Asymmetrical Information

From the desk of Mindles H. Dreck:

Wouldn't have happened?

Al Gore, like Krugman, Scheer and others, is trying to pin the current corporate Scandalaise on Bush.

The idea that most directly implies Bush administration culpability for Enron is, unfortunately for these critics, the silliest. They make the amusing and tired assertion that if Phil Gramm's wife hadn't exempted Enron from CFTC regulation, and congress had not passed the Commodity Futures Modernization act, Enron would not have failed. This is absurd on its face - as absurd as saying Clinton was responsible for the failure of Long Term Capital Management.

Looking at history, one might conclude that scandal and fraud are more common in regulated rather than unregulated industries. Librarian Roy Davies has helpfully compiled a a list of 30 of the biggest financial scandals in the last twenty years. I count seven that involved regulated commodities and futures trading, the CFTC's bailiwick. In fact, all but a handful of these scandals involved regulated entities.

Furthermore, when a company is regulated, they typically isolate the regulated activity in a subsidiary. When you consider that the bulk of Enron's problem assets were hidden in affiliates, it seems increasingly unlikely that CFTC regulation would have made much difference. Finally, the CFTC exists primarily to protect commodities investors and the exchanges, areas where Enron was not particularly active.

Yessirree, that CFTC regulation would have been pivotal.

Oh, by the way, there was a futures trading scandal some years ago involving a company that was "allocating trades". Allocating means doing a bunch of trades and then deciding whose account to put them in later. It's an old scam that allows a broker to run a ponzi scheme whereby he makes sure new, growing clients get the winning trades, and older ones get the losers. The CFTC, which specifically prohibits allocating trades, regulated the entity and brokers in question, who ultimately settled. That was long after they made a suspiciously tidy sum in cattle futures for a certain Governor's wife.

For those still trying to blame the world's problems on the Clintons, it's too bad Enron wasn't regulated by the CFTC. Then they could have blamed Enron on Clinton and been just as credible as Robert Scheer. Actually, they already are.

From the desk of Jane Galt:

Eleanor Clift just attributed WorldCom

Eleanor Clift just attributed WorldCom and Xerox to Bush's failure to promulgate government regulations after Enron.

Because, you know, those regulations would be in effect by now.

And regulations regarding the consolidation of limited partnerships would certainly have prevented WorldCom from incorrectly restating expenses as capital expenditures.

I am hereby calling for a moratorium on people calling for more government regulations unless they actually know something about accounting, and have some idea about what regulations would work.

A brief survey of left and right accounting-savvy people I know shows that every single one of them wants reform, and none of them have the faintest clue as to how to implement it.

From the desk of Jane Galt:

So there's been a lot

So there's been a lot of noise lately about stock options and whether they're a good idea or a bad idea, with the liberals and conservatives predictibly screaming across the ideological chasm, and the sense getting lost in the meantime.

Well, here's a little explanation for those of you who slept through this part of CorpFin 101.

Why do we use stock options?
Stock options are a solution to the principle-agent problem, which is a fancy way of saying that the professional executives who run companies have conflicts of interest with the shareholders who own said firms, and we can't just rely on the executive's altruistic sense of what is right and good to bridge the gap, any more than we can hope that if we sing Kum-bah-yah enough times Bin Laden will sashay out of whatever hole he's hiding in and stick a daisy in the rifle of the first Green Beret he sees.

We can't watch the bastards every minute; after all, we've got jobs and kids and bathrooms to regrout and the Lord of the Rings DVD we haven't even looked at. Think of a big corporation, say Exxon, as the equivalent of a gas station whose owner is on an extended vacation. When the cat's away, the mice will play.

While liberal commentators would have you believe that the sixties and seventies were a halcyon era of corporate responsibility and managerial modesty, they were also the era of bloated conglomerate empires, seven-figure expense accounts, and the Chrysler bailout. Managers, believing that forcing American consumers to buy whatever crap they made was their God-given right, were less concerned with innovation or competitiveness, and more concerned with building immense private fiefdoms for themselves, from which their vassal lords would bring them tribute in the form of junkets, three-martini lunches, and ludicrous perks suh as a corporate jet to fly you to the Tasti-Freez.

They also failed to optimize shareholder value, because their risk-reward profile was far different from the shareholders. When times were good, they were unwilling to take potentially profitable risks, because they weren't going to see much of the upside, while the downside meant they would lose their jobs.

When times were bad, they were willing to take insane risks, because hell, they were going to lose their job anyway, and if there was any chance that that bionic tweezer could turn things around, why not try? After all, they were going to lose their jobs anyway. Why leave assets to be repatriated to all those ungrateful shareholders when there was still the possibility that the CEO's corporate jet might be saved?

Stock-based compensation is meant to align the interests of the managers with those of the shareholders, by making a substantial portion of their compensation dependant on the share price.

So why didn't stock options work as well as we thought?

Well, for one thing, stock prices are an imperfect measure of a company's worth; the managers of a company, unless they are deluding themselves, always have a better picture of the actual health of a company than outside investors. This difference between insider and outsider knowlege is most pronounced over the short term.

Which brings us to the real problem: the risk-reward pattern of stock options is not identical to that of shares.

To understand why, we need to look at the relative compensation patterns of equally-valued stock and stock-option compensation packages. You there in the red shirt! Take your mouse off that "Back" button. This is important! You can look at naughty pictures later.

Let's look at two executives, both getting $1 million in salary, and $4 million worth of stock-based compensation.

Executive A, who we'll call Annabelle, is getting 4,000 shares valued at $100 apiece.

Executive B, who we'll call Belinda, is getting 16,000 options to buy shares at their current price of $100, excerciseable within 3 months.

[Why don't they get the same number of grants, you ask? Because we're not trying to equalize grants; we're trying to equalize the expected value, or the probability-weighted value, of the compensation.]

We'll assume, for the sake of the model, that we have perfect knowlege of probable outcomes, and that there is a 50% chance that the stock will be worth $50 in three month's time, and a 50% chance that it will be worth $150.

Wake up! We're through the boring part. Okay, so in three months time, what happens?

Annabel's stock is worth either $2 million or $6 million. Expected value: $4 million.

Belinda's stock options are either worthless, because the stock price is lower than $100; or very valuable, as she excercises her options at $100, sells them at $150, and pockets an $8 million profit. Expected value: also $4 million.

[How can this be? I hear you cry. Do the math:

Annabelle: (50% * $2 mm) + (50% * $6 mm) = $4 million
Belinda: (50% * $0) + (50% * $8 mm) = $4 million

And now you know how to do an expected value calculation. Isn't that exciting? I'll wait while you run out to phone your friends.]

Now, what does this tell us?

First, that Belinda is now willing to take more risks than Annabelle? Why? First of all, because Belinda's grant is all up-side. If Annabelle takes a risk that could put the company out of business, she loses everything. Belinda, on the other hand, loses no more if she puts the company out of business than she does if she just misses her earnings targets by a little; either way, she can't cash in.

The second reason is even more interesting. It's something called loss-aversion. What does that mean? It means that we'll do more to avoid losing what we have than to get more. This can lead to unhealthy risk-taking behavior. But it also leads to personal sacrifice and hard work to preserve the value of what you have. The executive with stock wants to avoid losing money more than the executive with options wants to gain it.

So in two important ways, the stock-option holder's interests are not aligned with those of the shareholders.

So why do we use stock options instead of stock grants
Two reasons: taxes, and financial accounting. Stock options allow you to play with the timing of expenses on both in order to maximize value.

Even more importantly, stock options don't show up on the balance sheet. Oh, they show up in the notes. But who cares about the notes? They don't show up in analysts model or the almighty EPS the same way that stock grants would, and that's the important thing. I'd explain the exact difference to you, but if you fall asleep that suddenly you might hurt yourself when your head hits the corner of your desk, and I couldn't live with that.

So what should we do?
You may not be aware of this, but Harvey Pitt is not knocking down the doors of Live From the WTC's editorial board to seek our opinion on this crisis. However, here is our opinion:

1) Change the accounting for stock options. Yes, we know that Black-Scholes has issues with long-term stock options, but not as bad, in our ham-fisted opinion, as the current valuation method.

2) Change the term and the blackout periods so that executives can't sell immediately after they excercise.

3) Eliminate the practice of re-pricing options, where an executive's pet board gets to decide that the stock decline wasn't really his fault and he should get to make a profit off his options anyway.

4) Preferably, move away from options and towards either a stock grant with a lengthy blackout, or the elegant solution proposed by Mindles H. Dreck: base compensation on the company's stock's outperforming stocks in it's industry sector; after all, we don't want the executive to benefit or be penalized by changes in the sector, but for how well said executive manages to maximize profits given market conditions.

I hope this answers your questions.

From the desk of Mindles H. Dreck:

Early is Wrong

Let's try a thought experiment. You are about to take a one year position in the Ten-year Treasury Note. You have access to a clairvoyant. He/she can answer one market question with perfect foresight. What question would you ask?

The answer is obvious, you ask the yield on the 9-year Note (a year has gone by) in one year's time, as that would directly determine the price of your asset. OK, now let's stipulate that the psychic can't answer this direct question (isn't that how it works anyway? the future always comes in riddles).

One's first instinct is to think fundamentals: Has GDP grown? What about consumer demand, the deficit, etc.? Perhaps one of these fundamentals will tell us enough to suggest the appropriate yield on the 10-year. But that won't help you. You don't really want to know what's happened during the year, you want to know what the market's consensus expectation for yields will be one year from now. The factors that determine the yield you can't ask for are entirely a function of the future the market attempts to discount. You ask the psychic what the market's expectations for inflation and nominal interest rates are one year from now.

In other words, it doesn't matter what happens to your asset while you own it so much as what someone thinks it is worth at the time you want to sell it.

This is a crucial distinction about markets that is repeatedly lost in the coverage of Wall Street Analysts, market bubbles and Elliot Spitzer's crusade. We tend to lose ourselves in a specific case of efficient market theory where all news is discounted, and an asset has only one true worth. That allows us the conceit of suggesting that the 'one true value' is either concealed or revealed by some overpaid smartypants analyst. But if you think about it, your not so interested in the value per se as in your ability to sell it later for more.

