## Department of "Huh?" (Wall Street Journal Op-Ed Edition)

One of the deepest bedrock beliefs held by all neoclassical economists is that, to a first cut, market failures, policy distortions, and other problems with resource allocations do damage roughly proportional to the square of the disequilibrium--to the square of the deviation of price from social value, or of the deviation of quantity from its optimal level. The damage done per unit of resource misallocated will be proportional to the gap between the price seen by the decision maker and the social value. The deviations of prices and of quantities from their ideal values will be related. Thus the bigger the already existing market failure, the more damage is done by making it worse.

This is, as I said, one of the deepest bedrock beliefs, ground into all neoclassical economists by every single course they ever took, starting with the first Harberger triangle they ever saw.

So when I read Ed Prescott's pro-estate-tax repeal op-ed and come across this sentence:

Ed Prescott, "Death and Taxes": [E]state taxes... would still do little to address the budget deficit. In 2003, net estate taxes accounted for $20.7 billion, a drop in the bucket of an$11 trillion economy. Clearly, we are not going to balance the budget by grave robbing.

I cannot believe my eyes. A neoclassical economist like Ed Prescott could write something like:

The budget is in approximate long-run balance, so little damage is done by a small increase in the deficit...

or:

The fact that the long-run deficit is huge means that even a small increase in the deficit is very costly indeed...

A neoclassical economist is prohibited from writing:

The problem is really bad--so let's make it even worse!

For embedded in the deep structure of neoclassical economic thought is the judgment that it is the problems that are really bad that are the ones for which even marginal improvements are the most valuable.

Prescott's is not a neoclassical economic or economist's argument. Indeed, I would not know how to characterize it.

## Maintaining Orderly Market Conditions for the Dollar...

It's not clear to me that decision-making inside the Bush White House is as rational as Bob Reich thinks it is--that Paulson was brought in for one reason, or indeed for any combination of reasons at all. But I think Reich is right in assessing what Paulson's most important task is: to maintain "orderly market conditions" and to talk the value of the dollar down gradually so that the world economy has time to rebalance itself.

Robert Reich's Blog: Paulson's Real Job: Paulson was brought in to accomplish one big thing. That's to oversee an orderly decline in the value of the dollar. By "orderly" I mean gradual. The Chinese and Japanese central banks don't want a run on the dollar because they have too many of them right now, and would lose their shirts. But they understand, as does the Bush administration, that the huge global imbalances represented by their giant export surpluses and our giant debts are already causing global investors to diversify their currency holdings out of dollars and into euros and other denominations.

It's only a matter of time before the dollar ceases to be the only "reserve" currency in which global transactions are undertaken, and before investors move substantially out of dollars. So the Chinese and the Japanese would like the dollar decline to be gradual, so they can move out as well without suffering major losses. Paulson understands the Chinese economy and has good contacts with top-ranking Chinese policy makers. He's the ideal man for the job. But will global investors give him time? Or will they turn into speculators, and rush to the door too quickly for the Chinese, Japanese, and the U.S. to keep the dollar relatively strong in the interim? That's the big question.

