I'm beginning to think that a much needed restriction on speech will require journalists not to be allowed to print anything until they have taken a course in basic data gathering and analysis.
The American Prospect has a little web piece by Ellen Miller which purports to refute what they call a "classic canard" of campaign-finance opposition: that the money follows the position on issues, rather than the other way around.
For the record, I should state that I basically don't care about campaign finance, because I don't think it's going to make much of a difference. Some small difference, I'm sure, but not enough to get excited about, either way. So it's not really on my radar, except insofar as its advocates cherish the idiot notion that corporation money is corrupting, while union and left-wing PAC money is not, because, you see, everyone is really in their hearts behind all these left wing issues, and only the evil corporate money is preventing them from voting the way they know is right. Excuse me while I guffaw.
But as long as it's issue neutral, I just don't care that much. I'm sure it's unconstitutional and all that, and in general I'm against things that are unconstitutional, but frankly, I don't have much interest in debating whether and how and why it's unconstitutional. I leave it to people who do care, of which there are an astonishing number.
All of which is by way of saying that I am not making fun of Ms. Miller because I am particularly opposed to campaign finance reform. I'm making fun of it because it's silly.
In his latest Washington Post column, George Will strives to discount the common-sense notion that special-interest money corrupts legislative action. In the process, he finds himself falling back on this classic canard, often repeated by the opponents of campaign-finance reform: "abundant scholarship demonstrates that most legislative behavior -- and most campaign giving -- is explainable by the legislators' political philosophies, party affiliations or constituents' desires."
Is your innumeracy detector on yet? First sign: someone has declared that something they believe is "common sense". Usually this is followed by an assertion of anecdotal evidence that backs up their case, followed by the statement that any numbers that don't are wrong, or ideologically motivated. But let's go to the tape. Miller lists three cases in which she claims that money bought votes:
Dinner Bell for Donors. The Tauzin-Dingell telecom bill that passed the House in February, allowing Baby Bells to offer long-distance broadband services without opening local service to competition, is a classic example of "money in, votes out." Those 273 members who voted in favor of the Baby Bells got seven times as much money from them from 1999 through 2001 as they did from long-distance companies (whose stance was on the other side of the issue). And lawmakers who got twice as much from the Baby Bells as from the long-distance carriers -- some 298 House members -- voted with them by a margin of 4-to-1. Within that group, the 180 members who got at least 10 times as much supported the bill by nearly 5-to-1. Those who got twice as much from the long-distance carriers, on the other hand, voted 19-to-1 against the bill. This holds true across party lines.
Post hoc ergo propter hoc. Miller makes an undergraduate error: confusing correlation with causation. She offers no evidence that the money caused the vote; only that candidates who voted with the Bells got more money from them. But it is as easy to explain this with the supposition that the Bells gave money to people who were predisposed to support them, as that the Bells "bought" votes -- unless you have added an unstated, unproven assumption that people will vote against the Evil Corporations unless they are paid not to.
Maybe it's so (although the data suggests otherwise). But if you believe it is so, you have to prove it before you can insert it into a proof of anything else.
CAFE Tabled. Did fuel-efficiency standards ever have a chance? The auto industry accounted for nearly $4 million in soft money, political-action committee, and individual contributions to federal parties and candidates in 2001 (79 percent to Republicans). On average, the 62 senators who voted with the industry to avoid toughening the fuel-efficiency standards received more than $18,800 from auto companies. The 38 senators who wanted strong standards received just a third of that amount.
Again with the correlation=causation. It doesn't seem to have occurred to Ms. Miller that Senators might be concerned about auto jobs in their district, irate constituents unable to afford new cars, or businesses caught in the vise of paying vastly inflated prices for underpowered light trucks.
Called to Account. Or how about the accounting bill that passed the House on April 24? The bill's a huge boon to the industry. And the House members who voted for it got, on average, twice as much from the Big Five accounting firms and their trade association as those who voted against it ($33,150 versus $17,332).
I'm repeating myself. Class? That's right -- correlation does not equal causation.
Okay, the studies that George Will cited are serious, peer reviewed studies by political science professors who lean pretty damn far to the left (the ex-boy, whose mother was a poli-sci professor and who grew up in Ann Arbor, didn't know a single Republican growing up). Cato, which of course has its own axe to grind, nonetheless has a good summary of their conclusions here. Ms. Miller thinks that this smattering of anectdotal evidence gathered from lefty interest groups is a refutation? Even if it were actually valid, rather than a standard admixture of logical fallacies and unexamined assumptions, it wouldn't prove anything except that in the real world no data set lines up as pretty as it does in the textbooks -- there are complications.
But even the three anecdotes she cites don't make her case unless you already share her prejudices (which, of course, most of her audience does). And worse than the embarrassing unfamiliarity with even the basics of number gathering displayed by a journalist from a publication I enjoy, is the fact that it's appallingly common, on the right as well as the left. Witness the Horowitz Poll. How many journalists reported it as if it were conclusive? How many people wrote in to tell me that its methodology didn't matter because they already knew that there was liberal bias among faculty? I'm pretty sure myself, but that doesn't mean that it's irrelevant how we go about confirming our hypothesis.
But the closing line of the piece just makes me titter:
Thanks to the Center for Responsive Politics and Public Campaign for the number crunching above. Over the years, George Will has penned countless apologias for the rich in the form of anti-campaign-finance reform columns. These data show that his latest item is just as off the mark as all the others.
Not because her wide-eyed conviction that she's proven something she hasn't puts me in mind of the perpetual motion booth at a 3rd grade science fair. Not because she uses numbers from those two groups, when the sound of their hatchets whining against the grindstone practically drowns out the hum of traffic inside the beltway. No, it's because she refers to the process of using a spreadsheet to do simple addition as "number crunching". Where I come from, unless you at least throw in some multiplication, division, and a little simple factoring, we call that "typing".
Of course, on second thought, maybe that isn't so funny.
Matthew Miller has a stirring editorial about bringing some ideas back into politics. Now, they're Bill Bradley's ideas, so I probably disagree with most of them. But I'm very much behind the principle. Which is probably why I always felt I'd sooner vote for Bill Bradley than Al Gore, even though Bradley is farther to the left. He seemed more interested in ideas than raw power.