This is a simple and obvious experiment, but it brings into focus some difficult truths:

1) It is possible for an analyst to have a screaming buy on something he thinks is a piece of shit.

2) Said piece of shit may turn out to be a good investment, as long as the market for pieces of shit remains ebullient. How long that lasts is anyone's guess.

I distinctly remember clients criticizing us for not owning internet stocks. I remember sitting in a room discussing Amazon with about 70 other senior investment professionals at a week-long program run by AIMR in the spring of 2000. Only one of us had ever owned the stock (she ran the pension fund for a Fortune 500 company, but she owned the stock personally, not for the fund).

Portfolio managers have a saying - early is wrong. Saying we all knew the bubble would burst is a far cry from knowing when. As much as dot-coms seemed overvalued, it also seemed perfectly plausible they would be worth more in the future. As long as so many believed in their overly-rosy prognosis, that market share would turn into profits, they would be worth more later.

Don't get me wrong. Selling something you think is worthless is immoral. However, refusing to sell internet stocks into the 1996-2000 market would have been a nearly impossible choice for a bulge bracket brokerage firm. I'm glad I didn't work for one of them.

From the desk of Jane Galt:

My Polish co-worker's words, when

My Polish co-worker's words, when asked why people in Poland want to go back to Communism:

"There's a large group of people in Poland who are worse off now."

Who's in that group?

"It's people who are

1) Uneducated
2) Unskilled
3) Mostly drunk

Those people did better under communism."

So how can that one group be so powerful in elections?

She pauses.

"Well, you have to understand, that's like half of Poland."

From the desk of Jane Galt:

So I was reading an

So I was reading an editorial about the Southwest Airline fat scandal. For those of you who aren't familiar with this tempest in a tinpot, Southwest Airlines told overweight passengers that if they didn't fit into their seat (as measured by the objective standards of a) needing to raise the armrests in order to fit or b) needing a seatbelt extender), and the flight was full, they'd need to pay for that extra seat they were taking up.

The editorial was written by a member of the fat acceptance movement who, unsurprisingly, desired the repeal of this rule. Of course, she had a hurdle to get over, which is that while she's trying to fight Southwest, there's the fact that the extra girth doesn't bother the flight crew -- it bothers the person sitting next to the overweight person, who is sacrificing a third of their seat to their neighbor's Big Mac attacks.

How insensitive of me. It's not that overweight people are unhealthy; they're just unlucky. 'Fraid not; most fat people are fat because they are eating more calories than they burn off. Oh, there are exceptions, but according to the doc I interviewed for my last Salon article, metabolic disorders account for less than one percent of the overweight -- and as it happens, I am blessed with the most common of these, hypothyroidism. You pop your Synthroid like you're supposed to and the weight comes off. I'm sorry, but eat more, weigh more; it's not a mysterious formula.

Now, of course, everyone is entitled to weigh as much as they want -- but I don't see how that translates into an entitlement to take up space that other people have paid for. Losing weight is hard, but so is spending seven hours jammed against the wall of an airplane because your neighbor is spilling over into your seat.

The fat acceptance woman tried to get around this by proclaiming that she didn't want to take up her neighbor's seat; she wanted Southwest to make the seats bigger. Of course, she doesn't want to take anything from regular ol' folks like you and me; just the greedy corporation who wants to penalize her for her weight with no good reason.

Sorry, that won't fly. To see why, we have to take a look at a little airline economics. That's right, it's time for another timely lesson at Jane Galt U!

Try to make your gleeful clapping a little quieter; it's disturbing the people in the other cubes.

Our subject today is that age-old question: Why can't they just make those [Censored] seats a little [Expurgated] bigger?!

As with most questions that start with "Why can't they just. . . " the answer is cost.

The airline industry is an interesting kettle of fish. Ever wonder why you never get the same price twice for a ticket? That's because airlines are, or so their shareholders light-heartedly hope, extremely adept at upending their customers to shake every last nickel they're willing to pay out of their pockets. It's called price discrimination, and while it sounds scary and mean, it's actually a form of corporate socialism whereby business travelers subsidize your Hawaiian vacation -- so shut up and be grateful.

To see why this is, let's look at the major cost components of a given flight.

There's the guys running around in khakis and golf shirts back at headquarters nattering about revenue-per-passenger-mile and other things that make us dizzy and slightly nauseated with boredom when we dwell upon them too long; have to have 'em, if only so there's someone to appear in the commercials explaning the company's last plane crash, so we all have to kick a little into the kitty to support them in the style to which they'd like to become accustomed.

There's the landing slots at the airport, which are very valuable and handed out in a byzantine procedure which no one, including the airlines, entirely understands.

There's the airplane itself. Every time you use the airplane, it takes a little more wear and tear. Imagine that there are a fixed number of miles that an airplane can travel, even with great maintenance; you've just dipped into the mileage piggy bank and spent a little of it, decreasing the value of the airplane in the process. This is known as depreciation, and now you know what that mysterious thing is you've been hearing about all these years.

That maintenance doesn't come free either.

There's the jet fuel. This is an enormous component of airline expenses, which is why every time Saudi Arabia sneezes, airline stocks catch cold.

There are ticketing and baggage systems and union negotiators and Commodore Lounges, and the slow-normal girl who you talk to when you have trouble with your frequent flyer miles. . . all these things have to be paid for out of the revenue from flights.

Then there's labor. Oh, boy is there labor. Every time the flight attendants go on strike for higher wages, guess who's picking up the tab?

From the point of view of the flight, all of these things are fixed costs; whether you carry one passenger or three hundred, they stay pretty much the same.

There are also variable costs on each flight, costs that vary by the number of passengers on the plane, but you're not going to offset your jet fuel costs with fantastic savings on cocktail napkins. Almost all the cost of every flight is fixed.

That means two things. First, the airlines want each flight to be as full as possible. And second, because the number of passengers is limited by the number of seats, they want to shake as much revenue out of each passenger as possible.

It also means that there is a lower limit on the number of passengers that a flight can carry and still break even. The numbers I've heard with our new, more stringent security regulations, are around 73% of the current, tightly seated, capacity of the airline. Obviously, not all flights make money; some are used as loss leaders, to sell into the lucrative business market. Still, on average, the planes have to be pretty full just to break even on an operating basis, which is to say, leaving aside investment and financing costs. And for the airlines to actually make money, which is by no means a regular occurrence, they have to be fuller still.

Can you see where this is going?

Fewer seats mean the airlines can carry fewer passengers. Which means that they have to get more money out of each passenger who flies. Let's look a one aisle plane. The aisles are as small as they're going to get; for starters, if they were any narrower, our friends in the fat acceptance movement couldn't get down them, much less the beverage cart. So where is that extra roominess going to come from? You know the answer; from removing a seat. In each seat bank. In a standard one aisle plane (three seats to a side), that would mean cutting the carrying capacity of the airplane by a third. As you may notice from some simple arithmetic, this means that at current prices, the plane would lose money even if fully loaded.

So how do the airlines finance this goodwill gesture? From the vast corporate vaults where they store their ill-gotten gains? Brother, find me a consistently profitable airline and we'll talk. Post 9-11, the idea is ludicrous. No, they'll get the money from you and me.

In other words, rather than losing a third of our seat, we'll lose more of our hard-earned cash. And why should we do this? So that the fat acceptance folks don't have to bear the costs of their weight alone. Where do I sign up?

I'm not entirely unsympathetic. I'm 6'2 and all leg, and I don't fit into normal airline seats; I spend the entire flight with my knees wedged around my ears. I hate flying with Wagnerian passion. It's miserable, time consuming, and it makes my ears hurt. I can tell you stories about unsympathetic short people that would make your heart bleed. . . and no matter how much I diet, those extra inches won't seem to come off.

And sometimes I ask myself why they can't just give me a couple of extra inches of leg room when it's not my fault I'm so damn tall. And as with most questions that start off "why can't they just. . . " the answer I give myself is cost.

Because I don't want to pay more for my tickets. And I'm damn sure that you don't want to pay more for my personal comfort.

And if I don't like it, I can always walk.

From the desk of Jane Galt:

Xerox was one of the

Xerox was one of the early innovators in the recent trend towards declaring mind-bogglingly large accounting errors.

However, like many early adopters, they found themselves eclipsed by late-comers with more refined technology: WorldCom and Global Crossing are setting new records in accounting disclosures.

But don't count Xerox out yet -- the company's a fighter. They just came back with another $1.9 billion charge for improper accounting.

From the desk of Jane Galt:

Amy Langfield on why we

Amy Langfield on why we shouldn't let things get back to too normal. Beautiful.

From the desk of Jane Galt:

I meant to blog this

I meant to blog this outstanding article by Arnold Kling, whose site you should be stopping by every day for a beautifully balanced view of the economic news. But I forgot. Luckily, I remembered again, and here it is.

Arnold offers some good reasons why blogging isn't a fad, and then goes on to talk about how the market could compensate it. Personally, I know the tip jar's been a little light these last few months, and I'm all ears.

From the desk of Jane Galt:

We've been named The Safety

We've been named The Safety Valve's Blog of the Day! You like us. . . you really, really like us. . .

From the desk of Jane Galt:

Supreme Court has okayed vouchers!

Supreme Court has okayed vouchers! Rah! Rah! Sis-boom-bah!

On the down side, the ruling was 5-4.

Well, from my recent post we all know how I feel about the establishment clause; it was designed to protect religion, not surgically remove it from the public square. Even beyond this, I find it hard indeed to see why parents executing private choices to pick religious schools for their children is an unconscionable "establishment" of religion, and I heartily disapprove of the people going to court to try to argue that the way in which other people choose to educate their children somehow violates their freedom of religion. All in the name of "the children" -- the ones they want to maroon in failing schools so the teacher's unions can have a few more years of life. Ick.

From the desk of Jane Galt:

WorldCom's in a big mess,

WorldCom's in a big mess, and many of you have questions about it, so I thought that I would, in my ham-fisted, amateur way, attempt to answer them. Most of your questions run something like this:

What the [Expletive Deleted]!!!!!!!

