## The Financial Times Says that the World Bank Should Fire Paul Wolfowitz

Its editorial:

FT.com / Home UK / UK - Wolfowitz must be told to resign now: The president of the World Bank has one asset: his credibility. The Bank’s capacity to make a difference lies not in its money and ideas but in its ability to be the world’s voice for development. This includes, as Paul Wolfowitz, the current president, has insisted, being the voice for good governance....

It is important to understand what is not at issue here. It is not Mr Wolfowitz’s unpopularity.... It is not failures of management, even though his reliance on a group of outside appointees made him mistrusted by many inside and outside the Bank. It is not disagreements over development doctrine.... It is not a romantic relationship with a subordinate....

What then is the story? When Mr Wolfowitz became president of the World Bank he also became the boss of his girlfriend, Shaha Riza. To resolve this situation – inconsistent, rightly, with Bank rules – Ms Riza was seconded to the US State Department....

[T]he terms of the appointment, which appear astonishingly generous, violate a number of Bank protocols. Worse, it now appears Mr Wolowitz personally directed the Bank’s head of human resources to offer his girlfriend these exceptional terms. Worse still, this has come out after misleading claims by a senior official that the ethics committee of the board, in consultation with the general counsel, approved the agreement.

What then do we see here? The answer is: an apparent violation of Bank rules; favouritism that borders on nepotism; and a possible cover-up.... In the interests of the Bank itself, he should resign. If he does not, the board must ask him to go.

