Economics 113, Second Midterm
Brad Setser looks back at Argentina's recent crisis:
Brad Setser's Web Log: What happened to Argentine banks in 2001? And why?: Retrospective analysis of what went wrong in Argentina back in 2000 and 2001.... Argentina's crisis was a searing experience for me. In my no doubt biased view, the case studies are the real strengths of this just released IMF paper (fully disclosure: I contributed to the Argentine case study).... The core thesis of the Argentine case study is simple: Argnetine's banks were in far better positioned to survive a devaluation and a government debt restructuring at the end of 2000 than they were at the end of 2001. Consequently, waiting a year had real costs....
[D]uring the course of 2001, Argentine banks got rid of precisely those assets that would (potentially) have performed in the event of a devaluation and government debt restructuring. They ran down their best assets -- their liquid offshore reserves -- to pay off depositors (and to pay off maturing cross border credits). They also reduced their peso lending to Argentine firms dramatically. Peso deposits fell more rapidly than dollar deposits (that, incidentally, does not mean dollar depositors did not run: some peso depositors shifted into dollars, and some dollar depositors ran). To stay matched, currency wise, the banks had to reduce their peso lending commensurately.
That left the banks with dollar-denominated lending to the government, and dollar-denominated lending to Argentine firms. Both types of lending were almost sure to go bad in the event of a restructuring and a devaluation...
Ed Andrews of the New York Times writes about "Asset Returns and Economic Growth":
The New York Times > Washington > Social Security, Growth and Stock Returns: In barnstorming the country over Social Security, administration officials predict that American economic growth will slow to an anemic rate of 1.9 percent as baby boomers reach retirement. Yet as they extol the rewards of letting people invest some of their payroll taxes in personal retirement accounts, President Bush and his allies assume that stock returns will be almost as high as ever, about 6.5 percent a year after inflation.
'For the life of me, I can't imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future,' Treasury Secretary John W. Snow said Wednesday in a speech in Bozeman, Mont.
A growing number of economists, however, including many who favor personal accounts, say Mr. Bush's assumptions are optimistic. Many believe that stock returns will be lower than they have been in the past, closer to 5 percent than 6.5 percent, and that returns on a balanced mix of stocks and bonds will be much lower than that.... The statistical battle is politically important. If investment returns are just one percentage point lower each year than predicted, a person would end up with 35 percent less money than she expected after 30 years of saving. Under Mr. Bush's plan, moreover, people would need to earn at least 3 percent a year after inflation just to make up for automatic cuts in traditional Social Security benefits.
In a paper to be presented on Thursday at the Brookings Institution, three economists who are longtime critics of Mr. Bush argue that stock returns are likely to be about 4.5 percent if economic growth slows as much as the administration predicts. 'We find it arithmetically very difficult to construct scenarios in which asset returns are at their historic average values and real G.D.P. growth is markedly slowed,' wrote the economists, Paul Krugman of Princeton University, whose Op-Ed columns in The New York Times have long been sharply critical of Mr. Bush's plan; J. Bradford DeLong of the University of California, Berkeley; and Dean Baker of the Center for Economic Policy and Research, a liberal research organization in Washington.
To make the numbers work, the economists contended in their paper, domestic profits would have to grow far more rapidly than they have in the past, or American companies would have to become huge exporters of capital to faster-growing countries. At the moment, the United States is a huge net importer of foreign capital.... [M]any Wall Street analysts warn that stock returns are likely to be significantly lower in the future for a separate reason: stock valuations are high relative to expected earnings, and they are likely to remain that way. The S.&P. 500 index is currently valued at about 20 times earnings, which translates to an expected return of about 5 percent a year....
William C. Dudley, chief United States economist at Goldman Sachs, estimates that stock returns are likely to be about 5 percent in the future, because investors are accepting lower 'risk premiums.'... 'My view is that stocks really can't deliver the same returns in the future as in the past, unless we have a major decline in stock prices,' said John Y. Campbell, a professor of economics at Harvard University and an adviser to the Social Security trustees on the issue in 2001.... Two recent computer simulations, one by Robert J. Shiller at Yale University and one by the Congressional Budget Office, suggest that even historical stock returns are no guarantee against losing money....
Stephen Goss, chief actuary for the Social Security program, defended the administration's assumptions. 'Keep in mind that we are trying to make projections over a very long time, 75 years,' Mr. Goss said. 'I would suggest that 5 percent at the moment makes perfect sense. But if you buy at another time, when the price-earnings ratio is 10, you would expect a higher return over time.'...
White House officials may be revising their assumptions. N. Gregory Mankiw, who recently stepped down as chairman of the Council of Economic Advisers, said Mr. Bush's proposed break-even rate of 3 percent on personal accounts may be too high. The yield on inflation-protected Treasury bonds is about 2 percent.
White House officials say they are open to proposals for changing the break-even point, which would raise the plan's cost, but Democratic lawmakers remain fundamentally opposed to Mr. Bush's plans.
'The basic arguments are over the extent to which people ought to be given more freedom over their risk and return choices,' Mr. Mankiw said. 'Returns on the stock market may affect the choice people make, but the question of whether they should be given a choice is broader than the issue of returns.'
- It's not clear to me that Dudley-Campbell is anything other than Baker-DeLong-Krugman seen from the other side. High price-earnings and price-dividend multiplies coupled with slow GDP and profit growth imply low returns. Only if GDP and profit growth is rapid can current stock market levels be consistent with high returns.
- The issue separating Baker-DeLong-Krugman from Goss (and others, like MIT's Peter Diamond) is whether the stock market knows what it is doing. As we see it, there are three possibilities. We see all three of these as live. Goss sees only the third:
- The stock market knows what it is doing, and it is expecting low long-term returns (because of a fall in the equity premium and an anticipated fall in the rate of profit.
- The stock market knows what it is doing, and it is expecting normal long-term returns because it is anticipating relatively rapid long-term GDP and profits growth.
- The stock market doesn't know what it is doing, is currently overvalued, and will decline over the next decade to levels that are consistent with historical return patterns.
- A Bush plan that had a 2% real clawback rate (or set the clawback rate equal to the Treasury borrowing rate) would be vastly preferable to the current Bush plan: it would accomplish the important task of providing a vehicle for the poorer half of America's population to easily invest in equities on reasonable terms.
- Mankiw's invocation of the language of consumer choice and consumer sovereignty makes me very, very uneasy, for reasons I don't have time to set out here...
Why Oh Why Can't We Have a Better Press Corps? (Shut Up or We'll Kill Your Development Bank! Department)
The Washington Post "argues" that critics of Paul Wolfowitz as World Bank President should be quiet. Why? Because "the World Bank is necessary.... People who care about this institution and its mission -- as many of Mr. Wolfowitz's detractors do -- should think carefully before they damage it by attacking its new boss."
No argument that Paul Wolfowitz is the best candidate for World Bank President. No argument that he is even a good candidate. No argument that he is either minimally qualified--in his understanding of development, in his understanding of international finance, or in his ability to manage a large bureaucracy.
washingtonpost.com: Mr. Wolfowitz and the Bank: THE WORLD Bank's board will meet today and will almost certainly confirm the nomination of Deputy Defense Secretary Paul D. Wolfowitz as its new president. The initial expressions of shock from Europe have proved unserious and, in some cases, even hypocritical.... Imposing a particular deputy on Mr. Wolfowitz is not going to help. It will push the World Bank toward the nationality-driven hiring that is the bane of United Nations agencies.... It's true that the No. 2 at the International Monetary Fund, who is always an American, does boost U.S. clout within the World Bank's sister institution....
Mr. Wolfowitz's critics, domestic as well as international, should now get beyond their dislike of his role in the Iraq war.... [T]he institution will have a hard time facing down the inevitable attacks on its decision if it is simultaneously having to defend itself against critics who dislike its new president.
Most people agree that the World Bank is necessary. There are few competent organizations that can help manage the challenges of globalization.... The World Bank brings big financial and intellectual resources to all of these challenges; it provides around $20 billion a year to developing countries and houses the largest concentration of development thinkers anywhere. People who care about this institution and its mission -- as many of Mr. Wolfowitz's detractors do -- should think carefully before they damage it by attacking its new boss...
David Altig asks (rightly) why I didn't link to his and Nouriel's pieces in the Wall Street Journal. Ummmm... Sloth?
macroblog: Soft Landing, Or Hard?: Nouriel Roubini and I debate the issue in the latest installment of the Wall Street Journal Online's Econoblog. Get it while it's still free.
UPDATE: Andrew Samwick agrees with me, as does William Polley (and both add to the argument). But I didn't dent Brad Setser's resolve, and be sure to check out the discussion board at Econoblog where, last I looked, the sentiment was running heavily in Nouriel's favor.
UPDATE, THE SEQUEL: The Eclectic Econoclast reports that Peter Drucker agrees with Roubini and Setser.
YET MORE: An excellent summary by Kash ar Angry Bear.
ONCE MORE: Brad DeLong comments on Kash's post (thanks, pgl). However, he does neglect to link to the Econoblog debate that instigated Kash's remarks Hey, Brad! Give us some love!
Note to self: Back-of-the-envelope calculations suggest that between the start of 1999 and the end of 2001, investors in Argentina bonds were compensated ex ante for only about 36% of their losses. They were much too sanguine about Argentina's prospects until the very end.
Jesse Taylor of Pandagon watches Treasury Secretary John Snow embarrass himself, and gets positively shrill:
Pandagon: An Internal Dialogue: John Snow can't figure out why America is opposed to the vague set of platitudes that he's paid to shill for.
Snow, in remarks to the Chamber of Commerce in Bozeman, said he believed personal accounts for young workers would be cost-free for the existing Social Security system and would not affect benefits to retirees or near-retirees.
'For the life of me, I can't imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future,' Snow said.
'Why wouldn't we do this? I have not heard one good reason not to and it's hard to figure out why anybody would oppose it,' he said.
Here are four off-the-top-of-my-head reasons to oppose the Bush private-accounts plan, all of them very good ones:
- As private-accounts plans go, it is a lousy one: the high three percent real clawback means that the working class and the lower middle class run an unacceptably large chance of losing money if they sign up.
- It is not cost-free for the existing Social Security system: it increases the Social Security deficit: contrary to what administration spokesmen claim, the shift to private accounts costs more in reduced revenues flowing to the standard Social Security system than it saves in reduced standard Social Security benefits.
- It doesn't do a thing to raise national saving; in fact, if people treat their private accounts as close substitutes for their other saving, it could well significantly reduce our already much-too-low national saving rate.
- The Bush administration has a demonstrated skill at getting the important details of policies wrong: at turning gold into straw. Even a good plan would be wrecked in implementation by this crew.
It is pathetic that John Snow has not heard any of these reasons. The Treasury Secretary should not be an ignorant, underbriefed doofus.
A note for the next time I teach graduate macro:
A fall in the rate of economic growth--whether because of slower labor-force growth or slower growth in technology and organization--should carry with it a reduction in rates of profit and asset returns. Why? The intuition is clear: slower growth in labor, technology, or organization all reduce this generation's supply of effective labor relative to the capital stock provided by last generation's saving and investment. Effective labor becomes relatively scarcer, and capital becomes relatively more abundant. Thus the wage paid to an effective unit of labor rises, and rates of profit and asset returns fall: supply and demand.