Good question. Let me see if I can answer that.

One of the driving forces at the end of the nineties was that most research analysts were rather like fiancees. They had developed unrealistic expectations of the future based on the very short, and unusually rosy, period through which they had just lived. In the case of the equity analysts, they had begun to feel that they were entitled to see beautifully rising earnings each and ever quarter even though it was clear that if one extrapolated their expectations into the not-so-distant future, Toys 'R Us would be producing more revenue than the entire US economy. Much like a fiancee who is told that she should not expect her prospective groom to indefinitely continue to give up his best friend's superbowl party in order to escort her to the mall, research analysts got very cranky when they were told that their dreams of infinitely expandable earnings might be a tad unrealistic.

Like prospective grooms, CEO's were very anxious to please the equity analysts, because they were very afraid that if they didn't meet expectations, their beloved would start throwing the wedding china at someone's head. Ha-ha, no, what they were really afraid of was that the analysts, and the shareholders who listened to the analysts, would hammer their share price. Of course, this would lower the value of their stock-based compensation. It might also lower the value of the rest of their compensation -- to zero, when the angry shareholders kicked them out. CEO's have wives, and wives say things like "You'd better not expect to hang around here all day, because the servants have work to do, and I'm not having you interrupt my bridge party, so if you lose your job at WorldCom, you'd better start talking to the assistant manager down at the Tasti-Freez ASAP." This combination of greed and fear bred an unhealthy willingness to shade the truth.

However, shading the truth just created more problems. Like the bridegroom who attempts to assuage his demanding fiancee by cancelling his tee-time in order to drive her to her hair appointment, they found that meeting unreasonable expectations once simply established more firmly in the analysts minds the belief that their expectations were reasonable and deserved to be met, and thereby worsened the tempest that would follow if such expectations were, for any reason, disappointed. CEO's were further incented to cheat, and each round of cheating both increased the size of the "adjustment" that would be necessary next quarter, and increased the consequences that would follow if the adjustment were not made. CEO's were praying for a boom to bail them out, much as the internet boom rescued AOL from its shoddy accounting in the mid-90's. When the boom failed to materialize, eventually the scam got so large that it could no longer be hidden, and the entire house of cards came tumbling down.

Does that answer your question?

What, exactly, did WorldCom Do?

Well, when WorldCom started feeling the heat, they looked around for ways to increase revenue. Unfortunately, what with all this competition stuff in the telecomm area, they found the same thing that you have probably found when you looked for ways to increase your revenue: that it's would require more effort than you care to expend. So they started looking around for ways to reduce costs. And just as with your last cost-cutting drive, this too foundered on the rocks of self-interest, so rather than trying to actually reduce costs, they sought ways to look like they were reducing costs, figuring that, as in most relationships, it doesn't matter what you feel inside, as long as the other party buys your act.

Specifically, WorldCom took one of its biggest expenses and changed it from an operating expense to a capital investment. The expense was the fees that they paid local carriers in order to complete long distance calls; they treated it, accounting-wise, as if it were the same thing as building new fiber capacity or putting up a new switching station.

So either way, it says they spent money; what's the difference?

The difference is in the accounting. Normally, when a firm spends money to provide a service, that money is recorded as having gone out the door, poof, hit the road jack and don't you come back no more. This is what's known as an Operating Expense, or what a layman would call "What I'm spending to stay alive". Capital Expenditures, on the other hand, produce a corresponding asset on the balance sheet: whatever the money purchased, such as land, machinery, or valuable fur-bearing trout farms. This is what a layman would call "My investments".

Think of operating expenses as your grocery bill; you spend the money, you eat the food. Your net financial position has deteriorated by whatever your grocery bill was this month.

Capital expenditures, on the other hand, are like buying a house. On the one hand, you've got less cash in the bank, and probably a hefty mortgage to boot; on the other hand, you've also got a house, which is presumably worth at least what you paid for it. Your net financial position doesn't change; you've simply changed your asset base from cash to house.

We, as wage slaves, are accustomed to thinking of income in a very narrow way: what we got paid. But the root idea of an income statement is to capture the change in the financial position of the company, otherwise known as its net assets: its assets (things is has, or has a reasonable expectation of getting, like factories or accounts receivable) minus its liabilities (things it's pretty sure it's going to have to give to someone else, like debt payments or accounts payable). Okay, breathe, little butterfly. You don't have to understand all the jargon; all you need to know is that when you record something as a capital expenditure, you don't record any net change in your financial position, because the decrease in cash, or increase in debt, is balanced by the asset that you are supposed to have purchased with your cash or debt; while when you record an operating expense, the decrease in cash, or increase in debt, is not counterbalanced by another asset, so that your net financial position gets worse; in other words, you lose income.

Clear? Next question.

Is this legal? Do we need to fix the law, or what?

Not hardly. You don't need another law for this one; it's quite clear. Capitalizing the fees they paid to local carriers to complete the calls made on their long distance network is the equivalent of your trying to tell your banker that the groceries you bought are actually a capital expense because they're, you know, in your house. Accruing mold at the rate of 1% a day, no doubt.

It's totally illegal, not even a vaguely close call, at least according to my CPA buddies. We don't need a new law; we need to find the executives who did this and throw them in the pokey for a long time.

I'm Confused

Don't worry; that's a common feeling in the post-millenial angst zone. Have you tried herbal tea?

What if I have other questions later?

Just shoot 'em along to janegalt -at- janegalt.net and I'll see what I can do about answering them.

From the desk of Jane Galt:

So an appeals court just

So an appeals court just ruled that its unconstitutional for students to be led in a Pledge of Allegiance that contains the words "Under God". And I know that you all rushed to your computers with the burning question: "What does Jane think about that?"

Well, on the one hand, I think that the words "Under God" don't belong in the Pledge. It's more sonorous without them. Go ahead, try it: "One nation, indivisible, with liberty and justice for all." And it doesn't belong in a nation where not all the people believe in God.

On the other hand, what the hell is wrong with our country that this kind of stupid liberal hissy fit gets raised to a constitutional case? I mean, c'mon. . . "my kid can't be exposed to the word God, because they might be so contaminated by it that they'll never recover, and there's no reason that I should teach her to skip the "under God" part, because why the hell should I be expected to display a little moral courage?" Okay, I'm ranting, but why are we wasting time on this? Is having those words in the pledge what the Founders were worried about with the separation of Church and State? No, dear, they were worried about burning heretics, not burning cheeks from the shame of Not Fitting In, as if never feeling uncomfortable were some sort of implied constitutional right.

And think of what else this implies. It means we can't ever have anything said in class that might disagree with someone's religious beliefs; bye-bye, evolution. It means that we have become a nation of such pantywaists that the mere word God can send both coasts into a swooping faint. Oh, I think the court should uphold him. And then I think we should all dedicate a tiny portion of the rest of our lives to making fun of the idiot who brought this suit until he's ashamed to show his face in decent company.

From the desk of Jane Galt:

WorldCom just reported the largest

WorldCom just reported the largest accounting fraud in history -- a $3.6 billion fraud in which expenses were charged as capital expenditures, which is, for the unitiated, a big no-no. It's also, curiously enough, similar to what Amtrak did in leveraging capital assets to cover operating expenses. Wahoo! Dorothy, get in the storm cellar!

From the desk of Jane Galt:

So InstaPundit has his own

So InstaPundit has his own Watcher: InstaPunditWatch.

However, for a site designed to fact-check InstaPundit's ass, there's curiously little, y'know, fact checking:

Instapundit Watcher will let slide the crack about being an affiliate of Warblogger Watch, though she won't deny their efforts helped inspire this site.

More interesting is how Instapundit reacts. He calls Instapundit Watcher a "parasite", which she learned in school is usually defined as a hanger-on, a toady, a sycophant. Instapundit Watcher defies anybody to call her that. That title better fits some of Instapundits warblogging friends, especially the ones with the oh so clever variations on the "-pundit" theme, aka the "I want Instapundit's traffic" crowd.

I don't know what college Instapundit Watcher attended, but my dictionary defines a parasite as "something that resembles a biological parasite in dependence on something else for existence or support without making a useful or adequate return". Which I think more than adequately describes a site called Instapundit Watcher.

From the desk of Jane Galt:

There have been a lot

There have been a lot of dumb corporate decisions in history. But somehow you knew that the dumbest was going to have to come from the same chaps who located two of their stores on either side of my building: one between 93rd & 94th, and one across Broadway between 94th & 95th. No, I am not making this up: they have two full service stores a block from each other. It gives whole new meaning to that immortal analyst pitch "It's like the Gap with coffee!"

[That's a little -- heh, heh -- in joke. The Gap is in trouble because they massively overexpanded when they were hot, and then had to retrench. -- ed.]

Yes, the folks at Starbucks have outdone themselves this time. I don't know whether they thought it was hip, or they just didn't notice. Either way -- dumber than a bag of hammers, folks.

From the desk of Jane Galt:

This Washington Post article makes

This Washington Post article makes the good point that we're blaming Amtrak for failing to fulfill the impossible task we've set it: run a bunch of impossibly unprofitable passenger routes through every whistle stop that has ever been served by passenger rail in every powerful Congressman's district, while not losing money like a lottery winner in Vegas.

However, I must take issue with the core assumption that running impossibly unprofitable passenger routes is something that every right-thinking citizen supports. Consider this telling quote:

Just about everybody is in the game: The Office of Management and Budget, the Federal Railroad Administration, several congressional committees, a consortium of banks that extend Amtrak credit, the rating agencies and a crew of auditors. The only constituency without a voice seems to be the hundreds of thousands of passengers in the Northeast Corridor, California, Chicago and elsewhere who will lose their mode of transportation if action to save the rail system is not taken immediately.

As far as I can tell, the only constituency without a voice is the large number of people who have never ridden the train and have no intention of starting, and yet are expected to dole out their hard-earned dollars in support of the abovementioned impossibly unprofitable passenger lines.

