Asymmetrical Information

From the desk of Jane Galt:

InstaPundit has an unflattering picture

InstaPundit has an unflattering picture of Clinton at Wellstone's funeral, sharing a laugh with Mondale. Angry readers say it's a cheap shot.

I don't think so. Hell, I've laughed at funerals without being any less sincere for it. But state funerals, which this approaches, are not quite the same protocol as the family getting together to share some reminiscences after Aunt Dahlia finally passes. What really got me, though, were the live clips I saw from the event, with various Democratic icons, most prominently the Clintons, getting applauded as they walked in.

I thought, "What the #@%!?"

It wasn't a fundraiser, or a public speaking event, or indeed any sort of occasion in which it would be marginally appropriate for the Democratic elite to be taking curtain calls. It was a funeral. The purpose of the funeral is to honor the dead, not the important people with whom they were acquainted.

Paul Wellstone died four days ago. He was an honorable, courageous man, and I don't think it's somehow wacky or unrealistic to expect that at the hour set aside to honor his memory, that's what the people attending the service would be doing. Particularly after they'd spent the day

a) Furiously complaining that the Republicans had already begun campaigning by proposing that there be some debates so that Minnesota voters could find out something about the man they might want to vote for, rather than just ratifying him in the Sacred Memory of Wellstone
b) Filing a lawsuit because the supplemental ballot didn't suit them
c) Expressing their displeasure at the way Republican premature campaigning had profaned Wellstone's memory, by disinviting President Cheney from the birthday party. . . excuse me, funeral.

Well, hey, it's their guy, right? It just struck me as extremely wierd, even more so because the Clintons, rather than bowing their heads in respect, stood their waving while everyone applauded them. So no, I do not think that the picture was particularly unfair; it seems to me rather to have captured a very unpleasant undertone that just seemed -- off. And I don't think it's going to go over well publicly; it makes the party seem petty and grasping. Any momentum they might have gained by castigating the Republicans was lost when they put their own machine into action, and shattered when the party's national figures stole the limelight.

A minute ago I thought Democrats were going to keep the Senate. Now I don't know again. It does seem that every time they gain some advantage, Bill and Hillary and Terry grab the party by the neck and start shaking until all the voters fall out.

From the desk of Jane Galt:

Everyone who's going to vote

Everyone who's going to vote next Tuesday should go read Jacob Levy's terrific exposition on the implications of a 50/50 national Democrat/Republican split.

Incidentally, for those in New York, I'm looking for a public place to watch the election returns so we can have Blogger Bash 3.635. Nathan Hale's apparently doesn't have anything planned -- anyone else got any suggestions? And would anyone be interested in attending such an event?

Update The permalink is broken -- fie on blogger! Just go to his main page and scroll down.

From the desk of Jane Galt:

Just when you thought it

Just when you thought it was safe to go back in the water. . . a FedEx truck has just blown up on a highway near St. Louis. The cab is intact, and the occupants, thank God, escaped without harm. . . which makes it almost certain that this was a bomb of some sort.

Yes, sir, we sure do live in interesting times.

Update Seems the problem was not a nutjob sending bombs, but that other bane of Live from The WTC -- an overtired truck driver who nodded off.

From the desk of Jane Galt:

So every time we talk

So every time we talk about prescription drugs, we get people complaining about advertising. And the drug they complain about most is Vioxx. Sigh. They say that in most cases aspirin would do just as well, that it's an unnecessary expense, that the commercials send patients scurrying to their doctors to demand drugs they shouldn't have.

For the past year, my mother's had pain in her arm and hand that has gotten worse over time. Aspirin helps, but not enough. She can't open cans or bottles if the lid is tight, and she's had to give up needlepoint. Yesterday, she finally went to a doctor to find out if it really was arthritis, or something else.

He prescribed (I know you saw this coming): Vioxx.

She didn't ask for it; my mother has never seen a Vioxx commercial, as she doesn't watch much television. Moreover, she's not the kind of person who walks in to her doctor's office with helpful suggestions for the guy who spent 10 years studying medicine and another 20 practicing it. So clearly, some doctors do use the stuff, despite the insistence of my interlocutors that it's just more expensive aspirin, good for nothing except pumping up pharmaceutical firms' bottom lines.

I just spoke to her. "The pain is gone", she said, with wonder. "I can't believe it -- I just took the first pill last night. It's gone. Until this morning, I didn't even remember what it felt like not to have pain in that arm. I can't tell you what it's like not to wake up in the night . . . to sleep all night and wake up without that pain." When we finished speaking, she was off to see if she could open a bottle of Pellegrino, a task that has been beyond her for the last year.

It's a pity she didn't see those useless Vioxx commercials six months ago.

From the desk of Jane Galt:

What are the Democrats thinking?

What are the Democrats thinking? From Kausfiles:

Valerie Bauerlein of TheState.com reports on the recent debate in South Carolina between Democratic U.S. Senate candidate Alex Sanders and Republican Lindsey Graham:

Sanders said Graham was the one running a TV endorsement from Rudy Giuliani, former mayor of New York City.

"He's an ultra-liberal," Sanders said. "His wife kicked him out and he moved in with two gay men and a Shih Tzu.

"Is that South Carolina values? I don't think so."

Prediction: Sanders will get a pass for his gay-baiting a) mainly because it's the sort of deliciously cynical cheap shot reporters who enjoy covering politics savor; b) secondarily because he's a Democrat running against a Clinton-impeacher and won't be attacked by gay-rights groups; c) because he has some sense of comic timing; d) because he's a pretty appealing fellow; and e) because he's going to be repudiated by the voters... But Sanders probably should be blasted for it anyway. Over to you, Frank Rich.

I feel at little upside-down here. When did the Dems become the party of gay-baiting? Toto, I don't think we're in Kansas any more.

From the desk of Jane Galt:

Busy, busy right now. .

Busy, busy right now. . . little time to post. Hope I can tide you over with this fascinating email from one of my readers:

Jane,

A very brief note on a phenomenon that struck me last night as I watched German TV. Sabine Christiansen is a well-regarded talk-show moderator, who hosts a number of guests on her show every other Sunday evening. (Unlike most of her American counterparts, she seems content to set the stage with a few comments at the outset and minimal interference during the discussion. Her guests are generally 'doers' rather than talking head, and each show seats 5-6 people of various stripes in an attempt at a roundtable discussion of events of the day - to the extent that guests refrain from spouting set-piece sound bytes.)

Anyway, last night the theme was the German economy, or more specifically reforming the German economy. Remarkably (or at least I remarked to my girlfriend), not a single guest was from the private sector ! I may be overstating, but if there's a clearer indictment of what's wrong with the German concept of the economy, I don't know what it could be. This panel encapsulates perfectly the German idea that government (either liberal or conservative, but still government), unions and academia are the forces to
decide how to organize the economy. Small wonder that Germany's now being referred to as the 'sick man of Europe'.

Don't know that many of your readers would be interested in this tidbit (since Germany is already so far on the outs that it would take major rehabilition to get back to 'misguided'), but the show certainly demonstrated the gulf between accepted economic theorizing in the US (even among liberals) and in Germany (even among conservatives).

Cheers,
Bob

PS - There was so much statism in play, that I couldn't bear to watch any longer and switched to a in-depth piece on the Moscow horror.

It's interesting, when you hang out with Europeans, to find how different our conception of liberal/conservative is. Even liberal Europeans are in many ways more socially conservative than conservative Americans; they're willing to tolerate a degree of enforced conformity that is quite amazing to an American. Though they may argue about what the One Right Way to do things is, they have little problem with the state, not to mention the neighbors, deciding there is a One Right Way and setting policy around that ideal.

Which I suppose just feeds into the prevalance of the idea, even among conservatives, that there is also a One Right Way for the economy, and that the state should be the driver behind that as well.

Many of my European friends tell me that to them, the political spectrum in America seems bizarrely cortated -- they have parties much farther to the left, and even some much farther to the right (socially), than ours. But on the other hand, the substantive disagreement between their parties is not between more or less state intervention; it is over how, not whether, the state should run people's lives.

From the desk of Jane Galt:

Jeff Jarvis points out the

Jeff Jarvis points out the biggest problem with Tablet PC's -- no keyboard.

Back in the dark ages, when I was a secretary (we spelled it "administrative assistant"), I had a boss who got himself some dictation software. Looked like fun, so I tried it. Uggh!! I type around 80 words a minute, last time I checked. The talking software clocked less than 30. It was like trying to wade through a molasses thought-fog while wearing concrete neuron-boots.

[Okay, that was a stretch. Work with me, people. I'm breaking new literary ground here.

Okay, well, actually I'm not. The entire New York writing community seems to have arrived at the Impossibly Complicated Mixed Metaphor long before I got there. And what fun it is!

Just clap and cheer, like you do for the slow kid at the end of the race, 'kay?]

Anyway, I'm with Jarvis -- until they figure out a way to get my dictation or handwriting speed up to my typing speed, I'm sticking with the laptop.

From the desk of Mindles H. Dreck:

More on SEC & Reporting Reform

A thoughtful anonymous reader had the following comments on my reporting reform ideas (inserted in [brackets] for reference). I'm responding in an "interlinear" fashion, but do not mistake it for a you-know-what-ing.

1) [repeal IRS 162 limiting salaries] Agree

2) [revise regulation FD] Disagree. Transparency is not a goal of FD, equal access to information is. If the only value add the analysts had was to be able to wheedle material information out of the Company that no one else had, then they are only exposing the quality of the Company’s Investor Relations, not its operations. It seems to me that Wall Street analysts are a lot like CIA analysts; the problem is not too little data, but too little analysis. Let analysis stand on its own and be paid explicitly for the value it adds. Otherwise, it is, and always will be, only a marketing arm of the investment bank’s corporate finance department. And it will be worth what it is paid by those who pay it.