However, it is especially interesting that one of the standard models--the Ramsey-Cass-Koopmans model as set out in Romer's Advanced Macroeconomics--predicts that while rates of return should fall when labor productivity growth falls, reductions in labor force growth have no effect on rates of profit and asset returns. In the R-C-K model, labor-force growth takes the form of an increase in the number of members of the representative household. The utility of the representative household is equal to the number of its members times a function (with declining marginal utility) of consumption per capita. Thus big households are better at turning consumption into utility than small ones. A R-C-K household that controlled its own fertility would choose to grow in size as rapidly as possible (even if the real wage its members earned were zero) in order to grasp the possibility of becoming more efficient at transforming goods into utility.
Thus it turns out that in the R-C-K model a reduction in the labor force growth rate has two effects. First, it reduces the relative supply of effective labor in the future. Second, it reduces the efficiency of the household in the future at turning consumption goods into utility. The first effect raises the relative abundance of capital and causes rates of return to fall. The second effect diminishes incentives to save, reduces the relative abundance of capital, and causes rates of return to rise. It turns out that they exactly offset each other.
But is this a result we want--to say that a reduction in the rate of population growth reduces savings rates because households recognize that their future versions will be less efficient at turning goods into utility because they will be smaller in number? I suspect not, especially once one recognizes that the representative agent is a fiction and that the households doing the bulk of the saving are in all likelihood not the same as the households doing the bulk of the growing.
There is a general lesson here: these models are clean, elegant, powerful, and have lots of hidden subtleties that commit you to implicit assumptions you probably do not want to make. Inspect them carefully.
Why Oh Why Are We Ruled By These Liars? (Assistant Secretary Rob Nichols, This Is Your Life! Department)
From Josh Micah Marshall:
Talking Points Memo: by Joshua Micah Marshall: March 27, 2005 - April 02, 2005 Archives: TPM Reader JM could barely believe what he was hearing ...
It was a bit shocking to hear Rob Nichols, assistant secretary for public affairs at the Treasury Department, actually say out loud that U.S. government bonds in the trust fund are just worthless IOUs, causing an uproar from the audience. (This guy works for the Treasury Department!?) He also was emphatic that there would be exactly zero transition costs for establishing private accounts. 'After all, it is simply like pre-paying your mortgage.' He said this prepayment would require only $700 billion for the first 10 years, and to shouts of what about the second 10 years, claimed that they hadn't run the numbers. The audience wasn't buying it judging from the catcalls. Finally, Sally Canfield, assistant to Denny Hastert, tried to throw out the line about how each year we delay costs another $690 billion, until brought to a screeching halt by a cry of 'Liar' from someone in the crowd.
"They hadn't run the numbers" for what happens in the second decade of Bush private accounts? Do they really think the press corps and the people are dumb enough to believe that? And why do they think it's to their advantage to set out such transparent lies? Would anyone support a long-run plan proposed by people who haven't "run the numbers" beyond the first ten years?
Atrios directs us to Insomnia:
insomnia: The filthy Sanchez.: The ACLU today released a memo signed by Lieutenant General Ricardo A. Sanchez authorizing 29 interrogation techniques, including 12 which far exceeded limits established by the Army’s own Field Manual. More specifically, it points out that Gen. Sanchez committed perjury when testifying before Congress.
From Sanchez' testimony of May 19, 2004:
U.S. SENATOR JACK REED (D-RI): General Sanchez, today's USA Today, sir, reported that you ordered or approved the use of sleep deprivation, intimidation by guard dogs, excessive noise and inducing fear as an interrogation method for a prisoner in Abu Ghraib prison. Is that correct?
SANCHEZ: Sir, that may be correct that it's in a news article, but I never approved any of those measures to be used within CJTF-7 at any time in the last year.
That is absolutely refuted by the newly released memo, which says:
Presence of Military Working Dog: Exploits Arab fear of dogs...
Sleep Management: Detainee provided minimum of 4 hours sleep per 24 hour period, not to exceed 72 continuous hours.
Yelling, Loud Music, and Light Control: Used to create fear... (Sanchez's wording, not mine.)
Meanwhile, from the nineteenth floor of a building at the southern end of the Malay Peninsula, Belle Waring uses Google and TypePad to teach us how to improve our diets by eating the Power Grain of the Incas while lying in bed nursing a grumpy, teething child! (That's her. We can eat the Power Grain of the Incas out of bed, even if there's no nearby child at all.)
Aren't the Internets amazing?!
John & Belle Have A Blog: Quinoa Tastes Good: Quinoa, on the other hand, is yum-tastic. I'm lying in bed right now nursing a grumpy, teething child, so I can't check the ratio. I think it's 1 1/2 c water to 1 c quinoa? No, OK, 2 to 1, I can use google even in my reduced state. It's a good idea to wash it, as it can retain a bitter coating, but I'm lazy and never bother, and it's always been fine, so... First, cook some onion and/or garlic in a few T olive oil. Then add 1 1/2 t cumin, or whatever, and then the quinoa, and toast for a minute or two. Put in the stock (or water), cook over low heat 17-20 minutes, turn off the heat and let it sit a minute or two, fluff it, and there you go. You could stir in chopped tomato or cilantro at the end, include red bell pepper or chilis at the start, generally let your mood and the contents of the vegetable drawer guide you. The grains are very pretty; they are translucent, and each has a curling tail wrapped around it. They have a lovely texture. Also, the are super good for you. I think it is the only grain which is a complete protein. If you are pressed for time, cook quinoa, mustard greens in olive oil and garlic, and pan-fried pork chops or boneless chicken breast with teriyaki sauce. 30 minutes start to finish, and mad healthiness along the way.
Kash at Angry Bear sets out what the "hard landing" scenario is, and then why he is skeptical about it:
Angry Bear: [A]t some point those Asian central banks will decide to stop lending additional funds to the US. They do not have to dump their current dollar assets to cause a crisis; simply stopping the accumulation of new dollar assets will suffice to cause difficulties. When that happens, the US current-account deficit must necessarily fall by a (roughly) similar amount over a short period of time. The only way that that can happen, particularly given continued US government deficits, is for a sharp fall in the dollar, a sharp rise in interest rates, a sharp fall in asset values, a sharp fall in consumption, and a large rise in US saving...
And here's why he is skeptical:
Assuming that Asian CB lending to the US is indeed a crucial determinant of the US's CA deficit (see #1 above), will it be in the best interest of Asian CBs to stop lending additional funds to the US any time soon? The costs to those CBs of additional lending to the US are large: enormous potential capital losses when the dollar depreciates, growing inflationary pressures in their home countries (perhaps particularly in asset markets), and heightened protectionist pressures in the US.
But the costs that Asian CBs will incur if they stop lending to the US could be even greater: the sharp fall in exports to the US that would surely happen, a likely sudden rise in domestic interest rates, the crash in asset prices that would probably follow... all of which would make a recession -- possibly a rather severe one -- quite likely. Right now these costs are apparently greater than that aforementioned costs of continued lending to the US.
Is it likely that this calculus will ever change? I've generally been in the hard landing camp on this issue, but on this last question I'm not so sure. It seems entirely possible to me that the enormous downside risk of recession, asset price depreciation, and domestic economic dislocation could well outweigh any other consideration for a long time to come. If so, then Asian CBs will have every reason to only very gradually taper off their additional lending to the US -- gradually enough to ensure that the hard landing scenario never happens...
What this leaves out is that the associated central banks may lose control of the situation. As long as they all act in concert, things continue to work (at least in the short run). But suppose that one decides to hedge its reserve position against the risk that the dollar will decline. What happens then? The other central banks will have to step in to take up the slack--to buy its dollar holdings, and then to take up its share of new dollar holdings. The first central bank to decide that the game is up wins and escapes all risk. The rest are left holding the rotting hot potatoes. As the stakes at risk rise, the strains on the dollar-buying cartel that is the associated central banks of Asia rise. And when those strains become too great and the first one decides to try to get out the door first...
And what this also leaves out is the other actors in the game. As long as the dollar-buying cartel continues, you can move your assets from dollars into other currencies, wait for the dollar to fall, move them back, and thus have made 30% or more on your money. At the moment Americans are doing this at a rate of $600 billion a year as they trade bonds for net imports. There are about $30 trillion of dollar-denominated financial assets in the world economy. If their holders decide to convert only 2% of these from dollars into other currencies this year, that means that the central bank cartel will have to eat not $50 billion of new dollar holdings next month but $100 billion of new dollar holdings this year; if they decide to convert 6% this year than the central bank cartel will have to eat $200 billion of new dollar holdings next month. When the associated investors of the world who hold dollar-denominated assets decide on any significant scale that it's time to try to grab the 30% gain from the coming fall in the dollar, the game is over that very week.
If either of these happen--either a move by a couple of central banks to abandon the dollar-purchase cartel, or a decision by a significant number of investors to try to grasp the 30% profit from the forthcoming dollar decline--then things get wild immediately. Karen Johnson at the Federal Reserve, Kristen Forbes at the CEA, and Randal Quarles and Tim Adams at the Treasury will know what to try to do--or at least guess at what the least-bad course of action will be. But will anybody in the White House listen to them?
The New York Times > Opinion > Op-Ed Contributor: In the Name of Politics: Take stem cell research. Criminalizing the work of scientists doing such research would give strong support to one religious doctrine, and it would punish people who believe it is their religious duty to use science to heal the sick.
During the 18 years I served in the Senate, Republicans often disagreed with each other. But there was much that held us together. We believed in limited government, in keeping light the burden of taxation and regulation. We encouraged the private sector, so that a free economy might thrive. We believed that judges should interpret the law, not legislate. We were internationalists who supported an engaged foreign policy, a strong national defense and free trade. These were principles shared by virtually all Republicans.
But in recent times, we Republicans have allowed this shared agenda to become secondary to the agenda of Christian conservatives. As a senator, I worried every day about the size of the federal deficit. I did not spend a single minute worrying about the effect of gays on the institution of marriage. Today it seems to be the other way around.
The historic principles of the Republican Party offer America its best hope for a prosperous and secure future. Our current fixation on a religious agenda has turned us in the wrong direction. It is time for Republicans to rediscover our roots.
Late to the party, but welcome.
If you work for Heritage, and ever want to be taken seriously again, quit today. This is your last chance.
Kevin Drum reports:
The Washington Monthly: "A WEE ASSIGNMENT FROM THE HERITAGE FOUNDATION....From the description of a Heritage Foundation event to be held April 19:
A growing number of scientists around the world no longer believe that natural selection or chemistry, alone, can explain the origins of life. Instead, they think that the microscopic world of the cell provides evidence of purpose and design in nature — a theory based upon compelling biochemical evidence. Join us as Dr. Stephen C. Meyer, a key design theorist and philosopher of science, explains this powerful and controversial concept on the mysteries of life.
Two weblogs I very much want to see continue are having pledge drives. First, Arthur Silber:
Light of Reason: I’m having a pledge week here at The Light of Reason.... [W]hat market is there for a libertarian blog at the moment? Moreover, a libertarian, non-interventionist blog? A blog that manages to offend almost everyone at one time or another? (Now that’s a distinction not everyone can claim, if distinction it be.) When I began two and a half years ago, I was linked very often by the major prowar, liberventionist blogs. Not so much in the last year or so; in fact, hardly ever (or never). Nowadays, it’s the liberal blogs that link to me. Well, that’s evolution for you. But there isn’t any “camp” that I belong to, and there isn’t any group in which I feel completely at home. Talk about living one’s advocacy of individualism. Not that I wouldn’t mind finding a group of like-minded people, but thus far that has proven to be elusive in the extreme...