Or consider this treasure:

Under a starvation diet of subsidies, Amtrak still has produced the nation's first high-speed rail system [Which would be even better if it, you know, ran at high speeds -- ed.] and has kept a federally mandated unprofitable national route structure in business [Fantastic! There's nothing like keeping unprofitable operations in business to make a nation great -- ed.]. To balance this high-wire act, it has deferred maintenance and leveraged assets within its control. [Journo-speak for "It's mortgaged itself to the hilt to cover current operating expenses", behavior that would land a private CEO in a lot of hot water, if not the pokey. -- ed.] Passenger revenue has grown 44 percent in the past five years; expenses have kept pace with revenue until this year.[If you can't grow your passenger-to-expense ratio in a year when your major competition turns into a gigantic flying bomb, when should we expect improvement? -- ed.]

Or, you could just feast your eyes on this:

Highway users rely upon a highway trust fund generating more than $30 billion a year. Since Sept. 11, the aviation industry has seen a $17 billion loan-guarantee program added to an already significant government investment. Yet Amtrak, requiring a bare minimum of $1.2 billion a year, is budgeted to receive $521 million.

1) The highway trust fund is generated from passengers using the highways, which is how we'd like to see our trains be funded, thank you very much.

2) A loan guarantee is not the same thing as a direct subsidy because it is

a) One time
b) Worth less than $17 billion even in a worst-case scenario because a dollar tomorrow is worth less than a dollar today
c) Probably not going to cost $17 billion, because it is unlikely that every single airline will declare bankruptcy.

3) Go figure? We're not giving Amtrak any money because NO ONE IN THE COUNTRY WANTS TO RIDE THE TRAIN! You've probably noticed this, manifested in the lack of passengers on most of your trains.

Which is, of course, why he wants to hold them up at gunpoint to get more money. Imagine if Johnson & Johnson could do this. "Toothpaste sales are down! Quick, taxpayers, pay us for not making toothpaste!"

Take Amtrak out in the yard and shoot it quietly, then carve it up and give the pieces to teh needy. Or some such. But stop wasting our money.

From the desk of Jane Galt:

Very nifty post on the

Very nifty post on the judicial confirmation process by the inestimable Martin Devon.

From the desk of Jane Galt:

Sigh. Daddy Warblogs is reporting

Sigh. Daddy Warblogs is reporting that Neale Talbot of WarbloggerWatch has entered into the discussion of InstaPundit's visitor statistics with that tired old lefty chestnut: "[Name your discussion of something's size] is a proxy for penis size". Honestly. Psychiatry has moved past Freud -- why can't the left? Besides, which, even Freud admitted that sometimes a tree is just a tree. Every time I hear someone drag that old saw out, all I can think is "Oh, snore. Hasn't this person read anything since 1971?"

Which reminds me of a story.

I was working on a move at an investment bank. They were relocating into a beautiful new building with glass-fronted offices that reflected the 90's open office aesthetic without actually requiring the MD's to mingle with the proles. So, as is usual with relocations, chaos prevailed on the first day -- people who couldn't print, login, use their computers, what have you. I was just starting out in the industry, and as low man on the totem pole, was running around like mad trying to get everyone fixed.

So in the middle of all this I got a call from one of the MD's, who we'll call Ted Tyler. He was a large, burly Aussie with a flaming temper when he didn't get what he wanted, and I was quaking as I ran, not walked, to his new glass office. I am sure my voice trembled as I asked him what the problem was.

"This [expletive deleted] [censored] monitor," he said, gesturing to the piece of equipment in question. I stared at the monitor. It appeared, to my inexperienced eyes, to be working perfectly. I tapped it, moved the mouse around, turned it on and off, and still couldn't see a problem.

"What exactly is wrong with it?" I asked tenatively.

"It's too [expurgated] small!" he said. "I was walking around the floor and I looked into all the other offices and their [expletive deleted] monitors are much bigger than mine!"

"So you want another monitor," I said, simultaneously relieved and somewhat bewildered.

"[Censored] right, I do."

"How big a monitor would you like?" I asked.

He removed his cigar from his mouth and regarded me. "Oh, I want a big monitor. I want the biggest monitor you've got. I want a monitor twice as big as any other monitor on this floor."

I saluted and marched off to order him the largest monitor available -- a 31-incher designed for graphics stations and priced around the level of a mid-sized car.

Sometimes a tree is just a tree.

And sometimes, it's not.

From the desk of Jane Galt:

Well, it's been a hell

Well, it's been a hell of a week my friends, a hell of a week. I feel like the pulp that's left clinging to the side of the glass after you drink a glass of homestyle orange juice. I think I've invented a new cocktail:

The Jane Galt
Take six ounces of vodka
Place in water glass
Drink at once.

So now I'm off to the Poconos for a celebration (Happy Birthday, Tatiana!) Yes, that's right -- I'm heading to the land of horseback rides and heart-shaped beds, and a champagne glass whirlpool for two. I'll be back Sunday night. If in the interim you want to drop me a line pouring out your heartfelt adoration, or telling me how generally wrongheaded I am, just drop me a note at my new email: janegalt -at- janegalt.net. Don't use the hotmail box, as it's already full. Otherwise, tra-la, my little chickadees! I'll see you all on Sunday.

From the desk of Jane Galt:

KrugmanWatch Summary The Bush Administration

KrugmanWatch

Summary
The Bush Administration wants to privatise social security. This is a bad idea. Their report is bad. The people in the Bush Administration are bad. Someone deserves a good spanking, but we're not saying who.

Highlights
-- He's perfectly right that privatisation will play havoc with the government's accounting. Krugman correctly points out that establishing a private system means paying double: paying for current retirees as the same time as we are paying into private accounts.

Social Security as we know it is a system in which each generation's payroll taxes are mainly used to support the previous generation's retirement. If contributions from younger workers go into personal accounts instead, the problem should be obvious: who will pay benefits to today's retirees and older workers? It's just arithmetic: 2-1=1. So privatization creates a financial hole that must be filled by slashing benefits, providing large financial transfers from the rest of the government or both.

-- The weakest part of the argument for privatisation, and unfortunately about the only part that makes it into the media, is the argument that investors will suddenly become rich off their investments. The 90's are over, 'kay? Private accounts are not going to turn the nation's graybeards into itinerant millionaires anytime soon. Krugman hits on this every single time he writes about SS, and he's right -- those pushing private accounts are usually using inflated or unreliable numbers to exaggerate the potential returns.

Lowlights
-- Who cares what happens to the government's accounting? Government accounting makes Enron look like a model of financial probity.

Social Security is essentially a Ponzi scheme; the ones who get in early get a good payoff, and the later suckers get stuck trying to pay their rent with Amway crap. The government has covered this up by using those fake bonds in the "trust fund" to pretend that we aren't going to have to raise taxes, cut other spending, lower benefits, or borrow more money, soon. Even most people who are educated about the issue do not understand how soon the deficits will start affecting the taxpayers. Given this, who cares if the private accounts play havoc with the system?

Any money paid into it now comes out of taxes; any money paid to retirees later will come out of taxes. The trust fund is a myth. In ten years (sigh, people who want to rant at me can go to the SSA and read the numbers for themselves, 'kay? My numbers are right. I'm not arguing with you about this. You can read the numbers or not. I've read them, I know what they say, I know how they derived the projections, and I know the margin for error. Sshhhh! Zip it! You're wrong, and I have no interest in debating the matter. If you are merely ignorant rather than ornery, and you want an explanation rather than an argument, you can email me after you read what the Social Security Administration has to say.) or so, the tax revenues into the system from FICA will be less than the benefits going out of the system under the current regime. At that point, we will need to raise taxes, cut spending on other programs, lower benefits, or borrow money.

But the bonds! I hear you cry. Where do you think the money comes from to pay the bonds, my sweet? Say it with me: raising taxes, cutting spending on other programs, or borrowing more money. It's very nice that the Social Security Administration has equal standing with other bondholders (except it doesn't, because, among other things, the instruments are non-negotiable and don't count against the government's bond rating if it defaults) but it is irrelevant to the question of how much we, as taxpayers, are going to have to pay in taxes to cover retirees.

Note that exactly what Krugman complains we will have to do now to cover privatisation is exactly what we'd have to do in the future to cover non-privatisation.

So why do it now?

Because if privatisation is to work, the earlier the better; the money needs time to work. And that leverage works in the other direction as well; the longer we wait to do something about Social Security (whether or not that something is privatisation), the bigger the problem becomes. No, I'm not being alarmist. People make their retirement plans 10 or 20 years out based on current benefits. The longer we wait, the larger the pool of retirees and near-retirees who have not planned to live on lower benefits, and the smaller the percentage of workers who have not planned to pay another 5% of their income to the government every year.

-- Ultimately the point that establishing private accounts will mean paying more now is exactly the indictment of the sytem that Krugman is trying to avoid. Because, my little lefty buddies, ask yourself this: if we don't have the money to establish private accounts, then where is all the money from the "trust fund"?

It's in the farm bill and the prison system and the military and the Robert Byrd Memorial Parking Lot (formerly known as the State of West Virginia). It's gone. In other words, the reason we can't privatise is that this would reveal the fact that our politicians have been raiding the pension funds to cover operating expenses -- behavior that would put private executives in jail.

-- Then there's this:

A sample of [Bush administration man railing about a new report on SS]'s tactics is his insistence that private accounts don't weaken Social Security, because diverting money from the trust fund into those accounts doesn't reduce the total sum of money available — if you still count private accounts as part of the total. As they say in the technical literature, "Well, duh." Of course the money doesn't disappear — but it is no longer available to pay benefits to older Americans, whose own Social Security contributions were used to pay benefits to previous generations.

You know, I'd be sympathetic to this argument. I really would. If he weren't neatly reversing this chap's argument and using it himself.

This yahoo from teh administration is pulling some fast accounting to argue that there's no current cash deficit in the system if you include the private accounts in the system. In other words, he's looking at the asset base, rather than the cash flows, and arguing that we won't have to (One more time! Everybody sing it now!) raise taxes, cut other spending, shrink benefits, or borrow more money, because the money being diverted into private accounts will still be there, in the system. This is not true. It will be in the system, but it will not be available to pay current retirees.