I think the reader shortchanges the role of questioning in analysis. Analysis consists of looking at the available information and using it as a guide for where to look next. In the case of a sell-side analyst, that would result in a request for an unreported metric (think book-to-bill and things like that) or nugget of information that exposes the weakness or strength in the company's outlook. Regulation FD makes providing that sort of information to analysts difficult.

I agree with my reader that there is already a sea of information there, and that Wall Street wasn't paying attention (remember, analysts need to figure out what people will pay, which may or may not be connected to the fundamentals....). FD may not have hurt quantity, but it hurt quality and the ability to look deeper.

3) [dilute primary earnings with outstanding options] Agree and raise you. It seems to me that fully-diluted shares should include all shares in option pools, regardless of whether they have been granted or not. Also, no fancy methods of computing number of shares, just primary and fully-diluted as if every share that could be issued were.

Yeah, although it might seem a little unfair if companies started issuing deep out-of-the-money options.

4) [supplemental disclosure of compensation] Disagree. Effective August 29, 2002 any change in beneficial ownership by a director, officer or 10% shareholder must be reported on Form 4 before the end of the second business day following the date on which the transaction was executed, with some exceptions for situations in which the insider does not control the date of execution, e.g. 10b-5(1) plans and other employee benefit plans. Form 4 shows the number of shares and the price for the transaction. What more do you want?

I agree that all the information is available in the footnotes and 10Ks and nobody looked (as discussed in this post). I'm saying value the option grants using Black-Scholes (rather than expense) and put it up front with earnings, just to satisfy the options hawks.

5) [auditors should disclose fees by category] Strongly disagree. The biggest problem with audit is that it has been degraded to a loss leader for consulting. Now, you want to put additional price pressure on them at the same time you want them to get rougher with management! I can hear the next board meeting now: Director A, “CFO, did you see on the web that Amalgamated is getting its audit for 80% of what we’re paying? Why are we paying so much?” CFO, “They had a lot of clean up work to do from the mess my predecessor left, but we’re going to drive them down to a reasonable level this year!” I don’t know if you have noticed it, but many of your proposals push the auditors and the government closer together. That may seem to make sense at first, but at the end, and we’re approaching it soon, we’ll get audits that look more like sales tax audits than evaluations and judgments by sophisticated, knowledgeable professionals on the accuracy and veracity of financial statements. Besides, do you really think auditors are adding value to a company’s financial reporting?

I agree that auditing has been commoditized (and I said so). Seriously, though, you don't think this already happened in a cozy phone call? It is up to the auditors to maintain price discipline. Disclosure might work both ways. In answer to the last question-rarely.

6) [disclose contracts with affiliates] I certainly need more information about this, but for starters, are you asking to have the entire contract disclosed? The in addition item is shutting the barn door after the horses have left. What ever rule you set up there, the crooks will find a way around it and it is a needles nuisance to the vast majority of companies that are not run by crooks.

This generation of horse has left, but their offspring have not. Revenue recognition methods produce a scandal every five years or so - from pre-fab housing to AOL. Contracts are a good way to transfer value in contingent liabilities and legal control instead of numbers. Large contracts involving affiliates should have their principal terms disclosed. Arms-length contracts would have to meet a materiality test. Certainly, any encumbrances should be disclosed.

7) [eliminate corporate taxation/double taxation] Couldn’t agree more, though, what I would do is not eliminate the corporate income tax, but limit it to a percentage of the net cash flow from operations less dividends paid within 90 days of the end of the tax period. Clean, neat, simple. If managers want more capital to operate the business, they should have to go to the capital market to make their case, just like any start up. They should not have this competitive advantage of a constant, captive, involuntary, free source of capital from retained earnings. In fact, they should be taxed if they fail to return earnings to the shareholders. This would force managers to be much more responsive to the needs of the market for information and give the market many more opportunities to gather information and discipline wayward managements.

Unfortunately, cash flow from operations can also be manipulated, especially if the company is active in the financial markets. Enron's were pretty opaque - they tended to run negative in the first three quarters and have a big fourth quarter.

The SEC provides little information that institutional investors could not get and no information that is of use to small investors. I doubt that the SEC did much to contribute to the quality of markets in the 50 years prior to 1990. Nor do I think the SEC had much to do with the excesses of the ‘90s. I think the most important factor in the debacle of the last decade is that there were less than 10 people left on Wall Street who worked there during the Crash of ‘29. And I will go way out on a limb and suggest that the next outburst of irrational exuberance will commence in 2070 and end in 2080, (both dates plus or minus 10 years). Following that I would list the GREED of every INVESTOR who thought they deserved venture capital returns on treasury bill risk. Thinking there was something the SEC could or should have done that would have prevented it is naive. Trying to prevent it in the future is futile. The best we can do is make the hangover less painful. And so far the ‘00’s are a lot less bad than the ’30’s.

Too true. We can try to club people over the head with the "right" metrics, but it's clear that the bread crumbs were all there. See Michael Lewis on this today. I think his point about the old economy biting back is valid.

I agree that transparency and the rule of law are necessary to efficient markets and there are opportunities for improvement.

First the rule of law. We have enough laws on the books now. What we do not have is enough enforcement. What the SEC should do is not to try to find the 1 in 1,000 business that are crooked by making life hell for 999 businesses. It should make sure that life for the 1 crook is a hell of disgrace, public humiliation and hard time followed by death in poverty. If found guilty, Bernie Ebbers and Andy Fastow should spend a substantial potion of the remainder of their lives at a maximum security prison, not Club Fed. If they get Jeffrey Dahmer for a cell mate, so be it. Who caused society more misery? So, the SEC should enforce the law by making the guilty, not the innocent, pay with great public fanfare to dissuade the other 999 from following in their footsteps.

I agree that there are plenty of existing laws to deal with most of the recent fraud. It's not so much enforcement as prosecution where we fall down. I'll leave it to the lawyers to figure out why we can't send white-collar criminals to jail.

Transparency? I think the virtual elimination of retained earnings together with weekly public reporting on cash and revenue, monthly release of financial statements and the elimination of the 10-Q would go a long way to assuring transparency. This is information that the companies are already producing for internal use so should be no incremental burden to the Company and substantial new information for investors.

Well - now he's sounding like me.

From the desk of Jane Galt:

Now . . . big

Now . . . big Live from the WTC kudoes will go out to the first reader who notes and instance of a journalist or academic making reference to, without irony, Bellesiles work "proving" that early Americans didn't have a lot of guns.

Update Reader Dave F. emails this link, from the Violence Policy Center. It'll be interesting to watch if they change this, now that the work has been about as thoroughly discredited as is possible without an extended John Edwards session with the Founding Fathers, but we're looking for works that are

a) Unironic: the writer is unaware that Bellesiles has been discredited.
b) Written after Emory's findings.

Although if you'll keep emailing me links that show people who are knowingly continuing to use a tainted source -- as we must assume that the VPC, which has been heavily involved in this case, is. Or at least, we can so assume if they continue using it, as they've hardly had time to find every link to him on their site yet. Anyway, if you keep sending me the links, I'll put them up. I think it's worthwhile to expose these things. I also think it would be worthwhile, at this juncture, to write the Nation and let them know that you expect them to notify their readers that a non-partisan group of highly respected historians has given Bellesiles the thumbs-down.

From the desk of Jane Galt:

If the blogosphere is a

If the blogosphere is a neural net, let's throw some brain cells this guy's way.

From the desk of Jane Galt:

I hate to bring it

I hate to bring it up, but it's interesting, and several readers have emailed about it. Remember a couple of weeks ago when Slate had an article claiming that the stock market liked Democratic presidents? Which was cute, because the article achieved this miraculous effect by carefully choosing it's time period: 1947 on. If you'd chosen something more obvious, like say, the 20th century, you'd find that the stock market absolutely hated Democratic presidents, since it enjoyed all but one of its worst years under FDR. Or if you'd knocked out the most glaring bubble portions of the Clinton years, where it's obvious the stock market wasn't doing us any favors by rising so precipitously, you'd reverse the effect. Which is not to say that this is correct either. The data is extremely thin, and there's generally too many things going on to isolate the effect of the executive. Was Nixon a better president for the economy than Carter? Worse? Everything was so awful in the 70's, it's sort of like trying to answer that age old favorite: burn to death or freeze to death?

[The answer, by the way, is freeze. Sure, it takes longer, but at the end you get nice and sleepy and deliciously warm, as anyone who's ever had hypothermia will tell you. Overall, not a bad way to go. Burning, on the other hand. . . not so nice. But I digress.]

The article wasn't any sillier than any other sort of spurious correlation journalists pick up on to fill the barren expanse of column inches their editor demands. But it was hardly the compelling economic evidence that some lefty bloggers decided it was.

However, over very short time periods, it's much easier to both establish correlation, and do something akin to a natural economic experiment. Which is why what happened in the stock market yesterday is so interesting: as soon as word came across the wire that Paul Wellstone had died, the market turned around and started going up. It's hard to avoid the conclusion that traders were trading on the now-suddenly-higher probability of getting a Republican Senate. It wasn't Wellstone in particular; it could have been any Democrat up for re-election. But the traders clearly think that a Republican Senate will be good news for them. The timing is just too close for it to be anything else, particularly as there was no other news I'm aware of in the market.

Now, that isn't necessarily good news for us. They might have decided that they were going to get less crackdown on corporate thieves, which is not, on net, a good thing. They might have decided that this meant we were going to invade Iraq, subdue the Middle East, and begin shipping booty, women, and slaves back for the kings of Wall Street to feast on. We don't really know what it is they preferred about a Republican Senate. Hell, if my experience with traders is any guide, they probably don't know what they prefer about a Republican Senate.

