Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

Why Is Wood So... Woody?

Wood is truly an amazing substance. Relatively light, very strong for its weight, elastic, capable of being shaped to an extraordinary degree. Why is wood so... woody?

Wood Handbook, FPL-GTR-113: Forest Products Laboratory. 1999. Wood handbook--Wood as an engineering material. Gen. Tech. Rep. FPL-GTR-113. Madison, WI: U.S. Department of Agriculture, Forest Service, Forest Products Laboratory. 463 p.

It seems clear that competition between plants has a bunch to do with it: whatever plants can get their leaves higher and wider spread has a big advantage in photosynthesis and thus in fitness. It seems pretty clear that wind has a bunch to do with it: wind can put great stresses on plants--especially those that reach high and are widely spread.

But I really do wish that by now somebody had told me why wood is so... woody.

Tomorrow: I also wish someone would tell me why doping iron with carbon atoms changes its properties so much...

Somebody Is Willing to Bet That the Dollar Will Decline

From Reuters, via the Financial Times:

FT.com / Companies / US - Berkshire Hathaway loses currency bet: Warren Buffett's Berkshire Hathaway lost $310m in the first quarter from betting against the US dollar, but has nevertheless maintained its roughly $21bn stake against the greenback, the billionaire said on Saturday. At Berkshire's annual shareholder meeting, Mr Buffett said Berkshire expects... to announce an insurance acquisition worth less than $1bn, which is barely 2 per cent of the company's $44bn cash stake...

Does This Mean Anything?

In The Valve, Jonathan Goodwin writes:

The Valve - A Literary Organ | What's up with Social Text?: Ever wonder why Bombay was the bitch city [in Rushdie's Satanic Verses]? Feel as if your intuition that [the movie] Shri 420 was about smoking dope might be uninformed? Then Rashmi Varmi's 'Provincializing the Global City' is just what you need. An intriguing paragraph:

if the urgent political task is to make sense of how both the Hindu Right and transnational capital have achieved a necessarily incomplete hegemony over Mumbai's image and reality, it is equally urgent to construct alternatives. The somewhat hasty fabrication of an earlier universalism needs now to be refashioned in the context of an ever more careless celebration of the global marketplace. Our work, both political and intellectual (and across that potent divide), too, must answer to the new political configurations of our times that do not allow either for the easy recuperation and celebration of the older socialist and nationalist utopias or for an outright rejection of the possibilities of decolonization and global solidarity...

Ummm... Does this mean anything?

I think I understand what "transnational capital [has] achieved a necessarily incomplete hegemony over Mumbai's image and reality" means: it means that a lot of large businesses inside and outside India are trying--and in many cases succeeding--in finding some way to hire the people of Mumbai and sell the products they make on the world market and so make profits, and that this process is playing a powerful role in shaping both how the people of Mumbai live and how people inside and outside Mumbai think of the city, but that this is not the whole story. I think I understand what "the Hindu right [has]... achieved a necessarily incomplete hegemony over Mumbai's image and reality" means: it means that a certain political movement is playing the reactionary nationalism card, linking it to religion--we are Hindus and Indians and India is a Hindu civilization--and so trying to attain political power through shaping public memory into a revulsion of a hated "other" in their midst, and that in this case the hated other is not the African-Americans (as it was in the American Jim Crow South) and not the Jews (as in right-wing movements all across nineteenth and twentieth century Europe) but India's Muslims.

I don't understand what the "If the urgent political task is to make sense of [these two phenomena]..." means. I think we understand them pretty well. I don't know in what way the world market and National Hinduism need to be "made sense of." And I don't understand what "it is equally urgent to construct alternatives" means. Alternative economic systems to open engagement with the global market economy? Is this a call for the return to the License Raj of the Nehru Dynasty? (Varmi's text certainly suggests that as the alternative.) Alternative political movements to National Hinduism? Alternative ways of thinking about India today? But what is the purpose of this critique of critical criticism?¹

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¹Shri 420 is supposed to be a very good movie. The Satanic Verses is a good read. The first is, in large part, a reinvocation of the very old theme of the corruption of an honest and naive young man by the city where everything is for sale, people are treated by others as means and tools, and what is sought is not love or happiness but wealth--with the interesting twist that what is exalted is not the honest conservative squires of the country (as in Tom Jones and Oliver Twist) but Jawaharlal Nehru's hopes for socialist utopia. The second is, in large part, a cry of anguish against the authoritarian use of religion to control and condemn. One purpose of Shri 420 was to support the Nehru Dynasty. One purpose of The Satanic Verses was to mobilize opposition to religious intolerance (in a manner somewhat analogous to Voltaire). I cannot discern what the purpose of Varmi's juxtaposing and writing about the two of them is.

Jason Furman on Bush's Press Conference

Jason Furman writes:

HOW WOULD THE PRESIDENT’S NEW SOCIAL SECURITY PROPOSALS AFFECT MIDDLE-CLASS WORKERS AND SOCIAL SECURITY SOLVENCY?: In last night’s press conference, President Bush endorsed a proposal that would result in substantial cuts in benefits for middle-income families and deeper cuts for higher-income families. While the proposal was described as reducing benefits for the most affluent Americans, it would result in large benefit reductions for middle-class workers, as well.

All workers with incomes above $20,000 today would be subject to benefit reductions, and the benefit cuts would escalate sharply in size as income climbed above $20,000. A worker making $35,000 today would be subject to benefit reductions more than half as large as the benefit cuts imposed on people at the highest income levels. A worker making $60,000 today would be subject to benefit reductions more than 85 percent as large as someone making several million dollars a year.

The benefit reductions for average earners would be the largest in Social Security’s history. The 1983 Social Security reform, for example, lowered benefits for average workers by 17 percent, with the reduction phased in over 46 years. The President’s plan would lower benefits for average workers by 28 percent over a period of 70 years, and by considerably more than that for middle-class workers with incomes somewhat above the average, such as those who make $60,000 today.

Social Security survivor benefits would be cut by the same magnitude. How disability benefits would be affected is unclear, although the President implied they would not be reduced.

The President’s proposed change in the Social Security benefit structure is essentially a plan known as “progressive price indexing” that has been designed by investment executive Robert Pozen. Analysis by the Social Security Administration’s actuaries shows that Mr. Pozen’s plan would reduce benefits for average earners retiring in 2075 by 28 percent, relative to the current benefit structure, and that this reduction would apply equally to retirees, survivors, and people with disabilities.[1] The actuaries also have reported that the benefit reductions under the Pozen plan would close about 70 percent of the 75-year Social Security shortfall.

The White House last night issued a fact sheet stating that its proposals, too, would close 70 percent of Social Security’s financing problems. To do that, the President’s plan either must cut disability and survivor benefits substantially — after all, one-sixth of the savings in the Pozen plan come just from reductions in disability benefits — or cut retirement benefits for middle-class workers even more deeply than the figures cited above (which are the actuaries’ estimates of the benefit reductions under the Pozen plan). If the President’s plan shields disability benefits from cuts, as the President indicated last night — and does not cut retiree and survivor benefits more sharply than the Pozen plan — then it will close 57 percent of Social Security’s 75-year shortfall, not 70 percent. (The 57 percent figure also reflects the small cost of the poverty-level minimum benefit the President proposed last night.)...

Recipe Malfunction

It's time to admit that in the making of the Fifteen-Year-Old's birthday cake one cup of concentrated cold-process liquid--liquid that is supposed to be diluted four-to-one to make it into coffee--was added to the recipe, rather than one cup of coffee.