They are right. Moreover, this is not a great surprise. If you had asked me six years ago if Paul Wolfowitz was the kind of person who would tell the head of HR to give his girlfriend a $50K raise, I would have said yes. ## Lamont and Stein: Stock Market Efficiency in Cross Section, Inefficiency in Time Series Changes in cashflows and changes in "discount factors": http://www.economics.harvard.edu/faculty/stein/papers/aer-p&p-micro-macro.pdf: Samuelson’s dictum has been made concrete in empirical work by John Campbell (1991) and Tuomo Vuolteenaho (2002). Campbell shows that innovations to aggregate stock returns are largely transitory: less than half of the variance in returns is due to changes in expected cashflows, leading to predictable reversals in future returns. If one adopts a behavioral perspective and thinks of return predictability as being indicative of investor sentiment, this is consistent with Samuelson’s idea that the aggregate market is quite inefficient, with a large fraction of its price variation being due to non-fundamental factors. In contrast, Vuolteenaho shows that innovations to idiosyncratic firm-level returns are largely permanent: most of the variation in returns is driven by cashflow news, with a smaller component due to time-varying expected returns. This suggests that firm-level relative prices are reasonably efficient, with a smaller role for sentiment. ## Harrison Hong and Jeremy Stein: Disagreement and the Stock Market They make the case for "disagreement models" as the way forward for behavioral finance: http://www.economics.harvard.edu/faculty/stein/papers/Disagreement-Dec-2006.pdf The enduring appeal of classical asset-pricing theory over the last several decades owes much to its success in forging a consensus around a foundational modeling platform. This platform consists of a core set of assumptions that have been widely-accepted by researchers working in the field as reasonable first-order descriptions of investor behavior, and that—-just as importantly—-lend themselves to elegant, powerful and tractable theorizing. If behavioral finance is ever to approach the stature of classical asset pricing, it will have to move beyond being a large collection of empirical facts and competing one- off models, and ultimately reach a similar sort of consensus. While this goal seems well within sight in the part of the field that explores limits to arbitrage, it is much further away in the part that seeks to understand the origins of market mispricings. Many horses are still running in this latter race, and it is not at all clear whether a decisive winner will emerge in the foreseeable future. Nevertheless, our view is that, taken collectively, the disagreement models described above represent the best horse on which to bet. Disagreement models uniquely hold the promise of being able to deliver a comprehensive joint account of stock prices and trading volume, which we consider to be one of the highest priorities for theoretical work in asset pricing. Moreover, the modeling ingredients are highly tractable, for two reasons. First, preferences are taken to be completely standard—-so the modeler can work with constant absolute risk aversion utility or whatever other functional form makes life easiest. Second, in disagreement models, investors’ beliefs are often a simple function of just their own priors and the signals that they each observe directly; this is in contrast to rational-expectations models, where each investor must also update based on inferences about others’ priors and signals. As a result, disagreement models can be usefully deployed in everything from simple illustrative examples (like the two-period model of momentum discussed earlier in this paper) to elegant continuous-time formulations (like Scheinkman and Xiong, 2003). We hope that future research with disagreement models continues to develop their potential. The classical finance assumptions were never reasonable first-order descriptions of investor behavior; the most that was sever claimed was that they were reasonable first-order descriptions of those components of investor behavior that did not cancel themselves out. And the fact that people in disagreement models aren't making inferences from price patterns strikes me as a defect, not a feature... ## Brad Setser Worries the Issue of Global Imbalances And every day that passes makes our current configuration seem even more globally imbalanced: RGE - Hmmm – it is hard for the world to diversify away from the dollar when the world’s holdings of dollars need to rise by about a trillion a year: Emerging markets increasingly will be financing not the expansion of the US trade deficit, but the expansion of the US income deficit.... Exporters in emerging economies -- and real estate developers who have benefited from the rapid money and credit growth that has often accompanied rapid reserve growth -- have been the obvious "winners" from the current international monetary system. They are a strong constituency that supports the status quo. I have consistently underestimated the power of China's export lobby. China too has its interest group politics. But increasingly the emerging world will be financing a US whose imports from the emerging world aren’t growing. Remember, the trade deficit has to stabilize at some point. The costs associated with financing the US won’t shrink. But the obvious benefits will. Rather than financing export growth emerging market central banks (and the Japanese Finance Ministry) will increasingly be financing interest payments to themselves. At the end of 2006, I estimate that the world’s central banks – counting SAMA’s foreign assets and China’s hidden reserves -- held around$3.7 trillion in dollar reserves.   On current trends, that easily could rise by another $1.3-1.4 trillion over the next two years. if the average interest rate on their dollar holdings rises to around 5%, they will receive a bit under$200b in interest from the US in 2007 – and that total will rise to around $250b in 2009. By 2009, counting all its foreign assets (not just its reserves) and counting euro and pounds as well as dollars, China should get close to$100b a year in interest payments.   By then its total foreign assets will top $2 trillion. I am starting to wonder what China’s exit strategy is. On current trends, China will, after all, account for a very large of the growth in the world's dollar holdings over the next few years.... The surplus in China’s basic balance (net FDI inflows + the current account surplus) is now close to 15% of China’s GDP (the IMF estimates China's 2007 current account surplus will top 10% of its GDP, and their estimate looks low to me, given the q1 data). That finances the buildup of foreign assets by various parts of the Chinese state. And if the expected appreciation of the RMB against a dollar heavy basket of euros and dollars that replicates China’s reserve portfolio is about 33% (which seems reasonable), the expected capital loss on the incremental increase in China’s foreign assets – one measure of the implicit export subsidy – is around 5% of China’s GDP. That is at least a rough estimate of the annual cost of China's current policy: a full accounting would look at the interest differentials, which right now offset some of these costs. I think I know what the People’s Bank of China’s exit strategy is. But a new People’s Investment Company just shifts the accumulation of dollars from one part of the Chinese government to another... ## Paul Krugman Responds on Supply-Side Economics From Mark thoma's website: Economist's View: Supply-Side Economics: Paul Krugman Responds: Via email, Paul Krugman responds to recent posts on supply-side economics. The posts he is responding to are on the continuation page: OK, here's what I would say: Let's suppose that it's true that people in DC were still thinking in terms of crude, 1950-vintage vulgar Keynesianism, even while people in Cambridge were thinking in terms of a framework in which money mattered, there was no long-run tradeoff between inflation and unemployment, etc. Even so, why did you need a doctrine called supply-side economics, which purported to challenge the fundamentals of Keynesian economics? All you really needed was to bring policymakers up to date with the current state of Keynesianism! Furthermore, if we're going to judge an economic doctrine not by what well-informed people thought, but by the crude caricatures of the doctrine that penetrated the consciousness of ill-informed policymakers, what does that say about supply-side? I was in DC, on the staff of the Council of Economic Advisers, in 1982-3; let me tell you, the supply-siders around really did believe the crudest, most caricatured versions of the doctrine you can imagine. I recall a meeting in which David Stockman tried to explain why we were having a recession, without the benefit of any coherent economic model - and it made the most vulgar Keynesianism sound like Nobel-quality thought. The key thing is that good Keynesianism, as embodied even in undergrad textbooks of the time, was perfectly OK: Dornbusch and Fischer, 1978 edition, offered a description of what disinflation would look like that matches the experience of the 80s reasonably well, and the textbook does not seem all that dated even now. The idea that we needed a new doctrine to get our heads straight is just all wrong. ## How Supply-Side Economics Trickled Down... Bruce Bartlett's piece on supply-side economics: How Supply-Side Economics Trickled Down - New York Times: AS one who was present at the creation of “supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy... sparked an interesting and useful debate at Mark Thoma's Economist's View (which I previously noted). After thinking about it, I want to weigh in again--on the side of Bruce Bartlett as opposed to Paul Krugman. It's not that Paul says anything wrong about what he and his MIT colleagues thought at the end of the 1970s, but IMHO he underestimates the intellectual gulf between Cambridge and Washington. There are two issues here--stabilization policy and growth policy. On stabilization policy, Bartlett says that the Keynesians around 1980 believed that full employment should be produced via fiscal policy--spending increases and tax cuts, preferably spending increases, to boost aggregate demand--and that inflation should be controlled via incomes policy--jawboning unions to restrain wages and businesses to keep a lid on prices, tax penalties for price increases, excess-profits and other taxes to provide incentives to keep wages and prices close to previous nominal anchors, and the threat and perhaps the reality of wage and price controls. Monetary policy, Bartlett says they said, was next to useless in controlling aggregate demand. And the principal effect of fiscal policy was not its impact on the supply side--on incentives to work and invest--but its demand-side impact on the volume of spending. Krugman protests that what he and his Keynesian colleagues at MIT taught around 1980 was very different from Bartlett's parody of modern Keynesianism. MIT's Robert Solow had argued for JFK in the early 1960s that a good fiscal policy needed to pay at least as much attention to the supply side as the demand side. And certainly those teaching macroeconomics at MIT at the end of the 1970s--Stan Fischer, Rudi Dorbusch, and company--placed enormous stress on the power of monetary policy to affect aggregate demand, shape expectations, and control inflation. All this is true. And yet, and yet... Matthew Shapiro of the University of Michigan perhaps puts it best. He went to Yale as an undergraduate in the late 1970s and to MIT as a graduate student in the early 1980s. He says (roughly, this is my memory and not verbatim): At Yale in the 1970s, I was taught that the Chicago School was bad and wrong because they believed that monetary policy had powerful effects on production and unemployment. Then I get to MIT in the early 1980s and was taught that the Chicago School was bad adn wrong because they believed that monetary policy did not have powerful effects on production and unemployment. The second Chicago School was made up of the rational expectations revolutionaries of the late 1970s. The first Chicago School was that of Milton Friedman's monetarists who thought that controlling inflation was simple: don't use open market operations to expand the money supply. They were opposed by Old Keynesians who thought that monetary restraint was ineffective, by those who thought that monetary restraint was too effective (i.e., would cause too much unemployment), and by those (like Arthur Burns) who thought monetary restraint was impossible (i.e., that the Congress would never allow the Federal Reserve to stop inflation by generating a recession the size of 1982). My take on this story is found in J. Bradford DeLong (1997), "America's Peacetime Inflation"; and J. Bradford DeLong (2000), "The Triumph? of Monetarism". The first Chicago School by and large won the day, and Paul Krugman takes their substantial victory as natural and inevitable, and it did indeed seem that way from MIT in 1980, but not frm the trenches of the Joint Economic Committee where Bruce Bartlett wallowed in the politicial trench-warfare mud in the late 1970s. So it seems to me that Bruce is more right than Paul. I'm less sure that Bruce Bartlett was on the side of the angels on growth policy. I was taught that one sought to have cyclical deficits in recessions, but a budget in balance or surplus on average over the business cycle, so that the mix of policy tended toward a tight fiscal-easy money configuration that would produce high investment and rapid wage, output, and productivity growth, and one paid attention to high marginal tax rates and the deadweight losses they caused. Nothing that Bruce would disagree with there. And certainly I am on Bruce's side against those who focused exclusively on how high marginal tax rates were a good thing because they improved the distribution of income, and those who focused exclusively on fiscal policy as a manager of aggregate demand. But in practice... it seemed to me that Bruce's political masters like Jack Kemp were excesssively eager to throw the "budget in balance or surplus on average over the business cycle," and that the eager embrace of deficits and their crowding-out of investment did more harm than the focus on reducing marginal tax rates did good. We can argue about that, however. A good deal of the problem is that there were so many factions. On the left side, there was the Solow tight fiscal-easy money tradition; the Musgrave progressive-redistributive-tax-system tradition; the vulgar Keynesians who never met a deficit or a price control they didn't like; the New Keynesian faction to which Krugman belongs, and others. On the right side, there were Bruce Bartlett and company; the neoconservatives who wanted rhetoric but didn't care about getting economic policy right; those who were loyal to Reagan whatever Reagan would decide but had no clue about policy; David Stockman who hoped that cutting taxes now would produce a wave of revulsion against deficits that would enable him to cut spending later; the Buchanan-Niskanen "we are betrayed" faction that protested against the embrace of deficit spending by the Republicans; and the "starve the beast" faction. "What the supply-siders thought" depends very much on who is included in the charmed circle, and when. And the same applies to "What the Keynesians thought." ## Fernald, Thipphavong, and Trehan: Will Fast Productivity Growth Persist? John Fernald, David Thipphavong, and Bharat Trehan of the San Francisco Fed ask if the downward shift in productivity growth since mid-2004 is temporary or permanent. They say that it's temporary: Economist's View: FRBSF: Will Fast Productivity Growth Persist?: Is the era of rapid productivity growth over? To begin to answer this question, it is useful to look first at whether the pace of innovation in the ICT sector has slowed.... Other things remaining the same, the faster the rate of technical progress in the ICT sector, the faster the rate at which the price of ICT goods falls against other prices in the economy.... [T]he price of information processing equipment and software.... fell at close to a 6-1/2% rate over the 1973:Q1-1995:Q3 period; the rate of decline accelerated to 8-3/4% over the 1995:Q4-2000:Q4 period but has fallen back to 6% since. Based on this evidence... one could argue that the pace of technical progress in the ICT sector has slowed.... If the productivity slowdown in ICT production is permanent, should we then expect productivity growth in the ICT-using sectors to fall back to the rates seen before the boom? The GPT literature suggests that the answer is no. DeLong (2002) points out that, even though the period of double-digit annual productivity increases in steam-power and textile-spinning machinery ended in the early 1820s, these technologies made their major contribution to economic growth in Great Britain in the subsequent 50 years. Similarly, David (1991) emphasizes that the benefits of the electric motor took nearly half a century to spread, as firms learned how to make more efficient use of the technology. Is ICT likely to have the same impact that earlier GPTs did? At least one metric suggests that it could. It has been pointed out that ICT prices have fallen far more dramatically than prices of GPTs like electricity and the internal combustion engine, and the resulting decline in the price of capital goods is unprecedented. This suggests that we might expect productivity growth to remain elevated for a while yet. Furthermore, recent data for nonfinancial corporations suggest that productivity growth might not have slowed quite as much as the nonfarm business sector data indicate.... [P]roductivity growth in nonfinancial corporations has tended to track that in the overall nonfarm sector reasonably well, but the former has not slowed as much over the past year.... The reasons for the divergence are not clear. The underlying source data are different, since nonfinancial corporate output is measured from data on income, whereas nonfarm output is measured from data on expenditure. While the national accounts are designed so that, in principle, income and expenditure necessarily grow at the same rate, the two measures rely on different surveys, so there can be a "statistical discrepancy" between them. At the peak of the "New Economy" hype of the late 1990s, many claimed, "The Internet changes everything," and, by implication, that it happened overnight. But the history lessons from GPTs, like electricity and steam power... suggest that the necessary complementary investments and innovations that drive change unfold only slowly over time.... To the extent that ICT is, indeed, a GPT on a par with the electric dynamo, the returns to innovation (whether managerial innovations or the development of new products and processes) might remain high for some time to come. The strength of productivity growth in nonfinancial corporations provides another reason for hope that underlying productivity trends remain strong. None of this is meant to argue that trend productivity growth will revert to the 3% rate seen around the turn of this century; we are arguing instead that--in the