But at the very least, this should teach people to stop taking every puff piece as a sterling vindication of their deeply held convictions.

From the desk of Jane Galt:

So Michael Bellesiles has resigned,

So Michael Bellesiles has resigned, and it's hard to read the findings of the investigating committee without feeling a wave of compassion. If you've ever read academic reviews, this finding is the professorial equivalent of running around the quad shrieking "He's a big, fat liar!"

This was the right result. The review process worked, although obviously much, much less quickly than it should have -- the finding goes out of it's way to spank the journal where Bellesiles work on guns was first published, asking why no editor had thought to ask that Bellesiles supply the basic information needed to understand his tables. This is the professorial equivalent of giving them the fish eye and saying, "So, you guys just publish anything any idiot hands you? Or aren't you bright enough to read the little numbers in the boxes?"

It's instructive, though, that it took too much publicity to get the right result. Happy as we are that the integrity of the profession of history has been upheld, it's troubling that absent publicity, it probably would have taken 20 years or more for the record to be set straight. During that time, Bellesiles' work would have been incorporated into court cases, public policy, and the minds of millions of people . . . damage that would probably continue long after professional historians knew the work to be false. This tendency is apparent in almost every profession, particularly cloistered ones like academia, medicine, and police work, where practicioners tend to feel that it is "us" against "them", and when one of our own screws up, it's better to circle the wagons and protect him than risk one of "them" finding out that we aren't perfect. This should be a wake-up call to academics everywhere -- but of course, it won't be.

It's also instructive that Bellesiles thought he could get away with it. A friend has a theory that Bellesiles, like the guy at Bell Labs, wasn't in it for self-aggrandizement, exactly, but is just a compulsive liar. He got such a high from putting one over that he simply couldn't stop, even though the longer he went on, the more likely it was that he would be discovered. Another friend, an academic, thinks it more probable that Bellesiles really believed that he could get away with it. And of course if he had, the rewards were astronomical. Being the TV historian for gun issues . . . the lecture circuit. . . the prestigious prizes . . . [here I interject the opinion of an anonymous emailer, a graduate student in history, that the most embarassing thing about all of this is the famous historians trying to save face by claiming that the book was a towering work that would have gotten the Bancroft even without the probate records, indeed even had the subject not been so controversial: "the rest of the book, at least the parts that aren't misrepresented, is a trivial recount of explosive new facts that have been well known to professional historians for a hundred years"] . . . and indeed, it's hard to ignore the fact that Bellesiles became very famous for contradicting commonly accepted views of historical gun rights, even before his data was challenged. It seems likely that he picked his topic with that end in mind -- it's hard to imagine the New York Times devoting that much space to a shattering new interpretation of, say, early 19th century tariff laws.

So one can say he tried to lie his way to fame and fortune, and got a much-deserved comeuppance. And yet, I feel sorry for him. Just as I feel sorry for Monica Lewinsky and everyone else who sought fame and fortune, and found it in very public humiliation. We've all had the feeling, I imagine, of not being quite able to make it. We've all been tempted to push the envelope, go out on a limb, do something maybe not quite right just to put ourselves over the top. Thank God we didn't. We found a job or a field where we were more qualified, or we learned to compensate, or we accepted that we weren't ever going to win the Nobel Prize. But is it really so hard to imagine yourself taking that first step -- making up a couple entries in a table, maybe, to make your case look a little better? And when no one caught it, to make up a little more, so your case was really dazzling? And when people responded by showering you with praise for your results, is it hard to imagine how intense the pressure must have been to keep serving them up? People on HNN have been jumping all over a history professor for suggesting that this is a tragedy for Bellesiles -- that the peer review system served him as badly as it served us -- but really, couldn't we have saved ourselves a lot of grief by catching this the first time? Bellesiles might have been spanked and sent back to do better research, instead of rewarded in a way that demanded he produce ever more outlandish results. And how hard is it to imagine the hell he has been living in over the past few years, desperately lying to cover his previous lies, breathing a little easier as the questions receded for a time. . . but then the noose inevitably closing in? He didn't behave well, and he doesn't deserve mercy. But when we see a man destroy himself by inches, I hope we can muster up some compassion. His life is effectively over. He will never work again in his chosen field. He will never publish again. He stands revealed to everyone whose opinion ever mattered to him as a liar and a fraud. Frankly, I find it hard to imagine what he will do, since professors rarely have a lot of money, and their skills are somewhat rarified. Most of the professors I've worked for couldn't even type or file well enough to work in an office.

We shouldn't gloat, and we shouldn't say that Clayton Cramer and James Lindgren "won". It wasn't a contest. I think Volokh is right: they deserve our thanks for helping to set the record straight, not our congratulations.

Update Erin O'Connor makes an important point about the general condition of research in academia. As Instapundit points out, peer review is good for picking out problems with methodology -- but true frauds just fake the data. Hard science does a lot better at this -- generate interesting results, and you'll be deluged with requests to see the data so that other scientists can replicate it. It's time for the humanities to adopt the same standards, giving points for replicating results as well as generating them.

I also don't find it particularly likely, as some have accused, that Bellesiles was out to destroy the gun rights movement. He certainly wasn't fazed by the idea that his work would do them harm; indeed, it may have tickled him. But I don't think he would risk spiking his career this way for a political conviction he didn't seem to hold that strongly. I think he did it to get famous, not to advance his political agenda. Obviously, the better way to get famous was to pick something controversial, and I'll even venture to add, take the liberal side so the New York Times will give you good press. But it's a little extreme to think that he did this just to get the NRA.

From the desk of Jane Galt:

And the conspiracy theories are

And the conspiracy theories are already flying. On the left, I've already had two emailers suggest that this is a plot by my "best buddy, Shrub, the presidant-select" [sic] to. . . well, that part isn't very clear. Rid the world of dangled participles, perhaps. From the right comes a slightly more plausible correspondent who points out that the Democratic Party is probably better off trying a Jean Carnahan than trying to get Wellstone re-elected; in a year, when the passions have cooled, the Dem goes back in a walk. But while I am hesitant to state that there is no depth to which the leadership of either party would sink in order to get re-elected, I find it rather hard to believe that Tom Daschle and company have been scurrying about the country arranging for planes to crash in remote areas of Minnesota. To those on the right who do not put that much faith in the goodwill of the Democratic leadership, let me point out that this would take far more organization and planning than anyone in the party has heretofore displayed this election cycle.

Now, I like a good conspiracy theory as much as anyone. But there are times when you've just got to crunch a little extra tinfoil into your hat and accept that sometimes people die just because, hey, that's the way we're designed. That's why they call us mortals.

Update I've been chastised for calling the right-wing conspiracy theory more plausible. Let me make it clear that I meant that it was more plausible in the sense that I think this helps, rather than hurts, the Dems chances of holding the senate -- NOT in the sense that I think that Tom Daschle is more likely to have ordered Wellstone killed than, say, George Bush.

From the desk of Jane Galt:

So the reason McCall is

So the reason McCall is making such a poor showing here, apparently, is that he's out of money; spent it all on the primaries against Andrew Cuomo, the never-never candidate who, as you may recall, managed to drop out of the race after costing McCall the maximal amount of money. Democratic sources in the now say there's now a better than 50% chance that he'll finish behind Golisano, which means that the Independence Party will precede the Democratic on the ballot for the next four years. I won't venture a guess as to whether or not New York voters are so stupid that this will actually make a difference in the party's standings here.

Now the Democratic Party is telling the campaign they won't help him unless he gets his numbers up, which is idiotic, because he's had no money for media, running against two candidates that are saturating the airwaves. It's probably too late, but if Democratic readers want to put a little money in, or lean on the party to do so, it would help avoiding a seriously embarassing incident. It's going to be a nice black eye if one of the most reliably Democratic regions in the country drops the Democrats below the party of Ross Perot. Full disclosure: McCall isn't going to win. But hey, at least the Democrats could hold their head up in the state.

From the desk of Jane Galt:

Well, Blogger was out, because

Well, Blogger was out, because it was hacked, but it seems to be back up now.

For fellow amateur pundits who use Blogger, this means that you should change your password immediately, even though it’s improbable they scooped it. At minimum, you should change your passwords for your ISP, and any obviously related services, such as Yahoo or Hotmail, for which you use the one password you’ve managed to remember.

[Don’t shine me on. I used to work in IT. I know you use the same password for everything. Time for a change. And not the kind of change where you add a number or letter to the old password, ‘kay?]

We apologize for the inconvenience. We now return you to your regularly scheduled blog.

From the desk of Jane Galt:

Paul Wellstone and his wife

Paul Wellstone and his wife and daughter have been killed in a plane
crash. I didn’t agree with his politics, but I admired his conviction and integrity.This is a terrible tragedy.

From the desk of Jane Galt:

Has Jimmy Breslin lost his

Has Jimmy Breslin lost his mind?

From the desk of Jane Galt:

Interesting. . . seems Books

Interesting. . . seems Books Online is segregating books that have been pulled from public domain in the US due to the recent copyright extension. Of course, if you are in the United States, where such works are still protected, you shouldn't look. No, not even if you cover one eye.

From the desk of Jane Galt:

The guys on the news

The guys on the news are saying that Muhammed shot "expert" in the military. For non-military readers, I think the way it works is that everyone who goes through basic training has to qualify on a rifle range as able to shoot the darn thing without taking their foot off or hitting a bystander. There are a number of levels at which you can qualify. . . some dim memory is telling me that among the levels are "marksman", "expert", "high expert" and "sharpshooter", in approximately that order, but I can neither guarantee that that list is exhaustive, nor that it is correct and in the right order. At any rate, I seem to remember that qualifying as an expert is not any particular feat; the media is making it sound as if it's just a short step from there to being a sniper. Can someone from the military comment?