The cake was quite tasty...

The Darth Side

Chad Orzel clearly needs additional college administrative responsibilities. He finds this:

The Darth Side: Memoirs of a Monster: 'Make ready the jump to hyperspace.'

'But Lord Vader,' whinnied Admiral Ozzel, 'the armada is already moving along a prescribed route...'

I withered him with a stare, my hands on my belt.

He ordered the helm to replot our course, and notified the fleet commanders. Then he turned and asked as contritely as he could manage, 'May I at least know what leads you to suspect Themoth will yield results, my Lord?'

'You may ask,' I told him, turning away to the glass. 'As an ant may ask the sun why it shines. It is beyond you, Admiral. See to your duty.'

Ozzel hesitated. 'Sir,' he said crisply and turned on heel.

Do you want to know what the worst part is? My left leg is still on the fritz. Whose trachea do you have to crush with your mind to get a little service around here?

Posted by Darth Vader

It's the Circular Firing Squad of Flying Attack Monkeys!

Once again, that is the *only* way to describe the Bush administration's policy development process.

I read Bush's opening statement at his press conference last night:

Text of Bush's Press Conference-Part I: The money from a voluntary personal retirement account would supplement the check one receives from Social Security.

In a reformed Social System, voluntary personal retirement accounts would offer workers a number of investment options that are simple and easy to understand. I know some Americans have reservations about investing in the stock market, so I propose that one investment option consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government.

Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses.

The "build a nest egg" part... The "invest in Treasury bonds" part... Let's mosey on over to the Federal Reserve and look at the safest long-term investment the U.S. Treasury offers: the twenty-year inflation-protected TIP:

FRB: H.15--Selected Interest Rates, Web-Only Daily Update--April 28, 2005: Inflation-indexed: 20-year 1.83 1.86 1.87.

What the Federal Reserve is telling us is that the 20-year TIP is currently providing a real yield of 1.87% per year. What Bush is not telling you is that, under the Bush plan, if you divert $1000 from your Social Security to private accounts, that amount is clawed back--charged to an account associated with your normal Social Security benefit, that amount is then compounded at 3% per year plus the rate of inflation, and then after you retired deducted over time from your normal Social Security benefit.

If you are 45 and if Bush's plan were available today...

Follow George W. Bush's advice, divert $1,000 into your private account, invest it in TIPS, and at the 1.85% per year interest rate you will indeed by able to collect an extra amount worth $10.11 a month in today's dollars when you retire at 65...

But the clawback would reduce your normal Social Security benefit by $14.16 a month. You're $4.05 a month behind.

"Building a nest egg." Feh!

---

Did nobody inside the White House bother to run the numbers? Did nobody care?

And now I am told that the White House is wheeling out, to explain the details of his plan... Cathie Martin, Deputy Assistant to the President for Communications, will answer your questions about Strengthening Social Security and Future Generations. Are all the substance people in the White House fleeing from this? Where are they?

Ben Bernanke's Views on Global Economic Policy

He writes:

FRB: Speech, Bernanke--U.S. current account deficit--April 14, 2005 : I disagree with the view... that balancing the federal budget by itself would largely defuse the current account issue.... [E]ven if we could balance the federal budget tomorrow, the medium-term effect would likely be to reduce the current account deficit by less than one percentage point of GDP. [More likely 1.5-2%, IMHO.]

Although I do not believe that plausible near-term changes in the federal budget would eliminate the current account deficit, I should stress that reducing the federal budget deficit is still a good idea. Although the effects on the current account... would likely be relatively modest, at least the direction is right. Moreover, there are other good reasons to bring down the federal budget deficit.... Similar observations apply to policy recommendations to increase household saving in the United States.... Although the effect of saving-friendly policies on the U.S. current account deficit might not be dramatic, again the direction would be right. Moreover, increasing U.S. national saving from its current low level would support productivity and wealth creation and help our society make better provision for the future.

However, as I have argued today, some of the key reasons for the large U.S. current account deficit are external to the United States... purely inward-looking policies are unlikely to resolve this issue. Thus a more direct approach is to help and encourage developing countries to re-enter international capital markets in their more natural role as borrowers... improve their investment climates by continuing to increase macroeconomic stability, strengthen property rights, reduce corruption, and remove barriers to the free flow of financial capital. Providing assistance to developing countries in strengthening their financial institutions--for example, by improving bank regulation and supervision and by increasing financial transparency--could lessen the risk of financial crises and thus increase both the willingness of those countries to accept capital inflows and the willingness of foreigners to invest there....

Other changes will occur naturally... the pace at which emerging-market countries are accumulating international reserves should slow.... Domestic investment in East Asia and in other emerging markets will eventually recover.... The various factors underlying the U.S. current account deficit--both domestic and international--are likely to unwind only gradually, however. Thus, we probably have little choice except to be patient...

Why Oh Why Are We Ruled by These Fools? (Republican Congress Edition)

Kevin Drum notes the Republican Congress in action:

The Washington Monthly: A SHINY NEW BUDGET....Here's your new Republican budget:

The House and Senate broke a lengthy impasse over federal spending Thursday night, narrowly adopting a $2.56 trillion federal budget for 2006 that aims to trim the growth of Medicaid by $10 billion over five years, add $106 billion in tax cuts and clear the way for oil drilling in an Alaskan wildlife refuge.

Attaboy! Reduce the deficit $10 billion by cutting back on healthcare for the poor, and then turn around and increase the deficit $106 billion by approving additional tax cuts for the rich. Moral values, baby, moral values.

Mark Thoma Is on Intellectual Garbage Pickup (Another Why Oh Why Can't We Have a Better Press Corps? Edition)

Mark Thoma of the University of Oregon is performing this thankless task.

Here's Thoma on John Tierney:

Economist's View: Tierney on Social Security Privatization: Seeing the Tree: John Tierney looks at the case of a single individual and concludes that privatization in Chile is a success. Success stories are easy to find when the focus is on a single individual, in this case an economist at the University of Chile: "...Pablo, who grew up to become an economist %u2026 called up his account on his computer and studied the projected retirement options for him. 'I'm very happy with my account,' he said to me after comparing our pensions. He was kind enough not to gloat. When I enviously suggested that he could expect not only a much heftier pension than mine, but also enough cash to buy himself a vacation home at the shore or in the country, he reassured me that it would pay for only a modest place..."

But what if we look at the whole forest, not just a single tree? This is... from earlier in April: "In Chile: A Safety Net With Some Holes, By Monte Reel, Washington Post Foreign Service, Monday, April 11, 2005; Page A11.... Given the pace of contributions, more than half of the workers who retire in the next 30 years will not have enough money in their plans to receive the minimum payout..." [T]he forest is much less healthy than the single tree Tierney examined...

And here's Thoma on Robert Samuelson:

Economist's View: Samuelson's One-Sided Scissors: Robert Samuelson... excused the U.S. from any responsibility for the current account deficit.... "[W]hat if the problem of today's global economy is that people elsewhere... are saving too much and spending too little?... Bernanke's global savings glut is just such a notion. It helps explain (a) the huge U.S. trade deficits; (b) the weakness of the current economic recovery (now 3 1/2 years old); and (c) the difficulty of doing anything about (a) and (b).... [T]he flow of surplus global savings to the United States has caused Americans to spend more and save less.... Americans' low saving and high consumption offset foreigners' high saving and low consumption. The huge U.S. trade deficits result.... Like others, Bernanke warns that these trade imbalances -- our huge deficits, their huge surpluses -- seem dangerous. His contribution is to show that their main causes lie outside the United States...."