I, the not-particularly-mysterious Alameida, will make you, dear reader, a personalized gift of a nature I cannot fully reveal here, because it is against the law, sort of. (No, not that.) Not a real law, but more of an RIAA-type law.... So, c'mon, people, pony up. You'll get something nice of an undisclosed nature, and Gary Farber will get some of those sweet sweet prescription drugs he's been hankering for, like the ones that lower your blood pressure. (I hear that s*** is amazing)...
Just think: contribute to each 100 times the pro-rated time-cost of watching Crossfire, and you still come out *way* ahead. I would like to see it proven possible that the tip jar turn out to be bountiful enough to keep high-powered, idiosyncratic commentators like these active.
Wonkette notes a typical Kurtzianism:
Wonkette - College Faculties Infested with Liberals: Howard Kurtz reports: 'College faculties, long assumed to be a liberal bastion, lean further to the left than even the most conspiratorial conservatives might have imagined, a new study says.' Or maybe that should have been, Howard Kurtz interprets. Here's an actual excerpt from the new study, which is based on a study from six years ago: 'The 1999 study found 72% of faculty to the left of center, including 18% who were strongly left...'
So, fewer than one out of five evil liberal professors actually identify themselves as strongly left? Does Kurtz actually know any 'conspiratorial conservatives'? Believe us, Howard, they can conspire way more imaginatively than that! Once again, the insular nature of the liberal MSM reveals itself...
UPDATE: Ezra Klein throws down the gauntlet:
Ezra Klein: Why Professors Tilt Left: "it's time to stop the head-scratching. Being a libertarian is perfectly fine, as is being an economic conservative and a neocon. But the weird merging of the Christian Right, the Neocons, and Karl Rove's theories that's currently directing the Republican party makes no sense at all. It's an administration where the President believe the 'jury's still out' on how the earth was formed and the Senate Majority Leader -- a trained doctor! -- thinks AIDS can be transmitted through tears (to say nothing of the House Majority Leader who couldn't go to Vietnam because those damn minorities had gobbled up all the spots).
And so people who care about their party making sense shy away from Bush. Sometime they find more elements of their beliefs in him than in the Democrats, and so they pull the lever for the 'R', but the more that intellectual coherence matters, the less they make that bargain. And so as you climb up the rungs of academia, where internal coherency and intellectual rigor become values to live and die by, you find fewer Republicans. Simple as that...
Ezra is completely right.
A good deal of it, in economics at least, is that you simply cannot dare not--not if you want to look others in the eye (or yourself) adopt the line of the Bush administration. Consider what I was writing about yesterday--White House Social Security point man and "substance" person Charles Blahous, and his claims like:
BLAHOUS: It's also not a problem that, under the current system, we can grow our way out of. The current system is designed so that benefits grow as fast as wages and the economy grow. And what this means is that if the economy does grow faster than projected, then wages will grow faster than projected; we will collect higher revenues, to be sure, and we might be able to push off that 2018 date, or 2042 date by a few years, but we would also owe more benefits as a consequence of the higher growth.
No economist--no real academic economist--would dare to endorse this. The closest anyone comes is the Council of Economic Advisers, in its "Three Questions About Social Security", which states:
While economic growth makes it easier to sustain some government spending programs, this does not apply to Social Security, because Social Security benefits themselves increase with earnings.
But it immediately pulls back and corrects itself in the next paragraph (emphases added):
Some commentators have wondered whether the Social Security Trustees have underestimated future productivity growth and, thereby, future economic growth. If productivity grows faster than expected, the economy will indeed grow more rapidly, as will worker wages. But this won’t provide that much help to Social Security. As workers’ wages rise, their payments to Social Security go up, providing a short-term benefit to the program. However, their future benefits increase as well. Thus, while there is a short-term benefit to Social Security from economic growth, the long term benefit is relatively small. It is almost like running on a treadmill—-getting ahead requires more than is reasonable to expect. Specifically, the indexation of initial Social Security benefits to wages means that increased benefits offset much of the higher revenue from faster wage growth...
Note the "that much," the "long-term benefit is relatively small," the "almost," and the "much." What these mean is this: "Given current benefit and funding structures, an 0.1 percentage point increase in the long-run growth rate of productivity reduces the 75-year deficit number by about 0.1 percentage point; an 0.1 percentage point increase in the long-run rate of population growth due to higher net immigration reduces the 75-year deficit number by about 0.3 percentage points." Are these effects "small"? Does it mean that faster growth wouldn't help? Put it this way: an 0.6% markup of annual productivity and an 0.4% markup of annual population growth due to higher immigration would together wipe out the 75-year deficit.
It's acceptable in academia to be a Democrat. It's acceptable to be a libertarian. It's simply embarrassing to be a Republican.
Joshua Micah Marshall watches the circular firing squad of flying attack monkeys in action:
Talking Points Memo: by Joshua Micah Marshall: March 27, 2005 - April 02, 2005 Archives: Club for Growth loads up again and starts firing away at Sen. Lindsey Graham (R) of South Carolina for having the temerity to raise the possibility of raising the payroll tax cap to fund phase-out. This press release out from Le Club bashes Graham for considering raising taxes rather than being a principled conservative and just borrowing the money.
Very nicely done: very much worth reading:
Sam Bowles and Herb Gintis (2002), "The Inheritance of Inequality," Journal of Economic Perspectives.
Brad DeLong's Spring 2005 Berkeley Schedule
Econ 211: Economic History Seminar: M 2-3:30 Evans 639
Econ ???: Economic Growth Lunch: W 12 Evans 597
Econ 195: Senior Thesis Seminar: F 2-3:30 Evans 5
Office Hours: THIS WEEK: 2-4:30 on Wednesday March 30. Regularly F 12-2 in Evans 601, or by appointment: email firstname.lastname@example.org.
Sketch of answers to Problem Set 3.
Matthew Yglesias writes:
Matthew Yglesias: "Policy Imitates Star Trek: I had this cunning plan to wait until tomorrow link to the Gary Farber fundraising drive on the theory that a link would do more good with a little bit of delay between when I offered it and when John Holbo offered up a link on Crooked Timber. But Gary's gone and emailed in to say he likes old-fashioned blog-links, too, highlighting in particular this post which reveals (really) that at least one member of the President's Bioethics Council (really) came to the view that "that cloning and embryonic stem cell research are evil . . . in part, by watching Star Trek." Really. Personally, I'm more of a Star Trek: The Next Generation fan, but I'd really prefer not to launch a dispute on the topic. My hope would be that we can all agree this is perhaps not the soundest method of formulating bioethics policy. Although, considering the low knowledge level of the White House's in-house Social Security expert I suppose we'll take what we can get. Ironically, while the Trekkie bioethicist is not a scientist, the Social Security expert is not an economist but . . . a chemist. I suppose it's very pointy-headed elite of me to think that people should be basing their views on actual knowledge, but that's just what you get...
Let me agree that in this case for Republicans to arrive at their policy views by watching Hollywood science fiction has gone drastically wrong. But in general it seems to me that for Republicans to get their views on important issues from Hollywood science fiction is much better than the alternative. Consider the case of Klaatu Barada Nikto:
Life was certainly interesting when Ronald Reagan was president. For the neoconservative Cold Warriors who largely staffed the foreign policy side of his administration, it became most interesting when Reagan began wandering around the White House saying, "Klaatu Barada Nitko!" and asking people whether they had seen The Day the Earth Stood Still. "Here come the Little Green Men again!" Colin Powell would say.
Rotten.com has a timeline of some of this:
4 Dec 1985
Anticipating arms control discussions with his Soviet counterpart, President Reagan draws on an extraterrestrial analogy: "[H]ow easy his task and mine might be in these meetings that we held if suddenly there was a threat to this world from some other species from another planet outside in the universe. We'd forget all the little local differences that we have between our countries ..."
17 Feb 1987
Soviet premier Mikhail Gorbachev reveals Reagan's preoccupation with space aliens: "At our meeting in Geneva, the U.S. President said that if the earth faced an invasion by extraterrestials, the United States and the Soviet Union would join forces to repel such an invasion. I shall not dispute the hypothesis, though I think it's early yet to worry about such an intrusion..."
15 Sep 1987
During a luncheon with Soviet Foreign Minister Eduard Shevardnatze in the White House, President Reagan once again wondered what would happen if the Earth were under attack from an external threat: "Don't you think the United States and the Soviet Union would be together?"
4 May 1988
During a question-and-answer session in Chicago, President Reagan revisits his 'invaders from space' notion: "I've often wondered, what if all of us in the world discovered that we were threatened by an outer -- a power from outer space, from another planet. Wouldn't we all of a sudden find that we didn't have any differences between us at all, we were all human beings, citizens of the world, and wouldn't we come together to fight that particular threat?"
The Cold Warriors thought that they had a man who hated Communism and was eager for an expensive and bloody crusade against the Evil Empire. And they did. But there was also another Reagan roaming around inside Ronald's head: A Reagan who wanted SDI not to gain the U.S. an advantage in the Cold War but to protect people against the horrors of death-by-nuke--and who sincerely wanted to give SDI technology away for free to all nations so that no one would have to fear nuclear destruction. A Reagan who genuinely hoped to eliminate nuclear weapons from the face of the earth. A Reagan who had been profoundly influenced by the movie "The Day the Earth Stood Still," and bought 110% its powerful message about how small were the differences that divided the world's nations when seen from the right point of view. A Reagan who was definitely willing and eager to give peace--and Gorbachev--a chance.
This Reagan freaked his National Security Council staff out. But he proved remarkably powerful when pitted singlehanded against virtually his whole administration in 1987 and 1988. And we should not forget that Nancy Reagan was a powerful voice backing Ronald-the-Peacemaker in the waning days of the administration.
For that, thanks.
Sketch of answers to Problem Set 2.
And the Medium Lobster deals with this on the only level appropriate:
Fafblog! the whole worlds only source for Fafblog.: "Freedom is ever-marching, and its latest target for emancipation is none other than the Gulag Academia, where millions of students are held hostage by totalitarian educators whose cruel practice of teaching them things they don't already believe could soon be put to an end.
Florida Republicans are considering passing an 'Academic Freedom Bill of Rights' which will give college students the power to sue 'dictator professors' who offend their beliefs by teaching material which contradicts them. The Medium Lobster hails this as a measure long overdue. For far too long, higher education has been concerned with 'education' and 'instruction,' mere euphemisms for harsh indoctrination into the totalitarian ideology of Fact. But now students will be given the tools to fight back, to free themselves of their oppressive enslavement to a world in which life evolved over millions of years through natural selection, dinosaurs weren't wiped out six thousand years ago by the flood of Noah, and the evil Xemu was not responsible for the existence of body thetans...
For a limited time, the Medium Lobster is $8.99. But watching students sue because their professors refuse to consider the idea that their poor performance on the last exam was the fault of the evil Xemu? Priceless.
William Powers of the National Journal writes:
Off Message (03/18/2005): Maybe I'm just another out-of-touch journalist, but I have a hard time sharing the public's sense of disappointment in the media...