The U.S. has a strong need for the dollar decline to be gradual as well. If $800 billion a year of financing for home-equity loan-fueled consumption spending suddenly vanishes, then 8 million workers lose their jobs in construction, consumer services, and related industries and have to find jobs in export-oriented and import-competing manufacturing. That can be done if it happens gradually over five years. It can't be done if it happens all at once. Can the dollar be talked down gradually? Consensus economic models say no: once market expectations are that the dollar will be sharply lower in five years, speculators will make the dollar sharply lower tomorrow. Nevertheless, there is hope: consensus economic models say the dollar crashed three years ago. ## Francisco Franco Is Still Dead... Martin Peretz of the New Republic praises Francisco Franco! The Plank: How ignorant that [Spanish] judge is of his country's bloody history, which could actually have been worse had the communists won [against Franco and his fascists]... And Martin Peretz praises the prison of Guantanamo Bay, which is actually a much better thing than that bulwark of resistance to world communism that was Franco's Fascist Spain! I know that some of my readers will agree with the observation the other day of a judge in Spain that Guantánamo is to be equated to 40 years of Spanish Fascism... Or maybe he doesn't praise Francisco Franco after all? Maybe he doesn't praise Guantanamo either? It's all confusing! [T]he observation... that Guantánamo is to be equated to... Spanish Fascism... means that George Bush can be equated with Generalissimo Franco. These may be tempting analogies for hysterics. But they are, by the same token, insane. Few people can reach such heights of incoherent confusion in four sentences. Jonathan Chait, John Judis, Noam Scheiber, Franklin Foer, Peter Beinart, and company, you've set up shop in a really bad neighborhood. Think of either cleaning it up or moving out. Think hard. At the very least, stop Martin Peretz before he blogs again. Your reputation depends on it. ## The Debate Over the Estate Tax: "A Monkey in Intellectual Combat with Its Banana" Over at the Washington Monthly: The Washington Monthly: Guest: Steve Benen: THE WRONG GUY TO MAKE THE CASE....A Senate vote on a full repeal of the estate tax is slated for this week (probably Thursday), and as part of its coverage, the Washington Post ran dueling op-eds on the issue from Sebastian Mallaby and Sen. Jeff Sessions (R-Ala.). Readers can decide for themselves who makes the stronger case, but I think Ezra captured the heart of the debate when he noted that it's "a bit like setting a monkey in intellectual combat with his banana." Nevertheless, picking Sessions to take the lead on this is an odd choice for Senate Republicans, especially in light of the Alabama senator's embarrassing background on the issue. Federal troops aren't the only ones looking for bodies on the Gulf Coast. On Sept. 9, Alabama Senator Jeff Sessions called his old law professor Harold Apolinsky, co-author of Sessions' legislation repealing the federal estate tax, which was encountering sudden resistance on the Hill. Sessions had an idea to revitalize their cause, which he left on Apolinsky's voice mail: "[Arizona Sen.] Jon Kyl and I were talking about the estate tax. If we knew anybody that owned a business that lost life in the storm, that would be something we could push back with." If legislative ambulance chasing looks like a desperate measure, for the backers of repealing the estate tax, these are desperate times. Just three weeks ago, their long-sought goal of repeal seemed within reach, but Katrina dashed their hopes when Republican leaders put off an expected vote. After hearing from Sessions, Apolinsky, an estate tax lawyer who says his firm includes three multi-billionaires among its clients, mobilized the American Family Business Institute, a Washington-based group devoted to estate tax repeal. They reached out to members along the Gulf Coast to hunt for the dead. They found plenty of Katrina victims -- but none that was hit with the estate tax. For what it's worth, despite the hyper-wealthy conservative interests who have bankrolled this fight for years, it appears proponents of a full repeal are a few votes short. There's still an irresponsible "compromise" measure under consideration, but if things go as they should, this absurd initiative should be defeated by week's end. "Setting a monkey in intellectual combat with its banana." That is good. Note that things are no better on the right as you try to ascend the intellectual chain of being: estate-tax repeal advocates--Ed Prescott, Greg Mankiw, Jeff Miron--all talk about how some deficit-neutral combination of estate-tax repeal and other tax increases, or estate-tax repeal plus some combination of spending cuts would be a good deal. But that's not what's on offer, is it? They never make the case that the benefits to estate-tax repeal are bigger than the costs of adding another 0.4% of GDP or so to our long run fiscal gap. ## The Big Picture: How Cheap is the Market? Barry Ritholz notes that the market is no longer terrifically expensive: The Big Picture: How Cheap is the Market?: The answer might surprise you. It certainly raises some very interesting questions as to what cheap is, the importance of having a long term perspective. It also begs the question of how much patience long term investors have when it comes to thinking about various metrics. The question itself involves a combination of data analysis and opinion. To fully explore this issue, we will listen to two different perspectives on the subject: One says the S&P500 is cheap, the other asks, how much cheaper might it get? For part one, we go to Eddy Elfenbein of Crossing Wall Street: Eddy observes "S&P 500 is now trading at just under 16 times trailing operating earnings. The P/E ratio hasn't been this low since October 1995." Note that he references actual trailing earnings. This is more accurate than using forward forecasts, which tend to be very wrong at key turning points... ## Martin Wolf Wonders about China's Future Mark Thoma reads the excellent Martin Wolf in the FT: Economist's View: The Mountains Are High and the Emperor is Far Away: Martin Wolf discusses the political and economic future of China and the growing tension he foresees between the goals of those in power and the goals of society: China's autocracy of bureaucrats, by Martin Wolf, Commentary, Financial Times: What happens when a communist autocracy presides over a dynamic market economy? Do they live together happily ever after or does one destroy the other?... [T]hese questions. But they have been bubbling in my mind since I read S.E. Finer's illuminating discussion of the history of China's government. What emerges from this masterpiece is how much today's party-state is just another imperial dynasty in twentieth century guise. Finer summarised the contrast between the ideology of the Ch'in state, which unified China 2,200 years ago, and of the Greek and Roman republics, which are the west's ancestors, as follows: "Collective and mutual responsibility, not individualism; authoritarianism, paternalism and absolutism, not self-determination; inequality and hierarchy, not equality before the law; subjects not citizens; duties not rights." Who, reading this list, can fail to recognise its continued relevance?... "The mountains are high and the emperor is far away." This well-known saying captures what so often happened. When the emperor was weak, it became difficult to reach decisions. Officials looked after themselves and their families. Infirmity of purpose, corruption and an inability to protect the empire itself ensued. Sooner or later the dynasty fell, to be replaced by another, often after a period of chaos. Using the analytical machinery of political science, Mr Pei describes today's "dynasty" as being in just such a period of bureaucratic ossification. He points to the emergence of a "decentralised predatory state", in which officials feather their nests at the expense of the state, the economy and the people. ... Tension is growing, he suggests, between the state and the society.... Pei argues, persuasively, that China's gradualism... is as much a political as an economic strategy. Its aim is also to generate rents for those with political power or those whose support the powerful need.... One vast difference between what is happening to China today and what has happened to it in the past is evident: its dynamic economy. By offering its cheap, hard-working labour to the world and investing almost half of gross domestic product, China has managed to lift itself from age-old poverty. The society now emerging is increasingly urbanised, literate and open to the world.... I envisage four possibilities.... A democratic, law-governed society then emerges smoothly over the next few decades.... An autocratic superpower then transforms the political balance of the world.... China becomes a sad case of failed development.... [S]lowing growth generates political crisis. Turmoil ensues. But a democratic regime finally emerges.... The last possibility is far easier to imagine. I am forecasting neither a political crisis nor a sharp economic slowdown in the near future. The Chinese economy could continue to grow rapidly for years. But the combination of a market-led economy with a bureaucratic autocracy does not look a good bet for the long run. The market's irresistible force is meeting the party's immovable object. At some point, one of them must surely give. ## Diverting Tax Refunds into Savings A good sign: More Refund Options: Hoping to encourage Americans to save more of their tax