The argument is that high foreign saving caused low U.S. saving.... But isn't it equally logical... to argue the reverse, that the low saving rate, particularly public saving (the deficit) in the U.S. caused funds to flow in from abroad? Would that then mean, under Samuelson's definition, that the main cause lies within the U.S.?... As Marshall reminded us long ago in a slightly different context, "We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper." Yes, the high foreign saving rate played a role, but that is only one side of the scissors. The U.S. public and private saving rates played a role as well.

And, of course, Mark is right. A global savings glut that generated a two or three percent of GDP trade deficit for--capital inflow into--the U.S. would not be a bad thing. But overlay the Bush deficits on top of that, and the trade deficit gets worrisome. Have the trade deficit further amplified by China's and Japan's desires for export-led growth--and have foreign private investors decide that they don't want to hold any more U.S. bonds--and the situation becomes terrifying.

Samuelson, however, is no longer in the economic analysis business: you learn nothing about why Bernanke sees the current situation as dangerous. Samuelson, instead, is in the business of laying down a marker saying that anything bad that happens in the future is not George W. Bush's fault--"[Bernanke's] contribution is to show that [the deficits'] main causes lie outside the United States." Tierney never was in the economic analysis business: he can't truthfully say that Bush's private accounts are a good deal for beneficiaries, and he can't truthfully say that Chile's system has prefunded adequate pensions for its population, but he can misdirect with one personal case.

As I said, it's intellectual garbage collection. Mark Thoma is performing a thankless but necessary task, for which we should be grateful.

The Bush Social Security Clown Show Continues

Bush gives a press conference...

You will recall that there are four potential dealbreakers--four hurdles a Bush plan must surmount before it is worth supporting:

1. Its private accounts must be a good deal for beneficiaries.
2. The plan must increas national savings (which means not carve-out but add-on).
3. The plan that preserves the defined-benefit component of Social Security in the long run.
4. The plan must implemented by competent technocrats, not the deranged monkeys who have brought us such wonders as the current deficit, the steel tariff and the Iraqi nuclear program.

Bush may have made progress on (3)--or may not. I cannot tell. He certainly did not make progress on (1), (2), or (4).

FT.com / US - Bush shifts approach on Social Security reform: Edward Alden and Holly Yeager in Washington: President George W. Bush on Thursday night endorsed a controversial plan to ensure the scheme's solvency by cutting benefits sharply for better-off workers. In a rare prime-time news conference that also focused on rising petrol prices, Mr Bush said he wanted to reform the national pension scheme so that future benefits for low-wage workers would be preserved, while middle and upper-income workers would receive less than currently promised.... An ABC News-Washington Post poll this week found 64 per cent of Americans did not approve of the way Mr Bush was handling Social Security and 51 per cent did notsupport his plan for private accounts, down from 41 per cent in mid-March. While he reiterated his support for allowing younger workers to shift into private accounts some of the money they pay into Social Security.... Private accounts that divert funds from Social Security have faced united Democratic opposition, as well as criticism from some Republicans....

You know, when I look at my four requirements, it strikes me that three of them--(1), (2), and (4)--are primarily Republican issues, or issues that are of especial concern to those whom I once thought Republicans to be. They are supposed to worry about whether Bush's private accounts are structured to be a good deal for beneficiaries (they are not). They are supposed to be worried about raising national savings (the Bush plan doesn't, except through very indirect and improbable channels). They are supposed to be worried about competence in government.

So where are the grownup Republicans on this? I don't hear a peep.

Signs of the Times

David Altig writes:

macroblog: The GDP Report: We, Apparently, Are Not Pleased: I'm not sure I had ever contemplated what the day would look like when 3.1 percent growth was considered bad news, but now I know for sure...

So much have our estimates of the potential growth rate of the American economy increased in this, our age of technological revolutions.

What I'm Missing Today...

"No. Very few people from Berkeley make any of the seminars at the Federal Reserve Bank of San Francisco," says Chad Jones.

"That's easy to explain," says George Akerlof. "Consider the high quality of the marginal seminar you miss here at Berkeley."

Today's seminar that I'm missing is by Stanford's Bob Hall (I have to teach). Bob says: "I'm giving the 1023rd paper applying George's lemons model to the labor market. And yet there is still something new to say."

Q: Why are we justified in inferring that Bob Hall was once a computer programmer, and that his mind has been shaped by close encounters with a machine with a ten-digit register?

A: The number "1023." 1023 is as high as you can count in ten binary digits. The use of "1023" as a synonym for "a very large number" is a sign of having once spent a lot of time with a ten-digit register.

April 28, 2-4 p.m., 639 Evans MACROECONOMICS: Bob Hall (Stanford University), "The Amplification of Unemployment Fluctuations through Self-Selection": http://www.nber.org/papers/W11186.

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UPDATE: Bob Hall corrects the record.

First Quarter GDP Growth Slows

The Financial Times reports:

FT.com / US - US GDP growth slows to 3.1 per cent: By Christopher Swann in Washington: The US economy expanded at a slower-than-expected 3.1 per cent rate in the first quarter, its weakest performance in 2 years and below what most analysts consider its non-inflationary potential. The bloated trade deficit dragged the growth rate lower. But spiralling energy costs also appear to have stunted consumer and business spending....

More disappointing was a slowdown in business spending on equipment and software - which grew by 6.9 per cent annualised, compared to 18.4 per cent in the fourth quarter. Economists in the private sector and the Federal Reserve have been hoping that business investment would continue to power ahead as consumers started to rein in their spending. Data over the past few days has now cast that into doubt. ...

The core personal consumption expenditure index - the Federal Reserve's favoured measure of inflation - rose at 2.2 per cent - its fastest rate since the fourth quarter of 2001. In the previous quarter it was rising at a 1.7 per cent pace. "Overall the report is well below expectations," said Matthew Martin, an analyst at Economy.com...

The Future of Higher Education?

In comments, Ralph recommends The Teaching Company:

For the past five years, since retirement, I have been purchasing video lectures by prominent professors on a variety of subjects, put out by the Teaching Company. My interests have centered on Ancient and Modern European history. My expectations were exceeded by the quality of the lectures. They are really amazingly good. A recent example is a lecture on "the long 19th century: Europe from 1789 to 1917" by Prof Robert I Weiner of Lafayette College. There are 33 lectures about 45 minutes each. He covers topics like the French Revolution, the Napoleonic era, French history after Napoleon, Germany unification, Italian unification, diplomacy under Metternich, Bismarck, and post-Bismarck to WW I. Admittedly, this is one of the better products I have purchased and most were bought at sale prices. But as I have mentioned my expectations were exceeded.

They're not cheap. But I would recommend my friend Tim Taylor, who has done four very good lecture series for them:

• Introductory Economics
• Twentieth Century American Economic History
• History of Economic Thought
• Contemporary Economic Issues

A Quote too Good to Linger in Obscurity

Mark Schonfeld, director of the SEC's Northeast Region, has a future in any industry that rewards the creation of vivid metaphors. A correspondent writes that we should check out Deborah Solomon, "Moving the Market: Deloitte Statement About Adelphia Raises SEC's Ire," Wall Street Journal 4/27/05 p. c3:

As Deloitte & Touche LLP sought to resolve charges that it failed to detect accounting fraud at Adelphia Communications Corp., the auditor found itself back in hot water with securities regulators over its depiction of the role it played in the fraud. Deloitte agreed yesterday to pay $50 million to settle Securities and Exchange Commission charges that it missed fraud at the country's fifth-largest cable company. The payment is the largest ever levied by the SEC against an accounting firm. However, Deloitte found itself again in the SEC's cross hairs after issuing a public statement that appeared to shift blame to Adelphia by saying the company and some executives "deliberately misled" Deloitte's auditors.