Well, let me try to make it easier for him to share our disappointment. Let me express my disappointment in him.
William Powers reads a paragraph from AP:
While mortgage rates and other interest rates are expected to keep rising this year, those increases are likely to continue at a gradual pace unless inflation becomes a threat. But with oil prices surging to record highs, the worry about out-of-control inflation remains very real. Analysts said if policy makers at the Federal Reserve grow concerned that inflation is becoming a problem, they are likely to start pushing up interest rates at a much more rapid clip.
and his reaction is:
Off Message (03/25/2005): A lot of what we do in the news business is glorified busywork.... But when the economy is in the news, and particularly when Federal Reserve Board Chairman Alan Greenspan is jiggering interest rates, the shocking busywork reality becomes painfully clear.... Like economics itself, economic journalism is a dismal, foggy realm where the hapless news consumer is constantly bumping into weird conditionals and subjunctives.... The real problem is the nonstop stream of gassy speculation that predominates in economic coverage and does little except fill empty space and airtime.... This is cotton-candy journalism, devoid of substance...
This makes me want to bang my head against the wall. The AP reporter is trying to say--is succeeding at saying--four things:
- The Federal Reserve is currently planning to raise short-term interest rates on Treasury securities at a gradual pace this year (say, a quarter of a percentage point every two or three months).
- As a result, mortgage and other interest rates will probably rise at that same gradual pace.
- If the Federal Reserve sees signs in the data that it has significantly underestimated rising inflation, all bets are off.
- In that case, interest rates--all interest rates--will go up much faster.
If that AP paragraph takes one into "a dismal foggy realm" of "weird conditionals and subjunctives"... Excuse me, ahem, were that AP paragraph to take one into "a dismal foggy realm" of "weird conditionals and subjunctives," then I would be Queen Marie of Roumania.
It's not a weird conditional. It's a straightforward one. It's not a foggy point. It's a clear one. William Powers bewilders himself because he ventures into a realm where he knows nothing, nothing at all about the substance of what is going on, and where he doesn't bother to try to learn.
Let's be clear: I am not disappointed with William Powers because he is (initially) ignorant about Federal Reserve policy and American finance. I am disappointed with William Powers because he doesn't try to cure his ignorance.
Feh. Some quality control, please.
Outline notes for a talk on China I gave a week ago...
Peering into the Future of China
J. Bradford DeLong
(925) 708-0467 email@example.com
China's historical advantages
- Trade (reached in 1100s levels not reached in Europe until 1700s)
- But: office-land-corruption complex
- Leveller (land redistribution)
- Soviet tutelage (communes; heavy industry)
- Fortunately it didn't really take
- Mao goes insane
- Great Leap Forward
- Cultural Revolution
- "We cannot find him"
- "To get rich is glorious"
- 1.3 billion people: population growing at 0.6% per year, 1.12 male/female newborn ratio
- All in a space the size of U.S. east of the Mississippi
- Economic growth: up to 10% per year
- Investment: 43% of GDP
- Industrial production growth: 30% per year
- Economy size: $2 trillion GDP ($1,500 per person per year)
- $6 trillion PPP GDP ($4,500 per person per year) (cf. U.S.: $40,000)
- Economy sectors: agriculture 15%, mfg mining 52%, services 33%
- But: labor: agriculture 50%
- Economy distribution:
- Top 10%: 33% of income
- Bottom 10%: 2% of income
- Exports: $500 billion a year and growing...
- Coasts disconnecting from the interior...
- 400 million people on the coasts
- 800 million people in the interior
- 400 million people in the cities
- 800 million people in the interior
- People doing well:
- Coastal cities
- Party bosses
- Peasants near coastal cities
- Migrant workers
- People doing badly:
- Heavy industry
- Rural peasants without migrants in their families
- The Communist Party's task
- Move 10 million people a year into the coastal cities
- Find them jobs
- Make them happy
The Communist Party's Strategy
- Export at all costs...
- Redistribute income to the interior...
- Hope that nobody remembers they're supposed to be Communists...
- Keep the economy growing...
- Avoid the financial crisis...
- Someday, somehow, grow a middle class big enough to serve as a source of demand...
How long can China keep growing?
- 400 million peasant workers whose productivity is 1/3 the average
- 100 million manufacturing workers whose productivity is 4 times the average
- Do the math:
- Basic mechanization of agriculture plus transfer of 250 million peasants will triple the size of China's economy and its desired manufacturing exports...
Dangers to Business-as-Usual
- The bond market
- The next U.S. recession
- China's interior
- Lack of a legitimate politics
- North Korea
Matthew Yglesias is unhappy with Richard Stevenson of the New York Times. He writes:
[TAPPED: March 2005 Archives:] MEET THE EXPERTS. Richard Stevenson's written a little love poem to Karl Rove in today's New York Times which, one hopes, will give him the access he needs to score important scoops in the future. For now, though, he's trying to get us to believe that the president's decision to put Rove in charge of policy as well as politics represents not the further decline of Republican seriousness, but rather Rove's unique brilliance as a substantive thinker. The only actual evidence is this:
'He can talk the specifics even with Chuck Blahous,' Mr. Card said. 'I've never actually seen him correct Chuck, but I have heard him tell Chuck how to explain what he's saying so the rest of us can understand.'
Blahous is the administration's main man on Social Security policy, and I'd say that if there's only one other person at the senior level who can understand what he's saying, that says more about the problematic situation inside the White House than about the unique virtues of Rove. Either they need to hire someone to do Blahous' job who's better at explaining things, or they need to hire some people to do other jobs who aren't too dumb to understand policy exposition. It's kind of an important part of running the government. I note incidentally that Blahous is a chemist by training, which some would find an odd qualification for being top policy official in a policy domain that's about economic policy. Nevertheless, it's good to hear that there are specifics being hashed out inside the West Wing. Maybe Bush will enlighten the public as to what the content of his secret plan to privatize Social Security is one of these days. Or maybe Blauhous is the only one who understands it and that's why they can't tell us.
I'm afraid it's considerably worse than that. Yglesias assumes that Blahous knows what he's talking about. But Blahous doesn't understand the Bush Social Security Plan. He can't hash out specifics inside the West Wing.
Here are some selections from a briefing he gave the morning of the State of the Union address. He says a great many things that are simply wrong. For example:
(1) BLAHOUS: The problem that we now face is not one that we can tax our way out of, for a very simple reason: The costs and the current program are growing faster than the underlying tax base. So if we were to raise taxes today to deal with it, and the costs of the program continued to grow faster than the tax base, then in the future, future generations would simply have to come back and raise taxes again.
Here Blahous is simply wrong: The 2005 Trustees Report says that a 1.8 percentage point increase in Social Security taxes would be expected to balance the system out to 2075, and that a 3.5 percentage point increase would be expected to balance the system out to infinity. I think these numbers are high: I think it's more like 1.2 and 2.0, respectively.
Let's move on:
(2) BLAHOUS: It's also not a problem that, under the current system, we can grow our way out of. The current system is designed so that benefits grow as fast as wages and the economy grow. And what this means is that if the economy does grow faster than projected, then wages will grow faster than projected; we will collect higher revenues, to be sure, and we might be able to push off that 2018 date, or 2042 date by a few years, but we would also owe more benefits as a consequence of the higher growth.
Here also Blahous is simply wrong: faster productivity growth improves Social Security's finances by an amount equal to roughly half of life expectancy at retirement times the change in the productivity growth rate. 1% per year faster productivity growth reduces the deficit by about 1 percentage point. The point is that faster productivity growth raises the current Social Security tax base relative to its current obligations: pay-as-you-go systems like Social Security make sense only if productivity growth is relatively high, and the faster is productivity growth the more sense they make.
(3) BLAHOUS: With respect to the fiscal effects of the personal accounts, in a long-term sense -- and I know those of you who have talked to me have heard me say this before -- but in the long-term sense, obviously, the personal accounts, as we would structure them, would not create a net new cost for the system. To the extent that people put money in these accounts and invest in these accounts, there would be a corresponding reduction in the government's liabilities from the Social Security system that is equal in present value to the money placed in the personal accounts up front. So in a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government.
Here, once again, Blahous is simply wrong: given divorces, remarriages, the progressivity of the benefit formula, and so forth, in a large number of cases the government does not have a large enough Social Security liability to be able to reduce it enough to balance the cost of the money diverted to the private account. A ballpark estimate is that the Bush private accounts proposal has a net fiscal cost to the U.S. government of some $1.1 trillion in present value--half a percentage point or so of taxable payroll.
Most of this net fiscal cost comes because the private accounts proposal is biased toward the rich. The working and middle classes essentially borrow from their traditional Social Security benefit at 3% per year plus inflation to fund their private accounts (this is what makes private accounts a relatively lousy deal for them). Because of the limited reach of the clawback, the upper middle class and the rich get to borrow to fund their private accounts at less than 2% per year.
(4) Q: In saying that there is no net added cost to the program, are you implying -- is it implicit that there is a benefit offset of one-third current guaranteed benefit because you're diverting one-third of revenues away from this program? If that's not correct, what would the benefit offset be to traditional benefits, and how would it be calculated?
BLAHOUS: The way that the election is put before the individual in a personal account structure of this type is that in return for the opportunity to get the benefits from the personal account, the person foregoes a certain amount of benefits from the traditional system. Now, the way that election is structured, the person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive. So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase as a consequence of making that decision.
Q: So he would only get a benefit to the extent that his portfolio performed in excess of 3 percent?
BLAHOUS: Right. You can think of it as saying -- if you were making a decision on where to put your money going forward over the next 10 years, and you're saying, should I put it in this account or that account, if you're choosing to put your money over here instead of over here, then the net effect on you, as an individual, is to compare what would be the rate of return you get from this system, as opposed to putting it over here. And that would be the difference between the two.
Blahous is simply wrong yet again. It's 3% only if you're in the working or middle class--for the upper middle class, it is less. There is a net fiscal cost to the private accounts proposal, and it is a transfer from taxpayers in general to those whose earnings are near or above the Social Security maximum.
Last, let's go to Blahous simply being evasive:
(5) BLAHOUS: In the near-term, however, of course, there will be transition financing required. Our estimate of the total amount of transition financing for the accounts, according to the schedule that I've outlined before, is about $664 billion through the end of the budget window of 2015. If you assume that -- debt service effects on top of that, that would be another $90 billion.
Q: You talked about the $664 billion for the near-term costs. There's been a lot of speculation in advance that it would be something like $2 trillion. Talk a little bit more about that. How do you square that?
BLAHOUS: I don't want to say too much about it. Obviously, the $2 trillion number is not a number that was ever generated by us or by the Social Security actuaries, or any of the other nonpartisan scoring agencies. There were different assumptions that went into that number, and they reflected, I think, the thinking of other people beyond the scoring agencies.
Q: If I could follow up on a couple of questions that have already been asked -- can you give us a second 10-year estimate on the revenue effect? Can you tell us how you would pay for that, in the first 10 years' revenue loss? And am I right in assuming that in the way you describe this, because it's a wash in terms of the net effect on Social Security from the accounts by themselves, that it would be fair to describe this as having -- the personal accounts by themselves as having no effect whatsoever on the solvency issue?