refunds, the Internal Revenue Service said it will change its rules to allow taxpayers who opt for direct deposit of their refunds to divide the money among up to three financial accounts.... The change will allows taxpayers to put some of their refunds into a checking account, and some into a saving or retirement account. "Split refunds should encourage saving, and we hope it will dampen demand for refund anticipation loans," said IRS Mark W. Everson. The program will take effect in January 2007. The next step is to top-off refunds deposited in IRAs--10% for the first$1000, 5% for the second $1000,$3.3% for the third $1000--and see if that changes behavior... ## Those Who Forget History... Google News reports: Your search - "Al Gore" 1993 "energy tax" - did not match any documents. "Al Gore" 1993 "BTU tax" - Google News: Results 1 - 1 of 1... "Al Gore" 1993 "carbon tax" - Google News: Results 1 - 1... Brad DeLong's Website: Incentives for the Environment: John Tierney advocates taxes on energy use. However, it somehow slips Tierney's mind to praise Al Gore, who was the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993. I observed that the New York Times's John Tierney was calling for a carbon tax, yet had neither the honor, the grace, nor the guts to remind his readers that Al Gore--the driving force behind the Clinton administration's attempt to raise energy taxes back in 1993--had been ahead of him for two decades. Nor did Tierney have the independence of mind to remind his readers that back in 1993 Gore's BTU tax had been blocked by a combination of the oil lobby, the Republican congressional leadership, and a few feckless Democratic senators. As I said last month: Brad DeLong's Semi-Daily Journal: Why Oh Why Can't We Have a Better Press Corps? (John Tierney Edition): Would it have strained John Tierney's brain to tell his readers that Gore did propose a carbon tax back in 1993, got no backup at all from John Tierney and company, and lost? That the topic is "taboo on Capitol Hill" in large part because John Tierney and company gave Gore no backup when he tangled with the American Petroleum Institute a decade ago? Indeed, the sweep through Google News above suggests that nobody--certainly nobody in the media--both remembers and wants to remind their readers of the history of this issue. And this week John Tierney is joined in amnesia by the usually excellent Clive Crook: WEALTH OF NATIONS: The Politics Of Global Warming (06/02/2006): Facing such huge but distant risks, the crucial thing is to think long term, the very thing that Washington does worst. An initially moderate carbon tax, an initially gentle scheme of mandatory caps on greenhouse-gas emissions, and an honest plan to promote long-term energy efficiency could nudge the economy with minimal disruption on to a path of much lower climate-change risk... Who is in turn endorsed by Greg Mankiw: Greg Mankiw's Blog: The Crook piece does a good job of summarizing where, to my knowledge, the majority of the economics profession is on the issue of global warming. Most economists I know would endorse: 1. Rejecting the Kyoto treaty, 2. Imposing a modest carbon tax. I include myself in this consensus (although I do not hold myself up as an expert on the issue)... How about it guys? A little bit of the history of this issue would greatly raise the level of the debate, wouldn't it? ## Marty Feldstein Is For Tradeable Gasoline Rights Mark Thoma finds Martin Feldstein proposing tradeable gasoline vouchers as a better way of reducing energy consumption than tighter vehicular CAFE standards: Economist's View: Tradeable Gas Rights: Martin Feldstein has a way to reduce gasoline consumption, tradeable gas rights: Tradeable Gasoline Rights, by Martin Feldstein, Commentary, WSJ: The rapid rise in the price of gasoline has produced calls for tougher fuel economy standards on new cars and trucks. Although reduced gasoline consumption would be good for the environment and for national security, such a regulatory change would be a mistake. A far better approach would be a system of tradeable gasoline rights, or TGRs. These could be distributed in a way that actually raises the income of a majority of households while giving everyone an incentive to reduce gasoline consumption... [...] Advocates of a gasoline tax argue that it would produce extra revenue that could be used to reduce the budget deficit or to finance equally large cuts in personal taxes.... [But] it is hard to believe that Congress would now respond to the public's unhappiness over high gasoline prices by enacting a gasoline tax that would raise the price even more. That aversion to a higher gasoline tax is why tougher mileage standards for new cars is back on the legislative table. They would, however, do virtually nothing to lower the price of gasoline. And if individuals want to economize on gasoline by driving smaller or more fuel-efficient cars, they can do so now without government action. ... Higher gas mileage standards would reduce gasoline demand in a very inefficient way by focusing exclusively on the rated mileage of new cars. Separate fuel efficiency standards for each type of vehicle -- one of the options now being considered -- would be even worse because it would provide no incentive to switch to more fuel-efficient cars. Requiring higher mileage standards on new cars would do very little to reduce total gasoline consumption in the near term because each year's new cars are only about 10% of the total cars on the road... I think Marty's right. I think it's a clever idea--and much better than tightening CAFE. Tom Kalil was talking about higher gasoline taxes with the revenue dedicated to paying the first X thousand of individuals' Social Security taxes. But I think Marty's scheme is more transparent, which gives it powerful political-economy advantages. ## Greg Mankiw Asks: What Did Democratic Economists Think of Kyoto at the Time? Greg Mankiw writes: Greg Mankiw's Blog: Kyoto, Carbon, and Al Gore: Most economists I know would endorse 1. Rejecting the Kyoto treaty, 2. Imposing a modest carbon tax. I include myself in this consensus (although I do not hold myself up as an expert on the issue). My understanding is that the economists in the Clinton administration fought vigorously against the Kyoto treaty but lost the internal policy battle to the Vice President's office. I don't recall the full story of that battle ever being told. If any reader knows of a reference, please let me know. Maybe former Clinton appointee Brad DeLong can enlighten us. Brad has lately been calling for greater candor by former administration officials. This is a good opportunity to lead by example. Gladly--although I wasn't there, and hence am not a reliable source. I know only what I was told and what has been hinted at. As I understand it, the economists--Janet Yellen's CEA, plus others including the National Economic Council and the Treasury Department--said that something like Kyoto looked like a good deal if developing countries like India and China were brought into the process, and if the U.S. could satisfy its carbon-reduction commitments by buying up some of China's and India's carbon-emission rights. Otherwise, they said, it looked like a bad economic idea: potentially expensive for the U.S. economy (although not as expensive as more recent policy missteps like the Bush budget disasters, or the Medicare Drug Benefit), and not useful in fighting global warming as long as newly-industrializing China and India did not have incentives to curb their own carbon emissions. Clinton's response was that it was important to start the ball rolling, that Kyoto might not be a great idea it was seen as the final treaty, but that it wouldn't be the final treaty. China, India, and company would be brought into the process, and would be brought into the process relatively soon. But that if the first step--Kyoto--was not taken now on his watch, Clinton thought, the dithering might last for generations. I think Clinton was wrong, but if he was wrong it was one of his very few policy mistakes. And, as I said, I wasn't there. I'm not a reliable witness. What I was there for was an earlier episode of environmental-economic policymaking: the 1993 attempt to establish a modest carbon tax as part of the Clinton 1993 budget. It was the right thing to do. Clinton got very little backup as he tried to push it through Congress--certainly few if any Republicans singing the praises of carbon taxes now did so then. In the end the "modest carbon tax" of 1993 was sabotaged by the oil lobby, by a few relatively conservative Democratic senators--Boren, Breaux, Kerrey, and a couple others--who preferred to earn oil-lobby brownie points than do what was right for environmental policy, and, of course, by the Republican congressional leadership. Clinton was eager to deal with any sensible, environmentalist Republican senators and representatives, and would have paid a high price for their votes. Perhaps he could have succeeded if there had been Republican opinion leaders singing the praises of carbon taxes into the ears of legislators back in 1993. ## Any Advocates of Estate Tax Repeal? The Republican congressional leadership is trying to push permanent repeal of the estate tax through the Senate this week--without, of course, any offsetting spending cuts to neutralize the impact on the federal deficit. This is, as Bob Reich pointed out, a deficit-widening move of about the same order of magnitude as Social Security's long-run 75-year deficit. I haven't found anybody serious willing to argue that this$5 trillion present value increase in the deficit and steeply regressive change in the tax code is good public policy, save for Ed Prescott:

Prescott, "Death and Taxes"

Is there any other serious economist arguing that this is a good deal? Any other half-serious economist? Quarter serious?

UPDATE: Jeff Miron and Greg Mankiw sign up. Both of them, however, make arguments for a deficit-neutral repeal of the estate tax--estate tax repeal coupled either with reductions in spending or increases in other taxes. But that's not what's on offer, is it?

## Sweet (Macro) Statistics Clash With a Sour (Micro) Mood

Daniel Gross has a good "Economic View" column in the New York Times:

When Sweet Statistics Clash With a Sour Mood - New York Times: [I]n the latest New York Times/CBS News poll, only 28 percent of the respondents said they approved of President Bush's handling of the economy, while 66 percent disapproved -- the worst such ratings of his presidency. Only 6 percent rated the economy as very good, while 46 percent said it was fairly bad or very bad. And consumer confidence plummeted last month, according to the Conference Board.

This strange and unlikely combination -- strong and healthy aggregate macroeconomic indicators and a grumpy populace -- has been a source of befuddlement to the administration and its allies.... Bush partisans... frustration at the public.... Rudolph W. Giuliani bluntly dismissed concerns about the economy and higher gas prices by saying, "I don't know what we're all so upset about."

Gas prices and the Iraq war have surely contributed to this disconnect. But a lesser-known factor is also at work: the misleading aggregates.... [M]any of the most popular aggregates are simply misleading. Dean Baker... [on] the Consumer Price Index.... [T]he index doesn't take account of rapidly rising co-payments and higher insurance deductibles when it calculates health and medical costs. And to gauge inflation in housing, the index approximates a measure of rent instead of looking at home purchase prices....

[A]ggregates... are averages, which are of declining utility in an economy characterized by greater inequality of income and assets.... To see how typical workers are doing, it's better to look at median wages and incomes -- the midpoint that separates the top 50 percent from the lower 50 percent. And median income, which was stagnant during President Bush's first term, is struggling to keep pace with inflation. "Median household income has gone nowhere since the turn of the decade," said Mark Zandi, chief economist at Moody's Economy.com.... From 2001 to 2004, the average net worth of an American family rose 6.3 percent, according to the Federal Reserve's Survey of Consumer Finances. But not everybody grew richer. For the bottom 40 percent of families by income, the median net worth fell...

## Good News on the Estate Tax...

Effort to Repeal Estate Tax Said to Be Faltering - Los Angeles Times: By Janet Hook, Times Staff Writer June 4, 2006: A decade-long drive to permanently repeal the estate tax is about to come to a head, but proponents are finding it surprisingly difficult to get their political football into the end zone. The repeal proposal may be an indirect casualty of Hurricane Katrina, which forced Senate leaders to postpone a vote on the plan in September, when hopes it would pass were high....

A key question is whether Kyl or others can assemble a bipartisan majority for an alternative that would sharply cut the estate tax but stop short of full repeal. Either way, the upcoming Senate debate is a pivotal moment for a coalition of wealthy families, small-business lobbyists and farm groups that has already accomplished a remarkable thing over the last decade: making a national political issue out of repealing a tax that applies to less than 1% of all taxpayers, including some of the richest people in the U.S....

[S]wing senators are now targets of an intense lobbying war. Advocates on both sides of the issue bombarded their home states with television and radio ads during last week's Memorial Day recess.... The ferocity of the fight is surprising in light of the fact that only a tiny slice of the population is affected by the tax, which applies to inheritances in excess of $2 million. Only 12,600 estates will be taxed this year, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. "How could a tax that's been around since 1916 that affects such a small handful of wealthy Americans be converted into such a populist issue?" asked Michael J. Graetz, a professor at Yale Law School and coauthor of a book -- "Death by a Thousand Cuts" -- addressing that question. "It is the genius of the proponents of repeal. They used all the modern tools available to political movements."... A recent report by Public Citizen, a liberal watchdog group, identified 18 wealthy families who contributed to organizations promoting repeal of the estate tax. It calculated that at least 15 of those families' businesses paid$27 million since 1998 for lobbyists to promote repeal of the estate tax....

Estate tax backers acknowledge they were outflanked in the early years of the debate. "The good guys were asleep for a decade," said Steve Richetti, a lobbyist for the Assn. for Advanced Life Underwriting, which opposes repeal. "No one was fighting against it."... Opponents of repeal say the deficit-ridden federal government cannot afford to repeal a tax that benefits only the wealthy. The Center on Budget and Policy Priorities estimates that in the first 10 years after a repeal, the government would lose $776 billion in revenue. The issue is coming to a head now because, in President Bush's 2001 tax cut, Congress voted to gradually reduce the inheritance tax -- which was then 55% on the amount in excess of$1 million -- and to repeal it in 2010. But because the entire tax law will expire after 2010, under a provision to hold down its price, the 55% estate tax is scheduled to be reinstated in 2011.... In recent years, the size of the federal deficit has prompted second thoughts among some who supported estate tax repeal in the past, including Sens. George V. Voinovich (R-Ohio), Ron Wyden (D-Ore.) and Evan Bayh (D-Ind.)...

And the Center on Budget and Policy Priorities Says:

Center on Budget and Policy Priorities: Next week, the Senate plans to vote on what is probably the most important tax issue this year: whether to permanently repeal all, or nearly all, of the estate tax.... The Senate was set to vote on the issue last fall, but backed away after Hurricane Katrina hit. Finance Committee Chairman Charles Grassley said then it would be "a little unseemly" to eliminate the tax "at a time when people are suffering."...