Hmm. . . check out the Cranky Professor, which gets my Favorite New Blog O' The Month Award, offering an Emory Historian's perspective on the whole Bellesiles thing.
I'm going to Florida for Memorial Day. After about Noon on Thursday, there will probably be little-to-no Live from the WTC action between Thursday and Monday. Any action that does occur will probably focus less on geopolitical crises and more on little drinks with umbrellas in them, and the strategic importance of beach volleyball.
Trying to go cold-turkey is not for everyone. Some people can handle it, but some people can't. The first thing to do is start preparing for the hiatus. Visualize how you will feel when you are unable to get biting commentary on pressing economic questions. Picture yourself dealing with it calmly, sitting quietly in your cubicle while taking deep, cleansing breaths. Practice saying to yourself "she'll be back Monday night". Prepare tapes of soothing music to play during particularly difficult times.
But if you aren't strong enough to go without my mordant wit all weekend, don't blame yourself! Scientists are finding more and more that there is a genetic component to addictions. Rather than castigating yourself -- which can often lead to a vicious cycle of blame and regret -- actively seek ways to help yourself. Get a friend to sit with you. If you spend too much time on the net to have actual, breathing friends that you see socially, now is a great time to find some! Bars are fertile ground for meeting new friends, although you shouldn't necessarily expect them to remember your name the next day.
If you find that the strain is simply too much, rather than doing something self-destructive, remember the archives! They're right there in the yellow box on the side of the page, and contain all of my amusing maunderings since the website began. Remember, most of what I say is pretty forgettable, so the nice thing is, you'll be able to read the archives without feeling like you're going over old territory.
But most importantly, don't go through such perfect withdrawal that you don't come back to see me on Tuesday. Because then I'll cry. Big, fat, tears rolling out of my darling green eyes, all because you don't love me any more. So it's okay to go away for a little while -- but don't forget to come back home when you're done.
This Brookings Institute fellow argues, despite a disclaimer to the contrary, that Bush should have foreseen and forestalled the September attacks. It's evidence is thin.
Nonetheless, the administration and intelligence community appear to have made important mistakes in the weeks before the attacks. The Bush administration believed Al Qaeda might resort to hijacking only in the traditional sense — seizing an airplane and treating its passengers as hostages for bargaining purposes. But the idea that Al Qaeda would engage in only a traditional hijacking should have been seen as doubtful. Well before Sept. 11, we knew that Al Qaeda and its affiliates were not traditional terrorists. Their record showed that they would try to kill as many Americans as possible using whatever new tactics they could devise.
Here I just thought that Al-Qaeda was like all the other terrorist groups, except better organized, better financed, and more murderous and fanatic than most. It turns out that they're terrorism's avante garde, bolding opening new frontiers in mass murder with a mixture of Andy Warhol's flamboyance and Pablo Picasso's daring transgressive style. Of course we should have known that they wouldn't do anything so ordinary as hijack a plane and hold the passengers hostage.
Give it a rest. We were supposed to divine their future actions from the fact that they weren't traditional? How does that imply crashing planes into a building, rather than, say, pipe-bombing middle America in a happy face, or kidnapping Jane Fonda and threatening to give her back unless their demands are met?
Terrorists are not performance artists, 'kay? They may change strategy and tactics, but they don't reinvent the wheel every time -- there was no particular reason to suspect that a terrorist group would be able to recruit 20 guys to fly a plane into a building, as opposed to a million other previously undone things-with-planes.
Or, it could be that they thought Al-Qaeda wanted to do what the single source who told them about the hijacking told them they wanted to do, according to this New York Times story:
the report provided to the president on Aug. 6, which warned him that Mr. bin Laden's followers might hijack airplanes, was based on 1998 intelligence data drawn from a single British source, government officials said today.
That source said Al Qaeda had an interest in hijacking airplanes in order to obtain hostages who could be used as bargaining chips so the terrorist organization could demand the freedom of Sheik Omar Abdel Rahman, a Muslim cleric who was convicted in 1995 for his role in the failed plot to blow up landmarks in the New York area.
And if there was so much reason to suspect it, then why didn't Michael Hanlon of the Brookings Institute, who had every piece of data at his fingertips except some vague intelligence that Al-Qaeda might be interested in hijacking a plane, figure it out? Or was he so blinded by Al-Qaeda's jazzy, untraditional style that he was unaware that most terrorists seem to have a broad general interest in hijacking planes? No, not someone of Mr. Hanlon's impeccable intellectual credentials and thorough righteousness. Which begs the question: why didn't he warn the nation?
Nick Denton gets it just about right on Bush's pandering to the protectionists. Oh, I'm still hoping that there's a logic to this that will eventually be revealed. But I'm no longer holding out much hope.
The most important thing you need to know about it is this: do not sit too close to the screen. I spent the entire night reeling from motion sickness after I got out.
Now, I want you to know that the original Star Wars came out when my sister was being born. I saw it 17 times that first week, while my mother was in the hospital with complications. My father is a very clever man; he knew it was better to sit through a movie many times than sit through the same number of hours of wailing 5-year old. I am second to none in my admiration for the Star Wars series.
(Side note: my father tells me that every time the movie would end, I would look at him with big, mopy eyes and say "Again, Daddy", and off he would troop to buy two more tickets. Poor but honest, that's us. Anyway, when it was re-released, we went to see it together and it was every bit as magical as it was when I was five. When it ended, he asked "what did you think?" and I, naturally, said "Again, Daddy". But I went out to buy the second round of tickets.)
This is all by way of telling you that the movie alternated between glorious and abysmal, in roughly equal parts.
The best parts, of course, were when things blew up, or drove fast dodging other things, or when there were panoramic shots of visually stunning and/or mythic vistas. I really liked Obi-Wan, and his relationship with Anakin, which did the sullen-rebellious-teenager thing to a T.
Where it all fell apart was Padme.
Men are not allowed to start shouting at me. I know she's beautiful. I don't begrudge you your enjoyment of watching her glide about in various stages of undress. But if you lack this perspective, other than admiring the constant innovation displayed by her costumer, her sections of the movie are soul-numbingly bad.