BLAHOUS: On the second point, that's a fair inference. On the first point, the long-term picture, of course, as you know, is very -- it's a very comprehensive picture. You're looking forward 75 years over all time, depending on how you gauge things. And that can only be done accurately in the context of a comprehensive plan to fix the system. For example, if we were to do projections out beyond 2015, we would have to model what were the hypothetical changes made to fix the system's finances, which are at this time yet undetermined.
Q: Putting those aside, what is the revenue implication of a fully phased-in 4 percent account of the type that you've laid out?
BLAHOUS: It would be very different depending overall on whether or not it was done alone or in the context of a comprehensive plan.
Q: Assuming it's done alone, since that's all you're putting out here --
BLAHOUS: And the problem with assuming it's done alone is that we aren't advocating that it be done alone. We're advocating that it be done in the context of a comprehensive plan.
Q: But you're not saying what else is in there. You're not saying what else is in the comprehensive plan, so --
BLAHOUS: Well, when we have -- at the point where we can attach numbers to a comprehensive plan and model the effects of the accounts in that context, of course we'll put those numbers forward. But until that -- those specifications exist, we don't have the ability to project that.
The answer to the question he's being asked is: "Over the next twenty years, transition costs are about $2 trillion. To the extent that we do other reforms that cut--excuse me, slow the growth--of benefits, we recapture some of those."
With (5), it's clear that Blahous knows the answer to the question he's being asked, but has been told not to give it out under any circumstances. (4), (3), (2), and (1) are somewhat harder to evaluate.
I've been told by people who worked with Bush Social Security Commission staff that (1) and (2) reflect Blahous's general low level of knowledge about how the Social Security system actually works. Within the Social Security community, claims that prefunding tax increases cannot balance the system or that productivity growth does not improve the system's financing are ludicrous. Yet Blahous makes them with a straight face.
I have heard from people who have talked to Social Security Administration staff that (3) and (4) result from the fact that Blahous simply did not do the staffwork to properly understand the impact of his own private-accounts proposal. That the proposal widened the fiscal deficit because in many cases the reach of the clawback was insufficient appears to have come as a great surprise to Blahous: he had only evaluated the impact of his plan on the median worker. That the proposal winds up transfering $1.1 trillion of wealth from the average taxpayer to the upper middle and upper classes also, I am told, came as a surprise to Blahous. I don't know how reliable the sources of my sources are.
But if Blahous is being held up a the gold standard of substantive knowledge on Social Security... we're in a lot worse shape than Matthew Yglesias imagines.
Kevin Drum on Paul Wolfowitz:
The Washington Monthly: DECONSTRUCTING WOLFOWITZ.... As regular readers know, every few months I like to find an excuse to post a reminder of Paul Wolfowitz's testimony before Congress on February 28, 2003, three weeks before the Iraq war started. Here's a summary of the New York Times account:
Mr. Wolfowitz...opened a two-front war of words on Capitol Hill, calling the recent estimate by Gen. Eric K. Shinseki of the Army that several hundred thousand troops would be needed in postwar Iraq, 'wildly off the mark.' Pentagon officials have put the figure closer to 100,000 troops.
....He said there was no history of ethnic strife in Iraq, as there was in Bosnia or Kosovo....He said Iraqi civilians would welcome an American-led liberation force....And he said that nations that oppose war with Iraq would likely sign up to help rebuild it....Mr. Wolfowitz spent much of the hearing knocking down published estimates of the costs of war and rebuilding, saying the upper range of $95 billion was too high.
....Moreover, he said such estimates, and speculation that postwar reconstruction costs could climb even higher, ignored the fact that Iraq is a wealthy country, with annual oil exports worth $15 billion to $20 billion. 'To assume we're going to pay for it all is just wrong,' he said.
This is, I think, the prime reason to oppose Wolfowitz's nomination to head the World Bank. Lots of people favored the Iraq war, after all, but how many of them displayed such convincing evidence of their appallingly poor judgment on such a wide range of topics in such a public venue? Do we really want a guy like that running anything, let alone the World Bank?
And yet.... here I have to confess something: I'm not a Paul Wolfowitz hater.... Guys like Kristol and Cheney and Rumsfeld, for example, talk a lot about democracy but mostly use it as a thinly disguised excuse for installing friendly pro-American leaders in countries that just happen to have lots of oil. Wolfowitz, conversely, really seems to believe this stuff.... The fact that Wolfowitz was willing to criticize Suharto at all, or that he's willing to tell a pro-Israel audience that they should be more mindful of Palestinian suffering, says something about what he really believes.
Of course, there's still that appalling judgment (see Wolfowitz, Paul, Congressional Testimony of, op cit)...
But, Kevin, zeal and enthusiasm do not counteract the flaw of analytical incompetence: they magnify it.
Brad Setser is puzzled by IMF Chief Economist Ragu Rajan:
Brad Setser's Web Log: The financing of the US current account deficit: That is why I was slightly disappointed with this speech by Ragu Rajan, the IMF's chief economist. If any institution is well placed to track global reserve accumulation, it is the IMF. Yet rather than emphasizing central bank financing, Rajan goes to great lengths to minimize it.
Rajan argues that the US deficit is financed primarily by private investors:
Overall, the bulk of US assets sold to foreigners are still [sold] to the private sector. That may come as a surprise to some of you who believe that the US current account deficit is being financed by foreign central banks ... the [foreign official sector] still only amount to about one-third of the total gross inflows into the US. ... It is therefore entirely correct to say the US current account deficit is more than fully financed by foreign private investors while US private investment abroad is partially financed by foreign central bank investment in the US...
Rajan appears to be saying that (a) if foreign central banks stopped buying U.S. Treasury and other securities, (b) U.S. investors and businesses would stop investing abroad, (c) would buy those U.S. Treasury and other securities instead, and so (d) the U.S. current account would be unchanged--exchange rates wouldn't move.
Conversely, he appears to be saying that (e) if foreign private investors' taste for dollar-denominated assets were to fall, (f) there would be no change in U.S. gross investment abroad as long as central banks kept buying, but (g) there would be a substantial reduction in the U.S. current account--the value of the dollar would fall.
A model of international trade and finance that made these predictions would be a very strange model of international trade and finance indeed. The same purchases of dollar-denominated assets would have different effects on the value of the dollar depending on who was making them.
I read Ragu Rajan's speech differently. In my experience, the IMF has two public communication modes. The first mode, Communication Mode (1), is when there are serious long-run problems with economic policies (and when are there ever not serious long-run problems with economic problems?) but the short-run outlook is relatively quiet. Then the task of the IMF is to aid national Treasuries in getting their High Politicians to take the long run problems seriously. And the IMF does this through public pronouncements of: "DOOM!! DOOM!! DOOM--not tomorrow, but in the long-run, sure as the sun will set!"
The second public communication mode, Communication Mode (2), is when the IMF judges that the long run is at hand, that there is very limited time before the crunch comes, that a market panic would bring the crunch now, and that the key task is calm markets and buy time so that--perhaps--last minute policy changes to avert utter disaster can be made. Then the IMF talks about the medium-run sustainability of policies, the depth of markets, the commitments of governments to reform, and so forth.
Rajan's speech looks as if the IMF has just switched, as far as the U.S. current account deficit and the value of the dollar are concerned, from Communication Mode (1) to Communication Mode (2).
That is pretty frightening.
Bloomberg.com: News & Commentary: Productivity: Treasury's Snow says high stock-market returns will be possible because gains in productivity -- or output per worker -- will continue to be strong, offsetting slowing population growth. GDP growth is a function of both growth in the workforce and productivity, he said in a March 23 interview. ``Productivity stays strong, and productivity per capita remains high,'' predicted Snow, who has a Ph.D. in economics. ``And it's productivity per capita that drives returns on assets.''
Yet the Social Security Administration expects productivity growth to plummet in the coming years, falling from last year's 4.1 percent gain to about 2.1 percent starting in 2010, according to the agency trustees' report released March 23....
I pity Mark Warshawsky. I know he's doing his best, but it looks like a very hard job indeed.
The 3% per year + inflation clawback is deadly:
NewsFinder: "BOSTON (MarketWatch) -- Personal Social Security accounts could bring more risk than reward to investors, and would shift more responsibility for saving for retirement to individuals, Standard & Poor's said Monday. 'The key question is whether an individual account holder can build enough money in savings to retire comfortably while withstanding any inevitable investment risk,' said David Blitzer, chairman of the index committee at S&P. Given the risks in the market, not all aggressive savers will retire with ease, S&P said...
And sounding both (a) reasonably coherent and (b) relatively allergy-free:
NPR : Inflation's Impact on Industries and Finances: The Federal Reserve suggested this past week that the pressures of inflation are picking up. But the industries that might be most affected -- and what to expect in the future -- remain a subject of debate. Sheilah Kast speaks with Brad DeLong, a professor of economics at the University of California at Berkeley.
This Easter Sunday, Susan of Suburban Guerrilla finds some more of the bats*** crazies:
Suburban Guerrilla: SIGH. What would Jesus do?
CHARLOTTE, N.C. - A church has withdrawn its support for a food pantry serving the needy because the pantry works with Roman Catholics. Central Church of God explained its decision in a letter March 1 from minister of evangelism Shannon Burton to Loaves & Fishes in Charlotte. 'As a Christian church, we feel it is our responsibility to follow closely the (principles) and commands of Scripture,' the letter said. 'To do this best, we feel we should abstain from any ministry that partners with or promotes Catholicism, or for that matter, any other denomination promoting a works-based salvation.'
Loaves & Fishes isn't the only ministry with which the large church has cut ties, and Catholics have not been the only reason they've given. The Rev. Tony Marciano, executive director of Charlotte Rescue Mission, said Burton told him the church could no longer support the agency after it allowed three Muslim students from UNC Charlotte to help serve a meal.
"Promoting a works-based salvation." Like St. Matthew? Or Jesus Christ?
Matthew 25:31-40: When the Son of man shall come in his glory, and all the holy angels with him, then shall he sit upon the throne of his glory. And before him shall be gathered all nations: and he shall separate them one from another, as a shepherd divideth his sheep from the goats. And he shall set the sheep on his right hand, but the goats on the left. Then shall the King say unto them on his right hand, "Come, ye blessed of my Father, inherit the kingdom prepared for you from the foundation of the world: For I was an hungred, and ye gave me meat: I was thirsty, and ye gave me drink: I was a stranger, and ye took me in: Naked, and ye clothed me: I was sick, and ye visited me: I was in prison, and ye came unto me."
Then shall the righteous answer him, saying, "Lord, when saw we thee an hungred, and fed thee? or thirsty, and gave thee drink? When saw we thee a stranger, and took thee in? or naked, and clothed thee? Or when saw we thee sick, or in prison, and came unto thee?"
"And the King shall answer and say unto them, "Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me."
Chris Bowers writes:
MyDD :: Diversity and the Two Lefty Blogospheres: In the comments section, angry moderate made an observation that caught my attention:
If you remove Atrios, the left blogosphere is neatly divided into two mutually-linking spheres: the moderate/intellectual(academicky) types - Drum, DeLong, Yglesias, TPM, Tapped, Crocoked Timber - and the left activist types - Kos, MyDD, Digby, Left Coaster, Pandagon (only this one surprised me a bit). Even at the modest 5-link level, none of these blogs link to anyone on other side. They'd be completely unlinked communities if not for Atrios who has links to TPM and Tapped, but also Kos and Digby. I suppose no surprise since Atrios is an academic leftist activist type.