Permanent repeal would cost nearly $1 trillion between 2012 and 2021, the first decade in which its costs would be fully felt. (This cost includes$776 billion in revenue loss and $213 billion in higher interest payments on the federal debt.)... [T]he annual revenue loss from repealing the estate tax is about the same as total federal spending on homeland security nationwide.... [T]wo critical facts remain poorly understood: the tax has shrunk considerably in recent years, and several so-called "compromise" proposals being pushed in the Senate would cause nearly as much budgetary damage as full repeal. Only 0.5 percent of estates now pay any estate tax whatsoever, and this number is falling. The value of an estate that is exempt from taxation has increased from$1.35 million per married couple in 2000 to $4 million per couple in 2006... the number of taxable estates has dropped from more than 50,000 in 2000 to fewer than 13,000 in 2006.... Proponents of estate-tax repeal frequently argue that repeal is needed to prevent large numbers of family-owned farms and businesses from having to be liquidated to pay the tax. A recent Congressional Budget Office study exploded this myth.... The leading "compromise" proposal would lose 84 percent as much revenue as full repeal and reduce the effective tax rate to just 6 percent.... Reportedly, Senator Baucus (D-MT) is considering proposing another costly "compromise" plan that would cause significant budgetary damage. The plan combines an exemption level of$7 million per couple with a graduated tax rate of 15 percent, 25 percent, and (for estate values in excess of $20 million per couple) 35 percent. The reported Baucus plan would lose 74 percent as much revenue as full repeal, according to the Tax Policy Center. In reforming the estate tax, increasing the exemption level makes more sense than cutting the tax rate. The main reason for the sharp drop in the number of estates subject to the estate tax between 2000 and 2009 is the large increase in the exemption level.... Conversely, the main reason for the large revenue losses under the Kyl proposal -- and, to a lesser degree, the Baucus proposal -- is its deep cut in the estate tax rate. Cutting the rate targets tax relief on larger estates.... [I]f the goal of estate-tax reform is to relieve smaller estates from the tax... freezing the tax at its 2009 level (with a$7 million exemption for couples and a 45-percent rate) is far superior to the Kyl or Baucus proposals...

## Bush's New Press Secretary: Let's Just Make Stuff Up

ThinkProgress writes:

ThinkProgress: Rice Drops White House Claim That Iraqi Prime Minister Was Misquoted About Haditha: On Thursday, Iraqi Prime Minister Nouri al-Maliki, was quoted saying the following about Haditha:

This is a phenomenon that has become common among many of the multinational forces. No respect for citizens, smashing civilian cars and killing on a suspicion or a hunch. It's unacceptable.

On Friday, White House Press Secretary Snow insisted that Maliki was "misquoted." Snow was unable to say exactly how he was misquoted, saying "it's a little hazy to me."

This morning on Fox News Sunday, Secretary of State Condoleezza Rice was asked about Maliki's comments. Rice said she had talked to Maliki directly about his remarks but did not claim Maliki was misquoted. Instead, she said he was "speaking to the concerns of the Iraqi people."

Impeach George W. Bush. Impeach him now.

## Not Quite the Stupidest Man Alive...

A correspondent reminds me that it is past time to lay down another marker on the internet that Donald Luskin really has no clue what he is talking about. However, we can no longer call him the Stupidest Man Alive--that crown has been permanently taken by John Derbyshire.

Fortunately, my correspondent provides an excellent example of what we are talking about:

The Conspiracy to Keep You Poor and Stupid: WE CAN NEVER SAY THIS OFTEN ENOUGH.... Inflation is not rising prices. Inflation is a declining dollar.

Ahem:

inflation - Definitions from Dictionary.com: The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

If the dollar declines against the Canadian dollar, but the prices of goods and services in dollars inside the United States remain unchanged, we do not say "there has been inflation." We say, instead, "the nominal and real exchange rates have declined." If the dollar stays constant against the Canadian dollar, but the prices of goods and services in dollars inside the United States rise, we do not say "there has been no inflation." We say, instead, "there has been inflation,a the real exchange rate has risen, and the nominal exchange rate has stayed constant."

One of the Stupidest Men Alive.

## A Memo to All Former Bush Appointees

MEMORANDUM

To: Former Bush Appointees
From: Reality-Based Community

You are free. You aren't under message discipline anymore. You can say what you think. You don't have to pretend that the invasion of Iraq was a component of a well-thought-out plan. You don't have to pretend that the things Bush does to boost the deficit are policies of economic genius.

Glenn Hubbard, for example, has broken free. The Wall Street Journal reports:

WSJ.com - Former Bush Adviser Criticizes Drug Plan: R. Glenn Hubbard, former chairman of President Bush's Council of Economic Advisers, says the Bush-backed expansion of Medicare to include prescription drugs was "unwise."

"The Medicare expansion without substantial reform of the system was unwise fiscal policy," Mr. Hubbard, now dean of Columbia University's business school, said in an online exchange sponsored by The Wall Street Journal. "The current Social Security and Medicare systems are on an unsustainable path," Mr. Hubbard said in the exchange with Robert Reich, a Brandeis University professor who served as secretary of labor in the Clinton administration. "In both cases, sound fiscal reform should involve slower benefit growth for high-income households. In addition, fiscal reform for Medicare must be accompanied by reform of health-care markets."...

Mr. Hubbard was chairman of the U.S. Council of Economic Advisers from February 2001 until March 2003, where he advised President Bush on economic, tax and budget policy, international finance and health care, among other issues.

## He Says He's Getting Too Old for This...

Ted Barlow hangs his epee up above the fireplace, and retires to his country estate to sit before the fire, drink the vin ordinaire of Gascony, and tell tall tales about the days when he was one of the... sixteen internet musketeers of :

Henry Farrell: Despite his modesty, we're going to miss Ted hugely; if nothing else, as Kieran pointed out two years ago, Ted has been responsible for many of our most widely read posts. Among the posts I've particularly enjoyed or found thought-provoking over the years are...

Others may have other posts (including ones from before Ted joined CT) that they prefer--feel free to mention them...