Under terms of the settlement agreement, Deloitte is required to neither admit nor deny the SEC's charges. SEC officials viewed the statement as denying liability and forced Deloitte to rescind it.

"Deloitte's characterization of the case is simply wrong. Deloitte was not deceived," said Mark K. Schonfeld, director of the SEC's Northeast Region. "They didn't just miss red flags, they pulled the flag over their head and then claimed they couldn't see."

Harry Kreiser's "Conversations with History"

Now that we are in the Broadband Age here on the Internets, this long-term project by Harry Kreisler, the Executive Director of Berkeley's Institute for International Studies, is an extremely valuable resource--largely because Harry is an interviewer genuinely interested in what his subjects have to say:

Harry Kreisler, "Conversations with History" http://globetrotter.berkeley.edu/conversations/

In these lively and unedited video interviews, distinguished men and women from all over the world talk about their lives and their work. Guests include diplomats, statesmen, and soldiers; economists and political analysts; scientists and historians; writers and foreign correspondents; actors and artists. The interviews span the globe and include discussion of political, economic, military, legal, cultural, and social issues shaping our world. At the heart of each interview is a focus on individuals and ideas that make a difference.

Harry Kreisler is executive producer and moderator of the series, which is produced at the Institute of International Studies at the University of California at Berkeley. Conceived in 1982 by Mr. Kreisler as a way to capture and preserve through conversation and technology the intellectual ferment of our times, "Conversations with History" includes over 300 interviews...

Harry's interviews are found not only on the Internets, but Friday evening at 6 and 9 Pacific Time on UCTV, found on the EchoStar DISH Network, Nationwide Channel 9412. Forthcoming TV broadcasts include:

April 29: Forensic Scientist William Haglund talks about digging up bodies in Bosnia, Central America, and Nigeria.
May 6: Steve Coll, author of Ghost Wars: The Secret History of the CIA, Afghanistan, and bin Laden.
May 20: Thomas Barnett, author of The Pentagon's New Maptalks about globalization, the world order, and what U.S. grand strategy should be.
May 27: Nobel Prize-winning economist Amartya Sen.

The Greenspan Succession

Greg Ip writes:

WSJ.com - Finding Someone to Fill Greenspan's Shoes. By GREG IP, Staff Reporter of THE WALL STREET JOURNAL: Sometime in the next nine months, President Bush will make one of the most important appointments of his presidency, one that history suggests will affect the economy in the U.S. and abroad long past the end of his term: Selecting a successor to Federal Reserve Chairman Alan Greenspan... three front-runners, all with sterling academic pedigrees: Martin Feldstein... Glenn Hubbard... and Ben Bernanke, 51.... [T]he White House will likely seek a successor who reassures the markets while being philosophically attuned to Mr. Bush's overall economic agenda. The chief job of the Fed chairman is to set interest rates, but -- especially under Mr. Greenspan -- the Fed chairman also has emerged as the arbiter of sound fiscal policy, and Mr. Bush is likely to steer clear of someone he thinks would criticize his budget policies.... Mr. Feldstein may have the edge in economic stature and political experience.... In an interview, Mr. Feldstein says the deficit is much smaller today as a share of gross domestic product than it was in the early 1980s, and it will likely decline further even if the tax cuts are made permanent, provided the administration is "even reasonably successful" in controlling discretionary spending.... Mr. Hubbard, as chairman of Mr. Bush's Council of Economic Advisers from 2001 to 2003, won admiration for his discipline and work ethic on issues ranging from the West Coast dockworker lockout to the 2003 dividend-tax cut. He was known for getting his staff to quickly draft authoritative policy memos for White House decision makers. "He earned his way into the Oval Office," says a former administration official.... Mr. Bernanke conducted research on monetary policy at Princeton University before joining the Fed in 2002. Since then, his plain-speaking style, numerous speeches and copious research have made him second in prominence at the Fed only to Mr. Greenspan. He recently said the hardest part of moving to the Fed was having to wear a suit: "My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded."... There could be several dark-horse candidates. Donald Kohn, a longtime Fed staffer and now governor, is well placed to emulate Mr. Greenspan but he is a political independent. Consultant Lawrence Lindsey has close ties to the White House and was a Fed governor, but his record as Mr. Bush's first National Economic Council director was mixed. John Taylor is a prominent monetary-policy scholar but he didn't leave a big mark in the four years he just spent as Treasury's top international official...

My view is that Bernanke is the best qualified: monetary policy is and has been his thing for his whole career.

Zero-Sum Grand Strategy: Just Say No!

Robert Kaplan has annoyed the highly-intelligent Praktike:

Robert Kaplan is Afraid | Liberals Against Terrorism: I have to say that it would be deeply unfortunate and downright foolish if America and China backed themselves both into a 'second Cold War,' as Kaplan puts it. It could only be the result of a mutual miscalculation. There's no doubt that we should be prepared militarily, and we shouldn't be naive in scrutinizing Chinese intentions. I admit that I have my own inchoate concerns about Chinese nationalism, its drive for new energy supplies, and its rumblings over Taiwan. But there are obvious and important differences between the Soviet Union and China, just as there are differences between the late 19th Century balance of power that Kaplan so lovingly uses as an analogy (which, as every schoolboy knows, collapsed after Bismark departed the scene) and the current state of play in the Pacific region.

The Soviet Union was, notably, communist and autarkic. China, by contrast, is developing via an export and FDI-led strategy--meaning that it understands that wealth, power, and geostrategic influence are best created by means other than territorial aggrandizement. The (nominally) Communist Party's internal legitimacy rests upon its ability to improve the living standards of its people, and that economic development is therefore its first priority. And that's good for us, because we like to buy cheap and increasingly well-made Chinese products, and we hope that China's huge population will become a vital market for our own goods and services.

U.S. policy ought to be about finding ways to create a win-win situation in Asia rather than on blundering into a pointless new Cold War that can only make everyone poorer and stupider. We shouldn't be afraid of China, but rather we should be afraid that U.S. China policy will be determined by people who think in zero-sum terms.

People like Robert Kaplan.

Inflation Central: FRB Cleveland

William Polley directs us to:

Inflation :: FRB Cleveland: Inflation Central: Track inflation in the United States and across the world and put it all in perspective with our analysis and commentary.

Why Is Bush Holding Up Galveston, Matagorda, and Brazoria as Good Examples?

Everything I've seen says that their numbers are not so good.

Think Progress Reports:

The Texas Privatization Plan:: Sen. Barbara Boxer (D-CA) took the president up on the "Texas idea" suggestion. The senato's office has released a report looking at the 1981 Texas plan. In 1981, three Texas counties "decided to opt out of Social Security and instead to provide their public employees with a system of privatized accounts." The analysis done by Boxer's office and the nonpartisan Congressional Research Service "compares two sets of families in three different income brackets [and] shows what happens to their retirement in 2005 under Social Security and under the Texas plan." The conclusion: "By examining the actual system in place in Texas, this study shows that Americans are worse off with privatized accounts - not in theory, but in reality."