First of all, I just don't believe that they've made this twit a Senator. Isn't there anyone on the damn planet they could have sent who's, say, able to get into PG-13 movies by herself? As a Queen, I believed her; young, experienced, but good-hearted -- fine. But the idea of making little Rebecca of Sunnybrook farm here your sole representative to the galactic government -- let's put it this way: if you wanted to do some down and dirty wrangling with the representatives of a couple of thousand other planets, would you want Alan Dershowitz representing you, or Shirley Temple?
Second of all, the script writers seem to have been so overcome by the thought of Natalie Portman in her costumes that they were unable to tear their mind's eye away long enough to focus on details like plot and character. Okay, I realize that one doesn't go to see a George Lucas film for its deft characterization and quicksilver dialogue, but this was appalling. One of the enjoyable things about the original films was the way they nodded their heads to old movie stereotypes, but in the scenes with Amidala, the script doctors don't just nod -- they bow down and worship the kinds of cliches that would be cut from a Lifetime Movie as being too obvious. Most of the dialogue between Anakin and Padme seemed to have been cribbed from the cast-off scripts of ABC after-school specials. I won't give too much away, but let's just say that when a young man says "I can't believe she's dead. Why did she have to die?" it's hard for me to stop cringing long enough to redirect my attention to the screen. This wasn't helped by Natalie Portman's wooden delivery -- I found it hard to shake the impression that she was reading her lines from cue-cards located somewhere over Anakin's left shoulder. Of course, I lack the same perspective on the matter as the fourteen-year old boys at whom this is presumably aimed.
But then there's the visuals, and we forgive them. The special effects, the setup -- it was glorious. The last half-hour was, as everyone's said, marvelous.
Still. . . the first three movies had a mythic feel to them; they plugged straight into the collective unconscious and made us feel larger than life. That was Lucas' gift. You still see the tattered remains of it here and there in the new movies, but they made me sadder than anything, because it was just a shadow of its original self. It was a fine movie. Not a bad way to kill a couple of hours.
The other day at lunch I was confronted with the common trope one often hears about aid to the Third World: that the problem with foreign development aid is that the money comes in and goes right back out again, used to buy Swedish or American or Canadian products instead of encouraging the local economy.
But this is silly. Of course it does. Money is just a piece of paper; it does not magically create goods and services. If we ship wads of cash to Tanzania, it won't do them any good (unless they need to economize on kleenex) until they use it to buy something. And since Tanzania doesn't have any native businesses producing -- well, much of anything, really -- of course it gets shipped back out of the country. That's where the stuff they need is. If the stuff they needed were in Tanzania, they wouldn't need the foreign aid.
I know y'all tune in here to watch me attempt to shred the man, but I'm afraid that today I agree with him. Mostly, anyway. Today's column is about the shabby state of our accounting standards, and aside from the horrible html editor, who/which has apparently decided that the blank line between paragraphs is a Relic of Our Imperialist Past, I enjoyed it. Although I think his treatment of stock options expensing is simplistic:
To see the absurdity of the current rules, consider stock options. An executive is given the right to purchase shares of the company's stock, at a fixed price, some time in the future. If the stock rises, he buys at bargain prices. If the stock falls, he doesn't exercise the option. At worst, he loses nothing; at best, he makes a lot of money. Nice work if you can get it.
Yet according to federal accounting standards, such deals don't cost employers anything, as long as the guaranteed price isn't below the market price on the day the option is granted. Of course, this ignores the "heads I win, tails you lose" aspect: executives get a share of investors' gains if things go well, but don't share the losses if things go badly. In fact, companies literally apply a double standard: they deduct the cost of options from taxable income, even while denying that they cost anything in their profit statements.
So how could it possibly make sense not to count options as a cost?
He's writing a column for a financially sub-literate audience; I'm sure it's very hard to get everything in when you have to explain all the simple things. But I would point out that while it's true that stock options mean that executives participate only in the upside of the stock, and take no downside risk, it's also true that stock options mean that investors only pay out (via dilution of their current holdings) if the stock appreciates; if the price goes down, they lose nothing. Nonetheless, I fully agree that stock options should be expensed at the time they're issued; companies today use very sophisticated and highly accurate models for valuing such simple options today, and I've seen no compelling evidence that they would be unable to do so in the case of the options they offer their employees.
It is the Bush administration's fault, of course; he hasn't strayed that far off the reservation. But he also singles out Joe Lieberman for criticism, evening out his Lying in Ponds score.
The column itself is on the subject of a very interesting development: Standard and Poor's is issuing their own, corrective financial evaluations of companies. Krugman sees this as an indictment of the failure of the government regulators; I see it as an interesting example of the way markets can fill some of the informational and regulatory burdens for which we are accustomed to relying on the government.
While writing this, I'm also struck again by something I've been thinking about recently: how slow FASB has been to adjust to the revolution in financial instruments over the last 20 years. This is not an indictment of FASB (The board, for those who don't know, that makes America's Generally Accepted Accounting Principles, or GAAP); gosh knows, I, a lowly MBA, am hardly brave enough to make such a criticism. After all, one really wants one's accounting baord to be conservative; it wouldn't do to have them dreaming up new standards every few years just to keep things fresh and hip. But principles like valuation of assets at historical cost were much more appropriate for the low-inflation industrial economy than they are for today's service economy with its highly sophisticated financing arrangements; I think we'll be looking at that over the next ten years or so. (I don't know if we'll change it; Lord knows I haven't any idea what we'd replace it with. Still, it gives you pause.)
Overlawyered reports that the Canadian government is considering calling allergies a disability for the purposes of keeping pets, flowers and perfume, among other things, off flights. It will be interesting to see what happens when the rights of allergic disabled people conflict with the rights of blind disabled people to have their seeing-eye dogs with them.
I just read this piece by Mary McGrory. One of us is living in an alternate universe.