I checked the paper and found that while generally accurate, this statement is not entirely true, since Dailykos did in fact have link exchanges greater than five with both Political Animal and Mathew Yglesias. Still, it is more or less true.
But the fun thing about social science is that your subjects have minds of their own:
This extreme seasonality in the demand for peeps must pose a complex economic problem for the Just Born Company.
Today they are reminding us that "peeps aren't just for Easter": they are for Halloween, Christmas, and Valentine's Day as well...
Admetos: Who's Don Kohn?
Glaukon: In a just world, Don Kohn might well be Alan Greenspan's successor.
Admetos: And in the unjust world we live in, who will be Alan Greenspan's successor?
Glaukon: Well, in a world in which the successor to Jim Wolfensohn at the World Bank is Paul Wolfowitz, clearly the successor to Alan Greenspan can be only one man: Donald Rumsfeld.
Why can't Michael Barone count? Wonkette deals with his overall argument at the level it deserves. But I want to point out that only a truly mighty degree of innumeracy could have led Michael Barone to even make this argument in the first place:
Michael Barone: The trustfunder left: a previously unidentified segment of the American electorate... a critical mass... a major force... the trustfunder left. Who are the trustfunders? People with enough money not to have to work for a living, or not to have to work very hard. People who can live more or less wherever they want....
These people... very liberal... have done nothing to earn their money... elite private or public high schools... colleges and universities... propagandized about the evils of capitalism and globalization.... Patriotism is equated with Hiterlism.... [T]hey are citizens of the world with contempt for those who feel chills up their spines when they hear 'The Star Spangled Banner.'...
Where can you find trustfunders?... Places with kicky restaurants... tolerant of alternative lifestyles... art galleries... organic food stores... Starbucks competitors. The... San Francisco Bay area.... Without the Bay area's 1.15 million-vote margin for Kerry, California would have come within 82,000 votes of voting for George W. Bush.... Blaine County, Idaho (Sun Valley).... Teton County, Wyo. (Jackson Hole).... Martha's Vineyard....
The good news for Democrats is that they have found a new source of votes and money. The bad news is that an important part of their core constituency has the characteristic that the British Prime Minister Stanley Baldwin ascribed to the press, 'power without responsibility, the prerogative of the harlot throughout the ages.'
Let's do the math. People with "enough money not to have to work for a living, or not to have to work very hard." How much money is that for an upper middle class lifestyle (have to go to all those restaurants and art galleries: organic produce is expensive)? Figure $70,000 (pretax) per year in property income (and even at that you still have to work pretty hard). If you spend 4% of your capital each year, that's a wealth level of $1.7 million.
Emmanuel Saez tells me that there are roughly 600,000 people living in households with $1.7 million or more of wealth--and that's including the value of their house. Only a fraction have that much income-producing wealth. More than half of that fraction are over 60. More than half of the ones who are left are Republican. And at least half of the remainder have earned all their money--not inherited any of it.
So we are down to less than 75,000 "trustfunder lefties" in America. And they--those of them who live outside the major cities--are supposed to be responsible for the worries about sprawl and environmental degradation that make Sun Valley and Jackson Hole lean Democratic? For the Bay Area's 1.2 million vote edge for John Kerry? Michael Barone embarrasses himself.
Furthermore, one might have thought that Michael Barone might have noticed that over the past generation the San Francisco Bay has been the most powerful engine of capitalist economic development anywhere, anytime. The merchant prince of Silicon Valley today are only fabulously rich rather than unbelievably fabulously rich because the market system works, and competition in the market system pumps wealth out of producers and into the hands of users and consumers. Nevertheless, they and their workers have created, accumulated, and pumped out more wealth than any other region in any other era. The last time I went to a chi-chi restaurant in San Francisco (Nancy Oakes's Boulevard, 1 Mission Street: truly excellent) I betcha I had the biggest trust fund at the table (a 1/12 share of my late grandmother's couple of million) and I also betcha that my household net worth was comfortably less than 1% of the table average. You could go through the restuarants of San Francisco's waterfront some Friday night and not find a single "trustfunder" eating a creme brulee.
Only a true idiot could begin raving about those who have "enough money not to have to work for a living, or not to have to work very hard" without wondering how many such people there are. And only the truly quantitatively innumerate--like Michael Barone--could avoid immediately figuring out that there are very few such people: that they aren't "a critical mass... a major force... a new source of votes... [a] core constituency" at all.
I don't know why Michael Barone is totally innumerate. I do know why he doesn't find innumeracy an obstacle to his career in Washington: if he were numerate, after all, he'd have a harder time just making stuff up.
As compiled by Tim Dunlop:
the road to surfdom: "Yes! There are no guerillas! There is no insurgency!
I guess the reason I don't use the phrase 'guerrilla war' is because there isn't one, and it would be a misunderstanding and a miscommunication to you and to the people of the country and the world.
Yes! There are guerillas! There is an insurgency:
U.S. Defense Secretary Donald Rumsfeld acknowledged today that the United States failed to predict the strength of the insurgency in Iraq, but he defended the size of the US force deployed to stabilize the country.
We didn't stop them because the invasion was so successful and we were just so damn quick:
In an interview with The New York Times, the president said for the first time that he made a 'miscalculation of what the conditions would be' after U.S. troops went to Iraq and toppled Saddam's regime in May 2003. The insurgency, he maintained, was the unintended result of a 'swift victory' that led to Iraqi troops disappearing into cities and mounting a rebellion.
Hang on. We didn't stop them because Turkey slowed us down!
'Given the level of the insurgency today, two years later, clearly if we had been able to get the 4th Infantry Division in from the north, in through Turkey, more of the Iraqi, Saddam Hussein, Baathist regime would have been captured or killed,' Mr Rumsfeld told Fox News. 'The insurgency today would be less.'
The archetypal Bush declension: There is no problem; there might be a problem; it's only a small problem; we've got this huge problem; X caused this problem.
I'll stop calling this crew "Orwellian" when they stop using 1984 as an operations manual.
Outsourced to the Carpetbagger Report:
Now He Tells Us: There's an annoying tendency of high-ranking Bush administration officials to grow bothered by the politics, road blocks, and ineffectiveness surrounding their work, only to have them talk about after they've left and it's too late. The latest in Tommy Thompson.
Yesterday, during a rambling question-and-answer session at the Kaiser Family Foundation, Thompson complained bitterly and broadly about his frustrations while working in the administration. But there was one complaint in particular that undermines Thompson's already-weak credibility.
Speaking to a luncheon of health policy experts, Thompson said another major frustration was Congress' refusal to let him and future HHS secretaries negotiate drug prices for the new Medicare prescription-drug plan. Critics say using Medicare's 42 million enrollees as bargaining leverage in price negotiations – a tactic that Congress never seriously considered – could save the program billions of dollars.
How wonderfully convenient for Thompson. He wanted to use Medicare's buying power to lower the price of prescription drugs, but those mean Republicans in Congress wouldn't let him. That's a wild distortion of what happened.
Republicans in Congress, to be sure, never even considered using Medicare to negotiate more affordable drugs, but the Bush administration's plan – personally championed by Thompson – designed its Medicare proposal this way.
In his State of the Union address this year, President Bush urged members of Congress to work with him to help control the rising costs of medical care. Just months ago, however, the president worked with Congressional leaders to block attempts to control the fastest growing health care cost: prescription drugs. The Medicare prescription drug benefit that the President signed into law and lauded in his speech omits any effective mechanisms to lower prescription drug prices. Instead, the President and Congressional leaders drafted the law with the intent of emulating the private market practices that have brought us to where we are today – exploding prescription drug costs that are increasingly borne by patients due to health insurers' restructuring of drug benefits. Even if the Medicare program experiences similarly unsustainable costs, the new law expressly forbids the secretary of Health and Human Services from acting to ensure reasonable prices under the drug benefit.
This report, the first in a series on the new Medicare law and its implications for beneficiaries and taxpayers, examines the law's provisions regarding prescription drug prices. After identifying concerns with the legislation as passed, the report offers options for legislative changes that would lower drug costs for Medicare beneficiaries and taxpayers.
The new Medicare law relies on private drug plans (e.g., HMOs and other private health insurers), in conjunction with pharmaceutical manufacturers, to establish the prices beneficiaries and taxpayers will pay for prescription drugs under the Medicare drug benefit. Moreover, it states, "In order to promote competition under this part and in carrying out this part, the Secretary (1) may not interfere with the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs."
These provisions were as subtle as a sledgehammer. The Bush administration didn't want HHS to be able to lower prices in negotiations with pharmaceutical companies, so the law reflected this, making it literally illegal for Thompson or any HHS secretary to even try.
Not only did Thompson go along with this, he was on the House floor, twisting GOP arms during the vote, making sure this bill became law.
And now he wants us to believe he wanted to help lower prices through Medicare? Please. It's kind of sad Thompson would even try such nonsense; the Medicare vote wasn't that long ago and too many of us remember his role in this fiasco.
It is hard for the Bush administration to find people to fill the empty seats in the U.S. Treasury because--in this administration--senior Treasury officials have great responsibility but no power. The New York TImes is displeased, and inveighs against the vacant Treasury Bench:
Treasury's empty seats are cause for alarm: Don't be fooled by the location of the U.S. Treasury, right next door to the White House. The department has suffered a steady diminution of prestige and influence during the Bush administration, starting with the unceremonious firing of its first Treasury secretary, Paul O'Neill, less than two years into the job, in part for suggesting that deficits do, in fact, matter. Things have been downhill ever since. Last December, Republican power brokers made no bones about wanting to oust the current Treasury secretary, John Snow, only to find that the administration couldn't entice anyone better to take the job....
[F]rom the start of his administration, tax policy and economic policy - the purview of the Treasury - have been handmaids to politics and ideology emanating from the White House. Without the clear-cut opportunity to drive policy-making, the best and the brightest aren't exactly clamoring for jobs at Treasury. And Snow is still in his post, reprising his first-term performance as cheerleader for Bush's tax cuts in his current role as salesperson for Bush's misbegotten plan to privatize Social Security.
Meanwhile, vacancies are piling up. The post of deputy secretary, the No. 2 job, has been vacant for nearly two months, and the first-choice candidate recently removed his name from consideration. The post of under secretary for domestic finance, the Treasury's main liaison with Wall Street and the person responsible for issuance of the federal debt, has been open all year. The job of assistant secretary for tax policy has also gone unfilled this year, a disturbing absence at a time when the president is calling for comprehensive tax reform. And on Monday, the under secretary for international affairs, the person who coordinates with the World Bank and International Monetary Fund and steps in when a country like Argentina or Brazil teeters on collapse, announced his resignation effective April 22.
The United States faces unprecedented financial risks, uncertainties and challenges, right now. The interplay of the federal budget deficit with record deficits in trade and global transactions has become the focus of the international financial community, with repercussions for the dollar, inflation, interest rates and economic growth.
The clear lack of a deep bench from which to fill vacancies is cause for alarm, as is the extent to which America's complex economic problems are beyond the ken of a mostly political, loyalist band of policy makers. That alarm, insistent though not yet overwhelming, would quickly reach deafening proportions if the United States were forced to respond to a sudden, destabilizing event like the Sept. 11 attacks without a credible Treasury team.