From the desk of Jane Galt:

Spoke too soon -- looks

Spoke too soon -- looks to me like a couple of nutjobs, one of whom possibly wanted to create his own private Al Qaeda. But I'm not going to bet on whether this is true or not, because sure as shooting, as soon as I come out in favor of the lone nut theory, it'll turn out that this Muhammed character is the bastard stepchild of Osama Bin Laden and Yasser Arafat.

From the desk of Jane Galt:

I have to go down

I have to go down to Washington next Thursday. Washingtonians, if I have to be at 2400 E Street NW at 7 AM, where's the best area to stay the night before?

Northwest Washington
Foggy Bottom/Georgetown
Dupont Circle/Embassy Row
Airport
Arlington

I'll have a car, (though I don't know if I can park it where I'm going). Deeply appreciate any input.

From the desk of Jane Galt:

Whoa, I walk away from

Whoa, I walk away from the TV for ten minutes, and suddenly they go and link the sniper to international terrorism? Can't I leave you guys alone for a second?

I don't know what's going on, but I assume it's terrorism. They wouldn't be looking for people in Washington and Alabama unless they had some pretty good evidence (or so I devoutly hope), and I don't see how they could be searching areas that dispersed unless there's some kind of group involved, which makes it terrorism. IF it's terrorism, I find it unlikely to be our domestics -- this isn't their kind of nuttiness. But who knows? Maybe they're trying to get Hale-Bopp back or something.

Boy, oh boy, I can't wait until the whole story comes out.

From the desk of Jane Galt:

Someone else is suing the

Someone else is suing the airlines for making them sit next to someone who took up more space than they paid for. And this time it's in England, where you can't blame it on our crazy liability system.

From the desk of Jane Galt:

For those arguing that national

For those arguing that national health care wouldn't cut research spending, there's this from Derek Lowe, who is a pharmaceutical research chemist:

I well recall that pharmaceutical brown-out known as the Clinton Health Care Plan. Everyone just stopped hiring scientists - raked the resumes into the trash can and spent the interview budget on something else. It wasn't a great time to be a fresh PhD or post-doc, that's for sure. Not that it was a picnic being employed, because some companies seemed to take the opportunity to make unpopular moves. And why not? If you didn't like it, where else could you go?

I'm sure some commenters are even now warming up their fingers to point out that he works for a pharmaceutical company. Well, yes, he works in research. I doubt he much cares whether they cut their advertising budget; what he wants is for there to be lots of jobs researching drugs. And he doesn't think there will be if there's national health-care -- and apparently, neither did the pharmaceutical companies, who, I dare point out, probably know better than you do. And when they thought the health care system was going to be nationalized, what did they do? Slash advertising? Nope, research.

From the desk of Jane Galt:

Outstanding: Mindles Dreck has some

Outstanding: Mindles Dreck has some suggestions for real reform of the way we regulate disclosure, not just handing the SEC more money and eliminating the expensing of stock options. And so I've decided to make a list of my own: reasons why just increasing the budget of the SEC will not magically make companies honest.

1) Regulatory Capture (follow the link -- one of the most outstanding "explanation" posts of all time) The SEC, like every other regulatory agency in history, eventually comes to serve the interests of the industry it regulates rather than the public at large.

2) The investment banks and their law firms have more money than the SEC The main enforcement guys at the SEC are lawyers. I don't know how much they make, but it's some embarassing sum lower than 40K a year. How much lawyer do you think you could buy for 40K per annum? Yup, the market works. And that means that the lawyers thinking up ways to evade the regulations are going to be, on average, smarter, more driven, and working longer hours, than the lawyers trying to enforce them.

Raise their salaries to the level of other government lawyers, you say. 70K? Starting salaries for freshly minted JD's at white shoe law firms are in the $125-$150K range. You going to pay the SEC lawyers that much? Honey, that's what the director of a government agency makes, not his enforcement staff. Meanwhile, the gap between what experienced lawyers in the public and private sector make is even more stark. And the same dichotomy holds true for accountants. You can make more setting up shop as a private accountant (after a couple hungry years, anyway) than you will ever make as a government agent. And while the FBI and the Justice Department are able to attract some talent anyway, they attract it largely because going after criminals is sexy, which going after the guy who erroneously booked his depreciation on a piece of equipment in Q1, even though the machine didn't ship until Q2, is not. And because there are lucrative opportunities in the private sector for people who put in a couple of years at the FBI or the Justice Department. The same is true of working for the SEC, of course. . . and those lucrative opportunities are located at the firms you are asking the SEC enforcers to descend on like the proverbial ton of bricks.

3) Many of the rules that need changing need Congress to change them. Congress is filled with two kinds of people: people whose eyes glaze over and whose palms begin to sweat when you start saying things like "NOL carryforwards" and "insufficient allowance for return of merchandise received"; and people who understand these terms, indeed revel in them . . . because they spent a significant amount of time working for one of the banks or law firms you want them to regulate, made most of their money that way, and still count the titans of that industry as close personal friends.

4) The public doesn't understand anything about accounting regulations. This makes them easy to demagogue. Hell, I understand accounting regulations better than, apparently, 99% of my readers, and 100% of journalists. Yet I often have to have Mindles or a similarly erudite person take me gently by the hand and explain to me why my take on a particular regulation is. . . ahem. . . idiotic. It is very, very difficult to make an informed decision about an issue like, say, the expensing of stock options.

(Thank you, incidentally, to those anonymous fellows who emailed to say "I think you're an idiot. Why not just pass a simple regulation?" It is instructive in these situations, I think, to ask yourself something: given that all the people arguing about it know quite a lot about accounting, and given that you don't know anything about accounting, do you think that it is more probable that the answer really is simple and everyone else is just an idiot, or that the answer is very complicated, and they're not the idiots here? If you answered the former, why don't you go find some physicists and lecture them on how you could do things better. The accountants already have enough back-seat drivers.)

Because the public has no realistic hope of actually making intelligent decisions on issues such as that one, agencies tend to careen between two states of affairs:

a) No one is paying attention to what they do, because it's complex and boring.

The agency regulates in a way that benefits the people who do care -- the companies, and their lawyers and banks -- because those are the people who are going to go to congress and complain if the SEC rules against them. Witness the march on congress of the technology industry in the face of a proposed change in the taxation or regulation of stock options. These are not, by and large, executives who are concerned about aggrandizing their own wealth (well. . . not solely concerned, anyway.) These are executives who are genuineley concerned about their ability to attract both capital and prime techie talent if the regulations are changed. They're self-interested, but not necessarily in a way that seeks to screw the rest of us for their own benefit. And in California, they vote. Cross them, and you can expect to have Boxer and Feinstein screaming in your ear in no time flat.

b) Something has gone horribly wrong and everyone is paying attention, and the public is screaming for you to do something now.

At this point, journalists, who know just about as much about accounting as they know about 7th Century Mayan Pottery (much less, in many cases) are going to be paging through all the regulations, searching for one that sounds relevent and can be paraphrased in a single sentence. Chances are better than even that they will either misunderstand the regulation (such as the journalists who appeared to think that the reason Enron's off-balance sheet entities were fraudulent was that they were located offshore), or totally misunderstand its implications (such as the journalists who think that banning accounting firms from consulting will eliminate conflicts of interest, without noticing that the audit firms still get all their revenue from the same source, the companies they audit; they just get less of it now.). Because they haven't the faintest clue how to read a financial statement, and aren't going to waste valuable time learning just so they can do some stupid story on financial statements, they are going to get the majority of what they report factually wrong, and come up with suggestions that will be as well thought out and useful as a journalist suggesting to an aerospace engineer that because birds can flap their arms and fly, we ought to be able to do so as well. Those will be the stories that the public reads that generate such useful thoughts as "Why is it so hard to just pass a simple regulation?"

Then their congressmen, aided by political science graduates who get all their ideas about accounting from the journalists, are going to pass some laws based on what will make the voters who read the journalists' stories think that their congresscritters are doing something about the problem. Given the public process by which the likely subject of those new laws has been selected, there are three possible outcomes:

i) The law will solve more problems than it creates.
ii) The law won't do anything much, or will create as many problems as it solves
iii) The law will create more problems than it solves.

Given the fact that the people involved have absolutely no background that would enable them to actually assess the effects of the laws they pass, the best-case scenario is that it mimics a random distribution: in other words, you have a 2/3 probability of doing nothing worthwhile. The worst-case scenario is that the bad ideas are easier to explain, and thus more likely to get passed, than the good ideas. Anyone who has ever actually tried to get the government to do something can judge for themselves which is more likely.

5) IT IS NOT POSSIBLE FOR THE SEC OR THE PRIVATE AUDITORS TO CATCH A COMPANY DETERMINED TO COMMIT FRAUD. I don't like to shout, but I'm a little fatigued by people who seem to imagine that a "beefed up" SEC is going to be some kind of real-life Hall of Justice, where accounting heroes swashbuckle about uncovering corporate fraud and abuse. First of all, as I pointed out above, you can't afford to hire the superheroes. And second of all, you have absolutely no idea about the scope of what you're proposing.

The public thinks that when Arthur Anderson went in to check a company's books, they poured over each and every entry, scrutinizing it for possible fraud, checking that it all tallied, and interrogating the executives about anything even slightly suspicious. Or rather, they think that this is what Arthur Anderson was supposed to do, and didn't. Child, when an audit team goes in, they take last year's results, check any "material variances", a.k.a. big changes in the numbers, and do a few spot-checks. That's how audit works at all teh companies. And that's how it will continue to work, because it's just not possible to apply the kind of scrutiny you're imagining.