All for one, and one for all!

## Repeating Internet Mistakes...

Am I the only person whose trackbacks are now 95% total spam garbage? Is this another good idea going down the drain because of insufficient thought about how to avoid the tragedy of the attention commons?

## Large-Scale Social Cooperation in the East African Plains Ape

If you are not reading David Brin, you should be:

Contrary Brin: ALTRUISTIC HORIZONS: Our tribal natures, the 'fear effect' and the end of ideologies.: ALTRUISTIC HORIZONS: For centuries social thinkers have nursed a quiet envy of physical scientists, yearning for the kind of predictive and transformational power offered by the universal laws of Galileo, Newton and Einstein. These reductionist rules enabled earnest workers to utterly change our relationship with the material world, from one of helplessness to great power and manipulative skill. If only similar patterns and laws could be worked out for human nature! Might we be able to construct an ideal society? One well-suited to decent living by all?...

[W]hile the models of Freud, Marx, and Machiavelli... have attracted legions of followers... I believe a much stronger case can be made for tribalism as a deeply motivating force in history. After all, should not any theoretical explanation of our nature apply across the long span of time when human nature actually formed? Also, if you can find a pattern or patterns that seem to have held across all continents and almost all pre-metal tribes, isn't there a much better chance that the trait really is... not an artifact of later cultural imposition...?

Isn't it strange that few social theorists... ever cite this long epoch, when humans were few, but when a vast majority of human generations suffered darwinnowing pressures, thriving or dying according to their fitness to meet challenges in a harsh world, unprotected by the houses and markets of the last 5,000 years?... So what might tribalism tell us about human nature, that was missed by Marx and Freud and Rand and all the others, with their post-literacy myopia?... Over and over, we see how devotion to a group, clan, or nation, has overwhelmed what might otherwise have seemed to be the individual's self-interest. Nor should this be surprising, since, for most of the last million years, human beings lived in clans. Any man or woman who lost the faith and confidence of his or her tribe was in great danger. Often effectively dead...

[...]

In fact, this process of horizon-widening is... intrinsic to liberalism in the older and truer meaning of the word.... For example, markets work best when competition is both encouraged and tamed... when it operates under rules of fair play that maximize creativity and minimize blood-on-the-floor. This can only happen when market participants must treat each other as competing teams, not deadly foes.... Both dogmatic extremes ignore history and are effectively quite mad! One side resists the widening of horizons while the other would force it with a patronizing, oversimplifying sledge hammer. Rather, this is about the true “liberal” notion of ever-increasing inclusion within the tent of human decency, while allowing a lot of give and negotiation and bickering and creative competition within the tent!

The crucial issue is this - can the long process of expanding human horizons be studied in order to determine crucial narrow points and bottlenecks that inhibit horizon broadening, among both individuals and cultures? If such bottlenecks can be found and diagnosed, might a judicious application of philanthropic funding help unblock the process, here and overseas, so that both tolerance and far-seeing investment practices take greater hold?...

He is also the author of my favorite apology. As I wrote before, it is:

Making Light: Displaced advice, and other sorts: the one from Startide Rising: "With my last volition, I will remove my head and place it in your trophy rack. May the next one I grow serve you better."

Be careful with your pronoun antecedents, boys and girls!

Greg Mankiw writes:

Greg Mankiw's Blog: Reich on Taxes, Again: As I have noted before, former Labor Secretary Robert Reich has a way of expressing numbers that is so striking it makes me sit up and want to check the facts myself. Here is what he says at his blog now:

repeal [of the estate tax] would cost the U.S. Treasury $1 trillion in its first ten years. That's about equivalent to what's needed to save Social Security over the next 75 years. Really? That is amazing. Let's look a little harder at this and see if we can find some numbers that, at least approximately, back this up... Now I hadn't noticed anything amazing when I read Bob Reich's weblog. So I went back to see why, and I thought as follows: In the late 1990s--before the Bush 2001 tax cut--estate tax collections were running at about 0.35% of GDP, with an expectation (by me at least) that under the then-current estate tax law that ratio would creep up to 0.4% of GDP because of the rising level of wealth inequality in America. If you go to Table 1-2 of the Congressional Budget Office's you will read that the CBO projects the 100-year Social Security deficit at a present value of 0.54% of the cumulative present value of GDP. So Reich's statement that repealing the (pre-2001) estate tax will wind up costing us as much as the projected 75-year Social Security deficit did not seem amazing to me. The two money flows--estate tax collections under the pre-2001 law, and the Social Security deficit--do appear roughly equal in present value over the next three quarters of a century. I, you see, had taken the antecedent of Reich's pronoun "that" to be "the cost of repeal of the estate tax." But Mankiw takes the antecedent of Reich's pronoun "that" to be "the$1 trillion cost to the U.S. Treasury of the first ten years of estate tax repeal." So Mankiw goes on:

## Matthew McIrvin on Achenbach on Global Warming Denial...

The highly-intelligent Matt McIrvin has a good and thoughtful take:

mmcirvin: Achenbach on global warming denial: I think this is the first time I've ever sparked a non-negligible political-blog controversy, over the merits of Joel Achenbach's Washington Post Sunday magazine article on global-warming skeptics.... I'm somewhat more sympathetic.... It's a Sunday magazine piece, not written according to the inverted-pyramid rule with conclusions up at the top. Achenbach's aim, as he explains, is to give the people he's profiling enough rope to hang themselves, and a fairly sophisticated reader will come away from reading the whole piece realizing that they've done so.

But... [h]e engages the people much more than he does the arguments, and that's a problem because their rhetoric is often pretty good. Somebody thinking, "OK, these guys are a little kooky and/or dishonest, but I never heard these points they bring up before. What about all those anomalies? What about the thickening ice, the Medieval Warm Period, the historical lag between temperature and CO2 levels? Might there actually be something in it?" still isn't going to get much of an answer from the Post Magazine piece.... [I]t's possible to do better without turning the whole thing into agitprop. For me, the gold standard for this kind of piece is John Farrell's outstanding 2000 Salon article "Did Einstein Cheat?" about the even more bizarre world of advocates against the theory of relativity. It doesn't just show you how kooky these people are, it also provides a fairly definite idea of just how they're wrong. By taking the ideas it's knocking more seriously than Achenbach did, it actually ends up being far more convincing.