near term--trend productivity growth is unlikely to revert to the rates seen during the 1970s or 1980s. But these are not statements that can be made with a high degree of certainty. As we confessed at the outset, economists, including us, do not have a winning record in predicting the path of productivity growth... J. Bradford DeLong (2002), "Productivity Growth in the 2000s was damned good for a paper that gives both a number and a date, if I do say so myself. ## Jason Furman Wants a Different Form of Health Insurance His hope is that this will finesse many of the problems with HSAs. I don't know. I'm not a health economist. I just play one on radio sometimes: Washington Wire - WSJ.com : A New Prescription to Curb Health-Care Spending: One Democrat is suggesting some tough medicine: force people to pay more of the bill, and spending will go down. Of course, this is not a Democrat who is running for office. It's a Democrat who is working for a think tank. Still, the idea may be intriguing to those looking to slow rapid escalation of health spending. Jason Furman, a one-time economic adviser to President Clinton and Sen. John Kerry, is proposing a radical solution that might have trouble finding backers outside, say, a seminar at the Brookings Institution, where it's being unveiled this morning. Furman, now director of the Hamilton Project, a think tank organized to come up with ideas for centrist Democrats, suggests that the U.S. could reduce health-care spending big time if people shared a larger slice of the cost of care. After all, when consumers know how much something costs, and when they have to pick up a hefty chunk of the bill, they are more careful about what sort of tests and procedures get ordered up on their behalf. This is the philosophy behind Health Savings Accounts, the health plan conservatives love and liberals love to hate. With Health Savings Accounts, participants have a high deductible, meaning they pay a large share of their health costs but are covered in case something really really expensive happens, like an extended hospital stay. The problem with Health Savings Accounts, Furman argues, is that they are risky for low- and moderate-income families. As an alternative, he proposes income-related cost sharing; a typical family would pay half of their health costs until the family's out-of-pocket costs reached 7.5% of the family's annual income. The more money you earn, the more you have to spend on your own health care before full coverage kicks in. Citing an analysis done by the RAND Health Insurance Experiment, Furman estimates this could reduce total health spending by 13% to 30% without hurting health outcomes. "Every family would have an affordable limit on their out-of-pocket payments," he writes in a paper. Implementing this idea would be a challenge.... In an interview, he added that while no one is rushing to propose this idea today, it could gain currency as part of a larger universal coverage debate as policy makers wrestle with how to control costs. "This type of idea can come in handy," he said. "It could be part of a political compromise. But I recognize it's not something we're going to do tomorrow." ## More Journamalism From the Washington Post! Why oh why can't we have a better press corps? Yes, it's Fred Hiatt vs. Fred Hiatt: Two weeks ago, Hiatt wrote: Glenn Greenwald - Salon: Mr. Gonzales finds himself in this mess because he and others in his shop appear to have tried to cover up something that, as far as we yet know, didn't need covering. U.S. attorneys serve at the pleasure of the president -- with the advice and consent of the Senate. The president was entitled to replace any he chose, as long as he wasn't intending to short-circuit ongoing investigations... Today Hiatt writes: Glenn Greenwald - Salon: THE DISPUTE between Democratic lawmakers and the Bush administration over access to documents and interviews with officials about the firing of eight U.S. attorneys seems to be escalating, not resolving. That's unfortunate, because it's become clear that the administration must make more information available than has been forthcoming. Perhaps the clearest case for that -- and the most troubling evidence of improper political motivations -- involves New Mexico prosecutor David C. Iglesias... What do we know now that we didn't know on March 26? Nothing. Why doesn't Hiatt today mention his March 26 editorial? No guts. No guts at all. Without major personnel changes, I give the Washington Post five years. ## Gwen Ifill 276. Don Imus 0 She writes: Trash Talk Radio - New York Times: LET’S say a word about the girls. The young women with the musical names. Kia and Epiphanny and Matee and Essence. Katie and Dee Dee and Rashidat and Myia and Brittany and Heather. The Scarlet Knights of Rutgers University had an improbable season, dropping four of their first seven games, yet ending up in the N.C.A.A. women’s basketball championship game. None of them were seniors. Five were freshmen. In the end, they were stopped only by Tennessee’s Lady Vols, who clinched their seventh national championship by ending Rutgers’ Cinderella run last week, 59-46. That’s the kind of story we love, right? A bunch of teenagers from Newark, Cincinnati, Brooklyn and, yes, Ogden, Utah, defying expectations. It’s what explodes so many March Madness office pools. But not, apparently, for the girls. For all their grit, hard work and courage, the Rutgers girls got branded “nappy-headed ho’s” — a shockingly concise sexual and racial insult, tossed out in a volley of male camaraderie by a group of amused, middle-aged white men. The “joke” — as delivered and later recanted — by the radio and television personality Don Imus failed one big test: it was not funny. The serial apologies of Mr. Imus, who was suspended yesterday by both NBC News and CBS Radio for his remarks, have failed another test. The sincerity seems forced and suspect because he’s done some version of this several times before. I know, because he apparently did it to me. I was covering the White House for this newspaper in 1993, when Mr. Imus’s producer began calling to invite me on his radio program. I didn’t return his calls. I had my hands plenty full covering Bill Clinton. Soon enough, the phone calls stopped. Then quizzical colleagues began asking me why Don Imus seemed to have a problem with me. I had no idea what they were talking about because I never listened to the program. It was not until five years later, when Mr. Imus and I were both working under the NBC News umbrella — his show was being simulcast on MSNBC; I was a Capitol Hill correspondent for the network — that I discovered why people were asking those questions. It took Lars-Erik Nelson, a columnist for The New York Daily News, to finally explain what no one else had wanted to repeat. “Isn’t The Times wonderful,” Mr. Nelson quoted Mr. Imus as saying on the radio. “It lets the cleaning lady cover the White House.” I was taken aback but not outraged. I’d certainly been called worse and indeed jumped at the chance to use the old insult to explain to my NBC bosses why I did not want to appear on the Imus show. I haven’t talked about this much. I’m a big girl. I have a platform. I have a voice. I’ve been working in journalism long enough that there is little danger that a radio D.J.’s juvenile slap will define or scar me. Yesterday, he began telling people he never actually called me a cleaning lady. Whatever. This is not about me. It is about the Rutgers Scarlet Knights. That game had to be the biggest moment of their lives, and the outcome the biggest disappointment. They are not old enough, or established enough, to have built up the sort of carapace many women I know — black women in particular — develop to guard themselves against casual insult. Why do my journalistic colleagues appear on Mr. Imus’s program? That’s for them to defend, and others to argue about. I certainly don’t know any black journalists who will. To his credit, Mr. Imus told the Rev. Al Sharpton yesterday he realizes that, this time, he went way too far. Yes, he did. Every time a young black girl shyly approaches me for an autograph or writes or calls or stops me on the street to ask how she can become a journalist, I feel an enormous responsibility. It’s more than simply being a role model. I know I have to be a voice for them as well. So here’s what this voice has to say for people who cannot grasp the notion of picking on people their own size: This country will only flourish once we consistently learn to applaud and encourage the young people who have to work harder just to achieve balance on the unequal playing field. Let’s see if we can manage to build them up and reward them, rather than opting for the cheapest, easiest, most despicable shots. Karen Tumulty: Imus, Again - Swampland - TIME: A number of commenters wonder whether Imus actually called Ifill a "cleaning lady" when she was covering the White House for the New York Times. Imus' own recollection on the Today Show this morning was: That happened back during the Reagan Administration. First of all, as Ifill herself notes, she covered the White House during the Clinton Administration. Second, how does that make it okay? Howard Fineman says it used to be OK to call women's college basketball teams "nappy headed hos," but isn't any more: Just before I came on the show, I was coming upstairs and my cell phone rang, and it was some listener who called me out of the blue. I'd never heard of the guy before. I'd never heard his name. He called me and he said, "Are you going to go on the show and finally confront this Imus guy? Are you going to quit enabling him?" And, you know, I thought about that, and I said to the guy, "You know, I'll puzzle that through on the radio."... We all make mistakes. This was a big one. And I thought that the way you handled it just now -- and I'm not blowing smoke here -- I believe it, you know, was very heartfelt. And I know you well enough to know that that's the case and you're going to do everything you can to set it right. You know, I don't know what'll happen. I think -- you know, it's a different time, Imus. You know, it's different than it was even a few years ago, politically. I mean, we may, you know -- and the environment, politically, has changed. And some of the stuff that you used to do, you probably can't do anymore.... You just can't. Because the times have changed. I mean, just looking specifically at the African-American situation. I mean, hello, Barack Obama's got twice the number of contributors as anybody else in the race.... I mean, you know, things have changed. And the kind of -- some of the kind of humor that you used to do you can't do anymore. And that's just the way it is... ## Kai Bird Thinks That Alger Hiss Wasn't the "Ales" Mentioned in VENONA It's the wrong headline. The evidence--if correctly interpreted--points to somebody else rather than Alger Hiss being "Ales": Author suggests Hiss wasn't a spy: [N]ew evidence suggests another U.S. diplomat, not Alger Hiss, was the Soviet agent who fed U.S. secrets to Moscow. The claim was presented Thursday at a daylong symposium, "Alger Hiss & History," at New York University.... Kai Bird said there was new evidence to suggest that... Wilder Foote... [was] feeding secrets to the Soviet military intelligence agency GRU under the code name Ales. Bird said he and co-researcher Svetlana A. Chervonnaya had identified nine possible suspects among U.S. State Department officials present at the U.S.-Soviet Yalta conference in 1945. A process of elimination based on their subsequent travels to Moscow and Mexico City excluded eight of them, including Hiss, he said. "It left only one man standing: Wilder Foote," Bird said. Foote, a member of a well-known Boston family, died in 1974 after a career as a diplomat and owner of a string of newspapers. During World War II he was involved with U.S. lend-lease operations supplying the Soviets.... The key...was that Ales' contact at the Soviet embassy in Washington would have known that Hiss... had returned from Mexico City, whereas Ales was known to have remained there.... Bird said that more research would be required to prove that Foote was Ales but that "he fits the itinerary in every way, and Hiss simply does not."... Also Thursday, Timothy Hobson, an 80-year-old retired surgeon who was Hiss' stepson and grew up in the family home in Washington, D.C., said Whittaker Chambers... had lied about his personal relationship with Hiss and had never visited the Hiss home as he claimed. Hobson said that during the time Chambers claimed to have visited the home, he was recuperating from a broken leg and met every person who came calling.... "It is my conviction that he was in love with Alger Hiss, that he was rejected by Alger Hiss and he took that rejection in a vindictive way," Hobson said... My view: Would Richard Nixon and company have forged evidence against Alger Hiss if they had had the opportunity? Yes, at the drop of a hat. Did they have the opportunity? Probably not. Was Alger Hiss at some time a spy for the Soviet Union? Probably. Is there a reasonable doubt? I have doubts, and I am not sure that my doubts are unreasonable. ## Ross Douthat Claims That the Press Didn't Pull Its Punches on George W. Buh The intelligent (if somewhat naive) Ross Douthat writes: The American Scene: Judy Miller and Michael Gordon's WMD journalism is what everyone remembers... but... the broader range of coverage that the Times offered in the run-up to the [Iraq] war... [gave] the impression that the paper's reporters... thought the invasion was a pretty bad idea. That was certainly my impression at the time.... And once the invasion came and went - and after a brief flurry of heady, pro-Bush coverage when the mission seemed to have been easily accomplished - I hardly think that either the Times or the Post can be accused of underplaying the incompetence of the occupation that followed. Now there's a difference, it's true, between the coverage of Iraq and the coverage of Bush himself, and maybe there's an argument to be made that even where the national press acquitted itself honorably in its treatment of discrete foreign-policy issues, it failed to adequately expose the incompetence at work in the highest reaches of this Administration until it was far too late. But here again, I think the picture is more complicated than DeLong suggests. Was it really only in "the last year or so" that the D.C. press corps began writing major negative stories about Bush's management style? Then what was the Times, for instance, doing running Ron Suskind's famous "faith-based Presidency" piece back in October of '04? Obviously, this is just a single example, and you'd have to spend a month on Lexis to get a more rigorous sense of whether DeLong's impression, or mine, is closer to the truth. But I think DeLong, like many on the left, is letting the sins of Judy Miller - and the fact that there are enough bad journalists in the world to provide constant fodder for his oh why oh why drumbeat - stand in for the conduct of the entire press corps since 2001. PS - For arguments on both sides of this issue, the NYRB exchange between Robert Kaiser and Michael Massing is worth a look. Let me cite two counterexamples. The first is Rajiv Chandrasekhar's Imperial Life in the Emerald City: Inside Iraq's Green Zone to demonstrate that yes, the press did underplay the incompetence of the occupation. It was published on September 19, 2006. Chandrasekhar covered Iraq for the Post in 2003-2004. The best stories in Imperial Life in the Emerald City did not repeat not repeat NOT make it into the stories the Post published by Chandrasekhar in 2003-2004. Back in 2003-2004 you had to go to webloggers like Joshua Micah Marshall, Laura Rozen, and Colin Soloway writing in small magazines like the Washington Monthly http://www.washingtonmonthly.com/features/2003/0312.whoswho.html to get the story. The second counterexample is Tom Ricks, also of the Post, to demonstrate that the press pulled its punches in the runup to the war. Tom Ricks now says that he believed in March 2003 that Iraq had no ongoing WMD program--"I thought that at most they would find some old mustard gas buried out in the '91 war that somebody had forgotten about"--yet there he was writing about how: http://delong.typepad.com/sdj/2007/01/why_oh_why_cant_1.html: One major early mission of U.S. forces would be to locate and secure Iraq's suspected arsenal of chemical and biological weapons, [General Richard] Myers said. The U.S. government expects to learn far more about those weapons programs once its forces invade Iraq. At that point, he said, the "giant shell game" played by the Iraqi government to conceal its weapons "would come to a halt," and instead "people would come forward and say, 'Here's where this is, here's where that is.'" You cannot--I cannot, at least--place Tom Ricks's book Fiasco at my right hand and his earlier Post coverage of Iraq on my left without getting sick http://delong.typepad.com/sdj/2006/08/thomas_e_ricks_.html. As for Ron Suskind, I agree with Ross: if the press corps were composed of Ron Suskinds, it would be a much better world. But the press isn't. And for a long time they would dine out on stories of Bush fecklessness and administration incompetence without printing them. And their refusal to print what they knew then and what we all know now mattered. After all, as Ross Douthat matter-of-factly wrote last month: It’s His Party: [W]hat has made the last six years [since January 2001] so polarizing isn’t the president’s ideology but the president himself—his tongue-tied speeches and lack of interest in policy detail, his mix of incompetence and abrasive self-assurance, his cronyism and disdain for compromise... The readers of the Post and the Times should have been informed back in 2001 and 2002 of what Ross Douthat takes for granted now. They weren't. ## At Least They No Longer Hate Us for Our Freedom! Andrew Sullivan writes: The Daily Dish: Enemy of the People: Meet Professor Walter F. Murphy, emeritus of Princeton University. He's a former Marine, with five years of active service and 19 years in the reserve, and a legal critic of Roe vs Wade and supporter of the Alito confirmation. He's also on the Terrorist No-Fly List: I presented my credentials from the Marine Corps to a very polite clerk for American Airlines. One of the two people to whom I talked asked a question and offered a frightening comment: "Have you been in any peace marches? We ban a lot of people from flying because of that." I explained that I had not so marched but had, in September, 2006, given a lecture at Princeton, televised and put on the Web, highly critical of George Bush for his many violations of the Constitution. "That'll do it," the man said." Just a heads up about what these people are up to. ## More Journamalism from the Washington Post... Matthew Yglesias finds Bill Brubaker of the Washington Post committing an exceptional act of journamalism: Matthew Yglesias / proudly eponymous since 2002: Jeopardize This: WaPo: President Bush used his Easter weekend radio address to suggest that while Americans are "blessed" to have so many brave, volunteer military service members, congressional Democrats are jeopardizing their safety by refusing to sign his$100 billion war funding bill.