It takes companies a fleet of accountants, payroll people, managers, and finance staff to generate all the numbers you're talking about. Checking everything they do would require an even bigger fleet. Plus, you'd have to make the number of finance, etc. employees 3 times bigger, because they'd be spending a significant portion of their time explaining to the auditors what they'd done. Which would in turn require more auditors. . . meanwhile, the company can't actually make or sell anything, because they're too busy explaining what they made or sold last year to the auditors. Compared to the level of scrutiny currently in place, you're talking about a simply massive reallocation of resources to audit.

Say getting a really good audit requires increasing the number of employees by 1%. That's probably conservative. You're talking about taking enough workers out of the limited pool of skilled labor and transferring them to do work that is economically unproductive: all it does is check that companies actually made the stuff they say they made. Now, it's worth it if the damage to the economy is more than, say, 1% of GDP. But that isn't the case. The scandals were bad, and they hammered the market. But the market was going to get hammered by something, because it was enormously overvalued. The cost is all out of proportion to the benefit.

Meanwhile, if the company really, really wants to lie, they're going to put in five of their really sharp folks to surround the area they're lying about, and you're not going to catch them, because they're good liars, and because they know what you're looking for, but you don't.

Increasing the SEC budget may be worthwhile, but absent the kinds of structural changes Mindles is talking about, it's not going to fix the problem. And those changes can only come from reasoned debate between people who understand the issues, not mass hysteria.

From the desk of Jane Galt:

Well, smack my fanny, the

Well, smack my fanny, the Democrats are worried they're going to finish third in the New York governor's race.

That would be a major ouch! for the party, since it means they'd drop to third on the ballot, behind the Republicans and the Independance Party, for the next four years.

This is thanks to a lackluster campaign run by Carl McCall, combined with the advertising strength of filthy rich, certified wing-nut Tom Golisano, who has been attacking Pataki, but ironically, seems to be picking up Democrats who want to vote against Pataki, instead of the apparent target of his ads: Republicans who want to vote for someone who will actually, you know, govern like a conservative. Fiscally, I mean. Not that Golisano is necessarily that man; he's run for election before, and looking over the platforms he's run on, it's hard to see what he really stands for, except of course election.

Meanwhile, Pataki has been running some really atrocious ads against Carl McCall, basically accusing him of wanting to rape the environment, leave our children unwashed and illiterate, kill our needy seniors, and all manner of other horrors. . . all because as Comptroller, he didn't vote for companies to embrace price caps on prescription drugs, bizarrely cost-ineffective environmental proposals, and similar sterling ideas. In other words, he didn't violate his fiduciary duty to the people he was supposed to be representing. We've reached a pretty pass when the Republican governor is running to the left of the Democratic candidate -- except it's hard to be sure that's actually the case, because I've yet to see anything from McCall except a couple of genial news conferences at which he comes out foursqare in favor of Mom, Apple Pie, and Our American Values. I don't like the Pataki ads, but it's hard to be too angry about them, because the McCall response is so weak. Pataki's campaign has saturated the airways 'round here, and not once have I seen a McCall ad running against them. I know they may be short on cash, but what are you saving it for, Carl? The concession party? Election's in two weeks.

I still don't know which way I'm going to vote; every time I think I've decided, another ad runs and I change my mind. But my mother, who is an invaluable barometer for The Sentiment of the People, is thinking about voting for Golisano. She knows he's a wing-nut, but. . . "Pataki's just too much of a tall white man," she says. And McCall?

"Who's McCall?" she says, frowning. "Oh, the Democratic candidate? Is that his name?"

I think the Democrats are right to be very, very afraid.

From the desk of Mindles H. Dreck:

A Few Suggestions for Corporate Reform

Paul Krugman feels the administration has intentionally sidelined the corporate reform effort, thereby leaving the foxes in charge of the henhouse and making the world unsafe for democracy, etc. etc.

He has a point, although some would be more forgiving given the distractions of international politics at this precise moment. I take issue with the reflexive solution of simply growing the SEC's enforcement budget. Why throw money at something that isn't working? The SEC was pretty formidable prior to the end of the bubble, despite characterizations to the contrary.

Training and fielding additional examiners may actually be counterproductive. The SEC should take advantage of the fact that the marketplace itself is particularly interested in transparency and fraud avoidance at this time. The SEC regulates both listed companies and the brokers and investment managers that invest in them. My first recommendation is for the SEC to separate those regulatory functions in different agencies and enforcement personnel and have the company regulators ally themselves with the money management ("buy side") community as opposed to remaining the "cop" to both investors and investees.

Given the enormous increase in risk premia in the stock and bond markets, buy side analysts are focused on separating the wheat from the chaff in the corporate world. There is no reason the SEC can't leverage this marketplace pressure productively. Companies are incentivized to reveal as little as possible to "cops". They have substantially greater incentives, particularly now, to be transparent to the investor community.

So I am suggeting the SEC take advice from the money management community in seeking new disclosure and transparency requirements. In form, I would suggest the SEC not wait for FASB to change its rules, but establish a set of new disclosures that could be answered in a supplemental periodic public SEC interrogatory (part of the 10Q, perhaps), accompanied by an auditor letter (just like the annual report). In time, perhaps this interrogatory could become a "laboratory" for new accounting standards.

In addition, we probably need some changes to existing rules (both SEC, and Federal code). Many of them fall under the heading of "unintended consequences" of prior regulation.

Here are some proposed rule changes and potential interrogatory disclosures:

1) Repeal the laws (IRS 162) reducing tax deductibility of non-incentive-based compensation. Usint tax policy to discourage base pay packages in excess of $1 million (the amount where Congress apparently takes moral issue with pay) was partly responsible for the increase in use of options over the last decade. Actually, using the tax code to legislate morality is stupid anyway.

2) Revise regulation FD. While the intention of making all information available simultaneously to all investors was honorable, the result has been that many companies have chosen simply to disclose less (or rather less of material value, not necessarily quantity), based on scary legal advice like this. We were left with less transparency and a hoard of Wall Street analysts trying to figure out how to differentiate their research with their information edge gone. It was the added information from smart questions that institutional investors were willing to pay for (in the form of commissions). Since the lack of informational advantage left analysts without an institutional following, some fell back on their ability to tout the stock to large numbers of retail investors and others worked on M&A deals. You know the rest of the story by now.

3) Require that fully-diluted earnings include all perpetual or long-dated options or warrants, whether in-the-money or not. Bring back the old definitions of primary and fully-diluted EPS with this change to the "common stock equivalent" tests.

4) Require supplemental disclosure of compensation, including the market value of all options received.

5) Require the auditor to disclose in their cover letter all fees received and contracted for related to the subject company over the prior three years, breaking the audit fees out from all others.

6) Require supplemental disclosure of large contracts (>10% of period revenues), and the values of any contracts that include tying arrangements requiring vendors to purchase or use the company's products and payments in kind. In addition, require disclosure of contracts with unconsolidated affiliates (the notorious "special purpose vehicles") and all guaranties or hypothecations on behalf of those entities.

7) Eliminate differential treatment of dividends and capital gains (in fact, eliminate double taxation, but that's a whole 'nother post and it violates the expense restriction stipulated above). Jane Galt covered this issue well back in the good ol' days.

This post is a work in progress, so I haven't thought through everything above as thoroughly as if this were a professional journal (ahem) - but that was the point of posting it. I'll add some other items as I get the chance. In the meantime, I welcome your comments and any additional points you might offer about SEC structure and disclosure requirements.

UPDATE: You may be surprised by the regulatory ambition I display in this post. People who know me well know that my objection to regulation relates as much or more to an antipathy to bureaucracy than to the inevitable conclusion that free markets benefit more people in greater quantity than the alternatives. Transparency and the rule of law are necessary conditions to the free market. Regulatory bureaucracy, however, can be antithetical to free markets as well as morally hazardous and just plain hard on the senses.

SECOND UPDATE: A cynical reader might decide that I'm suggesting the resources of the SEC be co-opted for money managers! Bwha-ha-ha!

From the desk of Jane Galt:

Is all pharma advertising bad?

Is all pharma advertising bad?

I just watched a commercial aimed at people who have been misdiagnosed with depression, but in fact are manic-depressive, urging them to reassess their condition.

As it happens, I know a couple of people who had just this sort of thing happen, and it can be dangerous -- the medicines prescribed for depression can make bipolar people worse, not better.

The commercial was sponsored by Lilly, which, unsurprisingly, has a medication for bipolar disorder. Sure, it promotes the company's self interest. On the other hand, it seems to me, it also promotes people with bipolar disorder getting correctly diagnosed and treated. I know physicians hate those Celebrex commercials which put hordes of people in their office demanding meds they don't need. On the other hand, my sympathy is limited by the fact that hordes of people demand (unadvertised) antibiotics they don't need, and physicians comply just to get them out of their office. Live by the sword. . .

Anyway, isn't this just the sort of advertising we'd want done under a nationalized health care system? And who'd pay for it then? It's not like the government will have any interest in spending a lot of money in order to encourage people to seek expensive mental health treatment.

From the desk of Jane Galt:

Mindles H. Dreck, before whose

Mindles H. Dreck, before whose intelligence and erudition I kneel in awed admiration, has posted this table from the Census showing the income-to-poverty ratios from the census. This tells you, for each quintile (fancy word for fifth of the population, divided by income), what their income was as a percentage of the poverty line.

What does it show?

The bottom quintile held steady, or slightly faltered, from 1967, ground zero for Paul Krugman's edenic economic paradise. The second-from-the-bottom increased slightly. The middle quintile increased markedly. The second-from-the-top increased even more markedly. And the top quintile increased very markedly.

What does this tell us?