Carter is a problem for Bush in that he has become the most admired ex-president in history, right after John Quincy Adams, who left the White House to fight for freedom as a member of Congress. Carter, whose presidency was marked mainly by self-righteousness and bad luck, was born again as an elder statesman. Since he quit the Oval Office, he has devoted himself to good works. He has built houses for the poor with Habitat for Humanity. He has helped reduce river blindness and guinea worm disease in Africa; he has gone to a string of mean little countries to monitor elections.
He has sucked up to dictators as long as they were communists. He has apologized for the brutality of regimes from the Sandanistas to the PLO. He has offered to write speeches for Arafat. He's a shining example, all right -- a living, breathing reminder of why appeasement doesn't work.
McGrory also calls New Hampshire Senator Bob Smith an "ultra-right-winger". One of us is off base. I'll leave it up to y'all to decide which one.
Should they have known? I don't know. I don't think so, any more than I think that Clinton should have realized that Osama was the most pressing threat facing his administration. I have severe problems with Clinton's timidity and willingness to subordinate US interest to the unclear benefits of multilateralism, but should he have realized that Osama was such a threat? Should Bush? Hindsight is 20/20. The president gets a whole lot of information every day, much of which comes to nought; unless you think you would have done better (and I'm pretty sure that I wouldn't have called it) it's hard to argue that he shoulda.
But I'm sure my Democratic readers will disagree, so have at me.
So I've been meditating on some of the chilling parallels between the Great Depression and this economy (other than the fact that I, like many of my ancestors, am having to dramatically re-assess my career goals). Among them is the fact that, contrary to popular belief, the market did not bottom in 1929, but several years later, and did not regain its 1925 highs until the 1950's.
More interesting is the flood of gold that poured into America after World War I.
There were many reasons for this; the settlements from the Versailles Treaty required complex financial arrangements that were settled with gold, much of which found its way to New York to repay the war debts of the Old World. The British were attempting to fix their currency at an artificially high level, which, for complicated and boring reasons, also resulted in gold moving to New York. But what I've really been thinking about is among the chief sources of this flood: the stagnation of England following WWI.
We're accustomed here to think of the Great Depression as lasting from 1929-1940. In England, they never had a depression as severe as ours, but it lasted a whole lot longer; between the two world wars, Great Britain alternated between stagnation and decline. But England in her days of industrial might had accumulated vast reserves of capital; with no productive investments to be made at home, and a recent demonstration of our economic prowess in our funding of WWI, the holders of capital sent it here, where they thought it might do some good. And not just England; gold fled here from France's tax regimes, Germany's hyperinflation, Russia's revolution. It poured in from every corner of the world.
As the opportunities for productive investment were snatched up, and the river of gold continued to flow, some of that gold was diverted to rather less productive uses, such as perpetual motion machines and fur-bearing trout farms. There were several speculative booms and busts, most notably the great Florida land boom of the mid-20's in which a great many people lost their shirts.
Then a gentleman published a book purporting to discover that over long periods, stocks consistently offered a safe, high return that was much more attractive than bonds. Yes, that's right, the theory you've all been betting your 401(k) money on, currently being championed by Jeremy Siegel of Wharton, was well known prior to the longest and most devastating stock decline in history.
This was just one of many events that gradually persuaded the previously uninterested masses to put some money into the market. No one can explain why the fascination should have settled there, any more than we can explain why earlier generations chose tulips or Florida real estate. But that river of gold was quickly diverted into the lucrative business of making loans on margin. It became the fuel that fed the speculative boom in the stock market.
For those who are not familiar with margin loans, they're kind of like a mortgage for stocks: you put down some fraction of the price of the stock, and take out a loan for the rest. That loan is secured by the stock you bought. As long as the price of the stock stays above what you paid for it, you're rolling in clover. Any appreciation in the value of the stock goes entirely to you. With the stock market steadily rising, it seemed like the American public had finally discovered a Sure Thing. And the demand generated by the gold-fed margin loans kept prices marching higher steadily through the end of the twenties.
Of course, unlike with a mortgage on your house, the bank has an excellent idea of exactly how much the underlying asset, the stock, is worth. The minute the price dips below the value of the loan, the bank politely calls you and asks you to make up the difference with your own cash. This is what's known as a margin call. Unfortunately, the American public had leveraged itself to the hilt with margin loans; it didn't have any cash to spare for margin calls. Margin buyers forced to sell out, which lowered the price of the stock, which initiated another round of margin calls. . . The leverage which had shoved the market up worked just as dramatically in reverse.
Ho, hum, you know all this already. What does this have to do with the current economy?
Well, quite a lot, actually. Because during the 90's, we experienced a dramatic influx of capital from another mature industrial economy seeking to avoid lackluster returns at home. Rocked by deflation, Japan has been pouring money into the country for years. Our money supply increased dramatically. And ironically, the usual prescription for excess money supply -- raise interest rates -- may simply have attracted more foreign capital we didn't need. The huge increase in the supply of credit didn't just fuel the dreams of people who thought they could sell cat food on the internet; it fed our credit card binges, our home-buying sprees -- all the consumer goods we took as a sign that we, as a nation, had finally achieved The Good Life.
My Eyes Glaze Over, you say. And why should we care?
Why, because what goes up must come down.
Ah, now you're awake. The flood of money into our economy, and more broadly, the flow of capital into the financial asset market, is largely based on one thingg: the looming demographic crisis. One of the main reasons that the Japanese are in such a bind is that their work force is about to start shrinking. There have been a number of idiotic articles here and there talking about what a great opportunity this presents for younger workers. This is based on a fundamental misunderstanding of economics. The shrinking work force means that the economy, too, is going to shrink. The Japanese, aware of this, are desperately trying to save for retirement by sending their money here. Because they're saving too much and spending too little, their economy is actually going into premature decline. That shrinkage is, sorta kinda, fueling the artificial growth of ours.
But soon that money will have to be repatriated; after all, the reason they sent it here was so that it could generate some value that they could live off in their retirement. When that money goes away, the credit drain will pose the same issues of reverse leverage that the stock market crash did in the post 1929 debacle. In other words, we've borrowed a lot of our current prosperity, and pretty soon the bill's going to come due.
So thank god we're missing one parallel with 1929 -- prohibition. Because I need a drink.