Fontana Labs Gives College Advice

My only quarrel is that it understates the importance of being energetic and aggressive (and tough-skinned) in making a success of one's time at a large state school (or a large private school, for that matter):

Unfogged: Fontana Labs' agony column: college edition: ... an interesting question about choosing colleges: go with a moderate name and a big loan, or Big Ten for free? This is something I think about a bit, since I spent time at Big State as a student and I teach at a moderately tony private college.

The case for a smaller private institution: interesting opportunities are easier to find, and faculty are there for you-- something that's not true at a large university, where faculty are there primarily for research and grad student training. Our undergraduates have tremendous access to faculty.... My colleagues think a lot about teaching, and people can get fired for doing it badly.... The case for Big Ten: a larger, more diverse faculty means that you can find someone who's an expert in whatever you're interested in studying. You can work with profs with more active research profiles. If you're dedicated to finding good teachers and mentors, you can take advantage of these tremendous resources and put together a great education (and you can get letters from people who are pretty well-known, though they won't know you as well as their counterparts at College). Plus, it's cheap, or, in L's case, free.

Verdict: I'd have to go with the Big Ten in this case. Disclaimers: a lot of this depends on what the student is like. Some people get lost in a sea of 30,000 undergraduates. If you're not savvy about course selection, researching your profs, and so on, you can end up with mediocre product. You have to BE! AGGRESSIVE! BE BE AGGRESSIVE!"

The Pile Grows Bigger

Things that have shown up this morning that I really need to read quickly:

Martin Feldstein (2005), "Rethinking Social Insurance" (Cambridge: NBER Working Paper 11250) http://papers.nber.org/papers/w11250.

Eswar Prasad and Shang-Jin Wei (2005), "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations" (Washington: IMF).

Pranab Bardhan (2005), Scarcity, Conflicts, and Cooperation: Essays in the Political and Institutional Economics of Development (Cambridge: MIT Press: 0262025736) http://www.amazon.com/exec/obidos/asin/0262025736/.

Offshoring Creeps Closer to the Professoriate!

Sujeet Bhatt sujeet.bhatt@gmail.com writes:

BBC News: British exam papers India bound: "Thousands of exam papers from England will be sent to India later this year as part of the marking process. Critics in England say the move is the latest example of cost-cutting by outsourcing, and will result in errors in exam marking and delays in results. The exam board behind the initiative, AQA, told the BBC that no marking would take place in India and that the move would make marking more efficient.

There has been no comment from the firm in Madras that handles the papers.

http://news.bbc.co.uk/2/hi/south_asia/4485517.stm

Adrian Hon Tells Me to Like Serenity/Firefly

He writes:

Anyway, I for one welcome our new Serenity overlords. I bought the Firefly DVD set on the strength of numerous recommendations from forums and friends, despite not being a real Whedon fan (I didn't watch Buffy or Angel), and I loved it. Very dramatic, very funny and unconventional SF. Good dialogue and characters as well.

Much of Firefly's poor performance when it was on TV was down to Fox, as usual. They aired the series completely out of order, showing the pilot last, and also weren't sure how to promote it. It was primarily on the strength of the massive DVD sales that Universal decided to make it into a movie, something pretty much unheard of for a TV show cancelled after 14 episodes. The fact that it has a 5 star rating at Amazon.com averaged over 1278 reviews speaks to how much people liked it. A quick google search of "firefly dvd review" also brings up a bunch of highly positive reviews from DVD sites.

I'm sure we've had conversations about Firefly on the list a few times before and a lot of people liked it...

Adrian Hon

http://www.mssv.net - http://www.newmars.com - http://www.ibiblio.org/astrobiology

Gurk!

An unhappy durable goods number:

FT.com / International economy - US durable goods orders drop 2.8% By Christopher Swann in Washington: Orders for durable goods fell unexpectedly last month, adding to the mounting gloom in financial markets over the strength of the US economy. The 2.8 per cent fall - the largest monthly decline in more than 2 years - was relatively broadly based with ebbing orders for aircraft, cars and computers. Even excluding the volatile transport sector, bookings fell 1 per cent after a 0.2 per cent decline in February. The closely watched non-defence capital goods excluding aricraft component - seen as the best proxy for business equipment investment - slid 4.7 per cent after a 2.5 per cent decline in Febraury. ING Financial Markets said this may cause some analysts to nudge down their expectations for economic growth in the first quarter to 3 per cent from around 3.5 per cent. "Overall another disappointing figure that is likely to increase talk of a pause at some point by the Federal Reserve as it moves rates to neutral," ING said, in its research this morning.

Well, That's It...

I guess I've bought my last software product from--excuse me, paid my last license fee to--Microsoft:

Suburban Guerrilla: "WASHINGTON -- Microsoft Corp. is paying social conservative Ralph Reed $20,000 a month as a consultant, triggering complaints that the well-connected Republican with close ties to the White House and to evangelist Pat Robertson may have persuaded the company to oppose gay rights legislation...

It's Not Just About Politics

Robert Waldmann writes:

Robert's Stochastic thoughts: Brad DeLong has criticised Jonathan Weisman from time to time for excessive Bush friendliness. I expect that Brad is satisfied with this column. I personally have no complaints about the headline (for a change)...

Robert is wrong! Take a look at the leading paragraphs:

GOP May Be Splintering on Social Security: A badly divided Senate Finance Committee yesterday held the first hearing examining President Bush's efforts to restructure Social Security. While the Democrats remained united in their opposition, there were signs of cracks in the Republicans' support for the president.

After months of political positioning, the stakes were high as the committee took up Bush's signature domestic issue for his second term. The White House has framed the Social Security debate as a matter of political courage, challenging both parties to secure the program's long-term solvency while giving all Americans an ownership stake in their economy. But over the course of the president's Social Security tour, public support for Bush's proposal has fallen, and Democrats see the issue as their best chance to make political gains in Washington.

With that highly charged backdrop, Republican divisions at the hearing had added significance...

Democrats see the issue as one of stopping yet another destructive and badly-thought-out Bush proposal--like its entire security policy, like its budget deficits, like its corporate tax giveaways, like its farm bill, like its incredibly defective Medicare drug benefit. It's not just about politics.

After all, if it were just about politics, would the Republicans be splintering? Grassley, Thomas, and Snowe are not just playing the game of politics, they are trying to figure out what is best for the country--as are Conrad and others.

Weisman and Fletcher mislead their readers when they pretend that it is all about, and just about politics. But they don't know enough to write the story any other way.

So no, Robert, I am not satisfied.

Where's My Access to the Universal Online Library of Humanity?

It's heeerrrreee! Actually, it's not here yet. But it's coming:

Google Print Search: brad delong:

"Economic Puppetmasters: Lessons from the Halls of Power by Lawrence B. Lindsey - Page 18As Brad delong, former Clinton aide, now a professor at the University of California at Berkeley, said in a Wall Street ...[ More results from this book ]

Human Dignity and Contemporary Liberalism by Brad Stetson - Page 41On the loss of property rights specifically, see James V. delong, Property Matters (New York: The Free Press, 1997). 63. ...[ More results from this book ]

Money Changes Everything: How Global Prosperity Is Reshaping Our Needs, Values, and Lifestyles by Peter Marber - Page 24As economist Brad delong points out: Today the average American possesses a degree of material comfort that in many ways outstrips the reach of even the ...[ More results from this book ]

Explorations in Classical Sociological Theory: Seeing the Social World by Kenneth Allan - Page 100... .berkeley.edu/Economists/smith.html (Site maintained by Brad delong, Professor of Economics at the University of California, Berkeley; brief biography ...[ More results from this book ]

Death of Distance: How the Communications Revolution Will Change Our Lives by Frances Cairncross - Page 4... in the way mass production raised the efficiency and quality of manufacturing. As Brad delong, an economist at the University of California at Berkeley ...