Well, Krugman is right that inequality is increasing. But it seems to deny his assertion that it is increasing because the bottom 4 quintiles have basically stayed stat, with all the increase in GDP since 1970 accruing to the very rich. The very bottom has stayed flat, but then, we'd expect that; the very bottom consists either of very young workers with no skills, or people for whom the government's baseline has set a floor on their standard of living. If that baseline was supporting life in 1967, you wouldn't expect it to have increased much since.

From the desk of Jane Galt:

Why it's hard for the

Why it's hard for the Fed to fight asset-price bubbles.

From the desk of Jane Galt:

University of Chicago Philosophy Professor.

University of Chicago Philosophy Professor. With a blog. Double-yum.

From the desk of Jane Galt:

Gridlock. Yummmm.

Gridlock. Yummmm.

From the desk of Jane Galt:

A number of you have

A number of you have emailed to ask what I think of the Paul Krugman article. I know you're all expecting me to dump all over it, but I quite agree with a lot of it. It's been obvious to me for quite some time that the level of many CEO salaries was based less on their personal acumen, and more on their ability to build a captive board that ratified insane stock options. And other unsalutary developments, about which I'll explain more later.

Some of the sections are terrific, such as this able summation of the theories behind rising inequality:

In the middle of the 1980's, as economists became aware that something important was happening to the distribution of income in America, they formulated three main hypotheses about its causes.

The ''globalization'' hypothesis tied America's changing income distribution to the growth of world trade, and especially the growing imports of manufactured goods from the third world. Its basic message was that blue-collar workers -- the sort of people who in my youth often made as much money as college-educated middle managers -- were losing ground in the face of competition from low-wage workers in Asia. A result was stagnation or decline in the wages of ordinary people, with a growing share of national income going to the highly educated.

A second hypothesis, ''skill-biased technological change,'' situated the cause of growing inequality not in foreign trade but in domestic innovation. The torrid pace of progress in information technology, so the story went, had increased the demand for the highly skilled and educated. And so the income distribution increasingly favored brains rather than brawn.

Finally, the ''superstar'' hypothesis -- named by the Chicago economist Sherwin Rosen -- offered a variant on the technological story. It argued that modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less. The classic example -- which gives the theory its name -- is the entertainment business. As Rosen pointed out, in bygone days there were hundreds of comedians making a modest living at live shows in the borscht belt and other places. Now they are mostly gone; what is left is a handful of superstar TV comedians.

The debates among these hypotheses -- particularly the debate between those who attributed growing inequality to globalization and those who attributed it to technology -- were many and bitter. I was a participant in those debates myself. But I won't dwell on them, because in the last few years there has been a growing sense among economists that none of these hypotheses work.

Although I would like to point out that one of the reasons he won't dwell is that he was firmly behind the "skill" theory, which doesn't track with the data. And personally, I think the theory he seems to prefer now is a little. . . well, iffy:

Some -- by no means all -- economists trying to understand growing inequality have begun to take seriously a hypothesis that would have been considered irredeemably fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to inequality. According to this view, the New Deal had a more profound impact on American society than even its most ardent admirers have suggested: it imposed norms of relative equality in pay that persisted for more than 30 years, creating the broadly middle-class society we came to take for granted. But those norms began to unravel in the 1970's and have done so at an accelerating pace.

I'm afraid I just don't believe that people refrained from, say, making themselves enormous compensation awards in the 60's because they felt it wouldn't be cricket, but feel no shame about doing so now. This relies on a somewhat utopian view of corporations:

Exhibit A for this view is the story of executive compensation. In the 1960's, America's great corporations behaved more like socialist republics than like cutthroat capitalist enterprises, and top executives behaved more like public-spirited bureaucrats than like captains of industry. I'm not exaggerating. Consider the description of executive behavior offered by John Kenneth Galbraith in his 1967 book, ''The New Industrial State'': ''Management does not go out ruthlessly to reward itself -- a sound management is expected to exercise restraint.'' Managerial self-dealing was a thing of the past: ''With the power of decision goes opportunity for making money. . . . Were everyone to seek to do so . . . the corporation would be a chaos of competitive avarice. But these are not the sort of thing that a good company man does; a remarkably effective code bans such behavior. Group decision-making insures, moreover, that almost everyone's actions and even thoughts are known to others. This acts to enforce the code and, more than incidentally, a high standard of personal honesty as well.''

John Kenneth Galbraith's "New Industrial State" is not exactly a quotation to fill me with confidence in what comes behind, since it is arguably the worst of Galbraith's breathtakingly bad books on economic theory. (His economic history books, such as the Great Crash of 1929, are much better.) And Krugman himself seems to be confusing GM's press releases with their actual behavior. Managerial self-dealing was rampant in the 50's, 60's and 70's, the era of takeovers done for no reason other than to build personal fiefdoms; expense accounts that would make a con man blush; and tax-deductible everything.

On the other hand, I flat out disagree with this:

Economists also did their bit to legitimize previously unthinkable levels of executive pay. During the 1980's and 1990's a torrent of academic papers -- popularized in business magazines and incorporated into consultants' recommendations -- argued that Gordon Gekko was right: greed is good; greed works. In order to get the best performance out of executives, these papers argued, it was necessary to align their interests with those of stockholders. And the way to do that was with large grants of stock or stock options.

I don't disagree that economists said this, but Krugman's implication is that they were wrong. They were right. They still are. What they didn't do was predict the ways that certain regulatory schemes -- schemes, I might add, that were passed to curb the inequality Krugman is lamenting -- interacted with this theory to produce a disaster. The law capping the deductibility of cash or stock compensation at $1 million pushed CEO compensation into stock options. This was compounded by the fact that stock options are tax favored, for both company and employee, over other forms of compensation.

This had several effects. Some seem to have taken unconscionable risks because options are a different security from the one investors hold, one that encourages risk taking behavior since executives have unlimited upside if the price rises, but the downside is the same whether the stock price holds steady or falls to 2 cents. It exacerbated an already strong trend towards earnings management, since executives generally want to liquidate their options as soon as they mature, and therefore needed, each and every quarter, to keep earnings from the precipitous slump an earnings restatement can produce. It also pushed a lot of compensation off-balance sheet, making it easier to raise it to unconscionable levels.

Now, many of my interlocutors will say that this doesn't matter, because investors will just back the options out and produce a "real" EPS number. I believe this is mistaken in several ways. First of all, during the bubble, many investors were trading on something other than a full understanding of the numbers. I was at a dinner last week, listening to several financial professionals agree with each other that it was ludicrous that people should trade stocks based on research done by investment banks, when the conflicts were obvious. Well, yes they were, to us. Not to my mother, or the millions of investors like her. Not to mention the fools who mortgaged the house to day trade. Many of the spectacular rises in price were produced by those folks, buying what they didn't understand. Executives with stock options profited handsomely from this sort of trading.

The other reason this doesn't hold is that the balance sheet is where the majority of people are going to look for executive compensation. Stock option grants are delayed compensation, and don't show up on the public radar until the executive cashes in some years later. Thus, any present grant is a painless gift for the board to make to the CEO; no one's going to complain until it's too late.

However, none of this invalidates the general theory that stock aligns CEO incentives with those of the shareholders better than does cash salary; it does. The companies of those halcyon days Krugman is recalling were logy with corporate fat, brought on by the astounding disconnect between what was good for the shareholders, and what was good for the managers who owned not very much corporate stock. Economists were trying to revitalize our economy by getting rid of the compensation structure that made management uncompetitive, and in fact I would argue that they succeeded in doing so. That they did not anticipate a market structure and tax/regulatory scheme that would give CEO's the ability to game the system to award themselves outlandish loot, does not make the theory a failure. It's more an indictment of the regulatory scheme than the theory.

Parts are also disingenuous:

It was one of those revealing moments. Responding to an e-mail message from a Canadian viewer, Robert Novak of ''Crossfire'' delivered a little speech: ''Marg, like most Canadians, you're ill informed and wrong. The U.S. has the longest standard of living -- longest life expectancy of any country in the world, including Canada. That's the truth.''

But it was Novak who had his facts wrong. Canadians can expect to live about two years longer than Americans. In fact, life expectancy in the U.S. is well below that in Canada, Japan and every major nation in Western Europe. On average, we can expect lives a bit shorter than those of Greeks, a bit longer than those of Portuguese. Male life expectancy is lower in the U.S. than it is in Costa Rica.

Still, you can understand why Novak assumed that we were No. 1. After all, we really are the richest major nation, with real G.D.P. per capita about 20 percent higher than Canada's. And it has been an article of faith in this country that a rising tide lifts all boats. Doesn't our high and rising national wealth translate into a high standard of living -- including good medical care -- for all Americans?

Well, no. Although America has higher per capita income than other advanced countries, it turns out that that's mainly because our rich are much richer. And here's a radical thought: if the rich get more, that leaves less for everyone else.

Now, first of all, the median is also higher than anyone else's median, which means it isn't just the rich getting richer. And second of all, I'm told that if you back out immigrants, Americans do, in fact, have the highest life-expectancy in the world; the 15% of our population that was born somewhere else has a dramatically lower life-expectancy than the native born. If you back out the effects of our sedentary lifestyle, it's even starker. It's not as if Krugman, an economist, is unable to compare median incomes, or look at the difference in health care outcomes for the native-born, both of which are obvious reality checks.

There's also the fact that after spending a lot of time comparing personal income data and concluding that the rich are getting richer, he then declares we're not allowed to compare income data between the US and Sweden, because it's not a good measure of quality of life. There's some validity to this, but if the problem is difficult when making comparisons between nations, it's even more difficult when making comparisons between eras, as Krugman is doing.