Update Ouch! I've just gotten three emails accusing me of fallaciously predicting another Great Depression. Let me state right now that I am not now, nor have I ever been, predicting a second great depression based on parallels between the influx of foreign capital in the 1920's and now.
I am predicting another Great Depression for entirely different reasons. (No, I'm kidding).
I think that there were interesting parallels between the asset-price bubbles of the 20's and the 90's. And I think that the 90's bubble hasn't deflated as far as it will -- nor will it, I think, until the Japanese savers and the Baby Boomers really start trying to live off their savings, which is at least a decade away.
I do think that to the extent that we have been spending on money borrowed from credit cards or home equity lines, or borrowed against paper gains in stock wealth, we have borrowed our prosperity. But I do not think that this is the majority of the economy. I do not think that we will again see 25% unemployment and hobo towns. Or any of the other devastating losses of the Great Depression. The Great Depression was a mix of a bad recession, a bad market collapse -- and utterly disastrous monetary and fiscal policies. Or at least, that's what I've been able to glean from my reading. I do not think that we will see a repeat of the Great Depression soon, if ever.
I do think that the looming demographic crisis presents us with challenges that no peacetime economy has ever grappled with, and I think that their will be a lot of trouble, worldwide, making the adjustment. But I don't think that history is going to repeat itself, either as tragedy or farce.
But I am by no means an expert on international monetary policy, so I am open to correction by readers who know more. Such as the very kind reader who sent this usenet summary of the causes and competing theories, with which I am pretty much in agreement (and the writer should know better than I, as he's a sci.econ contributor).
There's pretty much a clear consensus among economic historians -- from Keynesian to conservative -- about what caused the Depression, although for some reason it hasn't made it out to usenet forums and such.
*Very* shortened version:
After WWI the nations of the world reimposed the Gold-standard, fixed-exchagne rate monetary system using pre-war monetary parities that no longer fit, under circumstances that it no longer fit.
This caused systematic, world-wide deflationary pressure, especially upon many economies that had already been severely damaged by the war.
(For instance, countries that had a surfeit of gold relative to their parity, such as France and the US, "sterilized" it with open market operations to eliminate inflationary pressure -- which they shouldn't have done under pre-war gold standard "rules" -- while countries with a lack, like Britain, suffered deflation, producing net deflationary pressure in the world monetary system overall.)
In this general situation of stress, the U.S. Federal Reserve then in its wisdom took it upon itself to increase real interest rates (nominal minus inflation/deflation) in the US to 11% to 13% for three straight years -- in spite of ongoing recession and deflation.
Try to imagine Alan Greenspan raising interest rates today to 14% or 16% today and holding them there for three straight years, even after the economy goes into a recession. What do you think would happen?
Even so, the economists of the time generally predicted strong recovery from the '29-'31 slump in '32 -- and interestingly, modern computer models using data from the time did so too in a "looking back" study made a few years ago.
But then in late '31, amid the ongoing recession and deflation, the Fed *raised* interest rates yet again by two full points to stem an outflow of gold, which it deemed to be it's obligation to do under the gold standard.
The resulting shock to the economy collapsed the monetary aggregates immediately in a way never seen before or since, and was transmitted worldwide to other already weakened economies through the international fixed exchange rate -- much like the shock transmitted through the fixed exchange rate nations of Asia a few years ago. The *real* Depression was on.
When FDR came in he broke the tie between the dollar and gold, real interest rates dropped 10 points and growth resumed -- albeit from about a 30% lower base.
I can't imagine why Kangas didn't report any of this on his web site. ;-)
Anyhow, if you want to learn economic history you should get it from analysis by an economic historian, not from web sites or usenet.
Two recommendations .. (A quick & easy read): _Lessons from the Great Depression : The Lionel Robbins Lectures for 1989_, by Peter Temin of MIT, MIT Press.
(Comprehensive coverage): _Golden Fetters : The Gold Standard and the Great Depression, 1919-1939 _ by Barry Eichengreen of University of California, Berkeley and the National Bureau of Economic Research, Oxford University Press.
For you I'd recommend Temin. The book's an easy read, he's an overt liberal Keynesian, and his academic credentials are top-tier. You've got an .edu address, I'm sure you can find it in the library.
You will find, however, that while Temin credits FDR with ending the plunge and restarting growth in the US by breaking the dollar-gold link, he also blames FDR for lengthening the Depression in the US by slowing recovery with New Deal policies. These encouraged business cartels, artificial price floors and the like, on some kind belief that high prices would somehow encourage economic activity. In fact they resulted in persons who already had jobs and profitable businesses getting higher wages and income, those who were unemployed being locked out of the job market (because new and expanding business that might threaten the cartels with competition were barred), and in consumers being forced to pay more --- the very same results that cartels and artificial price supports produce today.
Temin contrasts the US experience with faster recoveries that occurred in other countries that followed opposite policies.
BTW, there's an interesting Federal Reserve analysis of just *how much* different factors like tariffs, fiscal policy, monetary policy, bank failures, etc. may have separately contributed to the Depression in the US at http://minneapolisfed.org/research/qr/qr2311.html
And after all this, if you want to argue the liberal position about it all, I'm sure you'll be able to do a much better job than the late Mr. Kangas. --------------------------->>
The states are in big trouble. The revenues from the boom have evaporated, and the bust is bad.
Now this is often blamed on the tax cuts of the 90's, but this is a fallacy. If the surpluses had been left with the governments, the odds that they would have been socked away for today's rainy day are slim; the legislators would have spent the hell out of them to get re-elected. At least the tax cuts probably added a little growth to the economy. And as I've said before, any spending, once done, develops a constituency that makes it nearly impossible to undo; had that money been spent instead of used to cut taxes, those who are now blaming those tax cuts would still be arguing for tax increases to sustain that new, higher level of spending. Which is, in a recession, about the worst thing you can do.
If this recession does one good thing, it may finally force legislators to tighten their belts. At least, one can hope.
Update: No discussion would be complete without the round-robin of complaints about Bloomberg's proposed spending cuts, this time offered up by Bob Herbert. Herbert, who always writes beautifully, points out that there are no easy answers -- but then he tries to slip one in in the form of tax increases.
