Brad DeLong

We Will Make an Economist of Him Yet

The sharp-eyed Matthew Yglesias:

Last year the Trustees said that "Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.3 percent in 2030, and to 6.6 percent in 2078." This year things have gotten better, not worse. "Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.1 percent in 2030, and to 6.4 percent in 2079."

So why is the administration saying that Social Security projections have gotten worse? He puts his finger on it:

Apparently, the Trustees have changed their mind about what proportion of the overall economy in the future will come in the form of tax[able] payroll.

The 2005 Social Security Trustees Report

The 2005 Social Security Trustees Report lowers the estimate of Social Security's deficit through 2079 to 0.6% of GDP. Last year's Trustees Report pegged the deficit through 2078 at 0.7% of GDP.

Social Security's financial status improved even though the new forecast window adds a big deficit year--2079--to the calculation. And its financial status improved even though the Bush administration assumed:

1. Reduced earnings on the part of the young.
2. Reduced death rates on the part of the old.
3. Lower labor force participation on the part of the young and old.
4. More short term inflation.
5. No change in long-run productivity growth (in spite of very good productivity news).
6. No change in immigration (in spite of immigration running ahead of assumptions).

That's six thumbs on the scales, and still the long-run deficit shrinks.

So why is the headline that the financial status of Social Security has gotten worse? Can you say "an easily snowed press corps"? I knew you could.

Why Oh Why Are We Ruled by These Liars? (Tora Bora Edition)

They do lie about everything. Everything. From ThinkProgress:

George W. Bush, 10/29/04: Unfortunately – unfortunately, my opponent, tonight, continued to say things he knows are not true – accusing our military of passing up a chance to get Osama bin Laden in Tora Bora. As the Commander in charge of that operation, Tommy Franks had said, it’s simply not the case. It’s the worst kind of Monday morning quarterbacking. It is especially shameful in the light of a new tape from America’s enemy.

Associated Press, 3/23/05: A terror suspect held at Guantanamo Bay, Cuba, helped the al-Qaida leader escape his mountain hide-out at Tora Bora in 2001, according to a U.S. government document. The document, provided in response to a Freedom of Information request, says the unidentified detainee ‘assisted in the escape of Osama bin Laden from Tora Bora.’

Stephen Roach Goes to China

His report:

Morgan Stanley: China is a huge growth machine, but it is growth with a big asterisk.  Rapid GDP growth of at least 7% per annum is necessary to compensate for the headcount reductions that arise from ongoing reforms of state-owned enterprises -- an elimination of some 8–10 million jobs each year.  As such, sustained rapid growth is vital for stability of the Chinese system -- stability in economic, social, and even political terms.... By celebrating the successes of last year’s tightening campaign, the Chinese leadership is telling us that it has no desire to go overboard and trigger an unexpected hard landing that would jeopardize its all-important stability constraint.  Instead, the leaders would rather err on the side of tolerating more rapid growth....

For world financial markets, the China call is obviously very important.  Those banking on a prompt policy response from Beijing to the surprisingly strong Chinese data for early 2005 are likely to be disappointed.  At a minimum, the authorities seem willing to let the economy run for a while before they see how the data shake out in the months ahead.  Barring a growth accident elsewhere around the world, that suggests little relief on the demand side of energy or other commodity markets -- further fueling inflationary expectations, central bank tightening, and a general back-up in the bond market.  My bottom line for the markets: With China’s risk-reward calculus acutely sensitive to the all-important stability constraint, I read the message from this year’s China Development Forum as pretty much a green light on the growth front. 

As always, the highlight of this conference is a private session with the Premier... this year’s discussions were framed around the hot topic du jour -- Chinese currency policy.  Our group of outside experts laid out both sides of the debate to Wen Jiabao.  He said nothing to tip his hand and simply reiterated that China continues to actively study the issue and is ‘now trying to select both the proper plan and timing for RMB reform.’  Here, as well, I suspect it will all boil down to stability.... At the end of the meeting, the Premier shook his head and exclaimed, ‘I cannot sleep well at night with this issue of the RMB.’   He then glanced at his watch and politely excused himself.  As we left the Great Hall, a noisy motorcade rolled up to the official entrance.  We went out one door, and US Secretary of State Condoleezza Rice literally went in the other door.  There was a lot on Premier Wen Jiabao’s plate that day.  The growth and currency debates are only one piece in the big Chinese puzzle.  But in the end, always think stability when it comes to China -- whether the issue is economic or geopolitical.  For that reason alone, and based on what I picked up at this year’s China Development Forum, I have little reason to doubt that China is once again going for growth...

Fed Funds Rates at 3.75% by Year's End

Andrew Balls of the FT writes about the Federal Reserve's interest rate policy. The Fed's language has led the market to mark up its expectations of end-of-year Fed Funds rates from 3.5% to 3.75%:

FT.com / World / US - Fed signals concern on inflation: The US Federal Reserve on Tuesday signalled increased concern about inflation, as it again raised interest rates by a quarter point to 2.75 per cent. The rise was widely expected, and the policymaking Federal Open Market Committee said it expected to continue raising rates at a ‘measured’ pace, generally interpreted to mean quarter point increases. But the central bank held out the possibility that it might have to move more aggressively to curb inflationary pressures, or at least to continue with quarter-point increases for longer than investors had been expecting.

‘Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident,’ the statement said. The FOMC said it saw the risks to growth and inflation as roughly equal. But, in contrast to its statement in January, it made clear that this judgment was based on ‘appropriate monetary policy action’....

Futures markets, which had priced in a federal funds rate of about 3.5 per cent at year-end, increased this to 3.75 per cent, Mr Hooper said...

I'm beginning to understand the Fed a little better. I've tended to focus on falling real wages and wage shares as indicating that we are still very far from full employment, and that rapid increases in interest rates are inappropriate. The Fed is focusing much more on non-wage causes of increasing prices, and is very concerned not to get into a position where fighting inflation requires large and sudden interest rate increases in the context of a financial system that is much more fragile than we would like. Better higher unemployment now than even a chance of running into a conflict down the road between risking a financial crisis and letting inflation accelerate.

Why Oh Why Are We Ruled by These... Whatever-They-Ares?

At TAPPED, Jeffrey Dubner quotes Senate Majority Leader Bill Frist on his Schiavo bill:

TAPPED: March 2005 Archives: Mr. FRIST: Nothing in the current bill or its legislative history mandates a stay. I would assume, however, the Federal court would grant a stay based on the facts of this case because Mrs. Schiavo would need to be alive in order for the court to make its determination. Nevertheless, this bill does not change current law under which a stay is discretionary...

It's hard to tell if Frist was indicating a willingness to accept a court decision not to grant a stay, or indicating that he didn't think there was any question about it. If the latter, it just goes to show how little some of these Republicans appreciate how the law works in this country. They're like little kids taking sledgehammers to a jungle gym because it wasn't actually a rocketship.

Does Bill Frist have no lawyers on his staff--or in the Republican Senate Caucus--to listen to when they told him that a stay requires that the plaintiffs show a substantial likelihood of success on the merits of the case, and that given the inherent weakness of the federal deprivation-of-constitutional-rights claims the federal judge would probably not issue a stay? Is he a fool? Or did he know full well that the bill he was passing would probably have no effect on Ms. Schiavo's case? Is he a devious S.O.B.?

I think the first...

Is Chocolate Good for You?

From Commonsense Desk:

[CommonSenseDesk: Chocolate][1]: NEW YORK (Reuters Health) - Dark chocolate -- but not white chocolate - may help reduce blood pressure and boost the body's ability to metabolize sugar from food, according to the results of a small study. Investigators from the University of L'Aquila in Italy found that after eating only 100 grams, or 3.5 ounces, of dark chocolate every day for 15 days, 15 healthy people had lower blood pressures and were more sensitive to insulin, an important factor in metabolizing sugar. In contrast, eating roughly the same amount of white chocolate for the same period of time did not affect either blood pressure or insulin sensitivity...

[1]:

April Fool's Day Comes Early This Year!

April Fool's Day comes early this year!

My scheduled once-every-three-months surf over to Donald Luskin's website was supposed to happen on April 1. But a correspondent writes that Washington Post reporter Jonathan Weisman could use a little backup:

Donald Luskin on Social Security, Life-Cycle Accounts, and Robert J. Shiller on NRO Financial: The economics professor who may have coined the expression ‘irrational exuberance’ has been acting pretty irrational himself lately....

Here are the first two sentences from Jonathan Weisman’s story about the so-called ‘paper’ in last Friday’s Washington Post:

Nearly three-quarters of workers who opt for Social Security personal accounts under President Bush’s ‘default’ investment option are likely to earn less in benefits than those who stay with the traditional Social Security system, a prominent finance economist has concluded. A new paper by Yale University economist Robert J. Shiller found that under Bush’s default ‘life-cycle accounts’... nearly a third of workers would bring in less in benefits than if they remained in the traditional system.

Wait a second — is it ‘three-quarters of workers’ or ‘nearly a third of workers’?...

Readers of Weisman know that the "nearly three-quarters" number is if future returns have the same distribution as past global returns, and that the "nearly a third" number is if future returns have the same distribution as past U.S. returns. (Shiller thinks, quite reasonably, that the U.S. has had a bunch of good and lucky economic breaks over the past century and a half, and that as a result past U.S. returns overestimate what we should expect average luck to bring in the future.)

Only by artfully chopping and excerpting the lead of Weisman's article can Luskin create even the appearance of confusion between "nearly three-quarters" and "nearly a third."

Luskin's claim that Shiller coined the phrase "irrational exuberance"? It seems to be another piece of evidence of Luskin's isolation from reality. Shller writes:

Definition of "Irrational Exuberance": The term "irrational exuberance" derives from... Alan Greenspan... in a black-tie dinner speech... at the Washington Hilton Hotel December 5, 1996.... [P]eople ask me whether I coined the term irrational exuberance, since I (along with my colleague John Campbell and a number of others) testified before Greenspan and the Federal Reserve Board only two days earlier, on December 3, 1996.... I very much doubt that I am the origin of the words "irrational exuberance."... Greenspan is quoted in a Fortune Magazine article in March 1959... about "over-exuberance" of the financial community. Probably, "irrational exuberance" are Greenspan's own words... probably Alan Greenspan had written a draft of his 1996 speech even before I testified.

You do have to wonder just what National Review thinks it is doing by sponsoring Luskin. The overall effect is loony. After all, we have seen Luskin's ignorance of what a real exchange rate is, his claim that David Brooks is both 100% correct and is a traitor to his party for saying that the Bush administration routinely lies, his denial that the yield on a bond is an interest rate, his accusation that Gretchen Morgenstern is a plagiarist, his claim that George Soros might try to crash the market on October 31, 2004, his being off by a factor of five in calculating the liabilities of the Social Security system, his erroneous claims that faster productivity growth doesn't help the Social Security system--you get the picture.

Is National Review trying to damage the reputation of all its contributors? The blowback is something the smart ones are worrying about. The blowback should be something that we all worry about. Dean Esmay likes to quote John Stuart Mill: "Lord, enlighten thou our enemies... sharpen their wits, give acuteness to their perceptions and consecutiveness and clearness to their reasoning powers. We are in danger from their folly, not from their wisdom: their weakness is what fills us with apprehension, not their strength." A poor and stupid right wing is a dangerous menace--to us as well as to itself.

Stan Collender Watches the Budget Battles

Stan Collender is a very good reason to subscribe to http://nationaljournal.com/. (I would--if it were not for the fact that Stuart Taylor's playing footsie with torture turned my stomach too much.)