Duncan Black Tries to Teach Economics to the Wall Street Journal

Like teaching a pig to sing opera, it doesn't work. You waste your time, and it annoys the pig:

Remedial economics for the WSJ editorial board ... [Media Matters for America]: The Wall Street Journal editorial argued that 'the overall tax burden grew more progressive' in the last 25 years because upper income taxpayers pay a larger share of total taxes than they did in 1979... between 1979 and 1999, the share of total taxes paid by the richest 0.1 percent of taxpayers rose from 5.06 percent to 11.05 percent, and the share paid by the top 1 to 5 percent of earners rose from 14.69 percent to 17.75 percent. But over the same 20-year period, the share of total U.S. income that these two groups earned increased much faster than their share of the tax burden, as economists Thomas Piketty and Emmanuel Saez explained in an updated version of their paper 'Income Inequality in the United States, 1913-1998' (which now includes data up to the year 2000). In 1979, the top 0.1 percent of taxpayers earned 2.01 percent of total U.S. income; in 1999, they earned 6.63 percent. This group's share of total income more than tripled, while its share of federal taxes paid only increased by a little more than double.... The relative share of total taxes paid by various income groups -- which the Journal cites -- is [not] a... measure of... progressivity.... [A] tax system is 'more progressive' if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up... [as is explained in] the online supplement (PowerPoint exhibit for chapter 12, slide 35) to the third edition of his introductory economics textbook, Principles of Economics (Thomson South-Western, 2004), [by] N. Gregory Mankiw, who served as the chairman of President Bush's Council of Economic Advisers until late February 2005...

Well, maybe annoying the pig is worthwhile.

One of my most interesting moments in Washington was being seated at a luncheon table behind Charlie Stenholm and Judd Gregg, who began to spin more and more interesting and improbable theories about just why Dow-Jones let the Journal editorial page exist in its current form...

Grassley Tells Bush to Be Quiet

The Senate Finance Committee starts working. Dana Milbank reports:

Personal Accounts Are Not A Certainty: On the eve of the first congressional hearing on the restructuring of Social Security, Republicans on the Senate Finance Committee signaled that they will not insist that personal accounts be part of the legislation and that they will not seek further details from President Bush about his plans for the government-run retirement program. In a briefing arranged by Republican staff on the committee and given to 60 reporters yesterday, a committee official involved in the Social Security discussions also said the legislation will move through the committee in June or July. The briefing was given on the condition that the official, who is an aide to Finance Committee Chairman Charles E. Grassley (R-Iowa), would not be named and that his remarks would not be directly quoted.

The official's account, given in preparation for today's hearing on various Social Security proposals, appeared to soften many of the statements Grassley had previously made.... In yesterday's briefing, the committee official asserted that the contours of Bush's plan for Social Security are already well known and that the panel did not believe the release of further details of the plan would be helpful.

The Reaction to Greenspan's 2001 Testimony

Mark Thoma has done some digging and takes a look at press reaction to Greenspan's 2001 tax cut testimony:

Economist's View: "hat Did Greenspan Say and When Did He Say It?...

Mr. Greenspan told Mr. Sarbanes that the charge was 'frankly unfair' because it neglected the Fed chairman's unambiguous endorsement of 'trigger' mechanisms during the same testimony. 'I advocated tax cuts' in 2001, Mr. Greenspan acknowledged Thursday, 'but I also advocated triggers in the same testimony.' Did he advocate triggers?

While that term is not used directly in his testimony, it is used in a CBS report noted below, the only report I could find explicitly discussing spending restraint mechanisms, and Greenspan does say:

In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan, or spending initiative for that matter, be phased in. Conceivably, it could include provisions that, in some way, would limit surplus-reducing actions if specified targets for the budget surplus and federal debt were not satisfied. Only if the probability was very low that prospective tax cuts or new outlay initiatives would send the on-budget accounts into deficit, would unconditional initiatives appear prudent.... Indeed, the current economic weakness may reveal a less favorable relationship between tax receipts, income, and asset prices than has been assumed in recent projections.... But the risk of adverse movements in receipts is still real, and the probability of dropping back into deficit as a consequence of imprudent fiscal policies is not negligible. But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.

In my view, he does add quite a bit of caution regarding slipping back into large deficits, cautions that, as noted below, were not reported widely in the press.... However.... Consider the following quote:

But continuing to run surpluses beyond the point at which we reach zero or near-zero federal debt brings to center stage the critical longer-term fiscal policy issue of whether the federal government should accumulate large quantities of private (more technically nonfederal) assets.... I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise....

[W]hen the economy began slipping into deficit and the Trust Fund assets were evaporating, Greenspan did not protest....

Here are the headlines [from January 2001]:

Greenspan Endorses Tax Cuts WASHINGTON, Jan 25, 2001 (AP Online via COMTEX) -- Federal Reserve Chairman Alan Greenspan gave a major boost Thursday to President Bush's plan for across-the-board cuts in taxes...
GOP Raves at Greenspan's Tax Views January 26th WASHINGTON (AP) - President Bush, in office less than a week, has scored an early triumph in his campaign for a $1.6 trillion tax cut, winning Federal Reserve Chairman Alan Greenspan's support for tax relief...
In Policy Change, Greenspan Backs A Broad Tax Cut RICHARD W. STEVENSON (NYT) January 27, 2001... it should not be so big that it would plunge government back into deficit if federal budget surplus fails to materialize as projected...
Greenspan eyes tax cuts January 25, 2001: 2:09 p.m. ET WASHINGTON (CNNfn) - Federal Reserve Chairman Alan Greenspan gave his broadest endorsement of tax cuts to date Thursday... Greenspan said that if it became clear that politicians might be tempted to use the money for major spending initiatives, it would be better to cut taxes. 'It is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases,' the Fed chairman said...
Greenspan supports tax cut plan By Gerard Baker in Washington FT.com site; Jan 25, 2001 Alan Greenspan, chairman of the US Federal Reserve, on Thursday threw his weight behind proposals for a large tax cut, giving a powerful boost to the centerpiece of President George W. Bush's economic policy.... That created the real risk that, if budget surpluses continued, the US government would begin to acquire a growing portion of the nation's private financial assets - which would create serious inefficiencies...
Greenspan quick to move with times By Gerard Baker in Washington FT.com site; Jan 26, 2001 Alan Greenspan... found himself repeatedly echoing Keynes's defence...as he explained his remarkable U-turn...
LEX COLUMN Financial Times; Jan 26, 2001 Alan Greenspan's sudden endorsement of President George W. Bush's tax cutting plans looks like smart politics rather than sound economics.... Mr Greenspan worries that in six to seven years this debt will have been repaid and the government will be forced either to acquire private assets or go on a spending spree...
Greenspan Gets Mixed Reviews CBS News, WASHINGTON, Jan. 26, 2001 ...Greenspan urged caution, suggesting that Congress consider some type of trigger to trim government spending or tax cuts if the budget surpluses aren't as large as currently estimated...
Greenspan on tax-cut bandwagon Chicago Tribune - US FT Abstracts; Jan 26, 2001 Federal Reserve chairman Alan Greenspan told the senate budget committee yesterday that... he is ready to support reduced tax rates. Greenspan backs tax cuts as way to trim surplus...
Los Angeles Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan gave his endorsement for President Bush's ambitious tax cut program yesterday, citing the expanding budget surplus as reason for lower taxes...
Editorial: Interpreting Mr. Greenspan The New York Times - US FT Abstracts; Jan 26, 2001 Alan Greenspan's approval of tax cuts in his Congressional testimony yesterday should not be misconstrued by Bush as an endorsement of his $1.6 trillion tax cut offer.... Congress should therefore move carefully toward tax cuts...
In policy change, Greenspan backs a broad tax cut The New York Times - US FT Abstracts; Jan 26, 2001 Federal Reserve Chairman Alan Greenspan has given his blessing for a substantial tax cut... but he did warn that any cut should not be so big that it plunged the government into deficit should the federal budget fail to materialize as projected...
Greenspan, in about-face, backs tax cuts The Wall Street Journal - US FT Abstracts; Jan 26, 2001 In a dramatic departure from a long-held view, Federal Reserve Chairman Alan Greenspan yesterday lent his support to the federal government's tax cut package...
Zeal and doubt follow tax-cut blessing The Boston Globe - US FT Abstracts; Jan 26, 2001 The Federal Reserve's Alan Greenspan lent his support to the Republican's plan for a tax-cutting initiative yesterday...
Economic Realities Drove Greenspan The Washington Post. Washington, D.C.: Jan 26, 2001. pg. A.4 [FROM ABSTRACT] Alas, said [Alan Greenspan], it's not that simple. The moment the target is reached and the government stops using its annual surpluses to pay down the national debt, it faces a problem... What to do with the extra cash piling up at the Treasury?...
Bush's Hand Greatly Strengthened Glenn Kessler. The Washington Post. Washington, D.C.: Jan 26, 2001 [FROM ABSTRACT] [Alan Greenspan] dispelled the notion that [Bush]'s plan to cut taxes might be reckless, dangerous or even massive, as former vice president Al Gore charged...