Problem is, Krugman's doing the same thing at the other end. He's pretending that the mythical trust fund actually exists and that we will therefore not have to (Final chorus!) raise taxes, cut other spending, shrink benefits, or borrow more money, because the "Trust Fund" has the bonds -- without mentioning that in order to make the payments on the bonds, we are going to have to do exactly the same things to make the pension payments as we would if the bonds were not there.

But the issue is not, as he tries to paint it, whether we have to do these things; only when. The Bush administration has no monopoly on wishful numbers.

-- So why is the Bush Administration doing this? Yes, Pete, sit down; I know that you want to tell me it's because Bush and His Evil Capitalist Cronies are Trying to Take Us All for A Ride. Thank you for your opinion, now please SIT THE HELL DOWN.

No, the Bush administration is putting out these wacky numbers because it wants to sell its program.

And why does it want to sell its program? Yes, thank you, will someone please escort Pete to the men's room? His brain appears to be leaking out his nostrils, and it's ruining the carpet.

It wants to sell privatisation because the Administration believes (no, really!) that it's the right thing to do; just as Clinton, whether or not you agreed with him, believed about NAFTA and Universal Health Care.

So is it?

Well, here's my take on it; it seems to be shared by most of the economists I know.

The benefit of privatisation is not that it will provide outrageously amazing returns; if the economy is growing at 3%, stocks are not going to return 8% year after year. The risk premium isn't that big.

The benefit of privatisation is that it diverts resources into productive investments that the government can't make.

It is black-letter, I'm-not-going-to-argue-about-this-because-it's-proven-beyond-a-reasonable-doubt economics that the government utilizes resources less efficiently than private enterprise for a number of reasons, most of which are some variation on the agency problem, the free rider problem, or the tragedy of the commons. This is not to say that private enterprise utilizes resources perfectly efficiently; only that it is more efficient than the government.

The most basic reduction of the social security crisis is this: currently, each retiree collecting social security is supported by more than three workers. By 2050, that number will be less than 2. If we want to have more people supported by fewer workers without an overall decline in the standard of living, we are going to have to increase the productivity of workers. This is true whether they are taking their living out of the economy through government payments, or payments from private industry. It is the (correct) opinion of the privatizers that investing in private companies now is vastly more likely to produce the productivity increases we need in the future than spending the money (now) on the Trent Lott Memorial University of Mississippi Hogback Research Center and such.

Because money spent by the government almost never increases productivity. The farm bill isn't going to increase productivity, except of things we already have in excess. The military doesn't increase productivity. The many, many "social investment" programs have (look up the numbers yourself!) a dismal productivity record. Of course, that isn't the only reason we have those programs -- but the privatizers (rightly, I think) conclude that making sure that the workers of the future can support all their societal dependants in some modicum of comfort is more important than making sure that every underprivileged green-haired lesbian mother is being the absolute best that she can be.

By taking money out of the tax system and plugging it into private investments, the privatizers hope that productivity increasing investments will plug the demographic gap. They want to get the money out now in order to give the money time to work; investments take time to pay off.

The cheerleaders, like all cheerleaders, play down the problems. For one thing, there's no guarantee that the investments will increase productivity by the amount needed. For another, there's the possibility of distortionary effects on the market and the economy that can't be ignored. And then there's the Keynsian excess savings argument, which I find somewhat convincing, at least to the extent that investors generally overestimate probable returns. Privatizers are not unaware of this; they simply think that the alternative is worse. Leaving the money in the government's hands means lower productivity. And while other changes that have been proposed to fix the current system are certainly necessary and good, there's no reason to think that they will be sufficient; to take just one example, is it really reasonable to think that people are going to work until they are 75? Some people are healthy at that age, but a lot of people aren't -- and the ones the most in need of government support are also the ones most likely to be in jobs that are too physically demanding for a senior citizen.

Howlers

"It is difficult to get a man to understand something," wrote Upton Sinclair, "when his salary depends upon his not understanding it." To make sense of what passes for debate over Social Security reform, one must realize that advocates of privatization — of replacing the current system, at least in part, with a system of personal accounts — are determined not to understand basic arithmetic. Otherwise they would have to admit that such accounts would weaken, not strengthen, the system's finances."

Those wacky economics professors of mine -- poor sods didn't understand arithmetic! That's why they ended up at Chicago, famous refuge for Economists Who Can't Do Math.

Predictive Validity

Singles out the Bush administration. I'm tempted to take off points because he's right; but after accusing the other side of what he himself is doing, not that tempted. PV stands at 9 out of 11, or 82%.

From the desk of Jane Galt:

KrugmanWatch Teaser Something bad happened.

KrugmanWatch Teaser

Something bad happened.

It's the fault of the Republicans.

Current Predictive Validity of Charges of Krugman's bias: 8 out of 10, or 80%.

From the desk of Jane Galt:

Okay, personally, I think that

Okay, personally, I think that executing the mentally retarded is wrong. Of course, you'd expect to hear me say that, because I'm against the death penalty. But I think that executing the mentally retarded is even more wrong; mental children should not be punished as adults.

But what is this "evolving national consensus" nonsense? If there were such a consensus, legislators wouldn't make laws that allowed it, and DA's, hyper-political creatures that they are, wouldn't prosecute. What the Supreme Court is saying is that they want the national consensus to evolve in that direction, and are therefore giving it a kickstart by imposing their consensus on everyone else.

I'm a soft communitarian: I believe in the hidden law, and that within reason, it's okay for us to get the right result with the wrong legal argument. But when the court is this high, a good result from bad legal reasoning is worse than a bad result from good reasoning, for it opens the door to an unknowable number of bad rulings to follow.

From the desk of Jane Galt:

The law of unintended consequences

The law of unintended consequences in action:

First, the Communist revolution encourages a huge baby boom. Mao dismisses worries about overpopulation by saying "every mouth to feed also comes with two hands and feet." Fails to notice that it does not also come with two acres of arable land, that being the minimum needed to support life in a country dependant on pre-industrial agriculture.

When the Chinese notice that they now have over a billion people, and that the country can't really support two billion in the next generations, they implement the draconian "1 child" policy.

Unintended result: the country now has 40 million more men than women.

From the desk of Jane Galt:

Apple just gave notice that

Apple just gave notice that it's going to miss its earnings targets by 10%.

Now I'm interested: will the "Mac is going to rule the world! 20% market share by 2005, baby!" crowd react to, overreact to, or ignore, this information?

From the desk of Mindles H. Dreck:

Gone Fish and Chipping

I'm off to London to celebrate my 15th wedding anniversary. This is a laptop-free trip. I'll be back Sunday night.

The post on why Dominic Basulto hasn't considered the long arm of securities regulation will have to wait.*

Cheers.

* As I said over on the right, an investment blogger would have to disclose his own holdings, create a compliance infrastructure to vet his blog, which would be both research and an advertisement, and he would be vulnerable to touting accusations a la Jonathan Lebed.

From the desk of Jane Galt:

Josh Marshall thinks Pat Buchanan

Josh Marshall thinks Pat Buchanan is Deep Throat.

I'm not saying he's not; frankly, I don't care enough to know anything about the subject. But some of the reasoning's hilarious:

One of the great mysteries of Watergate and Deep Throat's identity is why exactly he's wanted to remain anonymous for so long. I mean, during Watergate? Sure. For a while after? Fine. But ten, twenty, thirty years later? Deep Throat may be an odd figure in American history. But for most he'd be a hero, someone who turned on a corrupt administration, the ultimate whistleblower, etc.

After all this time, why wouldn't this person come forward to get some of the limelight?

It's hard to figure ... unless he was someone still operating in those Republican circles where that sort of disloyalty would be very damning and even career-threatening. That is, unless it was someone like Patrick J. Buchanan.

It seems to me that if Buchanan were really concerned about alienating his peeps in the GOP, he'd be more worried about, oh, say, his running for national office on a third party ticket and thus siphoning off some of the party's base during a tight election year than he would about admitting he blew the whistle in a 30 year old political scandal.

But I'm just a lone weblogger. What do I know?

From the desk of Jane Galt:

KrugmanWatch Summary Congress is considering

KrugmanWatch

Summary
Congress is considering a prescription drug benefit. The Democrats are nice and have a good plan. The Republicans are mean and have a bad plan. Neither plan is probably going to get passed.

[For which we can all humbly thank God every day -- ed.]

Highlights
-- The best part of the article describes adverse selection, which is a major problem with all types of insurance, but especially those designed to cover risks that are already known, such as current prescription drug costs; only those with above-average risk/consumption will want to buy the insurance, so the average cost goes up, so the insurance company has to raise the price to the new average cost, which means that all those with risk/consumption below the new average cost drop out. . .

-- He does a good job of describing why Medicare doesn't cover prescription drugs

Lowlights
-- He predictably shills for the Dems single payer model, but glosses over the most probable outcome of such a plan, which is to destroy the pharmaceutical market for new drugs that are primarily consumed by the elderly. Why? We've been through this before; such a plan will inevitably involve bargaining the price of the drugs consumed by those over 65 to near marginal cost, which will mean no one wants to undertake the task of researching new drugs for that market.

-- He repeats forecast numbers as if they are actually meaningful, so that he can compare them with Bush's tax cut -- and hey! Where's the guy who was complaining about the Bush administration relying on far-off cost calculations?

-- More to the point, if they're political numbers (and they are) those numbers are projected on a trendline; in other words, they assume that having someone else pay for your drugs has absolutely no effect on your consumption of drugs. Done this way, I was recently told, the current cost of Medicare would be 1/10th of what it actually is. The Dems say that their plan would cost $500 billion over ten years. Hah! Want to bet?

Predictiva Validity Test Shills for the Democrat plan; criticizes the Republican plan. PV of 1. Current PV is 8 of 10, or 80%.

From the desk of Jane Galt:

Okay, so I cheated. I

Okay, so I cheated. I didn't read the column, but I did see the teaser, so I knew it was going to be about prescription drugs. That's how I knew that Paul Krugman would be plugging the Democratic plan.