BUDGET BATTLES A Bad Week For The White House, by Stan Collender secollender@nationaljournal.com:

[Y]es, the Bush administration told anyone who would listen that it was pleased with the budget resolution passed by the Senate. But... President Bush was seriously hurt by the specifics of what happened last week.... The specific rejections by the Republican-controlled Senate of several of the president's highest-priority spending cuts are the most obvious.... That makes Bush promise to cut the deficit "in half" by the end of this decade -- a questionable pledge to begin with -- even less likely to happen....

And yet for all that, the collateral political damage from the White House's failure to get the Senate to go along with its proposals is far more important. There are now real questions about the ability of the House and Senate to agree on a fiscal 2006 budget resolution. Without that, there can be no reconciliation. That would mean that most of the Bush administration's other budget initiatives would be in serious trouble....

The fact that a number of Republican senators who in the past have been loyal to the Bush administration were willing to vote against the president on parts of the budget resolution should be a real concern to the White House. Many of these senators previously had been willing to sacrifice their own concerns to help the president achieve his priorities....

And if there was any doubt before, the Senate's budget resolution debate clearly shows that the president's plan for Social Security is in serious trouble.... [T]he Bush administration's "starve the beast" approach must now be considered a failure as well. Republicans obviously are not prepared to reduce spending on domestic programs just because a series of tax cuts helped create a record-high budget deficit....

Why Are We Ruled by These Liars? (Nuclear Material to Libya Edition)

They do lie about everything. Everything. From the Road to Surfdom:

the road to surfdom:I know it's hard to believe that the Bush administration would lie about anything to do with weapons of mass destruction, but apparently the Bush administration lied--to allies--about weapons of mass destruction:

In an effort to increase pressure on North Korea, the Bush administration told its Asian allies in briefings earlier this year that Pyongyang had exported nuclear material to Libya. That was a significant new charge, the first allegation that North Korea was helping to create a new nuclear weapons state.

But that is not what U.S. intelligence reported, according to two officials with detailed knowledge of the transaction. North Korea, according to the intelligence, had supplied uranium hexafluoride -- which can be enriched to weapons-grade uranium -- to Pakistan. It was Pakistan, a key U.S. ally with its own nuclear arsenal, that sold the material to Libya. The U.S. government had no evidence, the officials said, that North Korea knew of the second transaction.

Thanks to Laura Rozen for the link.

The lying to allies is one thing. To do it to protect probably the biggest single WMD-terrorist-threat nation on earth, Pakistan, is another. The fact that the lies subsequently buggered up ongoing negotiations between North Korea, China and South Korea is just icing on the cake.

But hey, did someone say lying about WMD?

It seems the head of Britain's MI6, Richard Dearlove, has revealed that he advised the Blair government nine months before the invasion that the Bush administration was planning to go to war with Iraq come what may, and that ''The facts and intelligence' were being 'fixed round the policy' by US President George Bush's Administration'.

Daniel Gross on Social Security and Income Insecurity

A very nice piece by Daniel Gross, taking off from Gosselin, Moffitt, and Hacker. He gets bonus points by citing the extremely smart and thoughtful Raj Chetty:

The New York Times > Business > Your Money > Economic View: Social Security as Dramamine, by DANIEL GROSS:

President Bush's plan to transform Social Security from an insurance program that guarantees a minimum income into something more closely resembling a 401(k) investment program isn't going very well.... [E]conomics could help explain the public's reluctance, too.... As we learn more about income volatility in the information age, some scholars say, Social Security - an insurance program designed for the industrial age - may be even more essential.

Income volatility has long been a hallmark of the American economy.... [S]cholars have concluded that incomes are much less stable - i.e., much more volatile - today than they have been in the past. 'There has unequivocally been general upward-trend income volatility since at least 1975,' said Bruce A. Moffitt, the Krieger-Eisenhower professor of economics at Johns Hopkins University.... According to a measure of volatility constructed by Jacob S. Hacker, a Yale political scientist, which tracks the five-year moving average of family incomes, income volatility rose 88 percent between 1978 and 2000.... A series of articles last year in The Los Angeles Times, written by Peter G. Gosselin, who worked closely with Professor Moffitt and other scholars, reported that in the 1970's, income for middle-class Americans tended to fluctuate by 16 percent a year. But in the 1980's and 1990's, middle-class incomes fluctuated an average of 30 percent. For those whose earnings placed them in the bottom fifth, income volatility rose from 25 percent in the early 1970's to 50 percent in recent years....

[I]ncome volatility can wreak greater havoc now than it did in the past. 'The old view among economists was that income volatility didn't affect consumption much,' said Raj Chetty, an economist at the University of California, Berkeley. It was generally thought that when families' incomes fell sharply and unexpectedly, they would borrow, tap into savings or send a second adult (frequently a mother) into the work force rather than sharply reduce consumption. But, Professor Chetty said, 'that no longer seems to be the case today.' Why? Many families already rely on two incomes. What's more, fixed commitments have risen as a percentage of total income....

THE factors that functioned as internal shock absorbers for families have weakened. And so, too, have external buffers. Over the last three decades, the percentage of workers covered by defined-benefit pension plans and employer-provided health insurance - guarantees that provide ballast for fluctuating incomes - has declined. Add this to the trend of rising volatility - especially for people in the lower and middle income levels - and it's easy to understand the reluctance to transform a government program that guarantees seniors an income. 'Social Security provides a vital kind of insurance,' Professor Hacker said. 'The real issue lurking behind this debate is whether we should have a program that provides the bedrock protection against economic risk.'

Some Damn Fool Thing in the Strait of Taiwan

I was reading the always-incisive (though sometimes mad) Niall Ferguson's analogy of Taiwan today to Belgium in 1914:

t r u t h o u t - Niall Ferguson | Sinking Globalization: It is true that the Chinese have no obvious incentive to pick a fight with the United States. But China's ambitions with respect to Taiwan are not about to disappear just because Beijing owns a stack of U.S. Treasury bonds. On the contrary, in the event of an economic crisis, China might be sorely tempted to play the nationalist card by threatening to take over its errant province. Would the United States really be willing to fight China over Taiwan, as it has pledged in the past to do? And what would happen if the Chinese authorities flexed their new financial muscles by dumping U.S. bonds on the world market? To the historian, Taiwan looks somewhat like the Belgium of old: a seemingly inconsequential country over which empires end up fighting to the death...

Scary. Deservedly scary. But let me transport Niall's paragraph back in time 150 years, replacing "Taiwan" with "Canada":

It is true that the Americans have no obvious incentive to pick a fight with the British Empire. But America's ambitions with respect to Canada are not about to disappear just because Washington knows that Lancashire needs to buy its cotton. On the contrary, in the event of an economic crisis, America might be sorely tempted to play the nationalist card by threatening to take over its errant province. Would the British Empire really be willing to fight America over Canada, as it has pledged in the past to do? And what would happen if the American authorities flexed their new economic muscles by embargoing cotton exports?...

A hundred and fifty years ago it was our "manifest destiny" to own the entire North American continent. Today the desire to annex Canada is limited to us left-of-center Democrats desperate to turn the marginal voter from a guy outside of Nashville with a hound dog to a guy in suburban Toronto with a Greenpeace card. May an analogous process take place between China and Taiwan.

Paul Krugman on the "$600 Billion a Year" Number

Paul Krugman tries his hand at showing what's wrong with the Bush-Lieberman "waiting a year to fix Social Security costs $600 billion" number:

Bruce Willis, Asteroids, and Unfunded Liabilities

Sometimes you really have to wonder. It should be obvious that the Social Security Administration’s estimate of the growth of unfunded liabilities says nothing – nothing at all – about the cost of delaying a “fix”, whatever that might mean. But it seems that even many economists – to say nothing of Joe Lieberman – don’t get it.

So here’s an example, to illustrate the point.

Suppose that an asteroid is bearing down on our planet. If nothing is done, it will strike in 2019, inflicting $20 trillion in losses. At a nominal interest rate of 5 percent, that’s a present value of $10 trillion.

If we do nothing about the asteroid, by next year the present value of the future losses from the asteroid strike will be $10.5 trillion. So the “unfunded liability” from the asteroid strike rises by $500 billion a year.

Suppose that there is a way to fix the problem: we can send Bruce Willis into space to blow up the asteroid. So here’s the question: if we wait a year to send Bruce Willis into space, does that cost $500 billion?

Of course not: it could cost either more or less. If waiting a year means that we’ve lost our last chance to stop the asteroid, it costs $10 trillion – the full present value of the avoidable losses the asteroid would inflict. On the other hand, if Bruce Willis can still blow up the asteroid next year (or any year before 2019), there is no cost at all to waiting. In fact, if waiting increases the Willis expedition’s chances of success, there’s a benefit to delay.

In other words, the $500 billion increase in the present value of the future costs from the asteroid says nothing about the costs of delaying action. All it says is that the future is getting closer.

The same is true for Social Security. The future is getting closer, so the unfunded liabilities of Social Security are rising in present value (though not as a percentage of GDP). This says nothing at all about the cost of delaying a “fix.” Those costs, if there are any, depend on the nature of the fix.

And it’s hard to see any costs of delaying the Bush version of a fix. After all, the problem is that in the absence of changes in the system, at some future date Social Security may have to pay reduced benefits. The only thing the Bush plan does to help the system’s finances is – guess what – reduce future benefits. Why does waiting a year to announce benefit cuts that won’t happen for several decades have any cost?

One last point. Lieberman defends himself by saying that unfunded liabilities do too grow $600 billion a year. But that’s not what he said earlier: he said that each year we delay costs $600 billion, which isn’t at all the same thing.

Paul is, of course, right. There is no real economic cost associated with delay by itself: the $600 billion per year number is just a standpoint-of-valuation and choice-of-units effect. There is a real economic cost associated with delay only if delay robs you of the opportunity to undertake the most efficient and effective Plan A and forces you to adopt an inferior Plan B for fixing the problem instead. That's not the case here.

General Motors

Lee Hawkins of the Wall Street Journal reports on GM:

GM Cuts Outlook For 2005 Profit: General Motors Corp. rattled financial markets as it slashed its earnings estimates for the first quarter and full year of 2005.... GM faces a 'perfect storm' of health-care and pension costs and rising commodity prices.... GM continues to see its market share fall and inventories of unsold vehicles in North America rise. New models it has touted have failed to grab consumers' attention. It faces increased competition from nimbler overseas rivals, especially Japan's Toyota Motor Corp., and is burdened by heavy costs from health-care and pension obligations to its 1.1 million employees, retirees and their dependents....

In a conference call yesterday, Mr. Wagoner and John Devine, GM's vice chairman and chief financial officer, said swifter and starker changes are needed to restore GM's profitability in North America. 'We made a lot of progress on reducing structural costs, but what we saved on the operating side has been filled in by higher legacy costs,' Mr. Wagoner said, using a shorthand term for the comparatively rich health and pension benefits that are a legacy from the days when GM controlled more than 40% of the U.S. market.... Mr. Wagoner faces significant hurdles in turning GM around. Weighed down by high health-care costs and pension obligations, the company is struggling to compete with lower-cost rivals, led by Toyota... new models that GM executives said would turn the tide for the company have yet to deliver significant enough gains to offset slumping demand for older models. Sales of large SUVs such as the Chevrolet Suburban and GMC Yukon, GM's highest-profit vehicles, have collapsed as gas prices have risen and competition has increased from lighter, more maneuverable crossover wagons that offer many of the functions of a larger SUV....