Has the qualitative life experience of the rich really increased, while the poor stayed stagnant? Since the 50's? 60's? 70's? I would argue it's the reverse. The head of GM's life is not, qualitatively, much better than that of the head of GM in the 50's. The poor, on the other hand, have more space, better food, more and better clothes, color televisions, VCR's, automobiles. . . items that were beyond the wildest dreams of the poor in the 1950's. The numbers may have diverged, but I would argue that the quality of life is converging. Consider that many of the things the poor routinely own mimic the servants available only to the very rich until a short time ago: answering machines and cell phones to substitute for butlers and personal secretaries. Cars to substitute for the coach and four. Appliances to substitute for the cook, parlormaid, laundress, and scullery maid. Television and movies to substitute for the performing arts. Exact reproductions that make the Great Masters available for any livingroom wall. You can make your own list.

CEO compensation is an easy, and correct, target. Others are less obvious: sure, a one-time capital gains tax on rich Americans who renounce citizenship because of the tax burden sounds nice, but I have to tell you, the more I look at the nasty states around the world, the gladder I am that I live in one that lets its citizens leave at any time, for any reason. You don't have to be a libertarian to feel that way. (I should also point out that it wasn't, to my recollection, a "capital gains" tax; it was a plan to liquidate the assets of said citizens, and then charge them a capital gains tax. . . tactics which do give a little whiff, though Krugman may call it hyperbole, of Nazi Germany. Essentially they were saying that they were going to seize the property of anyone who decided to emigrate, sell it off, and then award some fraction of the proceeds they deemed "fair" to the owner. Since this is, in fact, what Nazi Germany and a number of other unsavory regimes did in order to maintain their control over their citizens, the comparison is hardly unjust.)

Nor am I enamored of the "correlation equals causation" argument by which liberals attempt to generate a causal relationship between the lower income inequality of the 50's and 60's, and the growth of the economy during that period, which, as far as I know, have at best little to do with each other. This is beneath an economist of Krugman's stature.

And the policy segment is, well, disappointing.

The problem with raising taxes on the rich is that you don't get the folks you want to get: the CEO's pulling in billions. What you get is the folks making 300K as a corporate lawyer in Atlanta, or what have you. Sure, you don't feel sorry for him if you make 50K as a lathe operator, but if it's not fair for you to pay more of your income in taxes than he does, surely it's not fair for him to pay more of his income in taxes than Jack Welch. Ditto the estate tax. Krugman cleverly elides the highly disproportionate share of the estate tax that falls on estates in the lower end of the range. Both occur for the same reason: these are people in a high bracket, but not a high enough one to afford massive tax planning. Jack Welch can take his income in any time period he wants, in any form he wants. He has a fleet of tax lawyers to help him do so. The poor bastard pulling down 200K as a CIO faces a tax rate that can easily top 50%, and can't afford to shift income to shelter it in tax-free munis, or as capital gains. Nor can he set up a trust to make sure that his zillion useless descendants never have to worry about where their next meal is coming from. Krugman wonders why tax cuts sell politically? Well, that's why. Not many of us think we're going to be Jack Welch. But a lot of us can imagine being successful enough to pull in 200K -- and getting kicked in the teeth by a tax system designed to "soak the rich".

("Just close the loopholes!" I hear you cry. Not possible. The more complicated you make the tax code trying to "close the loopholes", the more loopholes you create, and the more it favors rich people who can afford experts to sort it all out. Don't ask me -- ask your accountant. He'll tell you.)

I really am sympathetic. I think CEO compensation is outrageous. And as I was watching a documentary on television the other day on the houses all the Vanderbilt heirs built, I thought "this is really revolting." Those enormous palaces built just to show other people that you were the sort of person who can afford to build an enormous palace and crust it with marble. . . well, I can see why the anarchists wanted to blow it all up.

But I also don't believe it's a failure of social norms; I think that's a flood of Kennedy nostalgia talking. Nor do I think, as Krugman seems to, that this just provides proof that people whose politics I disagree with are evil, venal fools. Although you'll probably be unsurprised to hear that I do think my political opponents are partly responsible: I think a lot of it has to do with regulation.

Some of it is the regulation of CEO pay and associated items, most of which were designed to limit the phenomenon that they instead exacerbated: the cap on the deductibility of cash compensation; the corporate raiders who were supposedly looting companies for their own benefit, but who actually had provided a powerful check on the self-dealing of top executives.

Some of it is the creation of locii in the economy, through regulation, where people could make truly vast fortunes with very little effort. I am thinking, in particular, of product liability lawsuits and especially class actions; and investment banking.

Because the myriad of SEC regulations presents an insurmountable barrier to entry for most new entrants into the investment banking business, and because of regulations regarding fees that limit competition, investment banks were able to charge fees of 7% of each IPO. Roll that around. 7% of IPO's that could top $1 billion, for several hundred hours' work. When you look at that kind of money, it's obvious: of course research was abused; of course banks flogged off crap on unsuspecting retail investors. We're talking hourly rates of close to $1 million. That's a lot of money to walk away from on principle.

Without the SEC, investment banking business would probably barely exist; a couple 100K to help do the valuation, a couple 100K to register the security on the electronic exchange, and hey, you're good to go. Ditto M&A; without the SEC, that work would mostly fall to the lawyers, not the bankers, and the bankers certainly wouldn't make the kind of fees they do now; valuation is not rocket science.

Now think about class actions. Hourly rates there are also outrageous, easily topping $10K an hour, sometimes venturing into the millions. Often, this is for suits of trivial benefit to the alleged plaintiffs, such as the one that got me a $3 coupon from some fast food restaurant I'd never heard of for some alleged abuse I don't recall.

Of course, not all our newly rich are investment bankers or trial lawyers. But a lot of them are, and they're getting richer all the time.

That's why I have to laugh when people point triumphantly to say, Jon Corzine, and say "More regulation must be called for! Even Jon Corzine is in favor." Well, of course he's in favor, sweety. . . more regulations mean more investment bankers making him more money. Just like you'd be in favor if the government was going to pass a law requiring everyone to buy some expensive product from some company you own. It's not proof of the majestic truth of the law, but of plain old government rent-seeking.

Interesting, isn't it, that the alleged champions of the people are the ones pushing laws to keep these chaps fat and happy?

Update Having skimmed through that long and pointless screed, you can now read Arnold Kling's better, more succinct write-up here.

From the desk of Jane Galt:

Damn, I love this man.

Damn, I love this man.

From the desk of Jane Galt:

A Ted Barlow snippet caught

A Ted Barlow snippet caught my eye:

Steve at Deinonychus had a counter-post to my argument on single-payer health care. I personally don't find it terribly convincing, because (in my reading) it's basically a philisophical libertarian attack on the idea of treating health care as a public good. But I know I'm never going to convince a libertarian to support single-payer health care philisophically; I'd have to do it practically. That is, I'd have to show that countries that have single-payer health care manage to provide better care to more people for a lot less money per patient. I think that's true. Nonetheless, Steve's post is well worth reading.

That's an interesting question: would single-payer systems be cheaper if they were implemented here?

Single-payer advocates assume the answer is "yes" because health spending is lower in countries with single-payer than here. But that result doesn't necessarily follow.

1) Medical research. The top research facilities in the world are almost all in the US. Right now, those facilities are paid for, in large part, by the payoff from successful procedures: if you're the only guy who can do a heart-lung-spleen transplant, you can charge a lot for it, especially to people who come from other countries, paying full freight, for the privilege.

2) Medical equipment. Most major advances again come from the United States, where the market for medical machines is lucrative. You pay $1500 for an MRI in order to compensate for the cost of developing the MRI. Governments, which negotiate in bulk, pay less than the average cost of the equipment.

3) Prescription drugs. Argue, if you will, that you could save money by lopping off the advertising budget, but advertising is only 1% of a company's SG&A budget, and junkets are much less than the cost of the stuff that would still have to be done, such as printing information about the stuff to give to doctors. There's also the lengthy approval process involved in selling to a government agency. If you want to assess the potential cost, consider that much of th eR&D spending by drug companies is really compliance spending to put things through the FDA.

In all of these cases, the free market is subsidizing the government purchases, both domestically and abroad. Kill the free market, and the price of the government purchases will have to rise.

Other arguments I've seen, such as the fantastic savings to be gained in administrative costs, strike me as unconvincing. Sure, Medicare has a low administration cost, but that's because they push it off to the doctors, who do 4-8 times as much paperwork for a Medicare patient as for a regular patient, which is why many won't take new Medicare patients -- they lose money on every visit.

Also, all of the labor in a government-run system will be union, even if they're contractors. This says to me that labor costs are going to rise, and productivity is going to fall, and really bad health-care workers are going to stay in their jobs while evidence is gathered and a the process runs out (average time to fire a worker in the New York state system: 7 years).

Also, there are problems in the other systems: doctor and nurse shortages, for example. Sure, some of them come here. But some of them are just deciding to do something else.

Finally, two of the main savings come from exogenous political variables not possible to implement here. The first is extremely limited liability: we're talking about awards in the $100,000 range for someone who mistakenly had the wrong limb amputated. That's not going to fly here. The second is low immigration, which improves costs and health outcomes; a very high percentage of expensive emergency room care is focused on people who were not born here, and are thus less healthy. A third is the sedentary American lifestyle and rich American diet, which are not going to change short of police-state tactics.

There are also difficulties in predicting how the market would evolve in the face of a US single-payer system. For example, drug costs. Assume, please, that much of, of not all of, the price premium on pharmaceuticals is necessary either to run the company or research the product. We are not going to make drugs 20%, much less 40% cheaper, by going to a single payer system. Unless we gut pharmaceutical research, that is.

I just went on a new drug, Singulair. It's the first really new type of asthma treatment in 40 years. It's not an exaggeration to say it's changed my life. Oh, sure, it's a "lifestyle" drug, in the sense that it's a "lifestyle" choice to engage in physical activity, and not visit the emergency room to have tubes stuck up your nose. Pharma profits bought that drug. I don't want to miss the next one. And I think most of you don't want to miss the treatment that will save, improve, or extend your life. We're willing to pay for it.