[Memo to those who ask how the predictive validity is relevant: if I can predict, before I read them, that Paul Krugman's arguments will inevitably bolster the Dems, how compelling do you think those arguments are from an objective viewpoint?]

From the desk of Jane Galt:

Krugmanwatch Teaser Something bad happened.

Krugmanwatch Teaser

Something bad happened.

It's the fault of the Bush Administration.

If we'd only listen to the democrats, the planet would be saved.

Current predictive validity of accusations of Krugman bias: 7 out of 9 or 78%.

From the desk of Jane Galt:

So here's a serious offhand

So here's a serious offhand question: why the hell do women in Saudi Arabia and like countries cover themselves head to toe in black?

No, that was not an invitation for comments about the Islamic interpretation of the Koranic verses regarding the attire of women (which do not, by the way, mention anything about dressing up like a bed every time you leave the house). What I want to know is, why black? In the world's hottest, sunniest, most miserably prickly-heat-inducing climate, why are these women wrapping themselves in fabric that absorbs heat rather than reflecting it? I mean, maybe the images I'm seeing on television are not a representative sample, and the women only wear black for formal occasions like anti-US rallies. Does anyone have an explanation for this?

From the desk of Jane Galt:

Funny how when the New

Funny how when the New York Times rails against special interests lobbying the government for tax breaks, it forgets to mention the $80 million the Gray Lady is planning on costing New York City withthe sweetheart deal it got for its new building.

From the desk of Jane Galt:

Every so often I ask

Every so often I ask myself why I do this. Why do I keep reading stupid European columnists saying incredibly stupid things about America, things that they would pounce upon like a flaccid, over-cooked, smothered-in-cream-sauce-and-capers wedge of trout if we said such an ignorant, limited, foolish thing about their little plot of blessed soil? Why do I do this to myself?

Take this [expurgated] [expletive deleted] from the Independent. There are, of course, many things to criticize in the Bush administration. And what does this lackwit git seize upon? His foreign policy? His trade protectionism? His uncertain compromise on education?

Why no, of course not. The problem with our president is none of those things, you see; it's his grammar.

I consider myself something of an amateur grammarian. I reveal myself now as that difficult person who spoiled the curve on the SAT's. The Chicago Manual of Style is my bible; Strunk and White, my concordance. I have friends who can be found, in the midst of arguments, shouting "you are not supposed to talk like you write!", which is to say in complete sentences and without split infinitives or incorrect transpositions of "like" and "as".

All of which is to say that I am second to none in my horror of the sin in which the columnist has caught George W. in flagrante delicto: the misplaced modifier.

I have lost count of the times I have been ticked off in recent months, sometimes by quite senior politicians, for suggesting that George W Bush is a complete idiot. He is nowhere near as stupid as he seems, I have been told, a proposition that has some force solely because it is hard to imagine any world leader being afflicted with quite the degree of bovine incomprehension that the President habitually displays. On Monday, for instance, he was on cracking form, announcing in halting English – you'd think he'd be fluent by now – that a dangerous terrorist had been detained and "is now off the streets, where he should be".

As so often with Bush's pronouncements, what he appeared to say – that terrorists should be on US streets – was the opposite of what he meant. Unfair, unfair, his defenders will say: we have never claimed that our man is an accomplished public speaker.

Or they might point out that no one in the entire known universe, not even writers for the Independent, speaks in perfectly arranged sentences every moment of their life because that is not how the human brain is constructed; making sure that none of our modifiers dangled or modifiers were misplaced would slow down conversation to a crawl. The purpose of rigid grammatical rules, in writing, is to substitute for the redundancy inherent in conversation: the context, tone, body language, and ultimately, the ability to correct a misapprehension immediately which, should it occur with a piece of written work, would remain uncorrected.

Of course, this is not an excuse for horrendous grammar, in speech or in writing. Yet the lapses upon which the press pounces are inevitably trivial, evident only in transcripts of speeches; the speeches themselves, when viewed, are perfectly comprehensible. Of course, I may be setting the bar a bit too high in the case of this columnist; as a friend once remarked, the first thing she assumes when she hears that someone is a European journalist is that they are probably just a bit thick.

Of course, it may just be the language barrier. For example, Americans customarily view it as -- I'm afraid I don't know the word in your language -- wrong to use a complete clause as a parenthetical expression, especially when its content is not parenthetical but integral. However, since I understand that the journalist, being unfamiliar with the rules of our language, may have made this mistake inadvertently, I will not draw the logical inference about her total [deleted] stupidity that her article seems to suggest.

Fine, but my other reaction to the announcement – I am being unusually frank here – was, "You credulous git, do you believe every single thing anybody in the administration tells you?" US intelligence agencies are trying to deflect accusations that they failed to pick up warnings of last September's suicide attacks and desperately need the kind of crowing headlines – "US foils al-Qa'ida 'dirty bomb' plot" – that the announcement prompted.

Hello, I'm from the Royal Non-Sequitur Society. Tea cozies make lovely summer gifts!

Did I miss a memo? Was a transition edited out in order to save space for the earth-shaking observation that Bush does not deliver his informal remarks in gilt-edged, copper-plated sentences scripted by one of the itinerant Flauberts on his speechwriting staff?

I am lost. I was wandering around in Bush's grammatical errors, admiring the scenery, when the columnist coshed me on the back of the head and, while I was out, dumped me in the uncharted territory of his foreign policy mistakes. Now, like any kidnapped American tourist, I am in trouble. I don't know how I got here. I don't know why they've brought me to this place. And I haven't the faintest idea as to how I get back to somewhere I recognize, much less somewhere I'd actually care to be.

But the administration was soon backtracking, accused of exaggerating the importance of a US citizen known as Abdullah al-Mujahir, a former Chicago gang member who converted to Islam and changed his name in prison. The deputy defense secretary, Paul Wolfowitz, admitted "there was not an actual plan" to set off a radioactive device in Washington, and it now seems that al-Mujahir's research had not gone much further than surfing the internet. Nor is it clear why he was arrested while on a reconnaissance trip to the US from Pakistan on 8 May, after being under 24-hour surveillance since February, when further observation might have yielded valuable information about al-Qa'ida associates .

It must be the language barrier. The thesis of the article appeared, to my American eyes, to be that he was stupid. Then it appeared to be that he was a liar. I had attempted to synthesize these two into the thesis "Bush is a stupid liar", but this is seemingly belied by her plaints that he has put one over on Britain's senior politicians. With the new paragraph, however, I've given up. Clearly, she doesn't like the Bush administration, and harbors a sneaking fondness for those who wish to blow up things in America. But there does not seem to be any unifying thread holding it all together.

[Yes, I am starting my sentences with conjuctions. I revel in it. And occasionally, I do it just to prove I can. I dare you to correct me. I dare you. I'll have you up to your ass in incorrect idioms and dangling particples faster than you can say "William Safire".]

Meanwhile, a terrorist whose plans were at a rather more advanced stage succeeded in bombing the US consulate in Karachi on Friday, killing 11 people. None of this seems to have fazed the President, whose announcement about al-Mujahir coincided with a decision to transfer him to military custody, thus avoiding the embarrassment of having the more lurid allegations against him tested in open court. Bush's Defense Secretary, Donald Rumsfeld, was not so lucky, having been foolish enough to make grand claims about al-Qa'ida operating in the disputed border territory of Kashmir without a shred of evidence. Rumsfeld's announcement during a visit to India on Wednesday collapsed under questioning from journalists in Islamabad. "I don't have evidence and the US doesn't have evidence of al-Qa'ida in Kashmir," he admitted.

Still looking for evidence to any of the originally identified theses. Stupid? Nope. Liar? Nope. Columnist went out last night on the premise that she'd just write it in the morning, but rosy-fingered dawn has found her too hung over to think straight? Ah. . . .

That is not to say I underestimate the threat from Islamist groups whose motivation is as much their complex and ambivalent relationship with secular modernity as the genuine grievances – the US's uncritical support for Israel and undemocratic regimes such as Saudi Arabia – felt by moderate opinion in Arab countries. But what I am suggesting is that the response of Mr Bush and leading figures in his administration, with the exception of his sadly marginalized Secretary of State, Colin Powell, is akin to a bunch of ham actors staging a noisy hunt for pantomime villains. Think about the search for Osama bin Laden and the Taliban leader, Mullah Omar, whose whereabouts appear to be as great a mystery to Bush, Rumsfeld, Dick Cheney and John Ashcroft as they are to readers of this newspaper.

A-ha! She's found her nut graf! And I realize that I too, have been leading one of those noisy pantomime hunts -- and that was the point the entire time! She makes us think she's a marginally competent thinker with a thin veneer of recycled wit, when actually she's staging one of those elegant structural prose excercises that used to captivate writers before they abandoned elegance in favor of navel-gazing.

This reminds me of a story.

When I was in college, some of you may be aware that I majored in English. During my stay there, I perfected the art of working exactly hard enough on a term paper to get an A. This was not, I regret to confess, always very hard. In an ideal world, I would have worked as hard as possible, motivated by the pursuit of knowlege, rather than grades. However, in many of my classes, knowlege was rather thin on the ground, and pursuing it would have interfered with my other pursuits, of which more later.

At any rate. I was given an assigment in one class to write about similarities and differences between Uncle Tom's Cabin and a book called Incidents in the Life of a Slave Girl, which was a slave narrative from before the civil war. As I racked my brain for something to say, it occurred to me to comment on the fact that the actual slave narrative spoke much more kindly of the slave owners than did Uncle Tom's cabin, even though some fairly horrifying things had happened to the author's family. I therefore hit upon the idea of writing about Stockholm Syndrom, which you probably already know is the phenomenon whereby captives (in the epynoynmous case, hostages in the embassy in Stockholm) come, through a mixture of proximity and terror, to identify more thoroughly with their captors than their rescuers.

Tossed off the paper and handed it in. A month passed. Finally, I got it back from the graduate student who had graded it who said, "That was the best undergraduate paper I've ever read. I didn't understand all that stuff you said about Helsinki, but it was incredibly well-written and thought out." Now, keep in mind, I'd written the paper in a couple of hours and forgotten it as soon as I'd handed it in. I couldn't remember what I'd written about, but I was mystified as to how Helsinki might have entered into it. So I smiled and nodded and took back the paper -- A+ -- and read it as soon as I was out of the TA's sight.