To attract the people the Treasury needs, the White House must assure the best candidates that they will exercise true power and influence. The administration must also work in good faith, and with all due speed, to reach consensus with the Senate on its Treasury nominees, which would streamline the confirmation process and, in so doing, begin to restore the Treasury to its vital place and function.
Let's see who is at the Treasury right now:
Secretary: John W. Snow
Deputy Secretary: VACANT
Under Secretary (International Affairs): Tim Adams (designee) Under Secretary (Domestic Finance): VACANT
Under Secretary (Enforcement): Stuart Levey
General Counsel: Arnold I. Havens
Treasurer: Anna Escobedo Cabral
Assistant Secretary (Economic Policy): Mark Warshawsky
Assistant Secretary (Financial Institutions): VACANT
Assistant Secretary (Financial Markets): Timothy Bitsberger
Fiscal Assistant Secretary: Donald V. Hammond
Assistant Secretary (International Affairs): Randal K. Quarles
Assistant Secretary (Legislative Affairs): John Duncan
Assistant Secretary (Management): VACANT
Assistant Secretary (Public Affairs): Rob Nichols
Assistant Secretary (Tax Policy): VACANT
Assistant Secretary (Terrorist Financing): Juan C. Zarate
Assistant Secretary (Intelligence and Analysis): VACANT
Now that's just loony...
Now the reason that 1/3 of the most senior posts are vacant is clear: in spite of the faux-investment-banker fashion style of the Treasury, the jobs are not that highly paid, and so they are worth doing only if they are fun. And if you lack power and influence and the authority to implement good policies, the jobs aren't fun. Great responsibility without great power makes for unhappy campers.
Why this Treasury has no power is unclear. Paul O'Neill was extremely effective as a Deputy Director of the Ford OMB and as President of Alcoa, where he successfully organized a global aluminum cartel. He was well known to have very close ties with Cheney, Rumsfeld, and Greenspan. With the depth and power of the Treasury staff that Summers and Rubin left him, he ought to have wiped the bureaucratic floor. John Taylor was, I am told, highly effective in the Bush-the-First administration at the CEA, and is a superb economic thinker and macroeconomic analyst.
The stories I hear--which may or may not be accurate--are that Paul O'Neill had caught a very bad case of CEO disease while at Alcoa, that John Taylor never figured out how to use his staff as he went from a boss of 3 at the CEA to a boss of 300 at the Treasury, and that Assistant to the President Larry Lindsey never figured out that his influence and longevity depended on his orchestrating a consensus on good policies within the economic policy team, and that his use of the press corps to leak-bomb other economic policy team members was highly counterproductive (Lindsey was fired when O'Neill was, at the end of 2002).
The St. Petersburg Times is unhappy with John McCain:
Opinion: Shame on John McCain: At least President Bush didn't kiss John McCain again. Last year during his re-election campaign, Bush planted one on McCain as the Arizona senator pretended to like his old nemesis. Maybe McCain isn't faking it anymore, because he too easily damaged his reputation for principled straight talk to join Bush's misguided bid to privatize Social Security.
By diverting a portion of payroll taxes from Social Security into the stock market, Bush would add risk to retirement income and burden the program with trillions of dollars of debt. Bush's real purpose is to cut traditional retirement benefits, which could be necessary to control costs, but he won't provide any details on that part of his plan.... By his side at several stops was McCain, resorting to the kind of questionable tactics that once had been used against him.
The administration is trying to demonize AARP, which is putting up a spirited fight against private accounts. Bush and McCain suggested that older Americans are standing in the way of change to protect their own retirement incomes - an insulting tactic that could backfire. Those who have already reached retirement age understand better than anyone that a guaranteed safety net could be as necessary for coming generations as it is now, when nearly two out of three retirees rely largely or solely on Social Security. So they are looking out for their children and grandchildren, an act of responsibility not self-interest.
Shame on McCain for being a part of this effort to divide the generations. Usually noted for candid speech, he even resorted to misinformation when he said in 2042 'we stop paying people Social Security.' McCain knows that isn't true. That is the date (actually it was changed to 2041 the other day) when Social Security reserves are expected to be used up. Even then, with no change in the program, recipients would continue to get about 75 percent of what was promised them.
McCain should be familiar with such tactics. After his surprising showing in the 2000 presidential primary, McCain became the target of a smear campaign in South Carolina. People connected to Bush questioned McCain's patriotism and morality - distorting the facts of his Vietnam War record and his adoption of a Bangladeshi child.
It's too bad McCain didn't lead an honest debate on the challenges facing Social Security. Americans are going to have to face up to the fact that while a crisis is decades away, the program could be made indefinitely sustainable by a combination of increased payroll tax revenues and reasonable benefit cuts. Private accounts are merely a distraction, and the public has apparently figured that out.
Not only is the future of Social Security at stake, but so is McCain's reputation.
Writing from Oregon, Mark Thoma laments that Newsweek's Robert Samuelson doesn't know the difference between welfare and social insurance, and thinks Social Security is welfare. Thoma's right. You would think--Roosevelt thought--that a program in which you only got substantial benefits if you paid in substantial contributions could not be mistaken for a giveaway-handout. But Roosevelt misoverestimated Robert Samuelson:
Economist's View: No it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not welfare. Just because an economic activity transfers income from one person or group to another does not make it welfare. Fire insurance transfers income. Some people pay premiums for their whole lives and collect nothing. Others, the unlucky few who suffer a fire, collect far more than they contribute. Does that make it welfare? Of course not.
Social Security is no different, it is an insurance program against economic risk.... There is an important distinction between needing insurance ex-ante and needing it ex-post. Insurance does redistribute income ex-post, but that doesn't imply that it was a bad deal ex-ante (i.e., when people start their work lives)....
The main feature of Social Security is... insurance against economic risks and as such it makes us collectively better off. Calling it welfare when it isn’t is misleading... ignores and obscures the important role Social Security plays...
Particularly as applied to market reactions to the change of CEO:
Stumbling and Mumbling: What do bosses do?: How much difference do chief executives really make to a business? ‘A lot,’ say shareholders in Prudential. They raised the price of the company by £580 million yesterday when they learned that Jonathan Bloomer was to be replaced as CEO by Mark Tucker. If this judgment right, there's something very wrong about the market for chief executives; either Mr Bloomer was massively overpaid or Mr Tucker is grossly underpaid. But is it right? Of course, the Pru’s price fell sharply under Mr Bloomer’s watch. But how much of this is really his fault?...
If I were to say that CEOs made no difference to a company, and that the belief to the contrary were just an application of the fundamental attribution error or managerialist ideology, what hard evidence could you present to the contrary, except for pointing to a handful of extreme cases, such as Enron?
There’s one more problem here, though. Let’s say CEOs can make a difference. It doesn’t follow that investors can spot the bosses who are good enough to turn a company around.
Two cases will show my point. When Simon Wolfson took over at Next, many shareholders were sceptical. They thought he was too inexperienced for the job, and was the beneficiary of nepotism. Next’s price rose sharply in the following months. By contrast, when Rick Haythornthwaite took over at Invensys, shareholders welcomed his appointment. He’d done a good job, they thought, at Blue Circle. Invensys' share price has since collapsed.
As Warren Buffett once said: 'when a chief executive with a good reputation takes over a company with a bad one, it is the company that keeps its reputation.'
Of all the puzzles in xenobiology, perhaps the most remarkable is the existence of large-scale (but very imperfect) social cooperation among the East African Plains Ape of Sol III. Elsewhere on Sol III, large-scale social cooperation is limited to the social insects, in which each (sterile) worker is genetically identical to the (fertile) queen, and thus through standard Darwinian mechanisms treats the queen's children as if they were her own children and sisters. Aside from these social insects in which large-scale cooperative behavior is evolutionarily stable by virtue of genetic identity, cooperation on Sol III is limited to herds or packs of at most 100 individuals--and even there the pack must be closely genetically related.
By contrast, one million East African Plains Apes are involved in the complex social division of labor that we have termed "Toyota"--and those one million engage in complicated acts of social reciprocity with at least twenty times their number of outsiders who are not engaged in the "Toyota" social network.
How can this be?
We have recovered and are analyzing a textual artifact that we hope will provide the answer:
Paul Seabright (2004), In the Company of Strangers: A Natural History of Economic Life (Princeton: Princeton University Press: 0691118213).
Justifications for the Long-Run Productivity Growth Forecasts in the Trustees' Reports
To: Dean Baker, Paul Krugman, Other Interested Parties
From: Brad DeLong
Date: March 25, 2005
Paul Krugman observed:
a strange asymmetry between what is updated [in the Social Security Trustees' Report to reflect recent data, and what isn't.... [H]igh productivity growth since 2000... seems like big news... [but] isn't factored in at all. The reason is that the trustees use an average over the past four "full business cycles," measured from peak to peak (Section IV.B.7).... [T]hey won't take the good productivity news since 2000 into account [at all in forecasting the future] until the economy [begins] another recession. There's something very wrong with that...
This raises two natural questions:
- Why have the Social Security Trustees adopted this estimating convention of taking average productivity growth over the past four peak-to-peak complete business cycles and projecting it forward into the indefinite future?
- How long have the Social Security Trustees been using this--peculiar--rule of thumb for long-run forecasts of productivity growth?
The answer to question (2) is simple. The 2005 Trustees' Report is only the second year that the Trustees have used this rule of thumb that throws away all the favorable information about productivity growth since the 2000 business cycle peak.
Back in the 1990s the Trustees formed their long-run productivity growth estimates by taking the average level of productivity growth over the previous forty years and then marking down from that average because productivity growth had declined over time. Back in 1996 when the 40-year average was 1.8% per year their forecast was 1.4%. In 1997, 1998, and 1999 when the 40-year average was 1.7% per year their forecast was 1.3%.
In 2000, 2001, 2002, and 2003 as the fast productivity growth of the post-1995 period showed that we were no longer in an ongoing productivity slowdown, and as the gap between the 40-year and the 10-year growth average fell, the Trustees shrank their markdown and brought their estimate of future long-run productivity growth toward the 40-year average: the gap was 0.4% per year in 2000, 0.3% per year in 2001, 0.2% per year in 2002, and 0.1% per year in 2003.
Then in 2004 the Trustees freeze the long-run rate of productivity growth at 1.6% per year, thus for the first time choosing a forecast of future productivity growth lower than both the 40-year and the 10-year average, and for the first time justifying their forecast by saying that since "productivity growth can vary substantially within economic cycles... it is more useful to consider historical average growth rates for complete economic cycles." Had the SSA Trustees followed the 2000-2003 pattern of cutting the gap by 0.1% per year, they would have forecast 1.7% per year. Had the Trustees adopted the convention of averaging the past 40-year and the past 10-year growth rates, they would also have forecast 1.7% per year.
And in 2005 the Trustees continue to freeze the long-run rate of productivity growth at 1.6% per year, again justifying it by chopping off the data at the 2000 business cycle peak. Had the SSA Trustees followed the 2000-2003 pattern of cutting the gap by 0.1% per year, they would have forecast 1.9% per year. Had the Trustees adopted the convention of averaging the past 40-year and the past 10-year growth rates, they would also have forecast 1.9% per year.
Possible answers to question (1) are left as exercises to the readers.
2005 Trustees' Report:
For the 40 years from 1963 to 2003, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.5, 1.1, 1.5, and 2.0 percent for the 10-year periods 1963-73, 1973-83, 1983-93, and 1993-2003, respectively. However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively...