Mark Schmitt Agrees with Me...

Peter Orszag is a national treasure:

The Decembrist: Peter Orszag is a national treasure: I'm watching the Finance Committee hearing on Social Security. Peter Orszag of Brookings and the Center on Budget and Policy Priorities just had a wonderful metaphor to respond to the idea that private accounts are a 'sweetener' or 'dessert' to Social Security that will make it easier to swallow the tax increases or benefit cuts that would ensure solvency.

'That's like trying to convince your kid to eat spinach by offering him a turnip for desert.'

Perhaps the most bizarre thing is that I'm told that the White House has for months had numbers like Robert Shiller's and Goldman Sachs's thumbs-down assessments of the desirability of private accounts on the terms the administration has offered them. Yet they haven't bothered to change the terms, or even to make the argument that financing investments by borrowing from your Social Security defined-benefit account at 3% plus inflation is a good deal. Something very similar used to happen with Ira Magaziner and company: Marina Weiss--Bentsen's senior health care aide--would go in there and say, "Ira, we don't think this will work. Moreover, Robert Reischauer at CBO and Breaux's and Moynihan's people in the Senate think like us--they won't think this will work either. And you need Reischauer, Breaux, and Moynihan to be enthusiastic or this is going nowhere." And there would be no response.

In a Good World, Peter Orszag Would Be in the White House Running Social Security Reform

His testimony before the Senate Finance Committee this morning:

Social Security Reform

Peter R. Orszag
Joseph A. Pechman Senior Fellow in Economic Studies
The Brookings Institution

Senate Committee on Finance
April 26, 2005

Mr. Chairman and other members of the Committee, thank you for inviting me to testify before the Committee this morning. Social Security provides the foundation of retirement income, but must be combined with other saving to achieve full retirement security. Retirement income should thus be viewed in terms of tiers, with Social Security delivering a core tier of protection upon which additional retirement income must be built....

Both tiers of retirement security face challenges. In that context, my testimony makes four main points:

• Retirement security can be significantly enhanced by improving 401(k)s and IRAs through commonsense reforms that both sides of the Social Security debate should embrace. The individual accounts we already have -- in the form of 401(k)s and IRAs -- can be substantially improved and strengthened through a series of commonsense reforms that would make the pension system easier to navigate and more rewarding for American families. In the face of the difficult choices presented by the current system, many people simply procrastinate, which dramatically raises the likelihood that they will not save enough for retirement. Disarmingly simple concepts -- such as changing 401(k) plans so that workers are automatically enrolled unless they opt out, and making it easy to save part of an income tax refund -- have the potential to strengthen retirement security significantly. Both sides of the Social Security debate should agree on the straightforward steps necessary to improve 401(k)s and IRAs, and should come together to enact the changes immediately.

• Although improving the accounts we already have on top of Social Security makes sense, introducing accounts within Social Security does not. Under the Administration's proposal for accounts within Social Security, workers receive payroll revenue today, but pay the payroll revenue back, plus interest at a 3 percent real rate, at retirement through a reduction in traditional Social Security benefits. In effect, the individual accounts represent a "Social Security line of credit." Workers drawing upon that line of credit have payroll revenue deposited into their individual account today, but then owe the funds back, plus interest, once they retire. The system is thus similar to a loan from the government to workers. At best, assuming that all the loans carry the government's borrowing rate and are fully repaid, the accounts do nothing to improve solvency within Social Security over the long term -- as even the White House has acknowledged. A more likely scenario is that some of the loans will not be repaid in full, in which case the accounts harm solvency, even over an infinite horizon. And even if they are actuarially neutral over the long term, the accounts create a massive cash-flow problem in the meanwhile. Some argue that the accounts would facilitate other changes -- especially benefit reductions for higher earners -- that would help to restore long-term balance to Social Security. But it is hard to see why, unless they were subsidized, the loans should be particularly attractive, especially to higher earners. Indeed, a Goldman Sachs analysis recently concluded that, "In essence, the 3% real rate offset represents a loan from the federal government to the accountholder to fund the personal saving account. This is not an attractive proposition." Higher earners who typically already own a mix of stocks and bonds should find little or no value in unsubsidized loans from the government. And if the accounts were subsidized to make them more attractive to higher earners, their direct effect would be to expand the Social Security deficit. Increasing stock ownership among moderate and lower earners is desirable, but not by encouraging them to borrow against their future Social Security benefits. Instead, a better approach to increasing equity ownership and retirement saving for such households are the commonsense changes to 401(k)s and IRAs described above. Reducing traditional Social Security benefits to make room for individual accounts would also be unsound for society as a whole, since it would decrease the core tier of retirement income that is protected against financial market fluctuations, inflation, and the risk of outliving one's assets. Furthermore, whatever the initial rules for the accounts, there is likely to be considerable pressure over time for liberalizing pre-retirement access to the funds -- which is precisely what has occurred with 401(k)s and IRAs, along with the Thrift Savings Plan. Such access may make sense in the upper tier of retirement income, but not within the core tier because it undermines the preservation of funds for retirement.