And, of course, an unsophisticated reader who does not read Achenbach's whole piece with attention...

## Why Oh Why Can't We Have Better Think Tanks? (Yet Another Cato Edition)

Patrick Michaels of the Cato Institute is unhappy:

Patrick Michaels: Well, Paul Krugman sure smeared me in his May 29 column (sub. req%u2019d.) where he accused me of "fraud pure and simple" in congressional testimony eight (!) years ago. Krugman's screed... another salvo in the current global warming charm offensive... Gore's screeching movie... multiple smearings of any climate scientist who dares to speak out against the current hysteria....

What Patrick Michaels doesn't say is that Paul Krugman is not alone: that the accusations' root is climate scientist James Hansen, who writes:

NASA GISS: The Global Warming Debate: Dr. Michaels... had used (or misused) a figure of mine in testimony to the United States Congress. The figure showed the first predictions made with a 3-D climate model and time-dependent climate forcings — it was a figure from a paper that we had published in the Journal of Geophysical Research in 1988 and it had been a principal basis for testimony that I gave to the United States Senate in 1988....

The figure... shows the simulated global mean temperature for three climate forcing scenarios. Scenario A has a fast growth rate for greenhouse gases. Scenarios B and C have a moderate growth rate for greenhouse gases until year 2000, after which greenhouse gases stop increasing in Scenario C. Scenarios B and C also included occasional large volcanic eruptions, while scenario A did not. The objective was to illustrate the broad range of possibilities in the ignorance of how forcings would actually develop. The extreme scenarios (A with fast growth and no volcanos, and C with terminated growth of greenhouse gases) were meant to bracket plausible rates of change. All of the maps of simulated climate change that I showed in my 1988 testimony were for the intermediate scenario B, because it seemed the most likely of the three scenarios.

But when Pat Michaels testified to congress in 1998 and showed our 1988 predictions (Fig. 1) he erased the curves for scenarios B and C, and showed the result only for scenario A. He then argued that, since the real world temperature had not increased as fast as this model calculation, the climate model was faulty and there was no basis for concern about climate change, specifically concluding that the Kyoto Protocol was "a useless appendage to an irrelevant treaty".

Although scientists have a right to express personal opinions related to policy issues, it seems to me that we can be of more use by focusing on the science and carrying that out with rigorous objectivity. That approach seems to be essential for the success, as well as the "fun", of scientific research.

Fig. 1 is a good case in point. We now know (Hansen et al. 1998a, 1998b) that the growth rate of greenhouse gases in the period 1988-1998 has been flat, very similar to scenarios B and C (which are nearly the same until year 2000). Thus we can compare real world temperature changes in the past decade (filled circles in Fig. 1) with model calculations for the B-C scenarios. Taking account of the fact that the real world volcano occurred in 1991, rather than 1995 as assumed in the model, it is apparent that the model did a good job of predicting global temperature change. But the period of comparison is too short and the climate change too small compared to natural variability for the comparison to provide a meaningful check on the model's sensitivity to climate forcings. With data from another decade we will be able to make a much clearer evaluation of the model...

It's not Krugman alone who is a shrill critic of Patrick Michaels's ability to speak with unforked tongue. It's James Hansen too. And the excellent and serious people at http://realclimate.org have their own view of Michaels:

Mann and Schmidt: Patrick Michaels and associates billed his own paper (McKitrick and Michaels, 2004) (co-authored by Ross McKitrick), this way:

After four years of one of the most rigorous peer reviews ever, Canadian Ross McKitrick and another of us (Michaels) published a paper searching for "economic" signals in the temperature record.... The research showed that somewhere around one-half of the warming in the U.N. surface record was explained by economic factors, which can be changes in land use, quality of instrumentation, or upkeep of records.

It strikes us as odd, to say the least, that, after one of the "most rigorous peer reviews ever", nobody involved (neither editor, nor reviewers, nor authors) seems to have caught the egregious basic error that the authors mistakenly used degrees rather than the required radians in calculating the cosine functions used to spatially weight their estimates. This mistake rendered every calculation in the paper incorrect, and the conclusions invalid -- to our knowledge, however, the paper has not yet been retracted. (McKitrick and Michaels have published an errata correcting the degrees/radians error in CR 27, 265-268 which now shows that latitude correlates much better with temperature trends than any economic statistic.) Remarkably, there were still other independent and equally fundamental errors in the paper that would have rendered it entirely invalid anyway. To the journals credit, they published a criticism of the paper by Benestad (2004) to this effect. It may come as no surprise that McKitrick and Michaels (2004) was published in Climate Research and was handled by none other than Chris de Frietas.

## Why Oh Why Can't We Have a Better Press Corps? (Yet Another National Review Edition)

Judd Legum writes:

ThinkProgress: How The National Review Bastardizes James Hansen's Global Warming Research: Jason Steorts is on the defensive about his National Review cover story on global warming "Scare of the Century."... Steorts enlists James Hansen... the NASA climate scientist who was famously muzzled by the Bush administration.... Steorts quotes Hansen as saying "the IPCC scenarios are unduly pessimistic." Steorts never links to Hansen's actual writing.... Here's what James Hansen actually said:

There are reasons to believe that the IPCC scenarios are unduly pessimistic. First, they ignore changes in emissions, some already underway, due to concerns about global warming. Second, they assume that true air pollution will continue to get worse, with O3, CH4 and BC all greater in 2050 than in 2000. Third, they give short shrift to technology advances that can reduce emissions in the next 50 years....

Hansen's article is a call to action. He argues that we can reduce the impact of global warming if we limit carbon dioxide emissions, control air pollution and adopt new technologies. Here's how [Hansen's] article begins:

Global warming is real, and the melting ice is an apt portent of potentially disastrous consequences.... Study of these forcing agents shows that global warming can be slowed, and stopped, with practical actions that yield a cleaner, healthier atmosphere....

Steorts takes a couple of words from Hansen's call to action totally out of context to argue that action is unnecessary. This isn't a real argument, it's a shell game.