Matt comments: "Obviously, Democrats aren't refusing to sign anything. Democrats passed a bill that will fund the troops. Bush is threatening to veto this bill, thus denying the troops money.... So who's endangering whose safety?"

Brubaker's "congressional Democrats... refusing to sign" is designed to cloud the issue, and get readers confused.

UPDATE: The Post has now pulled back. A comment on Matt Yglesias's website:

They changed the first paragraph but left the "sign" in further into the story. Quote:

A clear majority of Americans oppose the war, which has cost more than $300 billion so far. But Bush said the Democrats' delay in signing his bill, which does not have a troop pullout deadline attached, will soon deprive U.S. military personnel of the equipment and training they need to do their jobs. Posted by: Mike in Houston on April 7, 2007 05:38 PM... As of 6:11 EDT, that graf now reads: A clear majority of Americans oppose the war, which has cost more than$300 billion so far. But Bush said the Democrats' delay in passing a bill with no troop pullout deadline will soon deprive U.S. military personnel of the equipment and training they need to do their jobs.

There's no note on the story documenting either correction.

Posted by: Jamie McCarthy on April 7, 2007 06:14 PM...

## Michael Novak of AEI vs. Saint Ambrose of Milan Cage Match on the Meaning of Easter

Michael Novak of the American Enterprise Institute on the meaning of Easter:

The Corner on National Review Online: In the longest and most beautiful of the liturgies of the Catholic Church, the Easter Vigil in the early hours of darkness last night brought an estimated 200,000 converts into communion with the Catholic Church.... If one assumes that an average of about ten persons entered the church in each of this nation's 19,000 parishes, the total number just in this country alone is 190,000.

It is a blessed night. The liturgy at St Mathew's was one of the most beautiful I have ever participated in.... Kierkegaard once noted, of course, that just when the music is celestial, the sermon moving (and not too long), and the dignity of the proceedings is picture-perfect -- that is exactly when paganism begins, and true faith flies away. It is not the human performance, in other words, that ought to hold our attention, but the real abandonment and cruel suffering of Christ on the Cross, in a demonstration of how much the Lord loves us, despite our faults and our miseries and our own emptiness...

Saint Ambrose certainly doesn't think that on Easter Sunday "our attention" ought to be held by "the real abandonment and cruel suffering of Christ on the Cross..." Saint Ambrose's attention is elsewhere.

Saint Ambrose of Milan:

Dear friends in Christ, on this most holy night, when our Lord Jesus Christ passed from death to life, the Church invites her children throughout the world to come together in vigil and prayer.

This is the Passover of the Lord: if we honor the memory of his death and resurrection by hearing his word and celebrating his mysteries, then we may be confident that we shall share his victory over death and live with him for ever in God.

Father, we share in the light of your glory through your Son, the light of the world. Make this new fire holy, and inflame us with new hope. Purify our minds by this Easter celebration and bring us one day to the feast of eternal light. We ask this through Christ our Lord. Amen.

Let us pray:

Christ yesterday and today.
The beginning and the end,
Alpha, and Omega;
All time belongs to him
And all the ages:
To him be glory and power
Through every age for ever. Amen

By his holy and glorious wounds may Christ our Lord guard us and keep us. Amen.

May the light of Christ, rising in glory, dispel the darkness of our hearts and minds.

Christ___ our____ light_____. Thanks__ be to God________

Christ___ our____ light_____. Thanks__ be to God________

Christ___ our____ light_____. Thanks__ be to God________

Rejoice, heavenly powers! Sing, choirs of angels! Exult, all creation around God’s throne! Jesus Christ, our King, is risen! Sound the trumpet of salvation!

Rejoice, O earth, in shining splendor, radiant in the brightness of your King! Christ has conquered! Glory fills you! Darkness vanishes for ever!

Rejoice, O Mother Church! Exult in glory! The risen Savior shines upon you! Let this place resound with joy, echoing the mighty song of all God’s people!...

## Could We Have Even a Slightly Smarter President, Please?

Hydrogen + Spark = Boom!

Plug it in, fire it up, Mr. President: The Detroit News: Credit Ford Motor Co. CEO Alan Mulally with saving the leader of the free world from self-immolation.

Mulally told journalists at the New York auto show that he intervened to prevent President Bush from plugging an electrical cord into the hydrogen tank of Ford's hydrogen-electric plug-in hybrid at the White House last week. Ford wanted to give the Commander-in-Chief an actual demonstration of the innovative vehicle, so the automaker arranged for an electrical outlet to be installed on the South Lawn and ran a charging cord to the hybrid. However, as Mulally followed Bush out to the car, he noticed someone had left the cord lying at the rear of the vehicle, near the fuel tank.

"I just thought, 'Oh my goodness!' So, I started walking faster, and the President walked faster and he got to the cord before I did. I violated all the protocols. I touched the President. I grabbed his arm and I moved him up to the front," Mulally said. "I wanted the president to make sure he plugged into the electricity, not into the hydrogen. This is all off the record, right?"

## Journamalism Watch: Michael Gordon, Max Frankel, Fred Hiatt

A while ago, Reihan at http://theamericanscene.com flamed me in the process of sucking up to New York Times reporter Michael Gordon:

The American Scene: Michael Gordon is a terrific, universally respected reporter (outside of Harper's and Democracy NOW!) who deserves at least some small fraction of a benefit of the doubt when it comes to military matters.... A reporter like Gordon is a very skilled professional.... [DeLong's] "why oh why can't we have a better press corps" often translates into, "why oh why can't we have a press corps that reports facts that are broadly in consonance with my policy preferences"?... I take it DeLong believes we should take reports from the Bush Administration and the Pentagon with a grain of salt.... [T]he American public agrees. This idea that the establishment media is obligated to take on a tutelary function... strikes me as faintly... undemocratic.

Prior to the invasion, serious arguments were made against the invasion, and these arguments were widely reported. In point of fact, public opinion generally opposed an invasion that would lead to significant American casualties or a sustained American military occupation or both. President Bush's judgment was the problem, not the press...

It is hard to know how to reply to Reihan. Yes, Michael Gordon is a skilled professional, but a skilled professional at what?

• Michael Gordon's "aluminum tubes" article of September 8, 2002 was, as Grenn Greenwald says, "one of the most discredited, journalistically irresponsible, and damaging articles of the last decade" that did a remarkably good job at poisoning the stream of information in the rumnup to the Iraq War. Either Gordon (and his sources) were playing his readers, or his sources were playing Gordon--and Gordon let them by taking no steps to hold them accountable for their misinformation.
• Michael Gordon's claim that Iran was the only source of EFPs in his article of February 10, 2007 was a similar piece of journamalism: here I think it is very clear that Gordon and his sources are playing us.
• Consider Michael Gordon's February 6, 2003 article about Colin Powell's U.N speech, the article that begins: "To convince allied nations that Saddam Hussein is trying to deceive United Nations weapon inspectors, the Bush administration today applied a tried- and-true strategy: it invoked the Powell doctrine. When he was the United States' top military man, Gen. Colin L. Powell was best known for his doctrine of using overwhelming force. As the United States top diplomat, Secretary of State Powell today sought to overwhelm the critics with evidence, some new, some less so..." and ends "'I think what he did today was to buttress in great detail the basic argument been making form the beginning, that this is the last chance for Saddam to comply, that he has not taken it and that this is something we need to confront,' a senior administration official said. Even the skeptics had to concede that Mr. Powell's presentation had been an important milestone in the debate. Critics may try to challenge the strength of the administration's case and they will no doubt argue that inspectors be given more time. But it will difficult for the skeptics to argue that Washington's case against Iraq is based on groundless suspicions and not intelligence information." In retrospect very embarrassing for Gordon, no?

To put it bluntly: when a story by Michael Gordon appears, I can't tell whether it is accurate, whether Michael Gordon's sources are lying to him (and he is letting them do so by not blowing them when they do so), or whether Michael Gordon is lying to us. Gordon would deserve the benefit of the doubt if I were confident that he was trying his best to inform rather than misinform us. I am not. And Reihan shouldn't give him the benefit of the doubt either.

This is, I think, a small part of a very big issue. Let me briefly note two additional examples--besides the work of Michael Gordon--of what is going very wrong with American journalism.

The first is an editorial written by the Washington Post's editorial director, Fred Hiatt, on March 17, 2007. In the editorial Hiatt makes a very small and limited apology for the Washington Post's coverage and evaluation of the George W. Bush administration. "We raised such issues" as to whether the Bush administration had properly thought its proposed adventure in Iraq through, Hiatt writes, "but with insufficient force." It is there--saying the right thing but not loudly enough--that Hiatt finds fault with himself and his organization.

The second is a comment by the former editor of the New York Times, Max Frankel, about how the Washington ecology of leaks is healthy, because "most reporters do not just lazily regurgitate... leaks." Instead, "they use them as wedges to pry out other secrets" and so oversee the government. They system may be "sloppy and breed confusion," but "tolerating abusive leaks by government [that misinform] is the price that society has to pay for the benefit of receiving essential leaks about government."

Hiatt sees a press corps that was a little too cowardly about overseeing the George W. Bush administration. Frankel sees a press corps where a sloppy and confusing process is nevertheless doing a reasonable job of overseeing the George W. Bush administration. I see a very different picture.

It was the summer of 2000 when I began asking Republicans I know--by and large people who might be natural candidates for short lists for various subcabinet policy positions in a Republican administration--how worried they were that the Republican candidate for president, George W. Bush, was clearly not up to the job: underbriefed and incurious. They were not worried, they told me. One of President Clinton's problems, they said, was that the ceremonial portions of the job bored him--and thus he got himself into big trouble. Look at how George W. Bush had operate at the Texas Rangers, they said. Bush let the managers manage the team and the financial guys run the business, and spent his time making sure the political coalition to support the Texas Rangers in the style to which it wanted to be accustomed remained stable. Bush knows his strengths and weaknesses, they told me. He will focus on being America's Queen Elizabeth II, and will let people like Colin Powell and Paul O'Neill be America's Tony Blair and Gordon Brown.

By the summer of 2001 the pattern was set that would lead British observer Daniel Davies to ask if there was anything that was (a) a Bush administration policy (b) that was moderately important (c) which had not been completely bollixed up.

This was the reality of the George W. Bush administration from the summer of 2001 onward. Yet if you relied on either Fred Hiatt's Washington Post or Max Frankel's New York Times, you would have had a very hard time learning about this reality until the last year or so. Today it is an accepted fact that the kindest thing you can say about the George W. Bush administration is that it is completely incompetent--that is even the party line in the hardest of right-wing Bush-supporting publications, National Review, and by the hardest of right-wing commentators, Robert Novak.

Why wouldn't the American press corps in Washington cover the Bush administration properly for its first five years? I really do not know. I do know that the world cannot afford to rely on America's Washington press corps again: fool me once, shame on you; fool me twice, shame on me. American journalism has fallen down, and is unlikely to be able to get up until it can look honestly enough at itself to figure out what has gone wrong.

## Judith Miller and Michael Gordon

The *New York Times* on its writers Judith Miller and Michael Gordon: >The New York Times > International > Middle East > From the Editors: The Times and Iraq: On Sept. 8, 2002, the lead article of the paper was headlined "U.S. Says Hussein Intensified Quest for A-Bomb Parts." That report concerned the aluminum tubes that the administration advertised insistently as components for the manufacture of nuclear weapons fuel. The claim came not from defectors but from the best American intelligence sources available at the time. Still, it should have been presented more cautiously. There were hints that the usefulness of the tubes in making nuclear fuel was not a sure thing, but the hints were buried deep, 1,700 words into a 3,600-word article. Administration officials were allowed to hold forth at length on why this evidence of Iraq's nuclear intentions demanded that Saddam Hussein be dislodged from power: "The first sign of a `smoking gun,' they argue, may be a mushroom cloud." >Five days later, The Times reporters learned that the tubes were in fact a subject of debate among intelligence agencies. The misgivings appeared deep in an article on Page A13, under a headline that gave no inkling that we were revising our earlier view ("White House Lists Iraq Steps to Build Banned Weapons"). The Times gave voice to skeptics of the tubes on Jan. 9, when the key piece of evidence was challenged by the International Atomic Energy Agency. That challenge was reported on Page A10; it might well have belonged on Page A1.