2004 Trustees' Report:
For the 40 years from 1962 to 2002, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.6, 1.1, 1.6, and 1.7 percent for the 10-year periods 1962-72, 1972-82, 1982-92, and 1992-2002, respectively. However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.5 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.3, 1.2, 1.2, and 1.5 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively...
2003 Trustees' Report:
For the 40 years from 1961 to 2001, annual increases in total productivity averaged 1.7 percent, the result of average annual increases of 2.7, 1.4, 1.3, and 1.5 percent for the 10-year periods 1961-71, 1971-81, 1981-91 and 1991-2001, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are the same as the ultimate rates assumed for the 2002 report...
2002 Trustees' Report:
For the 40 years from 1960 to 2000, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.7, 1.6, 1.4, and 1.6 percent for the 10-year periods 1960-70, 1970-80, 1980-90 and 1990-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are 0.1 percentage point higher than the ultimate rates assumed for the 2001 report. This increase reflects ongoing assessment of historical data, including the period of rapid productivity growth between 1995 and 2000...
2001 Trustees' Report:
For the 40 years from 1959-99, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.6, 1.8, 1.3, and 1.5 percent for the 10-year periods 1959-69, 1969-79, 1979-89 and 1989-99, respectively. The ultimate annual increases in productivity are assumed to be 1.8, 1.5, and 1.2 percent for alternatives I, II, and III, respectively. These are the same ultimate rates assumed for the 2000 report...
2000 Trustees' Report:
For the 40 years 1959-98, annual increases in productivity for the total U.S. economy averaged 1.9 percent, the result of average annual increases of 3.0, 1.8, 1.3, and 1.4 percent for the 10-year periods 1959-68, 1969- 78, 1979-88 and 1989-98, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.8, 1.5, and 1.2 percent for alternatives I, II, and III, respectively...
1999 Trustees' Report:
For the 40 years 1958-97, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 2.9, 2.0, 1.0, and 0.9 percent for the 10-year periods 1958-67, 1968- 77, 1978-87 and 1988-97, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively.
1998 Trustees' Report:
For the 40 years 1957-96, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 3.1, 2.0, 1.1, and 0.6 percent for the 10-year periods 1957-66, 1967- 76, 1977-86 and 1987-96, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively...
1997 Trustees' Report:
For the 40 years 1956-95, annual increases in productivity for the total U.S. economy averaged 1.7 percent, the result of average annual increases of 2.8, 2.0, 1.2, and 0.9 percent for the 10-year periods 1956-65, 1966-75, 1976-85 and 1986-95, respectively.... The ultimate annual increases in productivity for all sectors—wage-and-salary workers, self-employed persons, and the total economy— are assumed to be about 1.6, 1.3, and 1.0 percent for alternatives I, II, and III, respectively.
1996 Trustees' Report:
For the 40 years 1955-94, annual increases in productivity for the total U.S. economy averaged 1.8 percent, the result of average annual increases of 2.8, 2.1, 1.4, and 1.0 percent for the 10-year periods 1955-64, 1965-74, 1975-84 and 1985-94, respectively.... The ultimate annual increases in productivity for all sectors - wage-and-salary workers, self-employed persons, and the total economy - are assumed to be about 1.7, 1.4, and 1.1 percent for alternatives I, II, and III, respectively...
1995 Trustees' Report:
For the 40 years 1954-93, annual increases in productivity for the total U.S. economy averaged 1.6 percent, the result of average annual increases of 2.4, 2.3, 0.8, and 1.0 percent for the 10-year periods 1954-63, 1964-73, 1974-83 and 1984-93, respectively.... The ultimate annual increases in productivity for all sectors - wage-and-salary workers, self-employed persons, and the total economy - are assumed to be about 1.7, 1.4, and 1.1 percent for alternatives I, II, and III, respectively.
Greg Ip and Jackie Calmes of the Wall Street Journal report signs of thought about issues of substance inside the White House:
WSJ.com - Bush May Alter Private-Accounts Plan: As currently envisioned, an account-holder would need a real return -- that is, return after inflation -- of 3% to exceed the offset in the traditional benefit. But many outside experts say 3% is too high, and will limit the accounts' appeal. They noted Treasury bonds are now expected to return only about 2%, and stocks a few percentage points more. Thus, a private account of half stocks and half bonds would run a significant risk of returning less than 3%, leaving the account-holder worse off than someone who stuck with the traditional benefit.
Some experts have urged the administration to use a lower offset rate. That would make the accounts costlier to finance as long as Social Security sticks to its assumption that real Treasury yields average 3% in the long run.
Mr. Hubbard said the administration picked 3% because Social Security actuaries estimate that figure to be the government's long-term cost of borrowing. It is the figure that makes private accounts 'fiscally neutral,' he said.... Mr. Bush's proposed accounts are closely patterned on the second of his 2001 Social Security commission's three proposals, although that model used a 2% offset rate. A former administration official says a change to the offset rate to between 2% and 3% has been discussed, with special attention on 2.7%.
It really does look as if they chose 3%, and then never ran the numbers--never ran the numbers at all to see what the distribution of private account returns would be.
One underlying problem, of course, is that private accounts shift risk onto beneficiaries, and that beneficiaries are more averse to risk than the government. Thus it is genuinely hard to make private accounts both attractive to those non-rich beneficiaries who are most averse to risk and also fiscally neutral.
Dean Baker, J. Bradford DeLong, and Paul Krugman (2005), "Asset Returns and Economic Growth," Brookings Papers on Economic Activity 2005:1.
We in America are probably facing a demographic transition—a slowdown in the rate of natural population increase—and possibly facing a slowdown in productivity growth as well. If these two factors do in fact push down the rate of economic growth in the future, is it still prudent to assume that the past performance of assets is an indication of future results? We argue “no.” Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return. Moreover, if you assume that current asset valuations represent rational expectations, simple arithmetic tells us that it is next to impossible for past rates of return to continue through a forthcoming growth slowdown. Only a large shift in the distribution of income toward capital or current account surpluses larger than those of nineteenth century Britain sustained for generations give promise for reconciling a slowdown in future economic growth with a continuation of historical asset returns.
There are many things to mourn about the Schiavo case. That her heart attack destroyed Ms. Schiavo's mind. That for a decade and a half a woman whose soul has irrecoverably fled has been kept breathing. That the family is so dysfunctional--the parents have long hated the husband and the husband has long hated the parents--as to be unable to reach a collective decision on what to do. That the parents have been unable to listen to the doctors who tell them that their daughter's soul has irrecoverably fled. That the time of nurses and doctors who could be treating people who might recover is wasted by being spent, instead, on someone who will not recover. These, however, are "normal" tragedies that are created every day by the enormous power and yet limited reach of modern medicine.
It is right and fitting for all of us to mourn all of these
What is abnormal is for the Republican slime machine to step in, with its standard mix of lies: "She talks and she laughs and she expresses likes and discomforts," said Tom DeLay. "It won't take a miracle to help Terri Schiavo. It will only take the medical care and therapy that patients require." False witness on this scale is definitely not a help.
It is right and fitting for all of us to mourn this.
But what is even more abnormal, terrifying, and pitiable is that some people appear to have convinced the Schindlers, Ms. Schiavo's parents, that, in the words of their lawyer Pat Anderson, removal of her feeding tube deprives her of the "free exercise of her religious beliefs ... and, in fact, imperil[s] her immortal soul."
Now I'm a Pascal's Wager type myself. But for the Schindlers and others who trust that Jesus spoke with Authority and that the evangelists faithfully recorded his words, there is a direct message from the One Who Is to the Schindlers on this point. It is, "Fear not!":
Jesus said unto [Martha], "I am the resurrection, and the life: he that believeth in me, though he were dead, yet shall he live: And whosoever liveth and believeth in me shall never die."
Who preaches a God who would damn someone because their feeding tube had been removed?
Welcome, Ezra! You have been successfully assimilated!
However, he is really horrified:
Ezra Klein: Social Security Trustees Report: By the way, two years ago, when I was starting at UC Santa Cruz and spending a great deal of my time intoxicated, I really didn't think I'd ever be disappointed because I couldn't read the latest Social Security Trustees Report in a timely fashion. I mean, Jesus, what's happened to me? I can't even drink yet (well, legally), and yet I'm genuinely fascinated by actuarial assumptions regarding the long-term fiscal health of the state-run pension program? You must be kidding me.
Of course, he cannot hold a candle to Mark Schmitt's daughter:
The Decembrist: You know you've been in Washington too long...: when your 3-year-old interrupts at the dinner table and complains, 'I don't know anything about PAYGO!' The sad thing is, we've only been here for six months!
Resistance to assimilation is futile.
The Social Security Trustees explain their long-run productivity growth assumptions. From pp. 82-83 of the 2005 Trustees' Report:
1. Productivity Assumptions
Total U.S. economy productivity is defined as the ratio of real gross domestic product (GDP) to hours worked by all workers. The rate of change in total productivity is a major determinant in the growth of average earnings. For the 40 years from 1963 to 2003, annual increases in total productivity averaged 1.8 percent, the result of average annual increases of 2.5, 1.1, 1.5, and 2.0 percent for the 10-year periods 1963-73, 1973-83, 1983-93, and 1993-2003, respectively.
However, productivity growth can vary substantially within economic cycles. Therefore, it is more useful to consider historical average growth rates for complete economic cycles. The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively. The ultimate annual increases in productivity are assumed to be 1.9, 1.6, and 1.3 percent for the low cost, intermediate, and high cost assumptions, respectively. These are the same as the ultimate rates assumed for the 2004 report.
One would think that the fact that productivity growth has averaged 3.0% per year in the four years since 2000 would be worth a mention. One would expect some reason for completely throwing away the last four years' worth of data on productivity.
But it isn't there.
What would happen if the Trustees' Report had forecast productivity growth of 1.8% per year? How different would the numbers be? My back-of-the-envelope is that it would knock a bit more than a quarter of a percentage point off the 75-year actuarial deficit--reduce it down to 1.5% from the 1.8% of taxable payroll in the Trustees' Report.
Small differences, yes. But we've had good productivity news in the past four years: the Trustees' Report should recognize it.
UPDATE: Paul Krugman comments:
[T]he slight deterioriation in the near-term [Social Security] outlook is the result of a strange asymmetry between what is updated to reflect recent data, and what isn't.... [T]wo very recent events affect the projections for many years to come.... this year's [substantially] oil [price]-driven inflation rate leads to a reduction in the assumed real wage rate in all future periods... this year's low real interest rate leads to lower assumed earnings [on] the trust fund for a very long time.... On the other side, high productivity growth since 2000... seems like big news... [but] isn't factored in at all. The reason is that the trustees use an average over the past four "full business cycles," measured from peak to peak (Section IV.B.7).... [T]hey won't take the good productivity news since 2000 into account [at all in forecasting the future] until the economy [begins] another recession. There's something very wrong with that...
A very unusual day in Berkeley for late March: cold, blustery, with occasional storms scudding across the sky.
Fortunately, La Strada at College and
Telegraph Bancroft has a covered portico, so one can sit outside and sip one's lattes.
And, more fortunately, the roof of the portico has munga munga space heaters. It's 50 degrees "outside": it's 68 degrees "in here."
There is no wireless connection. But that is by and large an advantage: one wants to be present to the weather and the latte, after all...