Mr. Wagoner has overseen strong gains by GM in productivity and steady progress on product quality. But those improvements haven't slowed GM's slide in U.S. market share. The auto maker's share fell to 25% at the end of February, down from nearly 33% a decade ago....

In its warning, GM said it expects to incur a loss of $1.50 a share in the first quarter of 2005, excluding special items, compared with a previous estimate of break-even or better. The company also lowered its full-year expectation to $1 to $2 a share from a previous estimate of $4 to $5 a share, and said that instead of generating $2 billion in cash this year, as previously forecast, it will burn $2 billion in cash. In 2004, GM reported net income of $3.7 billion, or $6.51 a share.

The fiscal year before last GM pulled in about $20 billion, of which $2 billion went to the pension plan, $5.5 billion to health care (for current workers and for the 2.3 retirees for every current worker), $9.5 billion to bondholders, and $0.7 billion to the tax guys--leaving $2.8 billion for the shareholders (on an equity base now valued at some $16 billion).

With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly.

---

Annual Financials for General Motors Corporation: Fiscal Year-End:12/31
All amounts in millions except per share amounts.
	2003	2002	2001	2000
	12/31/2003	12/31/2002	12/31/2001	12/31/2000
Net Sales	185,524.0	177,324.0	169,051.0	184,632.0
Cost Of Goods Sold	152,071.0	146,793.0	138,847.0	145,664.0
Gross Profit	33,453.0	30,531.0	30,204.0	38,968.0
SG and A Expenses	21,008.0	20,690.0	19,433.0	22,252.0
R and D Expenditures	-	-	-	-
Depreciation and Amortization	-	-	-	-
Income Before Depreciation and Amortization	12,445.0	9,841.0	10,771.0	16,716.0
Interest Expense	9,464.0	7,503.0	8,317.0	9,552.0
Investment Gains (Losses)	-	-	-	-
Total Operating Expenses	30,472.0	28,193.0	27,750.0	31,804.0
Non-Operating Income	-	-	-	-
Other Income	612.0	281.0	-138.0	-319.0
Income Before Tax	2,981.0	2,338.0	2,454.0	7,164.0
Provision For Income Taxes	731.0	644.0	1,094.0	2,393.0
Income After Tax	2,250.0	1,694.0	1,360.0	4,771.0
Minority Interest	-	-	-	-
Net Income Before Extra Items	2,862.0	1,975.0	1,222.0	4,452.0
Extra Items Discontinued Operations	960.0	-239.0	-621.0	-
Net Income	3,822.0	1,736.0	601.0	4,452.0

M$FT

Microsoft spent $4.4 billion on research and development in the year ending June 30, 2001. $6.3 billion on R&D in the year ending June 30, 2002, $6.6 billion on R&D in the year ending June 30, 2003, and $7.8 billion on R&D in the year ending June 30, 2004.

Just what, exactly, is it doing? By and large, Word and Excel are the same programs they were when Wordperfect, Lotus, and Borland went down in the middle of the 1990s. Explorer is the same program it was when Navigator went down in the late 1990s. The mail and presentation programs are nice (perhaps), but. And there have been a lot of improvements to Windows: it doesn't crash any hour anymore, and the flaws that now have the Berkeley sysadmins on a search-and-destroy mission looking for installations of Windows 3.1, 95, and 98 by and large no longer exist.

What will users have to show for R&D expenditures that may crack $9 billion this fiscal year? What will shareholders have to show for this $9 billion. I know, they say "10% sales growth." But what would sales growth be if R&D were cut back to, say, $1 billion?

If anyone understands Microsoft as a business enterprise, I'd like to hear from them...

---

MICROSOFT FINANCIALS

All amounts in millions except per share amounts.
	2003	2002	2001	2000
	06/30/2004	06/30/2003	06/30/2002	06/30/2001
Net Sales	36,835.0	32,187.0	28,365.0	25,296.0
Cost Of Goods Sold	6,716.0	6,059.0	5,699.0	3,455.0
SG and A Expenses	13,306.0	9,988.0	8,095.0	5,742.0
R and D Expenditures	7,779.0	6,595.0	6,299.0	4,379.0
Income Before Depreciation and Amortization	9,034.0	9,545.0	8,272.0	11,720.0
Non-Operating Income	3,162.0	1,509.0	-397.0	-195.0
Other Income	-	-	-	-
Income Before Tax	12,196.0	11,054.0	7,875.0	11,525.0
Provision For Income Taxes	4,028.0	3,523.0	2,520.0	3,804.0
Income After Tax	8,168.0	7,531.0	5,355.0	7,721.0
Minority Interest	-	-	-	-
Net Income Before Extra Items	8,168.0	7,531.0	5,355.0	7,721.0
Discontinued Operations	-	-	-	-375.0
Net Income	8,168.0	7,531.0	5,355.0	7,346.0

Joenertia II

Senator Joe Lieberman is at it again:

The New York Times > To the Editor:

Paul Krugman ('The $600 Billion Man,' column, March 15) claims that when I say that every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities, I am 'helping to spread a lie.'

Nonsense. Experts we've consulted at the Social Security Administration have confirmed this estimate.

Everyone knows that Social Security is on a path to insolvency. Every year that we wait to make the program solvent will cost us more.

I know that Mr. Krugman opposes the president's carved-out private savings accounts. So do I. But if we stop there, the victims will be tens of millions of seniors who need Social Security to escape poverty.

As a columnist, Mr. Krugman has the right to just say no. As a lawmaker, I have a responsibility to work with other members of Congress in both parties and with the administration to protect this great program.

And as a Democrat, I feel a special responsibility to preserve one of my party's most effective initiatives ever.

Joe Lieberman
U.S. Senator from Connecticut
Washington, March 16, 2005

I don't doubt that the SSA actuaries "confirmed this estimate" that "every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities" to Lieberman's staff. But if Lieberman's staff had continued the conversation a little bit, they might have learned some other things.

For example:

1. Of the $600 billion, $250 billion is a simple inflation adjustment--the difference between valuing an obligation in 2004-value dollars and valuing the same obligation in 2005-value dollars.
2. If we are going to close the Social Security funding gap by cutting benefits in the future, moving the valuation date forward in time raises not just the present value of the unfunded liability but also the present value of benefit cuts in, say, 2080. The same benefit cuts in 2080 and beyond are required to close the gap whether the gap is measured as $10.4 trillion 2004 dollars or as $11.0 trillion 2005 dollars.
3. If we are going to close the Social Security funding gap by raising taxes, then what we should compare the present value of the funding gap to is the present value of the tax base. And the present value of the tax base also grows larger as we move the valuation date forward in time. The present value of GDP in 2004 was $867 trillion. The present value of GDP in 2005 will (I think) be higher by $58 trillion--$21 trillion because of the inflation effect on nominal values, $26 trillion because of moving the valuation date forward a year, and an additional $11 trillion because productivity growth in 2004 was faster than the SSA had anticipated and that has implications for the entire forecast path of GDP.

If Lieberman had said, "The SSA projects that each year we delay the present value of the infinite-horizon unfunded Social Security obligation goes up by $600 billion. It also projects that the present value of all of America's future wealth--all future GDP--goes up by $58 trillion," then Paul Krugman would not be complaining. If he had said, "In 2004 the infinite-horizon unfunded Social Security obligation was 1.20% of the present value of GDP. It looks as though in 2005 it will be 1.19% of the present value of GDP," then Paul Krugman would not be complaining.

But Lieberman strips the $600 billion number of the surrounding context needed for it to make sense. That is why he is guilty of spreading a lie. He pretends that $600 billion is the extra economic cost of delaying the Social Security fix for a year, and it is not. What it is is a combination of an inflation adjustment and a valuation-year effect.

The fact that he is so easily snookered into repeating deceptive Republican talking points makes me wish that he would curb his feeling of "responsibility to work with other members of Congress in both parties and with the administration": he's going to get taken to the cleaners.

---

UPDATE: Let's contrast the phony Republican $600 billion calculation with a different, real one: suppose we wait an extra year before we start fixing the Bush deficits. What are the implications? Well, if we fix the deficit--stabilize the debt-to-GDP ratio--just one year later than we otherwise would, we will have run one extra year of deficits and so boosted the long-run debt-to-GDP ratio by three percentage points. Elmendorf and Mankiw's rule-of-thumb is that $1 of debt reduces annual GDP by $0.07. That means an extra three percentage points of debt-to-GDP reduces GDP by $25 billion: puts us on a new, lower growth path where in each year GDP is $25 billion lower than it would otherwise have been. Capitalize this at a yield of 3.33%, and find that delaying action on the Bush deficit for a year is like imposing a one-time tax of $750 billion on America (offset by the fact that people benefit from the U.S. government's spending and not-taxing $360 billion it doesn't have this year: call it a net cost of $390 billion). This is a *real* economic cost: a reduction in people's wealth and standards of living. It's not the result of an inflation adjustment. It's not the result of choosing a different base-date for making your financial calculations.

Shiller: Private Accounts a Bad Deal

The precis from Robert Shiller (2005), "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation":

Methodology:

The paper uses historical returns from 1871-2004 to assess the President’s personal accounts proposal. It does 91 different simulations for a worker born in 1990 assuming that he or she experiences the actual returns from 1871-1914, 1872-1915, 1873-1916, all the way through 1961-2004. This sample has an average real stock market return of 6.8% annually, slightly above the 6.5% annual return assumed by the Social Security actuaries.

These historical returns are not, however, a good guide to future returns. The United States economy and stock market performed extremely well over the last century. Many factors suggest this lucky experience is not likely to be repeated: most analysts project slower GDP growth in the next century, the risk premium required for investing in equities may have diminished, and the P-E ratio is very high by historical standards.

The Wall Street Journal recently surveyed 10 leading financial economists, the median projection for the stock market real rate of return in this survey was 4.6% above inflation. This is slightly lower than the median real return of 4.8% in a 15 countries from 1900-2000 surveyed by Dimson et. al.

As a result, the paper also use “adjusted” stock market returns designed to match the median stock return in 15 countries from 1900-2000, this is slightly above the return in the Wall Street Journal survey and is a more accurate projection of future returns.

Life-cycle Portfolio: The paper analyzes a range of potential portfolios. The featured portfolio is a “lifecycle portfolio” designed to capture the President’s proposal. According to the President’s plan, workers would be defaulted in a specific mixture of stocks and bonds. At age 47, workers would automatically be shifted into the “lifecycle portfolio” unless they signed a form to opt out. The President has not specified the portfolio allocation of this account, this paper assumes a benchmark portfolio is invested 85% in equities through age 29 and then phase-down to 15% equity investment by age 60.

Key Findings:

Using historical returns, the life-cycle portfolio loses money 32% of the time (i.e., 32% of the time the internal rate of return is less than the 3% real return required to break even in the proposal). The median rate of return is 3.4% annually.

Using more realistic adjusted returns, the life-cycle portfolio loses money 71% of the time and has a median rate of return of 2.6%.

Discussion: These rates of return are considerably below the 4.6% that the Social Security actuaries have assumed for. In addition there is considerably more risk than one would generally associate with previous discussions of “lifecycle portfolios.” The most important reason this happens is that the life-cycle portfolio is invested in higher-yielding assets in early years and lower-yielding assets in later years. Because contributions are made annually, the returns in later years matter much more (i.e., the return in the first year only affects the first contribution but the return in the last year affects all 44 years of contributions). This effect is heightened because the typical worker reaches peak earnings in his or her fifties.