## The Easter Lesson

At Ezra Klein's, Stephen of The Thinkery presents the Easter message:

Ezra Klein: This Is Why The English Are Better Than Us: So on this Holy Saturday, the penultimate day of the most sacred week in Christianity, if you have the time, go find a copy of Life of Brian and watch it.... The following is my favorite scene from the movie. Feel free to share your own favorite scenes or quotes in comments. Consider it our Holy Saturday devotional.

Monty Python's Life of Brian is the ultimate Easter movie. Second is The Robe.

## Deltoid: Pinata Whacking

Tim Lambert watches Tim Blair, Steven den Beste, and company lose an argument to six year old Ryan Gwin:

Commentator 1: Hello, and welcome to a special Good Friday edition of INTELLECTUAL CAGE MATCH. Today we have a great match up for you. The topic is Global Warming and it's the collective wisdom of Tim Blair's commenters against Ryan Gwin, who is six.

Commentator 2: Ooh, that's not fair.

Commentator 1: I know, but we couldn't find any four year olds who wanted to take them on. But Team Blair has been training hard so we may have a contest here. Here's a hollingshead on their training program:

Hence why I stock up on Tim Ball videos.

C2: Ooh, they might sue Ryan if they lose. I remember back in '04, when ...

C1: You'll have to tell us later because the match is starting. Ryan goes first:

Ryan Gwin is oblivious to everybody around him, hunched over the coffee table in the lounge room. He is toiling away with a pencil and paper, putting the finishing touches to an essay about climate change.

He is six years old.

"I wanted to make a book so we wouldn't use cars so much," he says, deadpan.

"Because cars use fuel and that goes up into the atmosphere and causes global warming."

Ryan's book, titled, How To Save Our World: To Stop Globl Waming, contains sketches of cars and planes, crossed through with red pen. It is both disturbing and inspiring.

On the last page, a blue and white State Transit bus chugs its way through the suburbs. In small letters, Ryan has written: "powrd by nachrl gas".

The bus has become something of a theme -- when his father, Rhys, returns from work, Ryan usually asks anxiously if his bus was a gas-powered model.

C1: Solid start by Ryan, the kid sure knows his chemistry.

C2: Yes, because natural gas is CH4, it has a higher hydrogen/carbon ratio than petroleum or coal and produces more energy per unit mass than those fuels.

C1: That's right -- coal produces almost twice as much CO2 as natural gas for the same amount of energy. Now let's if Team Blair brought their best game:

I admit I have only 2 years of university chemistry, but don't you get just as much CO2 when you burn "nachrl gas" as when you burn anything else? Less smokey crap maybe, but just as much CO2. -- surly

C1: Not a good start, surly forgot to allow for the different amounts of energy produced. Let's see if they can recover:

Why is natural gas supposed to be better than petroleum? -- Steven Den Beste

C1: Good move, now some Blairoid can explain H/C ratios and they'll be back in this match.

C2: Hey! That was Steve Den Beste! Remember this?

C1: Whatever, let's see what they do with this opening ...

Because I own stock in a NG company. -- rbj1

Because it's natural, not processed, doncha know? Says so, right on the label. Just like Ben & Jerry's ice cream. -- The Real JeffS

C1: Ooh, not looking good. They really need someone to get them back on track...

I know you're joking, but I bet there really are people who think like that. That's one of those accidents of language, I suppose - in German, it's Erdgas and Erdöl, and consequently I'm quite sure every half-sane person here realizes they're pretty similar overall. -- PW

I was being sarcastic more than I was joking, PW. I've met people who do believe that. -- The Real JeffS

C1: Completely off track, they're just chasing this "natural" thing.

C2: This has always been a problem for Team Blair, they are easily distracted, especially by shiny things.

Thanks to the SMH's fawning review, the kid will be disadvantaged for life, having never been told that he actually sucks. -- Dan Lewis

C1: The ref called that a foul.

C2: Looks like Team Blair is living up to its reputation for dirty play.

The French (naturally) part of the Netherlands is charging something like 20 euros if you use your barbie. They monitor barbie action from helicopters in the air. Why don't we just legislate (or judicate) the value of pi at 3.014? DUMB DUMB DUMB -- rabidfox

C1: Where the hell did that come from?

C2: An April's Fools joke. Team Blair is flailing desperately.

Ever wondered why there seems to be so much so-called bullying at school these days? Well I reckon its because of the plague levels of little arsehole apprentice hippies like Ryan and Jake. I bet half the reason they are worried about water and garbage is because they spend most of their lunchtimes with their heads shoved down toilets or garbage bins. -- hazza

C1: The ref is showing him a yellow card for that.

What's the betting Ryan and Jake still wet the bed, and drink their own bathwater? -- Habib

C1: And now a red card. They're losing all discipline.

C2: This is turning into a blowout as bad as that match when Team Blair lost to a door which only opened if you pulled on it instead of pushing.

Coal and Natural Gas (Methane) have almost the same energy content per mole. They both have one carbon per mole. So their CO2 output/energy ratio should be almost identical. Therefore from a CO2 output point of view, they are basically equivalent. -- Nicholas

C2: For the love of god! Stop the contest! Stop the contest!

Natural gas may burn cleaner than other fossil fuels (those unnatural fuels!) but there are indeed plenty of carbon atoms them thar molecules. -- Hazy Dave

C1: Finally the ref steps in and stops it.

C2: Team Blair's losing streak now extends to 43 matches.

C1: This has been ... INTELLECTUAL CAGE MATCH.

## A Very Good Conversation on Supply-Side Economics

Mark Thoma quotes large chunks of Bruce Bartlett's views on supply-side economics:

Economist's View: Bruce Bartlett: How Supply-Side Economics Trickled Down: Bruce Bartlett says we're all supply-siders now... I don't fully agree:

How Supply-Side Economics Trickled Down, by Bruce Bartlett: As one who was present at the creation of “supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy.

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.

The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate.

But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue.... President Bush.... Senator John McCain.... Steve Forbes... Rudolph Giuliani....

This... threatens to undermine the enormous gains that have been made in economic theory and policy over the last 30 years. Perhaps the best way of preventing that from happening is to kill the phrase “supply-side economics” and give it a decent burial.

It’s important to remember that at the time supply-side economics came into being, Keynesian economics dominated macroeconomic thinking and economic policy.... Among the beliefs held by the Keynesians of that era were these: budget deficits stimulate economic growth; the means by which the government raises revenue is essentially irrelevant economically... personal savings is bad for economic growth; monetary policy is impotent.... These beliefs... lay at the root of stagflation, that awful combination of high inflation and slow growth that bedeviled policy makers in the 1970s. Based on insights derived from the Nobel-winning economists Robert Mundell, Milton Friedman, James Buchanan and Friedrich Hayek, the supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth.

As the staff economist for Representative Jack Kemp, a Republican of New York, I helped devise the tax plan he co-sponsored with Senator William Roth, a Delaware Republican. Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964.... We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every$1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models.... Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition.... Moreover, we were adamant that only permanent cuts in marginal tax rates would stimulate the economy. We thought that temporary tax cuts, tax rebates, tax credits and such were economically worthless, and we strongly opposed them.

Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics — that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon. Consequently, there is no longer any meaningful difference between supply-side economics and mainstream economics.... [S]upply-side economics has done its job, just as Keynesian economics did in the 1930s. Those who campaign as its champions are fighting a fight long won — and it is time for supply-side rhetoric to go, with its essential truths embodied in mainstream economics and its perversions discarded for good.

As noted above, I don't fully agree.... [T]here are two types of policies to consider. The first is the use of monetary and fiscal policy to stabilize the economy.... The second type of policy is growth policy.... The goal here is to increase the growth rate of output.... The question... is how much additional growth comes from a cut in taxes.... We'd disagree over the magnitude however. While some types of tax cuts can affect growth, the effect is nowhere near large enough to generate a 33% tax revenue recovery rate... and, in any case, all the low-hanging fruit has already been plucked....

Let me turn next to Keynesians. My focus is on the New Keynesian (NK) school.... New Keynesians attempt to stabilize actual output around the natural rate as shown above. Why does NK policy tend to focus on demand shocks rather than supply shocks? The answer is that although it would be ideal if we could use supply-side polices to smooth short-run fluctuations in output arising from supply shocks, the reality is that we cannot do this. As Bartlett notes, supply-side polices are very blunt, slow-acting policies.... Since supply cannot be managed in the short-run, that leaves demand management policies, i.e. monetary and fiscal policy. As we learned in the 1970s, demand side tools are not very effective instruments for offsetting supply-side shocks - trying to use demand side policy to offset supply shocks helped to generate the stagflation we saw at the time. We've learned since then, but practically we are still somewhat powerless to offset supply side shocks in the short-run - all we can do is manage demand to match changes in supply....

So, here's where we agree. Both NK and RBC advocates [today] see the long-run similarly. Both schools agree that demand side polices have little effect on long-run growth. Both agree that incentives matter, and that we should, of course, strive to enhance efficiency and long-run growth whenever possible. There is a difference in the two schools as to the strength of those incentives, but if that is all that is meant by supply-side polices, then fine, no problem, we're in agreement.

But there is a big disagreement over the short-run. RBC adherents take a hands-off, free market approach.... NK adherents believe government should take an active role in stabilizing the economy and that is something that, contrary to what is implied above, has not changed since the 1960s and 1970s....

And Bruce Bartlett replies:

Bruce Bartlett: Interesting discussion. However, I think Mark misses the historical context of my analysis. In the 1970s, we were unaware of real business cycle theory or New Keynesian theory. We were confronting Old Keynesian theory. What Mark has basically done is take a current theoretical debate and superimposed it on the 1970s. That's fine if one's goal is to understand how the economy really worked in the 1970s or what the actual effects of policies taken at that time were. But as a matter of history, it is misleading. We didn't know any of this stuff because it didn't exist then. We were dealing with a far different situation in terms of what people knew about the economy (or thought they knew) and that's one reason why I believe that terms like "supply-side economics" have outlived their usefulness. The context in which the term had meaning no longer exists and therefore it has become a barrier to communication rather than a facilitator...

Others comment:

Blissex says: I think that Bruce Bartlett here is being a bit of a revisionist, but his conclusions are sounder than that. In the 50s-60s the new-Keynesian betrayal of Keynes was that output problems were essentially always an issue of insufficient demand, a position of extraordinary faith in the markets. The idea was that markets would provide plenty if only insufficient demand traps were avoided. In hindsight that was ridiculous, and the idea that excessive levels of distorting taxation were stifling the operations of the markets, not just insufficient demand, was sound, and that it is now widely accepted is good, as the markets cannot simply adjust to any conditions except insufficient demand. I think however that Bruce Bartlett's memories are gravely wrong in two ways: He compares the ''realistic'' supply siders of the 1970s with the delirious ones of today, but in the heat of political discussion the claims of many influential 1970s supply siders were as extreme as today's, including Reagan's. The great inflation of the 1970s was not cured by supply-side economics, but simply by a change of political objectives. Inflation was as always solely a political phenomenon, the consequence of seignorage. In the 1960s policy was butter-and-guns, and to increase social stability in difficult times with a policy of easy, easy money, favouring debtors and holders of real assets with very low interest rates. In the 1970s politics reversed, as the Vietnam war was wound down, and Volcker implemented a ferocious policy of high interest rates, favouring creditors and holders of financial assets. Very, very little to do with supply side economics...

