting Japanese-style state meddling, combined with muddle-headed 50's do-gooder economic self-sufficiency financial policies.
restructure world trade toward true comparative advantage in the context of global full employment and global wage and environmental standards.
And while we're at it, let's do everything we can to promote peace on earth and goodwill towards men, with liberty and justice for all.
(Do I sound sarcastic? Sorry, this is blather. "Aggregate demand management" is one of those fine-sounding Keynsian phrases that is blissfully free of content, and the rest is a fine goal, but hardly a policy prescription.)
Let's see what would happen to developing economies if we removed this dreadful hegemony:
Right now, those countries are able to do these transactions because they're done in dollars. If they passed a law saying transactions could only be done in their own currencies, buyers would suddenly be exposed to a lot of risk if they wanted to trade with foreign nations. Let's say the government of indonesia wants to buy tractors from John Deere. Well, it takes a while to ship the tractors. Now let's say that the government decides it would rather pay less for the tractors, so it issues more rupiah to cover the price.
This creates what's known as currency risk. Currently, the locals are bearing it, which makes sense economically because they're the ones who want the stuff. Now it might seem fair, in some cosmic way, to make the big rich American corporations bear the risk instead of the poor little developing peoples. Unfortunately, if you make the corporations bear that risk, they'll either make the locals pay more for their products, or they'll refuse to sell to them. Either way, I doubt the Indonesians who need the tractors would thank you.
He's also demanding we create a PPP based currency exchange rate. Which would be lovely. If PPP were a precise measure, which it isn't -- what is the purchasing power parity of a Tanzanian currency that's spent on yucca and manioc, versus an American one that's spent on, well, everything? The mechanism we currently have for sorting this out is called the foreign currency market, which is what Liu wants to get rid of and replace it with, presumably, some 50's-style technocratic institution that runs around all day calculating the PPP value of various currencies. Hold on with that tractor sale -- Bud here's just wrapping up the computer run, and we should have it for you in a couple of hours! Market making institutions that use some mechanism to set prices other than what people want to pay work about as well as -- well, go ask the peoples of the former Soviet Union.
Or go ask the peoples of Argentina how they like the current plan for eliminating their dependance on foreign capital.
In other words, he wants us to shoot ourselves in the head to cure a headache.
Of course, it's possible that he's not as stupid as he sounds. He could be referring in shorthand to larger ideas that make more sense than the short version.
Or he could be advocating a regime that will benefit -- surprise! -- Henry Liu.
Denominating trades in a single currency reduces transaction costs and enhances trade. Not that that currency has to be the dollar; it could be any largish free country that's willing to restrain government borrowing and government money printing. (Okay, so it has to be the US. But Europe could do it, if there were enough places for people to sock their Euros while they waited to spend them, and if people weren't afraid that Germany will lose its hold on the central bank.)
So if we don't use dollars, we'll probably end up using something else. Like -- hey, what about gold?
In which one might suspect Mr. Liu has taken a long position.
(I have no idea whether this is true but a fair amount of this goes on in the financial press)
Anyway, I hope that this answers Andy's question. And if not, well at least I got to be petty and mean.
Now this is interesting: John Ellis on why the affinity of Jews for Bush may spell trouble for the Dems in 2004.
Does this effect how he reacts to the Sharon report?
Interesting, too, that I'm watching John Edwards on TV bashing Bush -- trying, essentially, to run to the right of him on defense. I wonder how viable this will be; it seems the most likely venue for taking back congress, but how much farther to the right can you get? (And as a side note; they've got a marvelous picture of Bush striding down the White House lawn, looking commander-in-chief-ish. Behind him, you can clearly see the reporters scampering to get a photo. I don't think I'd like it if every time I walked down the lawn, I had a horde of people following me to take pictures. But I guess that's why I won't ever be prsident.)
Via Steven Den Beste: ABC News reports that Sharon is going to hand over a report detailing Arafat's links to the terrorist bombings of the last two years.
Now we see if George Bush has the courage of his convictions.