Which means -- clap your hands, boys and girls! -- it's time for a simple economic model!
Let's imagine that New York collected approximately the same amount in taxes as it paid for all the services it provides last year. Call it $100 for simplicity sake. We will also say, for simplicity, that this is equal to 10% of the total economy, which puts the value of New York City's economy at $1000.
The decline in this year's tax revenues is approximately 20-25%. We'll settle on the lower number. That pegs the decline in the economy at $200, to a new value of $800, and the decline in tax revenue at $20, to $80. The tax rate remains the same.
Now, we can do one of two things: cut spending, or raise taxes.
If we cut spending, we cut by 20%. The common fallacy is that if we chose to raise taxes it would be by the same amount -- 20%. But that is not true. Our current tax revenues are $80. To make up the lost revenue, we would have to raise taxes by 25%, a full one quarter. The new tax rate would be 12.5%.
But that isn't the whole story. Businesses with a slim profit margin may find it unprofitable to continue to operate at this new tax revenue, because they no longer provide enough money for their owner to live on, or to earn back their owner's cost of capital. Those businesses will relocate or move, further shrinking the economy. Let's say this rebound effect is 1/3; for every 1% you raise the taxes, you decrease the economy by .33%. 2.5 * .33 = $66 decline in the economy. So you have to raise taxes further. But wait -- that decline in the economy means more people need services like welfare and unemployment counseling. So spending went up. So we have to raise taxes. So the economy declines. . . you get the idea. No, this process isn't self sustaining; it would level off, probably somewhere around a 30-40% increase in taxes, depending on how liberal is the economist you ask. But that's a big damn increase. And New York is uniquely vulnerable right now. Big businesses are deciding whether to stay or go -- and so are the people who work for those businesses. Increasing taxes at this juncture could deal the city an economic blow from which it wouldn't easily recover. Not to mention the fact that it would scare the bejeesus out of the bondholders, which means higher interest rate on our debt, which means less money for services, which means higher taxes . . .
If you want to see what a poorly timed tax increase can do, go look at Philadelphia. The tax policies of the 70's and 80's have left it a hollow shell.
No, there aren't easy solutions. But though tax increases look easy to the left, in the long run, they could hurt the poor even more than spending cuts now.
Doing a little research, I just stumbled across this. It's a little disjointed, but it's an interesting primer on some of the issues with the estate tax, about which more when I finish editing the article I'm writing.
Matthew Hoy jumps in -- and he's been noticed by Andrew Sullivan and Michael Barone. Sigh. It's just you and me, reader. But you know how much I love you, don't you? And not just when you drop things in the tip jar. Every time you hit my page a little more sunshine enters my life. Of course, if you do happen to know Andrew Sullivan or Michael Barone, feel free to, y'know, mention me. . .
Josh Marshall thinks that Jimmy Carter is making the Bush Administration look like idiots. I think he's wrong. I think he's making Jimmy Carter look like a traitor.
Not because I support the embargo on Cuba; I think it's dumb. (I also think that lefties who claim that Cuba's economy would start functioning if we lifted it are dumb.) But Jimmy Carter is using his position as the former President of the United States to make a communist dictator look good at the expense of the current president. Who the $%@! does he think he is? No, really. It's not like Castro is somehow deserving. He is responsible, personally, for more suffering, for more misery, for more human rights violations than the regime that preceded him, he's on every human rights disaster list in the nation, and Jimmy Carter is trying to embarass George Bush by sucking up to this man? (And Democrats who think this is cute can just imagine how cute they'd think it was if George Bush started moseying around Sudan to shame the next Democratic president into doing something about Sudanese Christian slavery while said president was in the middle of a major foreign policy crisis). Jimmy Carter is grandstanding on a stupid issue to try to enhance his own aura of sanctity at the expense of our national unity during a time of crisis. I used to think he was a good man but a bad president. Now I'm just disgusted.
And I don't think I'm alone. First of all, the red states don't like Castro; he isn't doing himself any good there. And there's a significant portion of the blue states that don't like him either. And there are Democrats who may agree with Carter but think that this is wildly inappropriate (I've talked to a few like that). To all of those people, Jimmy Carter is proving that he cares more about his public image than that of his country. So basically, he's traded the feeling most people had that he was nice but incompetent, for the good opinion of the few, and the realization by the many that he's either willing to place himself in the service of very bad people, or unable to recognize true badness when it knocks at the door. Neither of which bodes well for that legacy everyone seems to worry about these days.
Hawaii economic development officials resisted the urge to denounce or dismiss a Forbes magazine report that slammed Hawaii as a place to do business, and instead scheduled a Tuesday meeting to work up a detailed response.
As Dave points out, the possibility of actually doing something about their sclerotic regulatory environment, rather than trying to persuade people that it's not so bad, doesn't seem to have occurred to anyone.
Last week Stanley Works, a Connecticut tool company, postponed its plan to evade taxes by incorporating itself in Bermuda. ...
To be fair, the administration didn't create the loophole Stanley wants to exploit....
[Gee, really big of you Paul.]
By incorporating itself in Bermuda, a U.S.-based corporation can — without moving its headquarters or anything else — shelter its overseas profits from taxation. Better yet, the company can then establish "legal residence" in a low-tax jurisdiction like Barbados, and arrange things so that its U.S. operations are mysteriously unprofitable, while the mail drop in Barbados earns money hand over fist. In other words, this isn't about competition; it's about tax evasion.
The natural answer would seem to be to crack down on the evaders....
The administration doesn't want to say outright that it's in favor of tax evasion.... ------------------------------------------>>
SLANDER ALERT: Five claims made about "tax evasion", which is a FELONY.
But we're not talking about evasion, we're talking about ECONOMICS.
For which you not only don't go to jail, but you can win prizes if you do it really well. Like the John Bates Clark Medal.