I can't understand why anybody who wants to have a reputation writes for National Review.

## Why Oh Why Can't We Have a Better Press Corps? (Gee It's Hot in Here Edition)

John Quiggin writes:

John Quiggin: This Joel Achenbach piece on global warming sceptics... [is] a great instance of how the truth can be told while sticking to the much-criticised rules of journalistic objectivity.... Achenbach reports the scientific evidence on global warming then investigates the "parallel Earth" (his words) of the soi-disant "sceptics". As he says

It is a planet where global warming isn't happening--or, if it is happening, isn't happening because of human beings. Or, if it is happening because of human beings, isn't going to be a big problem. And, even if it is a big problem, we can't realistically do anything about it other than adapt.

Achenbach then proceeds to interview the sceptics, lets them speak for themselves, and lets the readers draw their own conclusion...

I used to think as John Quiggin does. Then I learned better. Now I think as the excellent and incisive John Emerson does:

John Emerson: It was an artfully written piece designed to get past the "balance" censor while still telling the well-informed what's really happening. Thus, everyone gets something. (This kind of writing was called "Aesopian" under the czars. Its better than pure misinformation, but it's far worse than actual honest journalism. It's pretty telling that czarist-era terminology works so well in analyzing contemporary US journalism).

Someone who just skims the first part of the piece will get an entirely different impression than someone who reads it carefully, and most newspaper readers are skimmers. I believe that Jonah Goldberg has already used this article to justify some of his ludicrous claims.

Part of the art of very bad, high-paid journalism is telling the truth in such a way that it won't be understood. The mealy-mouthed choice of the lead is extremely important: "As evidence mounts that humans are causing dangerous changes in Earth's climate, a handful of skeptics are providing some serious blowback". Not directly rebutting false claims in detail is another. Conforming the story to a storyline ("some say.... others say") is another. Just giving sympathetic treatment to a poor guy who lost his grants because his science was no good is misleading.... We've gotten to the frightening place, however, that it's more or less unthinkable that the Times or the Post (much less TV or cable) will write a straightforward unspun piece on global warming....

Many readers will get the wrong impression, and that's no accident. (The Times gets more careless readers than diligent readers, and even the careless readers of the Times are much sharper than the average citizen.) William Goodwin has apparently come to believe that direct, non-Aesopian writing is impossible and undesirable, and that it would be illicit editorializing to write a news story portraying loony disinformation specialists unmistakably as dishonest loons. And Goodwin is also, almost certainly, more thoughtful and better informed than the average citizen. We really are in bad shape.

Another way to look at this is to look for defensive writing in Aschenbach's piece. Where are the places that the author, hoping to ward off accusations of bias, softened what he wrote or changed the emphasis? The first line is obviously one of them, and that's usually the most important line. And the last line of the piece can be properly understood only by a careful, well-informed reader.

Am I saying that Aschenbach should have spelled out his conclusions in direct, unmistakable language? Yes! What problem would there be with that?...

William, neither the lead sentence nor the concluding sentence spelled out the conclusion. It would have been perfectly normal to have done so, in a healthy journalistic environment. Nothing on the first page tells you anything bad about Bill Gray or his ideas....

[You say] Aschenbach shouldn’t be worried about what less-than-careful readers are going to think of global warming after he’s done. Why not? Journalism isn’t Chekhov or Henry James. You don’t let the reader figure out from subtle hints that the narrator is unreliable. You show the reader directly that the narrator is unreliable, by juxtaposing the facts and the falsehoods. that’s what good journalism should be.

But what I’m really saying is that Aschenbach was thinking about the less-than-careful reader. He (or the Times editors) wrote a deliberately mushy article so that the right-wing political commisars wouldn’t get mad. The commissars don’t care what well-informed people think. Bush wins elections with the careless readers...

Can American journalism be saved? I'm beginning to think that the answer is "no." Joel Achenbach is one of the very best relatively young people the Washington Post has writing for it. Mike Allen was one of the Post's very best reporters--he has since jumped to Time. Yet Matthew Yglesias found Mike Allen saying that he, Allen, was not an idiot, that he knew perfectly well, but, as Yglesias put it:

Brad DeLong's Website: April 2005 Archives: [Mike] Allen... said that news writers are trying to present both sides' points-of-view, hence the 'he said, she said' quality to it, but that they're trying to present these points-of-view in such a way so that a discerning reader can tell who's right based on reading the story...

This is, when you think about it, an astonishing admission. Allen says that if you are a careful reader, that if you read past the fold to the end of the story, that if you are already sufficiently familiar with the issue to have the relevant background knowledge, then you can tell which of the "he saids" in the first four paragraphs on page 1 before the jump is a lie.

If not, not.

From this, I think two conclusions follow:

• Unless you have time to read them carefully and completely, searching for Aesopian language, don't read Achenbach or Allen--or other reporters of their ilk. If you are a hasty reader, they're not trying to tell it to you straight. Don't waste your time. Read somebody else who is trying to tell it straight, like http://realclimate.org/ or http://taxpolicycenter.org/.
• As time passes, reporters trained in the Achenbach/Allen "truthiness for the masses" mold will find themselves losing that audience that looks for information and retaining only that audience that looks for entertainment.

And one question:

As newspapers lose their classified ad business to the web, and as newsmagazines find themselves competing for the internet as well, who will pay for the Post or for Time? The Economist, yes; the Wall Street Journal, yes; the National Journal, yes. But the others?

## Why Oh Why Are We Ruled by These Liars? (Karl Zinsmeister Department)

Karl Zinsmeister: yet more quality personnel at the American Enterprise Institute:

The Horse's Mouth: WILL THE FUN EVER STOP WITH KARL ZINSMEISTER? Now it looks as if Karl Zinsmeister, President Bush's newly-appointed chief domestic policy adviser, may get sued for altering quotes he gave to the Syracuse New Times before reposting the story on the web. Between you and me, I spoke today with a former employee of the magazine he edited, The American Enterprise, and this person made it very clear that Zinsmeister is a tick-tick-tick-ticking time bomb waiting to explode. More on this later, I hope.

I can't understand why any economist--why anyone who wants to have a reputation--works at AEI.