Other Findings:

The optimal portfolio for a worker choosing the personal account as a replacement for much of the guaranteed Social Security benefit is considerably different from the optimal portfolio for a worker investing a 401(k) in addition to Social Security. If you have a Social Security benefit that is not subject to market risk, then you can invest your additional savings in a higher return/risk portfolio. But in the President’s proposal, the investments are replacing a large fraction of the existing Social Security benefit. Thus you would not want to invest them in as risky a portfolio.

A worker that has the correct balanced portfolio of stocks and bonds should not even participate in the accounts. Conditional on participating, he or she should invest entirely in bonds in order to avoid changing their current portfolio. Other psychologically constrained workers might benefit from shifting their portfolios more into equities. Social Security design has to take seriously psychological barriers to enlightened saving and investing; workers not subject to these barriers are very different from workers who already do things right. Overall, any proposals to encourage savings and investment should be designed with a variety of different types of workers clearly in mind.

Yes, Bush Private Accounts Are a Bad Deal

Jonathan Weisman writes a pretty good article about Robert Shiller's calculations in "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation". The 3% real interest rate on the clawback of contributions to private accounts is too high to make them a good deal. Shiller's right:

washingtonpost.com: Retirement Accounts Questioned: Nearly three-quarters of workers who opt for Social Security personal accounts under President Bush's 'default' investment option are likely to earn less in benefits than those who stay with the traditional Social Security system, a prominent finance economist has concluded. A new paper by Yale University economist Robert J. Shiller found that under Bush's default 'life-cycle accounts,'... a third of workers would bring in less in benefits than if they remained in the traditional system... [if future returns are like] historical rates of return in the United States. Using global rates of return, which... more closely track future conditions, life-cycle portfolios could be expected to fall short of the traditional system's returns 71 percent of the time.... Shiller used 91 computer simulations to analyze the past performance of stocks and bonds in a variety of portfolios. He measured the returns in 44-year increments, beginning in 1871, to approximate a worker's lifetime contributions to personal accounts.

The results 'showed a disappointing outlook for investors in the personal accounts relative to the rhetoric of their promoters,' concluded Shiller, a leading researcher in stock market volatility who gained fame in the late 1990s for his warnings of a stock market bubble. Shiller's paper... is adding to research that suggests the White House has been overly optimistic in its assumptions about personal investment accounts. A recent paper by Goldman Sachs economists said the White House's anticipated 4.6 percent rate of return above inflation could be nearly 2 percentage points too high.... Under the Bush proposal, workers would be better off choosing private accounts only if those accounts earned annual returns that exceed inflation by 3 percent.

'I'm one of these people who maintain the 3 percent rate is too high a trade-off,' said Jeremy J. Siegel, a finance professor at the University of Pennsylvania's Wharton School and a longtime advocate of stock investing. 'You can't get 3 percent in the market anymore.' Trent Duffy, a White House spokesman, said the administration is not contemplating changes to the proposal at this point. 'We're confident returns on the market will be well in excess of what we need to make the program work well for seniors,' he said....

[T]he 3 percent hurdle appears too high for many to clear, Shiller found, especially with the conservative strategy the administration has embraced. According to U.S. historical rates of return, the life-cycle portfolio fell short of the 3 percent threshold 32 percent of the time, meaning nearly a third of personal account holders would have been better off sticking with the traditional Social Security system. The median rate of return was 3.4 percent, barely better than the traditional system. Upon retirement, accounts would yield an annuity payment of about $1,000 a year, 'hardly a windfall,' Shiller said.

But he also adjusted for what he expects to be lower future rates of investment return by using historic rates of return from international stock and bond markets.... The life-cycle portfolio under these adjusted returns lost money compared with the traditional system 71 percent of the time, with a median rate of return of just 2.6 percent, $2,000 less in annual benefits than those of workers who stick with the traditional system. 'To say that there is a money machine in the stock market, that it can be tapped to yield great wealth without significant risk if one uses life-cycle investment methods, is a big mistake,' Shiller concluded...

I've been talking about this here, here, and here. But Shiller has real Monte-Carlo simulation results.

"Packed with Economists"?

The Economist loses its mind:

Economist.com | Economic policy: It is hard to claim that economists guarantee success: witness for instance the Clintons' economist-packed health-care plan...

"Economist packed"? I remember Ken Thorpe, Len Burman, Sherry Glied, and David Cutler (all of whom are superb). I remember me translating what they said for the benefit of the Treasury non-economists. I remember their having little impact on what came out of the White House. I remember *lots* of internal Treasury memos from civil servants like Jim Ukockis and Mike Springer--both of whom gave the American taxpayer at least ten times their salary in value added--discussing economic issues that Ira Magaziner and company simply did not get, and warning that the process was not set up to deal with issues of economic or administrative policy substance.

For example... due to freakish administrative mishap by the White House, some of their--very frank and very private--memos wound up getting publicly released. The picture is not of an "economist-packed" health-care plan with flocks of us darkening the skies and ruling the roost, but of a small shrill band desperately trying--and failing--to get the White House to listen to them:

Box Number: 1403
To: all health care task force and working group psnl
From: John D. Podesta, asst to pres and staff secy
Title: Task Force and Working Group Records

Summary: 1. must preserve all records; 2. may not delete electronic documents; 3. all property of White House and you may not take copies for any personal use or retention with permission of Marjorie Tarmey; 4. segregate TF from agency documents; 5. return all TF documents to intake center to Mary Schuneman, OEOB 287; identify general category of docs in each box...

---

Box Number: 1407 Date: 3/23/93
From: James R. Ukockis
Title: meetings 18, 20, 22 of Cluster Groups on short-term cost controls

Summary: "One particularly important point was made by Farah Walters (the CEO of a large non-profit health system in Cleveland) (fallacy of assuming high cost=inefficiency). Ms. Walters is a recent, and invaluable, addition to our wg. She is perhaps the only one who is sufficiently familiar with the institutional circumstances to be able to understand the real-world havoc the various constraining measures would entail." "Every option has fatal flaws." IM using euphemisms "a consensus is forming..."

Comment: Ukockis questions who is forming the consensus and what arguments/evidence are being considered; he may think the process is a sham and that outcome is predetermined; Also evidence of private sector participation.

---

Box Number: 1407 Date: 3/23/93
From: James R. Ukockis
Title: March 18, 20 and 22 Meetings of the Health Care Working Group--Cluster Group on Short-term Cost Controls

Summary: cont. from previous record "Every option has fatal flaws, which, although passed off as problems 'still under examination', are actually major roadblocks to successful implementation. Yet, because this adversarial process ahs been missing one adversary -- the con side -- there is substantial risk at least one of the cost containment options may become part of the May 3 reform package by default. ... Mr. Magaziner is employing euphimisms such as '...the current thinking is...', and '... a consensus is forming around...' to indicate certain policy choices are winning out. But, who makes up the consensus, and what arguments/ evidence are being considered? We need to press these issues or the Secretary may find he is confronted by a fait accompli when he is finally brought into the health policy process."

---

Box Number: 1407 Date: 3/30/93
From: Mike Springer
Title: Activity report: working group on health policy initiatives for underserved populations.

Summary: Concerning federal grants, "there are no mechanisms to hold states accountable in terms of consumer -oriented performance standards. In other words, it is the old categorical game would be covered with a grant consolidation fig leaf." "The Pres and Mrs. C’s committee will not be provided the analysis necessary to make that assessment; it appears that the decision has already been made by the leadership of a WG largely made up of agency and congressional staff whose perspectives and interests predispose them to continuation of the full array of existing categorical grant programs with as little change as possible."

Comment: WG mere window-dressing; main decisions already made to serve entrenched govt interests

---

Box Number: 1435 Date: 3/26/93
From: James R. Ukockis
Title: Comments on cost Control Options

Summary: "All four of the cost control options being considered involve generic problems common to any attempt to control price behavior. Non-price responses such as quality degradation, decreased availability, and investment disruptions can be expected to varying degrees if price is eliminated as an adjustment mechanism to cope with changing circumstances.... The need to judge the necessity of volume changes would be further confounded by the expected addition of large numbers of individuals seeking health care as the goal of universal coverage is pursued and accomplished. The surge of newly insured would make available aggregate volume data essentially noncomparable with data for the transition period..." [more]

Comment: dissension within the TF Classification: substance

Box Number: 1435 Date: 3/26/93
To:
From:
Title: Ukockis, p. 2

Summary: "If the marginal tax rates are made more draconian... it would not produce much tax revenue and would only force providers to take their income gains in nonmonetary form --particularly increased leisure.... In the present circumstance, the Medicare payment rates can be tolerated without bankrupting providers because the providers have an escape in the rates charged other payers. If the Medicare rate structure is extended to all payers, the escape is no longer available and great care would be needed to avoid financial havoc for many providers..."

Comment:

Box Number: 1435 Date: 3/26/93
To:
From:
Title: Ukockis, p.3

Summary: Problems with premium regulation. "The policy looks favorably upon the prospective forced exit of many companies from the health insurance field. The scenario is hardly one to entice timid investors. Second, the long run outlook is no more attractive. In return for exposure to significant short-term risk, aggressive investors dema nd a chance for big winnings later on. Nothing in the current policy rhetoric suggests the surviving insurance companies will have the chance to reap large profits under the new system. The result is obvious -- aggressive investors will not be attracted either. With both timid and aggressive investors excusing themselves, we are left with only crazy investors, which brings us to the government...." More on interest subsidies, drug price controls

Comment: pitfalls of price controls Classification: substance

How the Economist came to think that the Clinton health-care effort was "packed with economists" is a very interesting question. During the key months most of the Clinton administration's economists were working on the budget or NAFTA or both.

I'll try to find out.

When Webservers Attack!

Crooked Timber is down.

Kieran Healy explains:

Kieran Healy's Weblog: Crooked Timber is Down: Our transition to WordPress radically increased our database usage. Then we got a bit of an uptick in traffic on top of that and our host provider pulled the plug on us because we were gobbling up a lot of resources that needed to be shared. I have to say I think they were a bit peremptory about it. But in any event it seems we’re going to have to get a dedicated server now. Bit more pricey. Hopefully we’ll turn this around quickly and be back online soon.

Bruce Sacerdote on Nature and Nurture

Quoted from Steven Levitt and Stephen Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow: 0060776137):

In a paper titled "The Nature and Nurture of Economic Outcomes," the economist Bruce Sacerdote... takes a long-term quantitative look at the effects of parenting... three adoption studies.... Sacerdote found that parents who adopt children are typically smarter, better educated, and more highly paid than the baby's biological parents. But the adoptive parents' advantages had little bearing on the child's school performance... outweighed by the force of genetics. But, Sacerdote found... by the time the adopted children became adults, they had veered sharply from the destiny that IQ alone might have predicted. Compared to similar children who were not put up for adoption, the adoptees were far more likely to attend college, to have a well-paid job, and to wait until they were out of their teens before getting married...