I'd been so carried away with my Stockholm Syndrome idea that I'd forgotten to define the term.

Now, this was the backbone of the paper. If you didn't know what Stockholm Syndrome was, it was literally impossible to understand what I'd written about -- I tested this thesis by handing it to multiple friends who had never heard of Stockholm Syndrome.

The TA had given me an A+ because he didn't understand what I was talking about, and therefore figured that I must be smarter than he was, and therefore figured that my paper must be good. That, my friends, is the secret to success in this world; confuse them, then take the money and run.

And what does this have to do with the rest of this post? Well, at first glance it might seem to be an unrelated digression. But dig deeper. You will notice that while the individual paragraphs of my post may have nothing to do with each other on the surface, you are actually being cleverly led to the inescapable conclusion. Which is that I am not very clever, and also that I am insane. Which is exactly the same conclusion I have reached about the author of this piece.

It all comes together now, doesn't it? Take that, PoMo.

Readers of this newspaper, however, are not supposed to know that kind of stuff. It is not your job, or mine, come to that, to have advance knowledge of terrorist outrages. But we are entitled, in a world where what the US President says may affect all our lives, to expect something better than the overblown claims and ignominious climbdowns that are the hallmark of this ignorant, inept administration.

We are entitled, in fact, to direct US foreign policy, even though we have just proclaimed that it is not our job to know anything about potential threats, security issues, or US goals.

How will we do this, you ask? Luckily, the Psychic Friends Network is still operating in Britain.

Frantic displays of patriotism, random round-ups of hundreds of foreigners and unverifiable claims about imminent terrorist attacks cannot conceal the fact that its members do not know what they are doing; any day now, I expect to hear that Switzerland, or perhaps Belgium, has been added to the axis of evil.

You see how I have cleverly foreshadowed the discovery that this columnist is trying to fight a battle of wits with a regiment that's half-strength.

It is not just Mr Bush, as I naively hoped, who is absolutely clueless.

She fooled you all! You thought you'd found the nut graf earlier, but here it is; clever modern inverted design. And it is impossible to disagree.

No, I think we've all got our eyes on someone else who fits that description.

From the desk of Mindles H. Dreck:

Rewrites

Due to implausible interest from more mainstream media, I have spent some time re-working two old posts. I'm particularly pleased with the new version of "Save Me From Important", especially since I've worked in both Hegel and Flanders & Swann. Have a peek.

From the desk of Jane Galt:

I've gotten some emails over

I've gotten some emails over the past few months from liberal correspondents who seem to be unaware that there are economics departments outside of Stanford and Berkely.

Specifically, several of them have mentioned that they have no interest in economists who do not come from those two august institutions, because they seem to be "generally wrongheaded". One correspondent has stated that he refuses to read other economists because "they're a waste of time".

What's shocking is that this fellow works at a University.

Okay, it's not shocking that he's liberal. But it is shocking that he would choose to take all of his economic information from a single school. I went to possibly the most reputable single school in economics, and I wouldn't limit my reading to Chicago economists; for one thing, I'm suspicious of some of their more aggressive theories, and for another, there's a lot of good work going on at other schools; it would be ridiculous to confine myself to one or two departments, no matter how fine. In addition, programs usually end up specializing to some degree, because powerhouse economics professors, just like famous professors in other fields, attract young professors who want to work in the same specialty. So a great program for energy economics might be only mediocre in, say, labor or trade.

But it did make me think more generally about the phenomenon. What are we saying when we say that there are only one or two schools we like? Well, for one thing, it means that the programs are probably outside the mainstream of their profession. Now, they may be doing excellent work. They may even be right; for a long time, political scientists could only work on certain theories at Rochester, because departments everywhere else were in violent, pig-headed disagreement with their ideas. But the broader the scope, the less likely that this is so. In other words, if you think Chicago is the last word in Finance, that's one thing; if you've decided that they are the Only Source for economics of all kinds, you're probably seeking confirmation, not information.

Academic departments, like any organization, are prone to being colonized by those who shut out, through selective hiring, those who disagree with them; that's why companies develop cultures and regulatory bodies almost never change their style after the early years of their inception. The tenure system only makes this more likely, as the colony sticks around for the next fifty years to make sure none of those bad-type people with different ideas get on board. It doesn't happen with every institution, or every single brand of thought, but I think few who have labored in academia (or seriously considered doing so) would fail to recognize the phenomenon.

Which is why I found it surprising that a reader with academic experience would confess that they are so disinterested in learning things about economics that they refuse to have any truck with information sources outside of Northern California. They can't be unaware of the likelihood that these departments, if they are so comfy and other departments are not, are probably colonized by a particular brand of politics. And even if you share those politics, it's still a very good idea to seek information from non-believers.

First of all, all scientists look for data that confirms their beliefs; peer review mitigates, but does not eliminate, this bias. (Ironically, this has been demonstrated by multiple peer reviewed studies, including ones which reviewed not social science, but Biology and Physics.) So it's important to seek academics from the other side; even if you don't agree with their conclusions, they will have apprehended the weaknesses and potential downfalls of your theory more fully than you have. And second of all, in a field like economics there is always the hope and expectation among many in a top-flight department of working in some administration; work does get curtailed or steered away from things which might hurt your chances with your political party of choice. J. Bradford DeLong and Larry Summers are unlikely to voice cogent criticism of the Clinton administration, any more than you'll expect to see Larry Lindsay headlining the problems with Bush's economic plans in 2 or 6 year's time.

A toiler in the groves of academe, even one who isn't a professor, should know this. That's why it's odd that you would say this to me. It's tantamount to saying "I have no interest in finding any information that does not confirm what I have already decided to believe." Okay, but then why do you want to get into an argument with me? It is unlikely that you are going to pop up with some startling economics I haven't seen before (given that we're usually arguing matters of broad public interest); I'm probably not going to be converted by someone who isn't better versed in the subject than I am; and I am certainly not fulfilling your stated goal of keeping you free from uncomfortable facts.

On the other hand, you're reading the site. Probably you're just reading it to find things to rant about on your own web site, but hey, the smallest journey begins with one step. So welcome, pinko trolls; stay awhile and let's chat.

From the desk of Jane Galt:

James Lileks is trying to

James Lileks is trying to make me hang myself.

Oh, sure, he acts all innocent, like all he's trying to do is write about his dog. Bah! I say, and Bah! again because it felt so good the first time. What Lileks does, of course, under the guise of producing his daily bleat, is write about dogs so beautifully and completely that there is nothing left to say about doggishness except that Finnegan appears to be the coolest dog ever in the entire universe and also makes me laugh like a child.

From the desk of Mindles H. Dreck:

We've heard this song before

To the authors of the ridiculous letter published in the Guardian, I have only these lyrics, from the immortal Flanders & Swann. Perhaps they might consider using them in their next communication:

Some folk like music, some folk like tea, Some folk like women, they're not for me. Here is my motto, simple and terse: Everything;s lousy, and going to get worse! Oh, I wish Oh, I wish Man had never evolved from a fish. Oh, I wish I were dead, Wish I'd been dropped on my head, Broken my neck, lost the toss with a bull, Parachute jumped and forgotten to pull, Oh, I long to be dead, Wrapped in a casket of lead, Wish I'd been drowned in a barrel of stout, Dived off the pier when the tide was still out.

The grave, the grave,
Is a fine and private place,
The grave, the grave,
And who the hell wants to embrace?
I wish, I wish I were dead,
Laid out with a lilly in bed,
Wish that I'd drunk some carbolic for fun,
Tested the trigger while cleaning my gun,
Or just shrivelled up in the heat of the sun,
Oh, I wish I were dead, dead, dead,
Oh, I wish I were,
Oh, I wish I were,
Oh, I wish I were,
I wish I was dead.

P.S. - A "Spoken Word Artist" (see 'Saul Williams' among the signatories) is apparently a Poet.

From the desk of Jane Galt:

Chris Suellentrop offers some timely

Chris Suellentrop offers some timely advice on becoming the next world-famous Evil CEO. Finally, a reporter delivers a handy how-to guide in a simple, easy-to-read format. I smell Pulitzer.

From the desk of Jane Galt:

Bill Quick has a post

Bill Quick has a post on medical residencies that I think is interesting. I've commented there on the economics of it, but I just want to say that this is a law I'm actually in favor of.

For those who aren't aware of it, medical residents work shifts between 24 and 48 hours, even though they're technically not supposed to. I've had doctors I know argue about how this isn't so bad and the doctors are used to it. My Aunt Fanny. I've worked 24 and 48 hour shifts, and I don't care who you are or how well trained you may be, after you've been awake for 36 hours you are stupid. It takes longer to make decisions. You get easily distracted and confused. You forget things. You get short-tempered and don't think things through.

But Jane, you say, you did it.

Okay, but I was working on a box of bolts. If I made a mistake, the worst thing that happened was I had to reboot and try again. If doctors make mistakes, people die. Miserably fighting exhaustion is not the condition I want my doctor in.

Moreover, the reason that residents are in that condition is that they are victims of a cartel. They work these outrageous shifts for low pay because there is no Option B except writing off the $100K of debt they've acquired and joining Uncle Fred in the air-conditioning business. If hospitals actually had to compete for residents, these conditions would disappear. But because they engage in what is essentially a wage-fixing cartel, the residents have to work hours that put our lives in danger.

So for everyone who wondered if there are any laws that Jane supports, here's one: down with the medical monopoly! Long live the market!

From the desk of Jane Galt:

I've gotten several angry emails

I've gotten several angry emails claiming that I called Brad DeLong a partisan hack, with tedious defenses of his economic work.

I don't think that Brad DeLong did anything wrong by talking up the stuff he worked on. Presumably he believed in what he was working on; one assumes that that's why he did it.