• Failing to dedicate additional revenue to Social Security means that larger benefit cuts would be necessary to restore solvency. For example, dedicating the revenue from a reformed estate tax to Social Security could eliminate the need for more than $1 trillion in benefit reductions over the next 75 years. Every dollar of estate tax revenue dedicated to Social Security is a dollar less of benefit reductions or payroll tax increases necessary to address Social Security's projected deficit. Despite the claims of some advocates, the Administration's proposal for individual accounts makes brutally clear that such accounts do not directly help to restore solvency. Since accounts do not directly improve solvency and may well impair it, the only available policy options to restore solvency are reductions in benefits or increases in dedicated revenue. A fundamental tradeoff thus exists: Proposals that fail to dedicate additional revenue to Social Security will necessarily involve larger benefit reductions than plans that do dedicate additional revenue to the program. When push comes to shove, Americans seem to prefer relying on additional revenue -- or some combination of additional revenue and benefit reductions -- to mainly relying on benefit reductions. As just one example of the tradeoffs, taking the revenue from a reformed version of the estate tax and dedicating it to Social Security could close a substantial share of the projected deficit. For example, the revenue from an estate tax with a $3.5 million exemption per person ($7 million per couple) and a 45 percent tax rate on estates above that exemption would eliminate at least one-quarter of the projected 75-year deficit. That would obviate the need for more than $1 trillion in benefit reductions over the next 75 years. For a 20-year-old medium-earning worker today, it could mean avoiding $1,500 per year in benefit reductions. As a further illustration of the tradeoffs, retaining the same exemption level but reducing the tax rate on large estates to 15 percent would avoid only about $300 billion in benefit reductions over the next 75 years. In other words, with the revenue from a reformed estate tax dedicated to Social Security, reducing the tax rate to 15 percent would increase the benefit reductions required to address Social Security's deficit by $700 billion over the next 75 years. We as a society must decide whether this $700 billion is better used to provide larger after-tax inheritances to wealthy children or to reduce any benefit reductions necessary to restore solvency to Social Security. Every dollar of estate tax revenue dedicated to Social Security is a dollar less of benefit reductions or payroll tax increases necessary to eliminate Social Security's deficit.

• Recent "progressive price indexing" proposals are seriously flawed because they rely excessively on benefit reductions, cut benefits more if future productivity growth turns out to be faster than currently expected, and treat workers earning $900,000 or even $9 million a year the same as those earning $90,000. The recent "progressive price indexing" proposal involves surprisingly and excessively large benefit reductions for average workers. In addition, it reduces benefits more if productivity growth turns out to be higher than we currently expect, exactly the opposite of the appropriate response because the underlying 75-year actuarial deficit would be smaller with faster productivity growth. As the Congressional Research Service recently noted, "somewhat paradoxically, if real wages rise faster than projected, price indexing would result in deeper benefit cuts, even as Social Security's unfunded 75-year liability would be shrinking." Finally, the proposal treats someone earning $900,000 or even $9 million the same as someone earning $90,000; a sound reform plan would instead differentiate between the two. To be sure, imposing proportionately larger reductions in monthly benefits on higher earners compared to lower earners is sensible, in part because higher earners are increasingly living longer than others. "Progressive price indexing," however, is not the right way to accomplish that goal: It would make far more sense simply to adjust the current benefit formula directly to achieve the desired degree of protection for lower earners.

Why doesn't the White House care to find people of this caliber to staff its administration?

There's Something Very Wrong with the Republican Party

The Carpetbagger Report points out that there's something very wrong with a Republican Party whose senators think that Janice Rogers Brown belongs on the federal bench:

Janice Rogers Brown sees herself as part of religious "war": Part of being a qualified judicial nominee is an ability to show some judicial temperament and restraint. Janice Rogers Brown, clearly one of Bush's worst would-be judges, obviously doesn't understand that.

Just days after a bitterly divided Senate committee voted along party lines to approve her nomination as a federal appellate court judge, California Supreme Court Justice Janice Rogers Brown told an audience Sunday that people of faith were embroiled in a "war" against secular humanists who threatened to divorce America from its religious roots, according to a newspaper account of the speech.

Brown's remarks come as a partisan battle over judges has evolved into a national debate over the proper mix of God and government and as Senate Majority Leader Bill Frist (R-Tenn.) ponders changing the chamber%u2019s rules to prevent Democrats from using procedural moves to block confirmation of conservative jurists such as Brown.

Her comments to a gathering of Roman Catholic legal professionals in Darien, Conn., came on the same day as "Justice Sunday: Stop the Filibuster Against People of Faith," a program produced by evangelical leaders and simulcast on the Internet and in homes and churches around the country. It was designed to paint opponents of Bush's judicial nominees as intolerant of believers.

Apparently, Judge Brown was on quite a roll. She described these as "perilous times for people of faith" in the United States; she insisted the "idea of human freedom" is undermined when we move away from the nation's alleged religious underpinnings; and she condemned atheists for rejecting the "idea of freedom."... Her nomination sounds more like some kind of bizarre joke than a serious move to fill an appellate court vacancy. If the Republican Party still had any sense of decency left, Dems wouldn't have to filibuster Brown's nomination %u2014 GOP senators would have the sense to vote against her.

Charlene Huang Criticizes Dani Rodrik

My undergraduate thesis student Charlene Huang takes aim in her draft at Dani Rodrik's assertion that East Asia's "favorable initial conditions"--specifically, a high initial level of human capital--helped fuel its extraordinarily rapid post-WWII growth:

East Asia is generally characterized as having high initial levels of human capital (Rodrik 1994, 1997).... Primary school enrollment rates circa 1960 are usually employed in ascertaining the human capital levels... what Rodrik uses in his parsimonious regressions of growth in East Asia on the level human capital and the distribution of income circa 1960, which leads him to conclude that favorable initial conditions, that is, high initial levels of human capital and low income inequality, can explain 80% of South Korea and Taiwan’s rapid growth (Rodrik 1994).

However, a country’s primary school enrollment rate circa 1960 is less of an "initial condition" than an indicator of the competence and success of public policy. It serves better as a reflection of the post-colonial government's commitment to education and human capital development than as an indicator of initial levels of human capital. A more appropriate indicator of the stock of human capital, and hence circumstances before the period of growth being studied, would measure the educational level of the working age population in 1960, rather than the percentage of children enrolled in primary school in 1960.

Barro and Lee’s data on the percentage of the adults over 25 years of age in 1960 who completed primary school is such an indicator. Operating on the reasonable assumption that primary education was generally completed by 15 years of age, this measure would only include adults in 1960 who received their education by 1950.

As colonization of Taiwan and South Korea ended with Japan’s defeat in 1945, and Malaysia, Singapore, and Indonesia were decolonized by the British and the Dutch in the 1950s, this is a much closer approximation of the human capital with which the HPAEs were endowed, rather than policy choices of their post-colonial governments, or post-war governments in the case of Japan and Thailand. The percentage of adults who completed primary school during the time of colonization is a better indicator of colonial legacy than the percentage of children who are enrolled in primary school under a new non-colonial government.

A comparison of primary enrollment ratios in 1960 and the Barro-Lee data on the stock of human capital in 1960 clearly illustrates the difference between these two measures. For example, although Singapore and Korea both have about 100% primary enrollment in 1960, the percentage of the adults over 25 years of age in 1960 who completed primary school was 26.2% for Korea, but only 5.6% for Singapore. It seems that Singapore’s British colonizers were not as interested in educating the masses, as was Lee Kuan Yew’s government.

Primary enrollment ratios, especially under post-colonial governments, may thus paint a very misleading picture of true initial conditions. And the initial-condition levels of human capital in East Asia are not so favorable when this more appropriate measure is used...