Freakonomics

So a copy of the galleys to Steven Levitt and Stephen Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow: 006073132X), arrived today. I open it at random and find:

[A] crack gang works pretty much like the standard capitalist enterprise: you have to be near the top of the pyramid to make a big wage.... [M]ost of J.T.'s foot soldiers also held minimum-wage jobs in the legitimate sector to supplement their skimpy illicit earnings. The leader of another crack gang once told Venkatesh that he could easily afford to pay his foot soldiers more, but that it wouldn't be prudent. "You got all these n** below you who want your job, you dig?" he said "So... you try to take care of them, but.. you also have to show them you['re] the boss.... If you start taking losses, they see you as weak." Along with the bad pay, the foot soldiers faced terrible job conditions. For starters, they had to stand on a street corner all day and do business with crackheads.... Foot soldiers... risked arrest and... violence... The results are astonishingly bleak. If you were a member of J.T.'s gang for all four years, here is the typical fate.... arrested 5.9 [times].... Number of nonfatal wounds or injuries (not including injuries meted out by the gang itself for rules violations)... 2.4.... Chance of being killed... 1 in 4.

A 1-in-4 chance of being killed. Compare those odds to being a timber cutter.... Over four years' time, a timber cutter would stand only a 1-in-200 chance of being killed.... So if crack dealing is the most dangerous job in America, and if the salary is only $3.30 an hour, why an earth would anyone do such a job? Well... they all want to succeed in an extremely competitive field in which, if you reach the top, you are paid a fortune.... To kids growing up in a housing project on Chicago's south side, crack dealing was a glamor profession.... [T]he job of gang boss--highly visible and highly lucrative--was easily the best job they thought they had access to. Had they grown up under different circumstances, they might have thought about becoming economists.... But in the neighborhood where J.T.'s gang operated, the path to a decent legitimate job was practically invisible.... [B]arely one in three adult men worked at all.... [F]oot soldiers often asked... help in landing what they called "a good job": working as a janitor at the university of Chicago....

I have a feeling that I am going to recommend this very highly indeed when I have finished it...

---

Indeed, highly, highly recommended. Dubner and Levitt take the reader on an extravagant romp through a remarkably large range of Levitt's work. Mind you, I'm not sure that the fall in America's violent crime rate in the 1990s is--as Donohue and Levitt believe--fallout from Roe vs. Wade (I give them a 70% chance of being right). And I'm not at all sure that the important parts of parenting are, as they put it, not what parents do but who parents are: the self-reported information about what parents do is, I guess, much less reliable--so it's no surprise that children whose parents say they read to them everyday but don't have many books in the house don't have superior reading skills. For at some level, the doing/being distinction is unsustainable: what are we but what we do? It's noisy versus more accurate signals.

When Keyboards Attack!

Leslie Michael Orchard laments:

Bouncing Browsers - Archives - Blog - 0xDECAFBAD Blog: Safari seems zippy and easy on my CPU, but crashes at inopportune moments with lots of tabs open. And since the W is next to the Q and there’s no quit-confirmation in Safari, I’ve got yet another way to lose large groups of open tabs.

Yes. Let me join this plea. We hereby beg David Hyatt and company: please please please please please put quit-confirmation in Safari. We don't need yet another way to lose large groups of open tabs when our ring finger betrays us...

A Positive Program for Social Security

I'm writing a piece for Berkeley's GSPP's magazine, Policy Matters. It's trying to be a positive piece. Basically, I'm advocating Diamond-Orszag plus, where the "plus" includes automatic savings from your tax refund and a stronger Social Security Commission so that the Congress doesn't have to be too brave all at once.

---

A Genuinely Good Deal for Social Security

J. Bradford DeLong
U.C. Berkeley
March, 2005

Draft 1.2

Suppose that we lived in some bizarre parallel universe in which everything was topsy-turvy, and that as a result we were having an informed debate about what to do with our Social Security system that made sense. I know that this is total fantasy, but bear with me a minute: there is method to my madness. Suppose that this were so: what questions would we be trying to answer?

1. Roughly what proportion of pre-retirement income should we guarantee people will have after they retire--no matter how well their investments do, no matter how thrifty or feckless they were during their working years? In short, how big--measured as a share of pre-retirement income--should the Social Security system be?

We should guarantee a basic Social Security benefit of roughly half of pre-retirement after-tax income--a replacement rate for the median worker, counting state and local as well as federal taxes, of roughly 30 percent of pre-retirement pre-tax income. Anything less runs a substantial risk of producing a lot of elderly poverty: the feckless and the unlucky will, when they are old, live much worse than is common in the surrounding society. Now as society grows richer this elderly poverty will be a relative phenomenon: people will be much poorer than their neighbors, but few of them will be absolutely poor in the sense of living in boxes or eating catfood. Nevertheless, relative elderly poverty is real elderly poverty, and it is something that a good society should protect against.

2. How progressive should the Social Security system be? Those who make less than the average should probably have a higher replacement rate--receive a higher share of pre-retirement income--than those who make more than the average. But how much more?

The Social Security system should be somewhat but not extremely more progressive than is our current system. I see no case for exempting the top 15% of wage income from the Social Security tax base. I see no case for exempting non-wage income from the Social Security tax base. On the benefits side, we already have substantial progressivity: benefits relative to scaled lifetime taxes paid--the "Primary Insurance Amount"--rise at a rate of 0.9 for roughly the first $600 a month in your Social Security check, at a rate of 0.32 for roughly the next $900 a month, and at a rate of 0.15 thereafter. It would be good if the system were more progressive, covered everyone, and offered a minimum benefit to those whose taxes paid in were zero. But otherwise the system seems in good shape as well as progressivity is concerned.

3. How should this basic Social Security system be financed? Should it be pay-as-you-go, in that each generation of taxpayers pays for the last generation's retirement? Or should it be a funded system, that builds up enormous assets and so owns large chunks of the economy, and uses the returns on those assets to finance large chunks of benefits?

The answer to this question depends on the shape of future economic growth and demographic change. When the economy is growing faster than the interest rate, pay-as-you-go systems are attractive: they offer a low-cost way of moving wealth up the generations from the (richer) future to the (poorer) present, and so raising social welfare. When the economy is growing much more slowly than the interest rate, the burdens placed on workers by a pay-as-you-go system are much harder to justify, and funded systems--those that build up lots of assets to finance part or all of this generation's benefits--become much more attractive. Currently, the Social Security Administration's actuaries have a set of assumptions about economic growth, interest rates, and equity returns that I believe are inappropriate, and make pre-funded systems look artificially good and pay-as-you-go systems look artificially bad. There is definitely a strong case for pre-funding some of the cost of Social Security for the large baby-boom generation. There is not a case for prefunding much else of the basic benefit, and in my view there will not be a strong case for prefunding much of the basic benefit until immigration into the United States begins to decline significantly from its current relatively high levels.

4. What additional steps should the government take to make it easy--or perhaps mandatory--for people to save in their own private accounts, so that they reach retirement with more than their basic Social Security benefit to draw on?

This question is, I think, the most interesting. Americans do not take nearly as much advantage of tax-preferred and other savings vehicles as we economists think that they should. I am one of those who believes that America's national savings rate is dangerously low. The bottom half of America's income distribution has essentially no wealth invested in the stock market, and that cannot be right. It seems to me that these are problems that the government should address them.

How should it address them? The government should address them by making add-on savings out of payroll into individuals' private accounts the default--not mandatory, but the default: you have to fill out a form and check out a box in order not to make your contribution to your private account. The government should sweeten the pot: provide a partial match for funds directed into private accounts. The government should also provide a simple and reasonable default option for investing private accounts: half in a low-fee stock index fund, and half in a low-free bond fund. It should offer little else in the way of investment options: the danger that private account holders will be on the least informed side of trades is great, and the danger that private account holders will degrade their account through fees and transaction costs is great as well.

5. What kind of bureaucracy should govern and administer this system? And how much flexibility should it have--what adjustments should it be able to make on its own without going back to Congress for revised authorizing legislation?

It seems clear that the system needs more flexibility than current law allows. Fertility waxes and wanes, economic growth speeds up and slows down, returns increase and decrease. A pay-as-you-go system thought of as a defined-benefit program will always be sliding into deficit or surging into surplus. Americans' entitlement in retirement to their share of pay-as-you-go Social Security revenues is more equity-like than debt-like. Because there is no residual claimant or debtor (besides the U.S. government), the system should be operated more like a credit union or a mutual association, with payouts that naturally rise and fall with resources. Such a system is, I think, best operated with a Social Security Board of Trustees with a fiduciary duty to maintain the long-run actuarial balance of the system, and the power to alter benefit levels (and, within limits, contribution rates) to achieve that long-run actuarial balance.

As for the add-on system, we already have the bureaucracies to run it. The IRS is a natural place to receive the add-on contributions: a check box on form 1040 to opt in--or, better yet, opt out--to the savings program. And an expanded Thrift Savings Plan to manage the money. If it's a good enough system for members of congress and senior administration officials, it should be good enough for all Americans.

---

Thus the outlines of a potential deal on Social Security--a potential reform--that would be genuinely good for the country are clear:

1. Shift responsibility for maintaining actuarial balance off of the Congress and onto a Social Security Administration that has added discretion.

2. Uncap FICA--increase the Social Security tax base to all wage income and perhaps further--and apply the extra resources to sweeten private add-on accounts, to add a little more progressivity to benefits for the poor, and to serve other purposes (like boosting benefits for widows).

3. Make enrollment in private accounts automatic (it's done automatically on your 1040) but voluntary (you can fill in an extra form to get the money the IRS earmarks for your account back as part of your refund).

4. Use the government's existing Thrift Savings Plan as a vehicle for managing private add-on accounts--and keep its choices restricted: churning and extra administrative costs caused by asset shuffling are not your friend.

Such a plan should satisfy everyone. It would satisfy optimists who believe SSA's projections are much too pessimistic and that no benefit cuts ever are required: if they are right, it would impose no benefit cuts. This would satisfy pessimists who worry that there is no mechanism to finance the existing level of benefits: if they are right, the SSA will have the fiduciary duty and the power to cut benefits. This would satisfy Congress: if there are benefit cuts, their fingerprints aren't anywhere nearby. This would satisfy believers in boosting national savings: the revenues from uncapping FICA and the money flowing into private accounts from people's choosing the default option will boost national savings. This would satisfy those scared that private accounts would be churned and looted by unscrupulous brokers: the TSP is a good operation that provides powerful protections.

What's not to like?

Getting *Really* Medieval

Another person sides with the Ayatollah Khomeini instead of with James Madison:

Here we have James Madison, George Washington, and company:

Amendments to the Constitution VIII: Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

Here we have Eugene Volokh:

Eugene Volokh: I am especially pleased that the killing... was a slow throttling, and was preceded by a flogging. The one thing that troubles me (besides the fact that the murderer could only be killed once) is that the accomplice was sentenced to only 15 years.... I am being perfectly serious, by the way.... [S]ome forms of savagery deserve to be met not just with cold, bloodless justice but with the deliberate infliction of pain, with cruel vengeance rather than with supposed humaneness or squeamishness.... And, yes, I know this aligns me in this instance with the Iranian government.... [T]he punishment is proper because it's cruel.... I would therefore endorse amending the Cruel and Unusual Punishment Clause.... I think the Bill of Rights is generally a great idea, but I don't think it's holy writ handed down from on high....

[...]

A couple of people pointed out the risk of error.... [L]ocking up the wrong man for life isn't much better in my book than executing the wrong man.... I don't see it as much of an argument for a painless execution as opposed to a painful one...

Just don't let this guy near the carving knife at UCLA faculty dinners. That's what I'm saying.

Even the simple arguments--like that giving victims' relatives a leading place in the process increases the likelihood of error; or that if you let your rulers torture, you will soon find that you have rulers who like to torture--elude Volokh. There is a choice between Justice Coke and Judge Lynch, and we have chosen the Justice Coke side for very good reasons.