Nor do I think Krugman did anything particularly wrong by citing him on the topic. But in the same way that you wouldn't mention Ken Lay's opinion on energy deregulation without mentioning he headed a company that stood to benefit from it, you don't cite someone on the subject of work they did without mentioning they're the author. "Jane Galt of New York calls Live from the WTC without a doubt the finest web site in existence." More compelling if you don't know I'm the author, no?

It's not a mortal sin. But it's nonetheless true that he should have mentioned it.

From the desk of Jane Galt:

KrugmanWatch We're inaugurating a new

KrugmanWatch

We're inaugurating a new format for Krugmanwatch.

It's gotten kind of petty. I mean, he's partisan, but hey, so am I, at least until the Bush administration does one more protectionist thing, at which point I'll be joining the Kruggy brigade as we light up the torches and head for the castle. So I'm not going to pick on the cheap shots or petty partisanship, or dissect the column line by line; I'm going to present the highlights (things I liked) and the lowlights (unspinning the spin). Then I'm going to assess predictive validity on the following scale:

0 Does not single out Republicans or the Bush administration for ridicule over Democrats
.5 Blames Republicans and/or conservatives for a substantial portion of ills in our society, but does not name names
1 Singles out specific Republican politicians or the Administration to blame for a substantial portion of ills in our society, while wholly or partially absolving Democrats from similar sins.

We also have
- .5 Blames Democrats and/or liberals for a substantial portion of ills in our society, but does not name names
- 1 Singles out specific Democrat politicians to blame for a substantial portion of ills in our society, while wholly or partially absolving Republicans from similar sins.

But since this hasn't happened in the history of the column, I wouldn't bother to remember it.

Now, onto the column.

Summary
Inequality is increasing in our society. We should be worried.

Highlights
It's an interesting topic, and certainly, it could be worriesome.

Lowlights
-- Where's the beef? The whole article is a complaint about the inflation of CEO pay, based on the pay of the top 10 CEO's from 1980 to now. But there's no sense of whether this is a class-wide phenomenon, or simply a couple of guys who got very lucky. The top CEO's he cites have an annual income not that much greater than Michael Jordan's. Is Michael Jordan the harbinger of a new plutocracy?

Perhaps, but there's no other data. It's like deciding that society is doomed because the income gap on your block has widened; on the one hand, Bill Gates now lives on your street, and on the other hand, your neighbor's brother Bob is out of rehab and living in the Gazebo. Does this portend a crisis, or a statistical anomaly? Who knows.

-- What about inflation? CEO pay, if left unchanged from its $3,500,000 height, would be over $7,000,000 today -- which is not $154 mil, but not chicken feed either. Likewise, if left unchanged until 1988, it would have been $4,825,000. These are not inconsiderable gains.

-- What about growth? I couldn't, in my quick scan of the net, find a good chain-weighted measure of the change in median income, but per capita GDP has increased by about 50%. So even if our CEO had gotten no net increase except inflation and GDP growth, he'd be making around $10,500,000. So the correct inflator is not 43 times (and doesn't 4300% sound so much scarier than 43x?) but around 10 times.

-- Most of that extra income is in stock. Those CEO's did well because their companies did well.

And of course, now some of those companies aren't and the CEO's are parachuting away. And it's tempting to say "there ought to be a law". But fer goshsakes, what law? No estate tax is going to make these CEO's any less feckless, nor can you pass a law against bad judgement; you'd freeze the economy in its tracks, as everyone refused to take any risk or make any decisions. And a law telling CEO's not to be such screw-ups wouldn't prevent these golden parachutes they've written themselves.

What would? Who are these yahoos hurting? The shareholders. Who could have prevented them from writing themselves sweetheart deals with captive boards? The shareholders. And why didn't they? Because the little shareholders don't have a clue, and don't know that they don't have one, and the large shareholders are often short-timers. The institutional investors that hold these stocks could get serious and start demanding some long term value from the CEO's.

But how do you make them do it? Mutual funds and pensions are already some of the most regulated entities this side of kiddie porn. It hasn't made them any more sensible either, at least not to judge from my last Fidelity statement. And again, the law would be worse than the problem it's designed to replace; telling mutual fund advisors "If you don't do the right thing -- no, we don't know now what the right thing is, but you can be sure we will, after you've made your decision and we see what happens" would paralyze the capital markets.

-- "First we will hear that vast fortunes are justified because they are the reward for vast achievement. Here's where that table comes in handy, because it tells you what achievements actually get rewarded. Only one of the 10, Tyco's Dennis Kozlowski, has actually been indicted."

The implication being that the rest are but one bad stock trade from the pokey. But I don't know of any evidence to that effect. Neither, it seems, does Paul Krugman; he moves quickly on.

"But of the rest, three — four, if you count John Chambers of Cisco — were Andy Warhol C.E.O.'s: their companies were famous for 15 minutes, just long enough for the executives to cash in their stock options. The list also includes Gerald Levin, who engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage. "

Cisco's not exactly in the same class as Global Crossing, and Gerald Levin did actually run Time Warner for many years before the merger, and in fact, built it up quite a bit before then. The merger was a capitally bad idea, but he was hardly the only person in America to buy into the peak of the internet bubble. Of course, the golden parachute's upsetting -- but that's discussed above.

-- There's the standard Paul Krugman plaint about the estate tax. And maybe this is the argument that will change my mind about the tax -- I, for one, had no idea that the estate tax could be used to prevent companies from paying their CEO's nine-figure salaries. The mechanism is unclear from the article, but it's certainly an exciting development.

More to the point, for all his maundering about the estate tax, it hasn't done anything to break up the great fortunes of our era.

You are confused. You know that the estate tax did break up many of the robber baron fortunes, or at least make them more modest.

Actually, inflation did a lot of that, and the 1929 crash. The estate tax helped, but it's a one-trick pony. Before the estate tax, there were no estate planning services. Why would there be such a thing? Oh, there were trust and will departments, but there were not legions of accountants who did nothing but sit around all day thinking up clever ways to cheat the tax man out of his death duty. Now that there are, it isn't going away. The only people you get significant estate tax out of are people who are either too ignorant or too illiquid to plan around it. You can change the tax around all you want, but the instant you do the financial planners will be on it like white on rice.

Oh, the superrich pay something. But Krugman offers a datum that is misleading in the extreme: "I've even been assured by some correspondents that inheritance taxes on the very rich are impractical, that they will always be evaded — this in spite of the fact that in 1999 the estate tax raised about $15 billion from estates worth more than $5 million."

Hold on there. The estate tax raises about $50 billion a year. By my estimates, that means that $35 billion is raised from estates under $5 million; I don't think Ken Lay or Gerald Levin qualifies. In other words, the majority of the revenue from the estate tax comes not from the superrich but from moderately high-income savers with small businesses or appreciated assets. The owner of your local 7-11 is paying this thing while Jon Corzine's heirs toss some pocket change at the tax man and stroll away.

But the net effect is not to break up the estates; it's to put them into irrevocable trusts beyond the tax man's reach. The lives of the heirs may have been made marginally more inconvenient, their holdings more illiquid; they may even have to show up at a charity office once a week to justify their six-or-seven figure annual salary. But they are not impoverished by it. The estate tax is much more effective at gutting the upper middle class than the ultra-wealthy. And I don't think that Krugman is trying to get us hysterical about the coming rule of the lawyer-and-accountant aristocracy; even if he buys it, those folks are his readers.

Howlers

" But the Gilded Age looked positively egalitarian compared with the concentration of wealth now emerging in America. Pretty soon denial will no longer be possible. What will the apologists say next? "

On the contrary, we live in the most egalitarian age in history. Think about it: how much better is Bill Gates' life than Andrew Carnegie's?

He's healthier and will probably live longer. But is his house more comfy? His art better? His life more convenient? His clothing better quality? His food tastier and better prepared?

Nope. Healthcare and Gadgets aside, Bill Gates and Andrew Carnegie have little between them.

Now compare the worst paid guy in Carnegie's empire to the worst paid guy in Bill's.

The worst paid guy in Carnegie's empire lives in a couple of rooms with his wife, several children, and extended family. He eats meat once or twice a week. He owns one or two sets of work clothing and a good suit, probably the one he was married in. He has an ordinary hat, a good hat, and some seasonal apparel. He works twelve hours a day. He has no personal transportation; he walks or takes a horsecar. He does not vacation. He cannot afford books, plays, or other entertainment. His entertainment is church, conversation, and possibly music. He probably cannot read.

In human terms, it may be a rich life. In material terms, it wouldn't do a modern welfare mother for a camping weekend.

I don't think I need to itemize the fate of Bill Gates' mail boy for you to see the difference.

The rich were comfortable then and are comfortable now; the improvements are strictly marginal. The poor, on the other hand, have improved their lot immensely. Plutocracy, my Aunt Fanny.

Now, in fact, I am under the impression that inequality is increasing broadly. The problem is that Krugman knows as well as I do why that is: technology puts a higher premium on skilled than unskilled labor. If all you're good for is your muscle power, a machine will work cheaper and quicker and won't unionize. Bye bye human draft horses.

Neither the estate tax nor any other law man can make will remedy this. Only three things might: a subsidy to employers to hired unskilled labor, which is massively unproductive and distortionary, and would involve rolling back productivity increases in some industries; training, which has a dismal record last time I looked; or a negative income tax combined with a repeal of the minimum wage, enabling workers to labor with dignity at a price they are worth. As you can see from the spin, that last is my prescription.

PV He singled out a Bush adminstration guy; that should be a 1, but on the other hand, he's an economist, which is fair game; but on another hand entirely, he didn't treat his analysis all that fairly (it's flawed, but not that flawed). The kicker is, he mentioned that this guy was associated with the last Bush administration, which is irrelevant. .5 on the bias watch (hey, it's subjective.) PV now stands at 7 out of 9, or 78%.

From the desk of Jane Galt:

KrugmanWatch Teaser Something bad happened.

KrugmanWatch Teaser

Something bad happened.

It's the fault of the Bush Administration.

Current predictive validity of accusations of bias against Krugman: 81%.

From the desk of Jane Galt:

Krugmanwatch never sleeps: Thomas Maguire

Krugmanwatch never sleeps: Thomas Maguire points out something I should have noticed, which is that Krugm