Bruce Bartlett says: People need to keep in mind that this was not some purely theoretical debate taking place at some academic conference or in the pages of obscure journals. The people I was working with were members of Congress and their staffs and we were battling specific policies by putting forward specific policies of our own. Many people on both sides were unaware of the theoretical underpinnings because they were unstated, implicit. Part of the supply-side strategy was to make those assumptions explicit. I mention some of them in my article...

real person from the real world says: I think one of the points Barlett makes is that an idea was hijacked. A simplistic slogan that was based on an economic concept that you may or may not agree about, was used over and over again, to justify the implementation of some very self serving policies by past Republican administrations, and those who had the bucks used it as their banner. What's been done is done, now is the time to fix the mess that has been created, except the wrong people (corporate America, and the supper wealthy) now have all the power to stymie any pragmatic reform that rocks their nice little boats...

Paul Krugman says: I was a grad student at MIT - the great Keynesian stronghold - in the 1970s, and this bears no resemblance to what was being taught. In fact, I still have my copy of Dornbusch-Fischer, Macroeconomics, the 1978 edition - and it doesn't make any of those assertions. I'm particularly amazed by the "monetary policy is impotent" bit: no mainstream Keynesian in America believed that any time after, say, 1955. Dornbusch-Fischer is mainly about monetary policy, and how important it is. Let me suggest that good economic doctrines don't have to be sold by misrepresenting what other doctrines say...

Bruce Bartlett says: If Paul Krugman is right, then where did all the policy mistakes of the 1970s come from? Why did the Fed act as if the money supply had no linkage to inflation until Volcker changed gears in 1979? Why did the Congressional Budget Office routinely report that a tax rebate, a permanent tax rate reduction, and an increase in government purchases would have exactly the same macroeconomic effect because their only impact was on aggregate spending? I have some of those old reports in my library and can dig them out if necessary.

Of course, there were those in academia who knew better. Maybe Paul was one of them. But they weren't in charge of the Fed or the CBO. Also, I think a lot of economists who lived through the the 1970s and know better today have simply forgotten how screwy some of the economic policies of that time were and how many reputable economists supported them. Go back and read Leonard Silk's columns in the New York Times to see what mainstream economics was all about in those days. Don't go back now and cherry pick the isolated case where someone had it right. We had to do what we were doing in real time without the luxury of long and careful study of all the alternatives. It was a crisis atmosphere and we did the best we could with what we had to work with....

Blissex says: If Paul Krugman is right, then where did all the policy mistakes of the 1970s come from? Why did the Fed act as if the money supply had no linkage to inflation until Volcker changed gears in 1979? They were not mistakes, they were deliberate policies designed to pursue political important goals. Keeping the voters happy during difficult times was deemed more important than price stability.... I think a lot of economists who lived through the the 1970s and know better today have simply forgotten how screwy some of the economic policies of that time were and how many reputable economists supported them. Well, a large part of that was excessive faith in the ability of markets and entrepreneurs to adapt to any conditions. Instead the one great legacy of ''supply side'' was to point out that government policy matters as to creating a suitable climate for business and growth, as the markets and entrepreneurs cannot be given for granted, they can't do their job under all conditions...

Bruce Bartlett: Inflation was indeed the central problem. But policymakers were repeatedly told that to bring it down to tolerable levels would require an economic contraction as long and as deep as the Great Depression. It was hard to argue that the benefits of ending inflation were greater than the negative effects of another Great Depression. So policymakers just kept monetary policy on automatic pilot until the spectre of hyperinflation emerged. At that point, every serious person knew that something had to be done. Where I credit supply-side economics is in making the transition from a high inflation environment to a low inflation environment as quick and painless as possible. Of course, the 1981-82 recession was painful, but it was less painful than the 1974-75 recession, which did little to even moderate inflation, and a lot less painful than the Great Depression. If we hadn't cut tax rates in 1981 and taken the other supply-side measures Reagan took, the transition would have been vastly longer and more painful, in my opinion...

knzn: By most measures, the 1981-82 recession was more painful than the 1974-75 recession, and in fact the latter did moderate inflation, as you can see if you look at the inflation series in the 1975-77 period. The problem was that the Fed pushed the recovery too hard. What Volcker was willing to do, specifically, was to keep the 1981-82 recession going for as long as necessary to get inflation down to an even lower level and then to be very cautious about pushing the recovery. I strongly disagree with the opinion that cutting tax rates prevented the transition from being more painful. Volcker’s credibility helped, but the tax cuts meant that interest rates had to be higher for longer and that traded goods industries suffered long-term damage due to a strong dollar.... Also, I don’t know who was saying that brining inflation down “would require an economic contraction as long and as deep as the Great Depression.” It’s true that conventional Keynesian estimates of the sacrifice ratio were higher than what it turned out to be, but not so dramatically higher. I think you would have a very hard time finding any actual economist of the time who came up with a quantitative estimate of the required contraction that came anywhere near the severity of the Great Depression.

Blissex says: If we hadn't cut tax rates in 1981 and taken the other supply-side measures Reagan took, the transition would have been vastly longer and more painful, in my opinion. As to that I quite agree -- in part because it is sensible, standard Keynes-style fiscal policy ;-), in part because the level of taxation had reached ridiculous levels.

Note however that as remarked long ago, "ridiculous" above does not necessarily mean "damaging", as top tax rates were very high in the fifties too, a golden era. The case against excessively high taxes is mostly moral (confiscation), rather than economic, while the case against excessively low ones is economic (a business and growth friendly infrastructure is expensive) as well as moral.

Howard, for working men in the fifties, it was a much better economy then than it is today. Now I'm not talking about civil rights and the like. Well, that was in part because of politics. Working white men were the pillars of USA conservativism (and they still are, inasmuch they are asset and gun owners), and the inflation of the late 60s and the 70s was in part designed to buy them off; the buying off was in part meant to conserve their support for the war, in part to keep them happy even if blacks and women were given civil rights, in part to detach their interests from those of students and other ''subversive'' elements (the latter especially in Europe)...

Bruce Bartlett says: In an article in the American Economic Review (May 1978), Arthur Okun said that to reduce the basic inflation rate by 0.3% would require raising the basic unemployment rate by one percentage point for one year. With inflation well into double digits by 1980, one can see that it would indeed require unemployment on the scale of the Great Depression to bring inflation down to a tolerable level...

Paul Krugman says: A late entry - I'm on the road. Anyway, Bruce Bartlett's contention that the inflation of the 70s happened because people didn't think money mattered is just bizarre. There was a way too expansionary monetary policy in 1972, not because people didn't think it mattered, but because they did: it's widely believed that Arthur Burns pumped up the economy in an attempt to help Nixon win the election. Nixon's people worried about the effects of monetary policy all the time!

We might also want to mention two horrific oil shocks.

Again, what Bruce is describing is a caricature of an vulgar ultra-Keynesian, circa 1947. People like that never dominated Keynesian thought in the United States, and were pretty much nonexistent by the time supply-side economics came into existence. And no, it's not a matter of policy entrepreneurs versus academics: look at the people who were actually advising Gerald Ford or Jimmy Carter on economic policy, and they were nothing like the caricature Bruce describes.

It's sad, really: to make supply-side economics look respectable, it's apparently necessary to pretend that everyone else was an idiot....

Bruce Bartlett says: I think Paul's memory is just wrong. Has he forgotten how intense the arguments were about monetarism? A lot of people thought Milton Friedman's monetary ideas were crazy. And while it's true that Arthur Burns did a horrible job as Fed chairman, he inherited a situation in which inflation was already a serious problem. Jimmy Carter clearly had no clue about it and appointed G. William Miller as Fed chairman who gave us double digit inflation. I remember him testifying before the JEC that inflation was caused by failure of the anchovy harvest. I'm not making this up. They are used in fertilizer, which raised the cost of farming, which raised the cost of food and so on. Maybe up at MIT, people had it all figured out. But down in Washington, where I was, a lot of important people were seriously clueless...

## Newt Gingrich Bankrupts Vermont College Republicans

From the Burlington Free Press:

Burlington Free Press.com | Top Stories: UVM's Republican club folds: By Tim Johnson: There was a certain irony in the recent demise of the College Republicans at the University of Vermont. What ultimately proved to be the club's undoing was an appearance on campus by a national Republican heavyweight: Newt Gingrich.