---

UPDATE: Eugene Volokh sees reason:

The Volokh Conspiracy - : Mark Kleiman's Extremely Sensible Post Has Persuaded Me that much as some monsters... deserve a deliberately painful death, our society's legal system (no matter what constitutional amendments there may be) can't provide it.

20050317: Economics 113: Practice Exam for Second Midterm

Practice Exam for Second Midterm

When Collaborative Filtering Programs Attack!

Michael Berube writes:

Michael Bérubé Online: I bought "Goodbye Yellow Brick Road" from Amazon.  I’m not sure why I did it.... [O]ver the short term, that purchase was a terrible mistake.  For weeks afterward, folks, I was presented with Amazon e-mails telling me that the people who’d purchased Goodbye Yellow Brick Road had also purchased the whole Parade of Lite Horribles, from Rod Stewart to Billy Joel to Phil Collins to Michael Bolton Himself.  Panicking, I quickly ordered all of Brian Eno’s ambient albums as well as some Soul Coughing to throw Amazon off the scent...

On the Radio

Madeleine Peyroux just sang an absolutely amazing version of "You're Going to Make Me Lonesome When You Go" on the radio...

In the Army

From the New York Times Dining section:

The New York Times > Dining & Wine > K.P. With the Culinary Arts: "CONDITIONS at the 30th National Military Culinary Championships here were almost identical to those in Mosul, Iraq: 36 degrees, snow and driving winds.... [A]ll the cooks have seen battlefields, or probably soon will.... Staff Sgt. Jesus Camacho, the Army's reigning king of sugar sculpture, recently finished a tour of duty in Afghanistan. Last Wednesday, the 6-foot-2, 220-pound sergeant spent 90 minutes creating an undersea tableau: a lobster on a bed of coral, near a green wine bottle with a message curled inside, all made from sugar. In Afghanistan, he was responsible for feeding 500 soldiers a day. 'There's no time to practice sugar when you're deployed,' he said. 'But at night I would read Pastry magazine.'

Yuval Rubenstein Is a Genius!

He writes:

The Left Coaster: Democrats Must Find the "Evolutionary Middle": By remarkable happenstance, I just experienced a 'mind meld' with Al From, Bruce Reed, and Ed Kilgore of the Democratic Leadership Council, similar to the one Marshall Wittmann experienced with Joe Lieberman. The occasion for this supernatural occurrence was a front-page article in the Washington Post highlighting a growing nationwide campaign to curtail the teaching of evolution in our nation's schools. Here is a summation of our 'meeting of the minds' (sorry, couldn't resist).

Fellow Democrats (even you, Chairman Dean):

We here at the Democratic Leadership Council were most distressed to read an article in the Washington Post highlighting ongoing efforts in 19 states to counteract the teaching of evolution:

Propelled by a polished strategy crafted by activists on America's political right, a battle is intensifying across the nation over how students are taught about the origins of life. Policymakers in 19 states are weighing proposals that question the science of evolution.

The proposals typically stop short of overturning evolution or introducing biblical accounts. Instead, they are calculated pleas to teach what advocates consider gaps in long-accepted Darwinian theory, with many relying on the idea of intelligent design, which posits the central role of a creator.

[...]

They are acting now because they feel emboldened by the country's conservative currents and by President Bush, who angered many scientists and teachers by declaring that the jury is still out on evolution. Sharing strong convictions, deep pockets and impressive political credentials -- if not always the same goals -- the activists are building a sizable network.

Undoubtedly, the liberal urban elites in our party, led by Michael Moore and Eli Pariser, will scoff at these latest efforts. But we believe that this attitude is dangerously misguided. By fully embracing the theory of evolution, Democrats risk alienating millions of voters in our nation's heartland who would otherwise be attracted to our party's agenda. Therefore, instead of turning their backs on these Red State evolution skeptics, we strongly encourage Democrats to embrace the 'evolutionary middle.'

What exactly is the 'evolutionary middle,' you may ask? Well, one thing it most certainly is not is a wholesale embrace of creationism. After all, we do realize that, however much we at the DLC may dislike it, the Democratic party will never turn its back on the scientific community, let alone rational empiricism. Instead, we believe that the 'evolutionary middle' involves accepting the basic tenets of evolutionary theory, but loudly and insistently reminding our Red State brethren that it is, after all, only a theory. Furthermore, we must also go out of our way to emphasize that there is room for both evolution and the rival theory of 'intelligent design.' Rather than adopting a Howard Dean-like rejectionism, we must find common ground with ID proponents. To that end, we are announcing a partnership with the Discovery Institute, the leading proponents of Intelligent Design. Our goal is to adopt a set of scientific principles that are acceptable to both evolution adherents and ID theorists.

The Democratic party is at a critical juncture in its history. Held hostage by militant secularists and anti-religious zealots, our party is in danger of ceding a wide swathe of political ground to Republicans by failing to heed the concerns of evolution-hostile voters throughout the country. This is why our initiative to reach the 'evolutionary middle' is such a pressing concern. Please join us.

I'm enough of a fan of the DLC to think that it has a powerful productive role to play in the Democratic Party (if it would do things like actually produce a reasonable Social Security plan rather than complaining that other Democrats haven't). But Yuval's parody of the DLC is *so* *so* true.

Off Message

Think Progress watches George W. Bush go off message:

Think Progress: "I have not laid out a plan yet, intentionally." --George W. Bush, 3/16/05

VERSUS

"President Bush's plan allows you to make a decision to put your money in a different kind of prudent investment, with the potential for receiving higher pay-outs." --White House press release, "Fact Sheet: Setting the Record Straight," 2/3/05

"Bush's plan for Social Security" generates 6,190 hits on Google and 11,900 hits on Google News.

About Brad DeLong

Brad DeLong is Professor of Economics at the University of California at Berkeley and is a Research Associate of the National Bureau of Economic Research. He is also Chair of Berkeley's "Political Economy of Industrial Societies" International and Area Studies major, and Associate Director of Berkeley's COINS center. From 1993-1995 he worked for the Clinton Administration's Department of the Treasury as one of the Deputy Assistant Secretaries for Economic Policy. He has taught at Boston University, Harvard University, and MIT in addition to Berkeley. He tries to focus his research on economic history, business cycles, economic growth, comparative technological revolutions, and the history of economic thought.

He has a substantial internet presence as well. His website can be found at www.j-bradford-delong.net and his (recently moved) weblog at delong.typepad.com.

Charity Begins with Big Watching Robotic Eyeballs

Neuroeconomics is really fun!

Boing Boing reports:

Boing Boing: Humans are generous if watched, even by photo of robot: Last week, I posted about a scientific study demonstrating that monkeys think about whether they'll be seen before they swipe food that's not theirs. Similarly, humans donate more to charity if they're being watched. And oddly, this is true even if the gaze is coming from a photo of an anthropomorphic robot. Researchers at Harvard University tested the altruism of 96 volunteers with a game involving the donation of money. From New Scientist:

The researchers split the group into two. Half made their choices undisturbed at a computer screen, while the others were faced with a photo of Kismet - ostensibly not part of the experiment. The players who gazed at the cute robot gave 30 per cent more to the pot than the others. (Investigators Terry) Burnham and (Brian) Hare believe that at some subconscious level they were aware of being watched. Being seen to be generous might mean an increased chance of receiving gifts in future or less chance of punishment...

Burnham believes that even though the parts of our brain that carry out decision-making know that the robot image is just that, Kismet's eyes trigger something more deep-seated. We can manipulate altruistic behaviour with a pair of fake eyeballs because ancient parts of our brain fail to recognise them as fake, he says.

Why Oh Why Can't We Have a Better Press Corps? (Economist-on-Wolfowitz Edition)

Simply bizarre:

Economist.com | The World Bank: But [Wolfowitz's] lack of experience in the development community does not necessarily make him a bad candidate. Having served under Donald Rumsfeld during the controversial ‘Revolution in Military Affairs’, Mr Wolfowitz might, some argue, be well placed to bring radical change to an organisation sorely in need of it...

Should one say that this Rumsfeldian "Revolution in Military Affairs" simply has not happened? That with the exception of the 3rd ID's masterful outflanking march on Baghdad, Rumsfeld's tenure at the Pentagon has not seen a revolutionary modernization of the U.S. military but (a) attrition as too-few soldiers are tied down in Iraq on military police missions they are not organized for, (b) waste of money on missile defense systems that do not work, and (c) Abu Ghraib? That "radical change" is not good in itself if the people undertaking it have no clue what kind of change is desirable?

The Economist needs to shape up quickly if it wants to keep its reputation.

Sensitive Dependence of Answer on Grading Professor...

Barry Eichengreen and I are giving a makeup exam today:

---

Economics 210a Makeup Final Exam

Spring 2005

Answer one question from each part:

Part I

1. How is it possible to have commerce without law? How much commerce are you likely to have without law?
2. In what respects was the experience of humanity between the invention of agriculture and the industrial revolution "Malthusian"? In what respects is the Malthusian model inadequate to understanding pre-industrial economic history?

Part II

1. Studies of both capital and labor markets have used the spatial dispersion of rates of return as a measure of market development. Is this a sensible way of analyzing this issue? What does it capture and what does it leave out? Studies applying this methodology to 19th century American factor markets seem to reach very different conclusions depending on the markets on which they focus. Describe these different conclusions. Are these differences indicative of the limitations of the methodology, or are they telling us something important about how markets develop and about American history?
2. The speed with which Britain rose to become the first industrial nation and then lost its relative edge have struck economic historians as unusual and in need of explanation. Is the rapidity of these transformations in fact faster than we would have expected? If so, what factors in your estimation played major roles both in Britain’s ascent and in Britain’s relative decline?

Part III

1. Historical studies of the classical and interwar gold standard pay close attention to the so-called “rules of the game.” What were these rules? When were they invented? Is this focus on the so-called rules of the game a productive way of understanding differences in the operation of the international gold standard in these two periods?
2. It is sometimes argued that the case of the United States does not conform to the "international interpretation" of the Great Depression that has been extensively discussed in recent years. In what respects, if any, does U.S. experience in the 1920s and 1930s differ from that of other industrial countries. Do these differences suggest that international factors have less to say about this country’s Depression experience?

---

The interesting thing is that the correct answer to III.2 depends heavily on whether Barry or I am grading it. I say that the "international interpretation" by and large doesn't apply to the U.S.--it's a small part of the story (while it is an enormously large part of the story outside the U.S.) Barry says that the Great Depression in the U.S. is not that different from the Great Depression elsewhere.

I hope we made it clear that Barry is grading III.2...

The Bush Clown Show Continues

Can anyone come up with any reason to think that Paul Wolfowitz is the best person to be President of the World Bank?

FT.com / World / US - Wolfowitz to be named to lead World Bank: Paul Wolfowitz, US deputy secretary of defence, is to be nominated by president George W. Bush to replace James Wolfensohn as the president of the World Bank. The nomination of Mr Wolfowitz, one of the chief architects of the Iraq war and a former US ambassador to Indonesia, would likely be highly controversial, and could raise new questions about the process by which the World Bank chief is selected. One administration official said his nomination ‘would have enormous repercussions within the development community’.

Leadership of the World Bank and International Monetary Fund is decided by all the shareholders in the institutions. But the US and Europe in effect divide up the top jobs, with an American heading the bank and a European running the fund.