Though I really like the Krugman admission of what taxes REALLY ARE:
<< Furthermore, what does it say to the nation when companies that are proud to stay American are punished....>>
Much more candid than the way the last Democrat president used to characterize them: "contributions"
Back to Paul:
<< If the administration wants to eliminate the corporate profits tax, let's have a real, open debate — starting with an explanation of how the lost revenue will be replaced in a time of severe budget deficits. Meanwhile, let's crack down on tax evasion. >>
Which would be the SIXTH slanderous misrepresentation of what we are talking about. However, let's do what Krugman suggests: "let's have a real, open debate".
But let's start at a more legitimate place for an economist: The Dead Weight Loss of the corporate income tax.
Go right ahead, Paul. What do you estimate it, as a professional economist, to be?
Today, Paul Krugman's upset about the impending move of Stanley Works, the maker of Stanley and Bostitch tool products, to Bermuda for the purpose of avoiding their taxes:
Last week Stanley Works, a Connecticut tool company, postponed its plan to evade taxes by incorporating itself in Bermuda. The decision reflected pressure from the White House, which denounced the move as unpatriotic in a time of national emergency.
I am, of course, making that last part up. The shareholders' vote approving Stanley's move was challenged by Connecticut officials; also, the company has been put in the spotlight by David Cay Johnston, The New York Times's invaluable tax reporter. But the Bush administration, always quick to question the patriotism of anyone who gets in its way, has said nothing at all about Stanley Works, and little about the growing number of U.S. corporations declaring themselves foreign for tax purposes.
To be fair, the administration didn't create the loophole Stanley wants to exploit. And it's not enough just to denounce corporations that exploit tax loopholes; the real answer is to deny them the opportunity. Still, the administration's silence is peculiar. What's going on?
A better question is why in heaven's name the Bush Administration would mention it. Last year, according to their balance sheet, Stanley Works paid $78.4 million in income tax. Assuming that this is close to what they actually handed the IRS (it's often not), this would make their tax revenue 1/40th of 1% of the total corporate taxes paid last year. If we're going to put the Bush Administration in charge of loudly castigating every time some tiny company, of which no one would ever have heard if it didn't happen to be located in close proximity to the tax reporter for the New York Times, does something of which Paul Krugman doesn't approve, we won't have any time to talk about Enron and the scheming liars in the Bush Administration who plotted to hand over Our Democratic Way of Life to the machinations Soulless Big Corporations. We have better things to do as a nation than elevate petty local concerns to national importance merely because they happen to be located close to The Center of the Universe, otherwise known as New York City. "Thelma Sue down the block hasn't touched her hedge for weeks, and her crab grass is close to spinning dangerously out of control. Why has the Bush Administration kept silent? Could it be because Thelma Sue and her husband Bob gave a generous donation to the Wayne County Republicans last fall?"
The closest we have to an official statement on the issue of companies moving offshore comes from the Treasury Department's chief of tax enforcement: "We may need to rethink some of our international tax rules that were written 30 years ago when our economy was very different and that now may be impeding the ability of U.S. companies to compete internationally."
Unfortunately, that statement misrepresents the issue. For one thing, U.S. companies don't necessarily pay higher taxes than their foreign counterparts; Germany's corporate tax rate is significantly higher than ours, France's rate is about the same, and Britain's is only marginally lower. Anyway, the Treasury statement makes it sound as if we're losing revenue because U.S.-based companies are moving their headquarters to lower-cost locations, or because they are losing market share to foreign rivals. Neither proposition is true. In fact, we're losing revenue because profitable U.S. companies are using fancy footwork to avoid paying taxes.
They don't necessarily, but they usually do. Cute examples. Try Luxembourg, Switzerland, Ireland, Russia, anywhere in the Caribbean. . . you get the idea. Krugman's schtick is a variation of the EU harmonization regime, which says that countries should make sure that the highest available tax rate applies to keep any pressure off the government to lower them. Sounds fine to us when applied to Bermuda. Sounds maybe-not-so-fine when we have to raise our taxes to German levels, which believe me, is something the Germans would like a lot.
By incorporating itself in Bermuda, a U.S.-based corporation can — without moving its headquarters or anything else — shelter its overseas profits from taxation. Better yet, the company can then establish "legal residence" in a low-tax jurisdiction like Barbados, and arrange things so that its U.S. operations are mysteriously unprofitable, while the mail drop in Barbados earns money hand over fist. In other words, this isn't about competition; it's about tax evasion.
No it's not; it's about tax avoidance. Tax evasion is when you do something illegal, like not declaring income. Tax avoidance is when you do something legal that reduces your tax bill, like -- moving your headquarters to Bermuda. Or like buying a house instead of paying rent to take advantage of the mortgage tax deduction.
The natural answer would seem to be to crack down on the evaders — to find a way to tax companies on the profits they really earn in the U.S., and prevent them from using creative accounting to make the profits appear somewhere else. It's hard, but not impossible.
Hard is not the point. Expensive is. Setting up a regime to make sure that Stanley can't duck out to Bermuda, and thus threaten our vital national supply of tape measures and nail guns, would be extremely expensive, and would add to the complexity of the tax code, which costs us further money by reducing economic efficiency. The amount of money raised by the corporate tax is fairly trivial compared to overall revenues about 12%, but even more trivial is the revenue contributed by companies that can afford, for complexity and PR reasons, to relocate to Bermuda. The cost of enforcing such a ban (and I, for one, am not quite as sanguine as Mr. Krugman that one could) would be all out of proportion to the benefit of doing so.
But here's the key point: Administration officials don't want to help collect the corporate profits tax. Unable to push major corporate tax breaks through Congress, the administration has used whatever leeway it has to offer such breaks without legislation. The Hill, a nonpartisan publication covering Congressional affairs, recently reported on "a series of little-noticed executive orders . . . that will provide corporations with billions of dollars in tax relief without the consent of Congress."
Okay, I don't pay much attention to the legislative calendar. . . can one of you political types explain to me when Bush tried to push corporate tax breaks through the hill? Or is Krugman using his psychic powers again to divine that Bush would have liked to do so, but didn't try?
And now the silence on Stanley becomes comprehensible. The administration doesn't want to say outright that it's in favor of tax evasion; but it also doesn't really want to collect the taxes. Better to say nothing at all.