When the club invited Gingrich to speak at Ira Allen Chapel on Oct. 6, 2005, he settled for an undisclosed honorarium that was apparently higher than the College Republicans could afford. They took out a $7,000 loan from the Student Government Association to help pay the bill, but more than a year later, when the loan still wasn't fully repaid after several ultimatums, the Student Government Association decertified them. In other words, the College Republicans were removed last month from UVM's long list of "recognized," or subsidized, student clubs. That left the College Democrats and the International Socialist Organization as two of the more prominent political organizations for students, and it left political conservatives with virtually no formal organizational outlet on campus.... One point everyone agrees on is that there was nothing ideological about shutting down the Republican club. It was strictly a money thing. The fee for Gingrich, a former speaker of the U.S. House of Representatives, was never revealed -- the College Republicans said from the beginning that his contract was confidential, and Gingrich, through his press spokesman, will not say how much it was -- but an educated guess is possible. In 2005-06, the College Republicans budgeted$25,000 for speakers, according to Maggie Doran, who works in the Student Government Association's front office. Gingrich, who rose to national prominence in Congress during the 1990s, was the only speaker the club brought in during that academic year. The UVM President's Office contributed $2,000 toward Gingrich's fee, as did the Student Life Office. The sum of all those funds, plus the$7,000 from the loan, comes to $38,000... ## Ezra Klein: Health Insurance Works Ezra Klein writes: Ezra Klein: Health Insurance Works, Trusting Its Detractors Doesn't: Some of you asked me to take a look at The LA Times op-ed by Michael Cannon and Michael Tanner on why universal health care ain't all it's cracked up to be. I should preface this by saying that I like Michael Cannon.... [I]n trying to give him the benefit of the doubt here, I will say only that this article is violently, even surprisingly, misleading.... Cannon and Tanner write, "[y]ou may think it is self-evident that the uninsured may forgo preventive care or receive a lower quality of care. And yet, in reviewing all the academic literature on the subject, Helen Levy of the University of Michigan's Economic Research Initiative on the Uninsured, and David Meltzer of the University of Chicago, were unable to establish a 'causal relationship' between health insurance and better health. Believe it or not, there is 'no evidence', Levy and Meltzer wrote, that expanding insurance coverage is a cost-effective way to promote health." Believe it or not, Cannon and Tanner are misrepresenting the study's conclusions.... [H]ere's what Levy and Meltzer actually conclude, in their own words: The results of small quasi-experimental studies provide only mixed evidence that health insurance affects health, while larger quasi-experimental studies and the RAND Health Insurance Experiment provide consistent evidence that health insurance improves health. Only one large-scale quasi-experimental study (Perry and Rosen) fails to show a relationship between health insurance and health, and this study may not have adequate power to rule out the possibility that health insurance improves health. Taken as a whole, these high-quality studies of the health effects of health insurance strongly suggest that policies to expand insurance can also promote health.... We are left with the conclusion that health insurance can improve health but remain unable to say exactly which interventions related to insurance will do so most effectively... Is there a way out? Or will Ezra have to add Michael Cannon to the list of people we read with great suspicion? ## links for 2007-04-07 ## Checking that Space-Time Is Locally Pretty Flat... 6:47 AM: the reported time of sunrise in Lafayette, California, on April 6, 2007. 6:59 AM: the moment the sun first peaked over the top of Mt. Diablo on April 6, 2007. Mt. Diablo has 3,750 feet on us, and is about 15 miles x 5000 feet/mile = 75,000 feet away, for a sine value of 1/20, which is an angle of 1/20 radians. The earth rotates 1 radian in 12/π hours, so the sun travels 1/20 radians in 3/5π hours = 11 minutes. So, yes, locally, space-time around here is pretty flat so that plane trigonometry approximately holds... ## Books Do Furnish a Room... Bildung: As the Sixteen-Year-Old travelled around New England, people offered him books, including: He escaped with only A Tale of Love and Darkness, The Yakoubian Building, Hugh Brody, Maps and Dreams, and Black Reconstruction in America. We pleaded that we already own The Glass Bead Game, Doctor Zhivago, Postwar, and We Now Know. And I promised to buy At the Court of the Red Czar and Mao: The Untold Story. The Bulgakov are around here somewhere, I think, but I have never been able to get into them. ## Five From Fritz Stern's Memoirs On the responsibility of the intellectuals: Fritz Stern (2006), Five Germanys I Have Known (New York: FSG: 0374155402): p. 200: My brief stay in Munich [in 1950] afforded me a lasting gain: I met Franz Schnable, the principal professor of modern history.... Schnabel... liberal by temperament but not ideology, had written a four-volume history of pre-1848 Germany, unorthodox... a Catholic, South German response to... Heinrich von Treitschke, who was fervently Prussian, militaristic, and anti-Semitic. Schnabel had been a reserved supporter of Weimar, aware that Democratic citizenship placed great responsibilities on the historian, the more so given the weaknesses of the German Bergertum, with its acceptance of material success and political passivity. In the last great crisis of Weimar, when in 1932 Chancellor Papen ousted Prussia's [social] democratic government, Schnabel had denounced the step: Even if discussion should be closed and in the future everything should be dictated [from the top] in the German Fatherland, it still remains the duty of the intellectually leading group to raise its voice for as long as was possible. Even if every word was powerless as against previously-decreed decisions... One still had to speak out. That of course was precisely what the great majority of German intellectuals did not do. I went to hear him lecture.... He encouraged me... reminisced.... Thought too liberal by Catholic faculties and too Catholic by Protestant ones, he had begun his career in his native, liberal Baden as a Gymnasium teacher, later promoted to the Technical University of Karlsruhe, until the Nazis, in 1936, forbade his teaching altogether, banned his books, and didn't allow the completion of his projected fifth volume [of his history]. He told me with a touch of ironic pride that it had taken two wars and two revolutions for him to get a professorship at a regular university... On knowledge of the character of the Hitler regime: Fritz Stern (2006), Five Germanys I Have Known (New York: FSG: 0374155402): p. 94: In subsequent decades, some Germans were upset when I insisted that you had to be a village idiot not to have known about Dachau and some of the other camps during the 1930s. Hence I was interested to read not long ago that in July 1933 the celebrated violinist Adolf Busch wrote to his brother Fritz, the conductor, that Germans nowadays prayed: "Lieber Gott, much mich stumm, dass ich nicht nacht Dachau kumm." Lord, make me dumb [mute], so I to Dachau do not come. On one of the many reasons for the fall of the Weimar Republic: Fritz Stern (2006), Five Germanys I Have Known (New York: FSG: 0374155402): p. 101: Captain Hardinac von Hatten in 1933 on Fritz Stern's father, Rudolf Stern: For [Rudolf Stern's] exemplary courage at the Somme and his commitment to duty, he was promoted to lieutenant of the reserve, and after the battle of Arras in the spring of 1917, I successfully recommended him for an Iron Cross, First Class. If every soldier of the German army had fulfilled his duty to the fatherland as loyally and courageously in the foremost position as Lieut. Stern did under my command in 1916-1917, we would have been spared the shame of the last fourteen years... On the collective suicide of the Belle Epoque: Fritz Stern (2006), Five Germanys I Have Known (New York: FSG: 0374155402): p. 37: The German response [to the beginning of World War I] resembled a nationalist orgy, a morally-uplifting mixture of hyperpatriotism and religious passion. The other belligerent countries experienced milder versions of this divine madness but Germans seemed particularly vulnerable to mystical exaltation. The most important--and outrageous--example of this new spirit was the "Manifesto of the 93" of October 1914, a statement addressed to "The Civilized World" and signed by most of Germany's best-known artists and scientists, my grandparents' friends and intellectual heroes among them. It denied German responsibility for the outbreak of the war, defended the breach of Belgium's neutrality, and avowed the identity of German militarism and German culture. The "Manifesto" outraged the very people it was supposed to impress: elite opinion makers in neutral countries. Was this a sign of a political autism aggravated by war?... On authorial responsibility: Fritz Stern (2006), Five Germanys I Have Known (New York: FSG: 0374155402): p. 216: All manner of political editing had gratuitously added anticommunist comments to my discussions of Nazism. When I refused to allow the altered piece to appear under my name, Elliot [E.] Cohen, Commentary's legendary editor, yelled at me over the phone. I was a mere refugee, I was acting "un-American," and he had the power to "make me" in public life if only I would be reasonable. This intimidation mixed with promised reward didn't appeal to me, and I stuck to my guns... ## Down the Connecticut River Valley with Binoculars and Camera At Yale, we saw a tenured professor in his natural habitat: John Geanokoplos, on Hillhouse Avenue in front of the Economics Department, dressed in his Wall Street pants, talking to a sophomore with such complete focus that he didn't see me until I grabbed his hand. John is a large part of the reason that I am in this business. He taught that brilliantly at the start of Harvard's Economics 2002a in the fall of 1979. Sitting in front of him for that month and a half was one of the peak intellectual experiences of my life. ## Why Does Paul Wolfowitz Still Have a Job? Murray Waas writes: The Blog | Murray Waas: Favoritism Towards Wolfowitz Girl Friend | The Huffington Post: Wolfowitz, who as Deputy Secretary of Defense was considered an architect of the U.S. war with Iraq, disclosed to bank board members that he had a romantic relationship with a senior bank communications officer, Shaha Riza, shortly after he was nominated to head the World Bank. Bank regulations disallow bank employees from supervising spouses or romantic partners, but Wolfowitz reportedly attempted to circumvent the rules so he would be able to continue to work with Riza. Informed by the bank's ethics officers that that would not be allowable, the problem appeared solved when Riza was detailed to work at the State Department's public diplomacy office in September 2005--even though her salary was still to be paid by the World Bank. Before she was detailed over to the State Department, Riza was earning$132,660, according to bank records obtained by the Governmental Accountability Project. Had the bank's board adhered to its ordinary rules, as Riza was shifted over to the State Department, she should have only been eligible for a raise of about $20,000. Instead she was given a raise of$47,340, whereupon her salary became $180,000. Then last year, she received yet another raise which brought her salary to$193,000. That salary increase not only meant that Riza earned more than Secretary of State Condoleezza Rice, but apparently made her the single highest paid State Department official.

After GAP shared the records it obtained with the Washington Post's "In the Loop" columnist Al Kamen, and the New Yorker also mentioned the preferential treatment in a profile of Wolfowitz last week, the World Bank's Group Association was "inundated with messages from staff expressing concern, dismay, and outrage," according to the April 3 memo circulated by the association to the bank's rank and file employees...

## DeLong Sapience Watch...

Is Brad DeLong sapient? If so, how sapient? The evidence is mixed. Here is some more evidence:

There I was, procrastinating by looking at the iTunes music store, trying to figure out what my children had been buying. And I see a name? Aimee Mann. "That looks interesting," I think to myself. Why did it seem interesting? I didn't know. So I typed "Aimee Mann" into the search box, and...

...discovered that I had heard one of her songs, "Going Through the Motions," on the radio that day. Did I know that that song was sung by Aimee Mann? If you had asked me while I was listening to it if I knew who the singer was, I would have said no.

But something inside there did know.

Brad DeLong: sapient intellectual rational and reasonable being, or jumped-up East African plains ape running off a neural net and capable at times of putting forth an almost-convincing simulacrum of sapience?

## In Which I Fall Down on the Job...

A correspondent writes, asking where is my quarterly post reminding the internet that Donald Luskin--National Review's contribution to the grand coordinated right-wing Paul Krugman-trashing enterprise ably reported by Nicholas Confessore--more often than not simply doesn't know what he is talking about.

Now it is true that the right-wing campaign has collapsed--even its two original leaders, Mickey Kaus and Andrew Sullivan, now admit that Paul Krugman's batting average since he started at the New York Times has been above 90%. But Luskin is still out there: now he is trashing Alan Blinder in a piece that could not have been written in good faith if Luskin had actually read Blinder's stuff on outsourcing/offshoring.

You do have to wonder just what National Review thought and thinks it is doing by sponsoring Luskin. The overall effect is loony. After all, we have seen Luskin's ignorance of what a real exchange rate is, his claim that David Brooks is both 100% correct and is a traitor to his party for saying that the Bush administration routinely lies, his denial that the yield on a bond is an interest rate, his accusation that Gretchen Morgenstern is a plagiarist, his claim that the Bushies--Armitage, Libby, Rove, Cheney, Fleischer, and company--could never have revealed the identity of CIA undercover operative Valerie Plame because that would mean that they were guilty of something tantamount to high treason, his claim that George Soros would try to crash the market on October 31, 2004 to elect Democrats, his being off by a factor of five in calculating the liabilities of the Social Security system, his erroneous claims that faster productivity growth doesn't help the Social Security system--you get the picture. Is National Review deliberately trying to further damage the intellectual reputation of all its contributors?

But I can't do it.

I don't have the heart to surf on over to Luskin's web site and point out stupid errors, and egregious tendentious deliberate misinterpretations.

It's just too depressing.

I can, however, grab two truly unbelievable--but, alas! not atypical--examples of Donald Luskin's work from my weblog archives:

For my first example, let's recall Luskins demonstration that he cannot calculate a real exchange rate [1]:

Back in late 1982, the young Larry Summers and Paul Krugman--working for Marty Feldstein in the Reagan administration--wrote a memo in which they warned of the (very real) danger that large budget deficits and a falling dollar might reignite domestic inflation:

As the figure above, which plots the real exchange rate--the real value of the dollar--shows, they were right: the dollar was then overvalued (and was about to become much more overvalued in the next two years before returning to equilibrium). Luskin, trying to trash them, presented this graph:

and wrote:

The chart... shows the real exchange rate of the US dollar for a decade before the 1982 memo, and then through the end of the Reagan presidency. It did drift slightly lower for the first couple of years after the memo. But then it took off to new highs -- nothing resembling anything like a "return to approximately their historical levels."