The effort to pick the US candidate has been led by the White House National Security Council and the Council of Economic Advisers. The Treasury led consultations with other World Bank shareholders.

This Is Not Good

From Unqualified Offerings:

US Kills Iraqi Leader § Unqualified Offerings: Not a resistance leader, mind you.

The deputy commander of the Iraqi army in western Al-Anbar province was shot dead by US troops at a checkpoint Tuesday night, a police officer said. ‘The US forces opened fire at 8:00 pm on Brigadier General Ismail Swayed al-Obeid, who had left his base in Baghdadi to head home,’ police Captain Amin al-Hitti said. ‘They spotted him on the road after the curfew, which goes into effect at 6pm,’ the officer said in Baghdadi, 185 kilometres west of the capital.

Damned Commie Italians screw up everything, then lie about it.

To get all anti-imperialist on you like usual, I must note that this man was shot by Americans for being out after ‘curfew’ in his own country.

Dealing with Trolls...

Our first two trolls have shown up in the comments here on typepad. Pity.

I don't have time to moderate the comments to this thing properly. But I will try.

Here is some food for thought:

Teresa Nielsen Hayden: Some things I know about moderating conversations in virtual space:

1. There can be no ongoing discourse without some degree of moderation, if only to kill off the hardcore trolls. It takes rather more moderation than that to create a complex, nuanced, civil discourse. If you want that to happen, you have to give of yourself. Providing the space but not tending the conversation is like expecting that your front yard will automatically turn itself into a garden.
2. Once you have a well-established online conversation space, with enough regulars to explain the local mores to newcomers, they’ll do a lot of the policing themselves.
3. You own the space. You host the conversation. You don’t own the community. Respect their needs. For instance, if you’re going away for a while, don’t shut down your comment area. Give them an open thread to play with, so they’ll still be there when you get back.
4. Message persistence rewards people who write good comments.
5. Over-specific rules are an invitation to people who get off on gaming the system.
6. Civil speech and impassioned speech are not opposed and mutually exclusive sets. Being interesting trumps any amount of conventional politeness.
7. Things to cherish: Your regulars. A sense of community. Real expertise. Genuine engagement with the subject under discussion. Outstanding performances. Helping others. Cooperation in maintenance of a good conversation. Taking the time to teach newbies the ropes. All these things should be rewarded with your attention and praise. And if you get a particularly good comment, consider adding it to the original post.
8. Grant more lenience to participants who are only part-time jerks, as long as they’re valuable the rest of the time.
9. If you judge that a post is offensive, upsetting, or just plain unpleasant, it’s important to get rid of it, or at least make it hard to read. Do it as quickly as possible. There’s no more useless advice than to tell people to just ignore such things. We can’t. We automatically read what falls under our eyes.
10. Another important rule: You can let one jeering, unpleasant jerk hang around for a while, but the minute you get two or more of them egging each other on, they both have to go, and all their recent messages with them. There are others like them prowling the net, looking for just that kind of situation. More of them will turn up, and they’ll encourage each other to behave more and more outrageously. Kill them quickly and have no regrets.
11. You can’t automate intelligence. In theory, systems like Slashdot’s ought to work better than they do. Maintaining a conversation is a task for human beings.
12. Disemvowelling works. Consider it.
13. If someone you’ve disemvowelled comes back and behaves, forgive and forget their earlier gaffes. You’re acting in the service of civility, not abstract justice.

Buttonwood Thinks About the Dollar

From the Economist:

Economist.com | The Buttonwood column: the dollar: In two of the past three weeks, the dollar took a pasting on reports that various Asian central banks, whose purchases of America’s debt help it to go on borrowing and consuming, were planning to diversify their foreign-exchange reserves away from dollars. Bond yields spiked up....

America’s economic growth... mammoth consumption by both the private and public sectors... big trade and fiscal deficits... needs foreigners willing to suspend disbelief and buy shiploads of securities denominated in a currency that has steadily lost value for about 40 years.... Asian central banks have accumulated about $2.5 trillion in foreign-exchange reserves, up a quarter in little more than a year, most of it in dollars; Japan and China alone have reserves of nearly $1.5 trillion between them.

Central banks have more reason to purchase dollar assets than to dump them. Buying American securities keeps their own currencies low, their exports competitive and their workers free to move from fields to factories.... But the Faustian deal... whereby America gets to spend beyond its means and Asia gets to invest in export-led growth... turns out to have a shorter horizon than most people reckoned. It could turn sour at any time now. And confirmation of that comes from another set of economic data, this time due out on Wednesday: figures for America’s fourth-quarter current-account deficit. Officials have already warned that it will be a stinker....

[W]hat will happen if a significant portion of countries decided not to add to their dollar holdings? More than the dollar would weaken. Big foreign buyers of bonds have been keeping interest rates down, perhaps by one percentage point, as Alan Greenspan suggests. That would change, for a start. Without this support, the yield on the ten-year benchmark Treasury bond could rise to more than 5%, pushing up interest rates on mortgages. That, in turn, could prick America’s house-price bubble and prompt a general deleveraging, with implications for economic growth both in America and elsewhere. Standard & Poor’s, a rating agency, warned on Monday that a weak dollar would substantially increase concerns about credit quality. This is perhaps not the week to air such apocalyptic concerns, though they are much on Buttonwood’s mind. In the end, what foreign central bankers have it in their power to do is to reveal before all the world that the mighty American economic empire has no clothes...

Meanwhile, it seems as though the spring Brookings Panel on Economic Activity has four dollar papers--Mike Dooley and Peter Garber, "TBA," discussed by Barry Eichengreen and Jeffrey Frankel; Sebastian Edwards, "The U.S. Dollar and Twenty Five Years of U.S. Current Account Imbalances," discussed by Kathryn Dominguez and Pierre-Olivier Gourinchas; Olivier Blanchard and Francesco Giavazzi, "The U.S. Current Account, the Dollar, the Euro, and the Yen," discussed by Ben Bernanke and Helene Rey; and Maury Obstfeld and Ken Rogoff, "TBA," discussed by Richard Cooper and T.N. Srinivasan--and us on "Asset Returns and Economic Growth." The only one of the four dollar papers I've seen is Blanchard and Giavazzi.

Feingold and Chaffee Are Senators...

Mark Schmitt writes that Feingold and Chaffee are trying to do good this week. Let's salute them. We need more senators like this, and fewer who either have two faces or no sense of their responsibility to the country:

The Decembrist: PAYGO!: There's a lot going on on Capitol Hill this week.... One vote in the Senate will be of profound importance, however: On Wednesday, Senators Chafee and Feingold are expected to offer an amendment to the budget resolution restoring the 'Pay-as-you-go' rules, known as PAYGO, which will require Congress to pay for any further tax cuts with offsetting tax increases or spending cuts. The budget resolution as passed by the Senate Budget Committee lasts week instructs the Senate Finance Committee to come back with tax cuts totaling $70 billion, which will add to the deficit.

If the PAYGO rules, which were rejected on a party-line vote in the Budget Committee, pass, those tax cuts will either have to be paid for, or they will be subject to a 'point of order' in the Senate which will require 60 votes.

More likely, if the PAYGO amendment passes in the Senate, it will not pass in the House, and the two houses will not be able to agree on a budget resolution, which is not the end of the world. It happened last year. Without a budget resolution, though, there can't be a budget reconciliation bill, which has the same effect: Any further tax cuts will have to be subject to full debate in the Senate, and can't be rammed through with 50 votes.

Few things are more arcane than congressional PAYGO rules. And yet, little is more important, especially right now.... If Republicans are serious about cutting taxes and making government smaller, they must be willing to come forward simultaneously with the cuts they are willing to make and bear the consequences. Or, if they do not want to make cuts but still want to cut taxes for the top 0.2% of the population, they must be willing to say whose taxes they are willing to raise to pay for those cuts....

Like the bankruptcy bill, this is one of those things that most Senators assume no one pays attention to. A little bit of attention might make a real difference. It's probably the single most important vote in the budget process, because it sets a limit to just how much nefarious, dishonest tax-cutting is possible. So call your Senator and urge them to vote with Feingold and Chafee on the PAYGO rules.

I also noted from Steve Clemons that the key votes on John Bolton's nomination to the U.N. happen to be Feingold and Chafee. So it might be worth a call to those two offices also. Tell the receptionist, 'I want to thank Senator Chafee/Feingold for his leadership on honesty in our budget. And I'd also like to urge him to oppose John Bolton.' Mix a little love in with the pressure -- it's a time-honored strategy.

Nino Scalia, by Grace of God Justice and Lord

Don Herzog is weirded out by Nino Scalia:

Left2Right: Justice Scalia's blooper: News flash, or, dubious blast from the past:  like the medieval theorists, like the Stuart monarchs, Justice Scalia doesn't believe that political authority ascends from the people.  Here's what follows his joke.

JUSTICE SCALIA:  And when somebody goes by that monument, I don't think they're studying each one of the commandments.  It's a symbol of the fact that government comes — derives its authority from God.  And that is, it seems to me, an appropriate symbol to be on State grounds.

. CHEMERINSKY:  I disagree, Your Honor.  For the State to put that symbol between its State Capitol and the State Supreme Court is to convey a profound religious message....

JUSTICE SCALIA:  It is a profound religious message, but it's a profound religious message believed in by the vast majority of the American people, just as belief in monotheism is shared by a vast majority of the American people.  And our traditions show that there is nothing wrong with the government reflecting that.  I mean, we're a tolerant society religiously, but just as the majority has to be tolerant of minority views in matters of religion, it seems to me the minority has to be tolerant of the majority's ability to express its belief that government comes from God, which is what this is about.

There are different claims here.  Justice Scalia appeals to 'our traditions.'  He urges that the 'vast majority' may 'express its belief that government comes from God.'  (This blatantly implausible claim about what the vast majority believes reminds us why the law is reluctant to let judges take judicial notice of facts not on the record.)  But — it bears repetition — he asserts in his own voice 'that government comes — derives its authority from God.'  That, he tells us, is a 'fact.'

Nino Scalia's views on this are profoundly--there is no other word for it--UnAmerican. Here in the United States, we are all children of Thomas Jefferson. God does not give us rulers. Instead, God gives us rights: to life, liberty, and the pursuit of happiness. We then institute governments to secure these rights, and they derive their just powers from our consent, not from God's decree. Moreover, it is not the YHWH of Revealed Religion but instead "Nature's God" and Nature itself that are the source of these rights.

Where does Scalia's anti-Jeffersonian belief that God gives us not rights but rulers come from? It comes from Paul, whom Scalia likes to quote with approval:

Paul (Romans 13:1-5): Let every soul be subject unto the higher powers. For there is no power but of God: the powers that be are ordained of God. Whosoever therefore resisteth the power, resisteth the ordinance of God: and they that resist shall receive to themselves damnation. For rulers are not a terror to good works, but to the evil. Wilt thou then not be afraid of the power? Do that which is good, and thou shalt have praise of the same: for he is the minister of God to thee for good. But if thou do that which is evil, be afraid; for he beareth not the sword in vain: for he is the minister of God, a revenger to execute wrath upon him that doeth evil. Wherefore ye must needs be subject, not only for wrath, but also for conscience sake.

Note what Paul is saying in this passage. The government that is "ordained of God" and that one has a duty to obey is not a representative democracy or a merciful Christian king but the Principate--the government of the Roman Empire under the Julio-Claudian dynasty: Caligula, Claudius, and Nero. To fail to obey that government is contrary to the will of God: not just a crime but a sin.