The administration isn't in favor of evasion. Or if it is, that's a separate issue, because as I pointed out before, this isn't evasion, it's avoidance. Reader poll: who thinks that a man with a PhD in Economics who spends two days a week complaining in print about the Bush administration's tax policy doesn't know the difference between the two words?
The trouble is that hinting, even by silence, that it's O.K. not to pay taxes is a dangerous game,
Encouraging crab grass slackers everywhere to let their lawns go and possibly infect the nation with their Anti-American plague. . .
because it can quickly grow into a major revenue loss. Accountants and tax planners have taken the hint; they now believe that it's safe to push the envelope. Tax receipts this year are falling far short of expectations, even taking the recession into account; my bet is that it will turn out that newly aggressive tax avoidance by corporations (and wealthy individuals) is an important part of the story. And it will get worse next year.
No it can't, because as I've pointed out, the corporate tax is only about 12% of total tax revenue to begin with, and IBM is not going to pick up and move to Bermuda any time soon. My bet is that it turns out that revenues are down more than we thought, and hey, guess what? Neither of us knows which is right.
Furthermore, what does it say to the nation when companies that are proud to stay American are punished, while companies that are willing to fly a flag of convenience are rewarded?
Seriously, now. What does it say to America? What does it say to America when people are willing to sell out their professional integrity for partisan purposes? What does it say to America when the President of the United States sells pardons to the highest bidder and steals things from the White House as if he were souvenir hunting at a Holdiay Inn? What does it say to America when a man grabs a woman 1/3 of his age, whose name he does not appear to know, and drags her into a closet for a little tonsil-hockey, and then, in his position as the chief law enforcement officer of the land, perjures his ass off to get out of it? What Does This Say to America? Who cares? By now America is too stunned to listen.
If the administration wants to eliminate the corporate profits tax, let's have a real, open debate — starting with an explanation of how the lost revenue will be replaced in a time of severe budget deficits. Meanwhile, let's crack down on tax evasion.
It's LEGAL!!!!!!!!! The only group with the power to "crack down" on Stanley's tax avoidance is Congress. Which is -- ahem -- half controlled by members of Krugman's favored party, who are mysteriously silent on the subject of corporations that move their headquarters to Bermuda. What does that say to America? Apparently nothing very interesting.
Okay, so gloating isn't nice. But as William Quick demonstrates, it's an awful lot of fun.
"Europe" (whatever the hell that might be these days) pledged to take these murderous savages as part of a deal to end the Church of the Nativity standoff without giving Israel the victory it wanted. Then they discovered (shock! horror!) that the murderous savages they pledged to give asylum to actually were murderous savages At that point, the tragedy of their release slipped into farce, as one Euronation after another backpedaled from the deal as quickly and forcefully as they could: "What? We don't want them. You take them."
Now we slip into slapstick, as Israel grins nastily and calmly ups the ante: "We're gonna file to extradite them, you goofballs. Which means you have to arrest them and either prove they aren't murderous savages, (an impossibility, since they are, and trying to prove otherwise will just make you look like big, fat idiots) or you have to give them back to us - which will bring down on your cowardly asses precisely the wrath you hoped to avoid when you crafted the original sleazy deal.
I was thinking about this this weekend, in the context of the Likud vote against the formation of a Palestinian state. I can't decide whether it's a nasty, thoroughly meant "let them eat cake" to the Palestinians, or simply a response to Arafat's strategy. To wit: "I am a man of peace, but I can't control the radicals to my right." Does the Likud vote really weaken Sharon's position, or does it allow him to say "I am a man of peace, but I can't control the radicals to my right" and watch the UN drown in its own hypocrisy as it tries to explain why this is a valid position for Arafat but not for Sharon. (It'd be really interesting if Benyamin Netanyahu had his own armored division.) I don't know the answer to that. But I imagine we'll find out over the next few days.
Amusing Ideas from this weekend's socializing & inebriated ranting:
Problem: Balance of Power between the US and Europe. Europe wants to wield super-sized power, and we won't let them because we're afraid of what they'll do with it.
Solution: I think we should let them contest our power on the same terms we have it. So Europe should get 1 vote in the UN, treaties, and the International Criminal Court, just as we do. If it's part of the new Euro State with the new Euro laws, why should Belgium get any more say than Kansas does about the future of the planet?
Somehow I feel certain that Europe wouldn't be so enthusiastic about these organizations if they didn't excercise outsized power with respect to the US. And don't give me any crap about how it's necessary because we are too powerful; the EU has more people and a comparably sized economy. The only reason that they don't have a similar level of power is that they've chosen social spending over growing their economy or their military. Fine, that's their choice, but they don't get to complain that they can't eat their cake, and ours too. Gosh, the more I think about this idea, the more I like it.
Problem Trial lawyers who use enormous contingency fees to build a class-action juggernaut that destroys companies in its quest for profits and/or cosmic justice.
Solution: Eliminate contingency fees. No, wait, we're not going to deprive the poor of representation -- cap the fees for the plaintiff's lawyer at a risk adjusted multiple of the total fees paid to the defendant's attorney. Say, 2-3 times what the corporate attorneys defending their targets bill, assessed separately from the judgement/settlement. This still works out to a lush reimbursement, without creating vast pools of money to target new companies without thought for the consequences. It also serves to restrain the opposing side, who knows that they can no longer out-bill a deserving defendant. And it makes sure that all the money the jury awards goes to the person it's supposed to -- the victim.
Norman Borlaung, who received a Nobel Prize for his contribution to the high-yield farming revolution, pens this indictment of silly ideas about "sustainable" low yield farming in today's Wall Street Journal:
I've spent the past 20 years trying to bring the Green Revolution to Africa -- where the farmers use traditional seeds and the organic farming systems that some call "sustainable." But low-yield farming is only sustainable for people with high death rates, and thanks to better medical care, more babies are surviving.
The International Food Policy Research Institute recently projected that Africa is a "building catastrophe." African farms are currently locked in a downward spiral, in which the traditional bush fallow periods are shortened from 15 or 20 years to as little as two or three -- which means crop yields are declining, soil nutrients are depleted, and still more land must be planted every year to feed the people.