A US single-payer system unambiguously would have the power to gut the research budget. They can force pharmaceutical companies to sell near marginal cost, simply by taking the drug off the "approved" list if they don't agree. The pharmas can then sell, or go under. I find it hard to believe that politicians would refrain from so doing. The medical budget would simply be too large a portion of GDP, the taxes too unpopular, to hold back. I know that my friends on the left believe corporations can buy themselves any law they want, but that's simply not true. They can buy themselves addendums, riders, little changes in the law that benefit them at the expense of some other company -- but not at the expense of the majority of voters. Try this thought experiment: how much money from, say, Hollywood liberals, would it have taken to get congress to vote against the Iraq resolution? Answer: there is not enough money in the country to make Tom Daschle vote to get himself unelected next time around.

The open question, then, is whether the companies that are currently subsidized by the US would spread the costs around more, raising everyone's health spending to ca 13% of GDP -- a win for the US, a loss for everyone else, but no net loss of medical innovation -- or whether the political calculations of the various government officials involved, combined with monopoly purchasing power, would force margins down to the point where little research gets done. I'm betting on the latter. Government is, by its nature, a short-term enterprise. Politicians look to the next election, not the untold generations stretching ahead.

Building a model of what the system would look like is difficult. But there is ample reason to think that it would not be cheaper than the current system in most regards.

From the desk of Jane Galt:

From Den Beste: (On Screen):

From Den Beste:

(On Screen): Don't ever underestimate the courage of Australians:

A man armed with a number of handguns opened fire indiscriminately on a room of students at Monash University's Clayton campus today, killing two and injuring five people.

The man, aged in his mid-30s, was tackled by several people after opening fire in a classroom at the Menzies Building, part of the campus in outer south-eastern Melbourne, at about 11.20am.

They didn't dive for cover. They dived for the gunman.

Here was my first thought: what will the gun controllers say now? That they need stronger gun laws?

Update: For those who didn't understand the question, guns are banned in Australia.

From the desk of Jane Galt:

Survey reveals what journalists have

Survey reveals what journalists have always known: they're smarter than the rest of us put together.

From the desk of Jane Galt:

Here's a fascinating little tidbit

Here's a fascinating little tidbit -- a woman who was fired by Costco for refusing to remove her eyebrow ring is suing for, get this, religious discrimination. She claims to belong to the Church of Body Modification, which requires her to wear these things.

This is. . . what's the word I'm looking for? Oh, right, I can't use that word on a family blog. It's a crock, that's what it is. And it's really quite apalling. One hesitates to ask "Is nothing sacred?", but really, what other words will do? When you make up an entirely specious religion in a juvenile attempt to shelter your fashion choices behind the first amendment, what sort of morally bankrupt person are you? One realizes the judges are hesitant to start making pronouncements on what constitutes a "real" religion, but really, where will it end? The Church of Drinking at Work and Telling My Boss to Go [Censored]?

Well, not everything has a legal solution; sometimes, the social realm has to take over. Unfortunately, one imagines that this woman's sniggering little friends think this is all too cool. In time, however, she will grow up, and have to get other jobs, and work with real live adults who have better things to do than debase freedom of religion in this country in order to protect their right to accessorize. So, her name is Kimberly M. Cloutier of West Springfield, Massachussetts, and I'd like to urge, from this humble platform, that if you should ever run into Miss Cloutier, you do your best to know what the rest of society thinks of this sort of behavior. If you are an employer, I will point out that while it is not legal to make a hiring decision on the basis of someone's religion, it is perfectly legal to make it on the basis of their being an amoral twit. So if Kimberly M. Cloutier's resume ever comes across your desk, don't hesitate to send it to the circular file. And if you meet her socially, don't hesitate to give her what for. Politely, of course. There's no need to descend to her level.

From the desk of Jane Galt:

The most likely scenario, it

The most likely scenario, it seems to me, is that the Republicans keep the house and pick up one seat in the Senate. In which case, it is likely that Chafee will defect in order to keep control in Democratic hands.

But why? I mean, I understand the ideological reasons. . . kinda. It's not like he'll get anything passed as a Democrat. And for the same reason, it's not like the Republicans will get super-extreme bills passed if they get control, because they won't have a bullet-proof majority; that requires 60 seats. I guess there's the judges. But the Democrats have made it clear that they aren't going to approve judges unless they're. . . well, apparently, unless they're moderately lefty Democrats. Obviously, both sides are going to try to curtail the extremes, but as far as I can tell, Leahy isn't prepared to approve anyone to the right of Ruth Bader Ginsberg. That's not really a position even a nominal Republican can support, especially since the dearth of judges on the federal bench is going to approach crisis level if the Dems hold the Senate for another two years. Don't even THINK about Bush winning in '04; I shudder to think what our courts will look like if the Dems hold the Senate in that scenario.

On the downside, no one likes a traitor. Jeffords has found out it's not much fun to be Benedict Arnold; the Democrats don't need to treat him with kid gloves, because the Republicans wouldn't have him back. . . and the Republicans wouldn't vote for anything that helps Vermont if Jesus Christ himself came down to the Senate floor and commanded it. (Vengeance is mine, saith Trent). Once Chafee switches, he'll be in the same unenviable position. And quaking in fear lest the Republicans ever get control of the Senate again, which seems likely if Bush does well in '04, pulling a couple of candidates in behind him.

I hate to predict he won't, because I don't know what's going on in his head. But it doesn't seem like it has a whole lot of advantages for him.

From the desk of Jane Galt:

I kind of understand why

I kind of understand why Sadaam Hussein released all these prisoners. . . it's a way of defusing the political prisoners thing without admitting he holds political prisoners. But is the international community really so morally bankrupt that it's going to applaud Saddaam for releasing regular criminals to go prey on the population? And ignore it when he starts rounding up the political prisoners again? Or fail to notice how many political arrestees won't be making it home?

From the desk of Jane Galt:

So this is who's teaching

So this is who's teaching the teachers we are going to charge with shaping America's young minds.

From the desk of Jane Galt:

WaPo says Republicans are already

WaPo says Republicans are already planning for their takeover of the Senate. According to the article, most of these plans consist of technocratic plans to subsidize "key" industries. Gridlock has never sounded so sweet. On the bright side, they seem to be considering medical malpractice reform, without which a levelheaded friend who works with the insurance industry thinks that we will face a doctor's strike within the year; and lowering corporate taxes, which is a pet project of Live from the WTC, although they seem to be leaving the other half out, which is eliminating special treatment for capital gains. And don't snicker, Democrats -- if they get elected, and we get a raft of corporate welfare, it will be in large part because the Democratic leadership primed the voters by demanding that Republicans come up with a plan for the economy. If there's anything we should have learned from the last century, it's that when the government actually gets around to the planning, no one likes what results.

In related news, I have already commenced preparations for my appointment as Dictator For Life of The United States, Emperor of Canada, and Blessed Protector of Mexico, Luxembourg, Bora Bora, and the Associated Territories. Anyone who wishes to beg my mercy now, or shower me with gifts, should be aware that doing so immediately will be looked upon much more favorably than waiting until my inevitable reign is consecrated. And if Lincoln Chafee thinks that he can stop me with his puny threats, let it be known that I will impale him on the Imperial Sword of Justice should he attempt to challenge my power. Those who are doubtful about my ability to pull of this coup should spend a little time considering how much they might regret such a decision once I stand astride the world like a mighty colossus.

We now return to our regularly scheduled programming.

From the desk of Jane Galt:

D-Squared (who has fled my

D-Squared (who has fled my comments section for some reason, and is greatly missed) has a nice item on the nobel prizewinning experimental economics work.

One of the great problems for libertarians is that the longer we study economic theory, the clearer it becomes that people are apparently incapable of rationally maximizing expected value in many cases. This is due to two things: first, we don't have access to all the information we need, and second, we don't always make decisions rationally. The great contribution of Kahneman and Tversky (whose work I highly recommend if you can get your hands on it; they're not so impenetrable as to be incomprehensible to the layman), was to test out the ways in which people made bad decisions, in order to try to reveal the processes that were causing them to engage in non-value-maximizing behavior.

Now, many on the left who had never heard of these folks are triumphantly saying "See! We told you so!" Not so fast, l'il ranger. First of all, it's not like professional economists are unaware of the work. They're working on incorporating it into theory. In some ways, some of the decisions which might appear sub-rational simply manifest themselves as preferences in the larger model which have already been accounted for: risk aversion, for example. Second of all, the great lesson of studying either regulation or people who try to make their living gaming markets, such as financial professionals, is that the technocrats are subject to the same decision-making problems as the mass of consumers. That means that while it certainly means we need a more complex model for markets than we're currently using, it also means that government regulation is not the automatic solution to the problem.

Take one phenomenon documented by Kahneman and Tversky: loss aversion. This is the interesting discovery that people fear loss more than they value gain.

Take one game, where people can either take a $50 sure gain, or a $100 possible payoff, with a 50% chance of getting the cash, and a 50% chance of getting nothing. Most people will take the sure thing.

Now, take a game where people can either take a $50 sure loss, or a $100 possible loss, with a 50% chance of losing nothing, and a 50% chance of losing the whole $100. Most people will choose to gamble. This tells us that people evaluate expected losses differently from the way that they evaluate expected gains: they will assume more risk in order to avoid a loss.

Now, let's look at a government agency such as the FDA. The FDA's ostensible mandate is to maximize health and safety for everyone. In a rational world, this would involve doing a cost-benefit analysis of the expected gains, weighing it against the expected side effects, and approvi