What is the payoff from this belief of Scalia's that power comes from above? In his speech "God's Justice and Ours," Scalia says that God hates not just crime and open revolt but peaceful campaigns of civil disobedience which are, in Scalia's view, based on the false assumption that "what the individual citizen considers an unjust law... need not be obeyed."

Thus from Scalia's point of view for Blacks to sit at an all-White lunch counter when the law decrees they shall not--that is not just a crime but a sin. And the Martin Luther King, Jr. holiday--a celebration of his civil disobedience campaigns--is blasphemous: hateful to God, because it teaches people that there are circumstances in which they should disobey those whom God has commanded them to obey.

Now this is a free country. And Nino Scalia is allowed to break with those like Jefferson, Madison, and Lincoln who think that legitimate power ascends from the consent of the people. It's a free country. He can take his stand with those like James I Stuart, Innocent III, and Khomeini who think that legitimate power descends from God.

But does such a guy have any business being a Justice of the Supreme Court of a free country? No.

20050315: Economics 113: Midterm Changed to March 31

The second Econ 113 midterm exam is being moved up to March 31. It will cover "Slavery," "Gilded Age and Progressive Era," "The Great Depression," and "Labor and Capital."

20050310: Economics 113: Problem Set 3: Great Depression

Problem Set 3: The Great Depression: Due March 17: Economics_113_ps3.pdf

Joe "Let Me Endorse Some Phony Republican Numbers" Lieberman

Paul Krugman notes that not only is he Joe "I voted for the bankruptcy bill before I voted against it" Lieberman, he's Joe "Let Me Endorse Some Phony Republican Numbers" Lieberman as well:

The New York Times > Opinion > Op-Ed Columnist: The $600 Billion Man: The trustees never said that waiting a year to 'fix' Social Security costs $600 billion. Mr. Bush was grossly misrepresenting the meaning of a technical discussion of accounting issues (it's on Page 58 of the 2004 trustees' report).... The same type of 'infinite horizon' calculation applied to the Bush tax cuts says that their costs rise by $1 trillion a year. That's not a useful measure of the cost of not repealing those cuts immediately. So anyone who repeats the $600 billion line is helping to spread a lie....

But in his latest radio address, Mr. Bush - correctly, this time - attributed the $600 billion figure to a 'Democrat leader.' He was referring to Senator Joseph Lieberman, who, for some reason, repeated the party line - the Republican party line - the previous Sunday. My guess is that Mr. Lieberman thought he was being centrist and bipartisan, reaching out to Republicans by showing that he shares their concerns. At a time when the Democrats can say, without exaggeration, that their opponents are making a dishonest case for policies that will increase the risks facing families, Mr. Lieberman gave the administration cover by endorsing its fake numbers....

Mr. Lieberman stated clearly what was wrong with the bankruptcy bill: 'It failed to close troubling loopholes that protect wealthy debtors, and yet it deals harshly with average Americans facing unforeseen medical expenses or a sudden military deployment,' making it unfair to 'working Americans who find themselves in dire financial straits through no fault of their own.' A stand against the bill would have merged populism with patriotism, highlighting Democrats' differences with Republicans' vision of America.... [M]any Democrats chose not to take that stand. And Mr. Lieberman was among them: his vote against the bill was an empty gesture. On the only vote that opponents of the bill had a chance of winning - a motion to cut off further discussion - he sided with the credit card companies. To be fair, so did 13 other Democrats. But none of the others tried to have it both ways.

Some of the others did try to have it both ways, in a more constructive fashion. They voted against closing debate, and then voted for the bill on final passage. That's a much more real form of opposition that Lieberman's.

Greenspan Is Alarmed at the Budget Deficit

Greg Ip reports:

WSJ.com - Greenspan Sounds Alarm Once More On Budget Deficit: "Federal Reserve Chairman Alan Greenspan, continuing his warnings over the federal deficit, said the budget shortfall is a larger risk to the U.S. economy than the gaping trade deficit or large household-debt burdens. 'Our fiscal prospects are...a significant obstacle to long-term stability, because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances,' Mr. Greenspan said in a speech to the Council on Foreign Relations in New York....

Mr. Greenspan said the budget deficit's threat to the economy has been masked by foreigners' readiness to lend to the U.S. to finance its current-account deficit, now running at more than 5% of gross domestic product, or the total value of goods and services produced in a nation. 'The 30 million baby boomers who will reach 65 years of age over the next quarter-century are going to place enormous pressures' on the economy's ability to finance current entitlements, he said, and 'our success in attracting savings from abroad may be masking the full effect on investment of deficient domestic saving.'...

The Abyss Has Looked Into Us

Body and Soul freaks out:

Body and Soul: The Beast in US: I've been very depressed about politics the past few days. My comforting illusions are shattering. Look at some of the things that have come out recently:

1. Italian, German, and Swedish investigations into American violation of their laws when CIA agents kidnapped and detained people on their soil and deported them to countries where they faced torture.
2. Details of prison abuse in Afghanistan that caused two deaths military officials originally attributed to 'natural causes.'... 'kicks to the groin and leg, shoving or slamming him into walls/table, forcing the detainee to maintain painful, contorted body positions during interview and forcing water into his mouth until he could not breathe.'...
3. A formal agreement between the Army and the CIA to hide 'ghost detainees' at Abu Ghraib. The Pentagon has previously admitted that prisoners were kept off the records in Iraq, but claimed they 'slipped through the cracks.' They lied.
4. The ACLU's latest document dump... the use of dogs to frighten child detainees, the refusal to release even obviously innocent prisoners, and a statement by Lt. Gen. Ricardo Sanchez that is shocking even after all the previous shocks. According to an unnamed soldier, he said of the prisoners, 'Why are we detaining these people, we should be killing them.'
5. There's a great old gospel song called 'Nobody's Fault But Mine.'... One more time, Donald Rumsfeld is not asked to sing it...
6. Evidence of prisoners as young as eleven-years-old at Abu Ghraib. Actually, this isn't news. The New York Times mentioned that eleven-year-old (as well as a 75-year-old prisoner) in an article on Abu Ghraib that preceded CBS's revelation of the photographs by more than a month...
7. The Los Angeles Times ran an editorial about the 'barbarism' of extraordinary rendition. The Pentagon is planning Extraordinary Rendition II -- cutting the population of the Guantánamo detention facility in half by transferring hundreds of the detainees to prisons in Saudi Arabia, Yemen, and Afghanistan.

I've been following these stories for a long time, probably longer than is good for me. They don't surprise me. But I've been telling myself for a long time that if these things started pouring out, day after day, people would not be able to turn their backs.... Last weekend, the excuses for torture sounded panic-stricken to me. It seemed to me that facts were becoming harder and harder to ignore, and people who needed excuses were coming up with ones so feeble even they knew it. God help us, I think those feeble excuses will do the trick...

Impeach George W. Bush. Impeach Richard Cheney. Impeach them now.

Roger Lowenstein Writes About David Cutler and Health Care

Yet another excellent article by Roger Lowenstein:

The New York Times > Magazine > The Quality Cure?: Half of the growth in spending is for chronic conditions like asthma, obesity and diabetes.... In their case, particularly, [David] Cutler argues, quality will pay....

[Mark] McClellan, the Medicare administrator and former Cutler collaborator, is taking a gamble that pay-for-performance will work. Medicare has started half a dozen pilot programs to test various incentives. In one, hospitals scoring in the top 10 percent in a set of quality measures for certain conditions will be given a 2 percent bonus.

Medicare is also testing incentives that reward doctors for savings. The American Medical Association is nervous about anything that smacks of encouraging doctors to withhold care (a battle it fought with H.M.O.'s in the 90's), but it appears to be willing to look at schemes that link pay to quality....

Cutler says that Medicare's willingness to experiment is hugely important. Private health plans do not have the clout to force a clinic to purchase software or adopt performance goals. But Medicare is so big.... Reoriented to managing ''health'' rather than merely costs, H.M.O.'s might again become a useful part of the health-care landscape, Cutler says. Managing care, he says, was a necessary idea that went off the tracks as H.M.O.'s became remote, single-minded cost-control freaks....

Cutler says that the next step is for Medicare to go beyond trials and move from a fee-for-service model to, in part, pay-for-performance. ''If Medicare has to pay more to doctors -- which it will, given current projections -- don't raise fees across the board,'' he explains. ''Set up a bonus fund that goes to M.D.'s who follow guidelines or have the best measures of outcome.''...

To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others)....

Cutler's idea is to preserve the diversity of America's system while subsidizing people's access to it -- to let the G.E.'s and the HealthPartners of the world, and also the Mercks, continue to innovate.... [T]he government might spend an additional $100 billion a year.... Cutler's plan would seem not to brake the projected future escalation of spending. By 2040, according to various projections, that spending could rise from its present $1.8 trillion to something like $3 trillion -- that is, to 20 percent of G.D.P. or conceivably 25 percent. This is why so much attention is focused on cost.... Cutler's answer to these fears is not exactly cavalier.... If we institute a more results-oriented, and a more health-conscious, system, our dollars will buy us better care and probably cheaper care. By emphasizing prevention and effective treatments for the chronically ill, we might also reduce the rate at which spending grows.... But the drive to keep spending down will forever be challenged by technology's efforts to overcome it. If it turns out that gene therapy delivers a cure for cancer, and if that turns out to be something that most Americans want, we should be prepared to pay for it and indeed to tax for it, Cutler says. Spending a fifth, even a quarter, of our resources on life-enhancing and life-prolonging miracles would not be the worst of fates.

Admonishment...

In comment, Matt writes:

Though he's probably the 4th smartest person at the Tax Policy Center thinking about social security, he is a heavyweight, and as such we should learn to spell his name correctly. Eugene Steuerle.

I always miss the second "e." I always have. My brain simply cannot process it.

Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle
Eugene Steuerle

There. Maybe now it will stick.

Maybe not.

It Is Useless to Resist Tor Books...

Michael Froomkin wrote:

Discourse.net: A Literary Note: TOR, incidentally, is on a roll. I'm amazed that well more than half of the quality SF/Fantasy I've read in the past year was a TOR product.

Let me endorse that, and praise:

Scott Westerfeld (2003), The Risen Empire (New York: Tor: 076534467X).

The Geological Formation Formerly Known as the Snows of Kilimanjaro

Billmon at the Whiskey Bar reports:

From Great-Great-Uncle (by marriage)* Ernie:

Kilimanjaro is a snow-covered mountain 19,710 feet high, and is said to be the highest mountain in Africa. Its western summit is called the Masai 'Ngaje Ngai,' the House of God. Close to the western summit there is the dried and frozen thawed carcass of a leopard. No one has explained what the leopard was seeking at that altitude.

Ernest Hemingway, The Snows of Kilimanjaro, 1938

Billmon quotes the Grauniad:

Whiskey Bar: Modernizing Hemingway: "Africa's tallest mountain, with its white peak, is one of the most instantly recognisable sights in the world. But as this aerial photograph shows, Kilimanjaro's trademark snowy cap, at 5,895 metres (1,934ft), is now all but gone -- 15 years before scientists predicted it would melt through global warming."

"The peak of Mt Kilimanjaro as it has not been seen for 11,000 years," March 14, 2005

I'm going to go get a stiff drink.

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*Yep. I'm not kidding. When my grandmother Florence Usher was a small child, they would send her out to sit in the backseat when Ernest took her Aunt Hadley for a drive...