It is clear that one thing wrong with Luskin's graph is that it is upside down--the dollar falls in value from early 1985 on, it doesn't rise. The dollar doesn't "take off to new highs" after 1985--as anybody with any knowledge of the historical configuation of asset prices would know. But it is also clear that there are other things wrong with it: the real exchange rate in 1989 was within 15 percent of its value in 1973, not different by a factor of four.

We still do not know how Luskin generated this graph.

For my second example, there is Luskin's single-handed denial of the existence of the entire intellectual discipline of statistics:

The Times and the Journal cite many authoritative-sounding studies [of income inequality].... But to get an accurate picture... you'd have to track hundreds of millions of individuals.... [N]one of this is reliable... the Panel Study of Income Dynamics... tracks only 8,000 families out of a U.S. population of 295 million individuals.

The whole purpose of the science of statistics is to tell us that this is simply not true. As long as you can take a random sample of your population, you can find out an enormous amount about the population from a relatively small number of observations. You can find out what proportion of rich people had poor paretns, or what proportion of twenty year olds think they will graduate from college, or pretty much any other average proportion that you want.

Now the "random sample" part of this is very important. But if your sample is random--if the fact that the yes-no pattern of observations so far makes it no more (or less) likely that you next observation will be a "yes"--then the law of large numbers tells us that the sample average you compute will converge to the true population average at a frighteningly rapid speed.

The standard demonstration of this is to repeatedly flip a coin and count the excess proportion of heads over tails. We know that--with a coin flipped and caught in the air by a human being at least--the population average taking all coins that have ever been flipped of the excess proportion of heads is zero. How many observations do we have to take--how many coin flips--before the sample average converges to this population average of 0% excess heads?

Let's see. Here's one run of 1,000 "flips" from Excel's internal random number generator:

Here are ten more:

Impressive, no?

Try some yourself.

You could have a population of 295 million flipped coins. Yet you don't need to look at "hundreds of millions" of them to determine what is going on. Looking at 1,000 will do.

This is the principal insight of the science of statistics. it is an important insight. It is a powerful insight. It is also not an obvious insight--that's what makes it powerful and important.

Yet because statistical studies sometimes produce results ideologically inconvenient for the Republican Party, Donald Luskin either feels he has to pretend that this insight doesn't exist, or is so stupid that he doesn't understand the first thing about the Law of Large Numbers.

[1] Daniel Davies affects to feel sympathy for Luskin:

It is precisely this [same] mental block which led to my being forbidden by colleagues from ever mentioning exchange rates in public meetings. Oddly enough, clients tended to complain about the fees when the team's "technical expert" was seemingly unable to distinguish between division and multiplication :-)...

## Why Oh Why Can't We Have a Better Press Corps? (David Broder of the Washington Post Edition)

The fact that David S. Broder has not been forcibly retired is one of the marvels of nature:

David S. Broder on Hurricane Katrina and George W. Bush, Sunday, September 4, 2005; B07 http://www.washingtonpost.com/wp-dyn/content/article/2005/09/03/AR2005090301005_pf.html:

It took almost no time for President Bush to put his stamp on the national response to the tragedy that has befallen New Orleans and the Gulf Coast, a reminder that modern communications have reshaped the constitutional division of powers in our government in ways that the Founding Fathers never could have imagined.

Because the commander in chief is also the communicator in chief, when a crisis emerges the nation's eyes turn to him as to no other official. We cannot yet calculate the political fallout from Hurricane Katrina and its devastating human and economic consequences, but one thing seems certain: It makes the previous signs of political weakness for Bush, measured in record-low job approval ratings, instantly irrelevant and opens new opportunities for him to regain his standing with the public....

[F]or a president who believes that actions speak louder than words, this is an advantageous setting. By coincidence, the same day that the president flew back from vacation to take command of the hurricane response, a group of political observers was gathered two blocks from the White House to discuss the way in which Bush has come to dominate Congress.... The decline of oversight hearings on Capitol Hill reflects what many of the commentators called a loss of institutional pride in Congress. Majority Republicans see themselves first and foremost as members of the Bush team -- and do not want to make trouble by asking hard questions. Democrats find it more rewarding to raise campaign funds and cultivate their own constituencies.

The result is that a system of government in which... the lawmakers [of Congress] are thoroughly overshadowed by the magnified figure of the president...

What can one say, other than that a typical six-year-old has more insight into American politics?

## Benjamin Barber Hates Us for Our Freedom

Benjamin Barber hates us for our freedom: ur freedom to go to restaurants named "Stuff Yer Face" on Easton Ave. in New Brunswick, NJ, that is. Tyler Cowen and his mesnie get properly medieval on Barber:

There is actually [sic] a restaurant in New Jersey called Stuff Yer Face, and fast food generally is about stuffing your face: about nutrition, fueling up, taking in the calories, food as instrumentality, eaters as mere animals responding to biological imperatives.

The subtitle of the new book is How Markets Corrupt Children, Infantalize Adults, and Swallow Citizens Whole. Here is the restaurant's home page, with sound.

Posted by Tyler Cowen on March 28, 2007 at 01:44 PM in Books | Permalink

The title works even better if you replace "Markets" by "Socialism". Posted by: dearieme at Mar 28, 2007 1:50:41 PM....

Even more surprising is that stuff yer face isn't bad, at least for college food (it's right next to rutgers). It's one of the few places on easton ave serving food that you would eat while sober. The beer selection is pretty good as well. It's not a fantastic place, but it's better than the name suggests. Posted by: Anonymous coward at Mar 28, 2007 3:09:39 PM

Stuff Yer Face was also Mario Batali's first cooking job, while attending Rutgers. As the Anonymous Coward points out, it's decent enough for a stromboli and beer place (it was one of the places where we sent our out of town relatives who came for our wedding and were looking for something to eat the night before the wedding) Posted by: Bg Porter at Mar 28, 2007 3:48:26 PM....

Benjamin Barber is an arrogant gasbag. He believes in replacing his preferences in place of everyone else's. He thinks that "we" should be exporting more jazz and less Britney Spears. His view of markets is more-or-less neo-Rousseauian. He believes in sort of "directed democracy" even though he won't admit it. Barber is the type of dude who gives political theorists a bad name. He's typical of the reason that many of the smarter ones go into PHILOSOPHY departments so that they can be free of his ilk. The dude is a sophist and a very, very, VERY poor man's Michael Walzer. Posted by: Jeebus at Mar 28, 2007 3:50:21 PM

I don't know the context, but at face value it seems really odd to complain about people having an instrumental view of food. Is food supposed to be an end in and of itself? I suppose if you viewed getting pleasurable sensations from consuming food as being an non-instrumental usage of food, he'd kind of have a point, but it can hardly be argued that that is a vice of fast food resturants, which tend to make food that a good chunk of the population does enjoy eating. Posted by: MattXIV at Mar 28, 2007 3:59:43 PM

about nutrition, fueling up, taking in the calories, As opposed to anorexia, malnutrution, and throwing-up? food as instrumentality, As opposed to food as an object of mere aesthetic contemplation? eaters as mere animals responding to biological imperatives, As opposed to space aliens responding to cosmic imperatives? Barber is a sententious twat. And I mean that in the best way possible...

## Kash Mansouri Is Very Unhappy with the Economist on Bush on Trade

Kash Mansouri writes:

The Street Light: The Economist on Bush on Trade - Yahoo! News: Economy News : The Economist takes a massive dive today, as they continue to bizarrely and irresponsibly assume the best (or maybe "the least bad" would be more accurate) of the Bush administration. The last two paragraphs of the story contain the offending bits:

Despite a dispiriting start that saw the imposition of steel tariffs, the Bush administration has made great efforts on trade, pushing forward with both multilateral and bilateral deals. Its biggest goal, a substantive deal from the Doha round of World Trade Organisation negotiations, is currently on life support. But the administration has managed to secure a variety of smaller deals, while letting steel tariffs die a death at the hands of the WTO. Now even progress of that sort may end.

Already, the Democratic influence is showing on the administration's trade team. On Friday March 30th it announced that it was imposing countervailing tariffs on Chinese manufacturers of high-gloss paper to offset indirect subsidies they get from the state. America has usually steered clear of this sort of action against state-run economies, saying it is prohibitively difficult to calculate excess subsidies. But the gaping trade deficit with China, and growing protectionist forces, have altered the political calculus. New tariffs of up to 20% will be imposed immediately. The American economy will survive without cheap Chinese paper products. But this could open the way to tariffs on a wide variety of critical products and signals an unwelcome shift in American trade policy.

Please. With the imposition of tariffs on China last Friday, the Bush administration acted in exactly the same way that they've acted for their entire 6+ years in office: being in favor of free trade whenever and wherever it helps important friends industries, and being more than happy to impose trade protection whenever and wherever it helps important friends industries. The Bush administration enacted a host of tariffs, quotas, and subsidies during the six years when it had a compliant Congress, and last week's action was just more of the same.

Furthermore, the Doha Round (the round of multilateral trade negotiations that is intended to finally take serious steps toward helping the developing world) is "on life support" in no small measure because the Bush administration has never seriously tried to make it work, instead focusing on small bilateral agreements that make no difference to anyone in the US except for a few individual corporations. And there are good theoretical reasons to think that a bunch of small bilateral trade deals may actually make it harder to conduct multilateral trade negotiations, putting a world-wide level playing field further out of reach than ever before.

The Bush administration's record on trade policy is a hodge-podge of opportunism and indifference, and owes nothing to Democratic pressures or desires. For the Economist to pretend otherwise is a sad continuation of their baffling tolerance of Bush's long record of incompetence and misplaced priorities.

## Brad DeLong: The Secret Language of Central Bankers

The secret language of central bankers: 'If I seem unduly clear to you," Alan Greenspan said to his political masters in the United States Congress, "you must have misunderstood what I said."

It was 1987, and the newly-confirmed chair of the Federal Reserve was elaborating on how he had "learned to mumble with great incoherence" in the short months since he had "become a central banker".Greenspan was a strong believer, in practice if not in theory - for who could understand his theory? - that central bankers should speak in an opaque and convoluted dialect. In comparison, the Oracle at Delphi's advice to the King of Lydia - "If you attack Persia, you will destroy a great kingdom" - is clarity itself.

There was an old argument for "Greenspanese": voters or politicians or both are inherently short-sighted and myopic. They would always see and want to grasp the benefits of lower interest rates and a little more demand pressure - more production, more employment, higher wages, and higher profits in the short run. But they would either not see or be cynically indifferent to the problems of stagflation that would inevitably follow. The job of the central bank, according to Greenspan's distant predecessor, William McChesney Martin, was to "take away the punch bowl [of low interest rates] before the party really gets going".

But, the argument went, the Fed could not say that this was what it was doing in clear and transparent language, for, if voters and politicians could understand central bankers, they would then force them into following destructive inflationary policies that would be worse for everyone, at least in the long run. By using an opaque and convoluted idiom, the only outsiders - reporters, politicians, and academics - who would be able to understand what the central bank was saying would be those who had carefully studied the issues and the language. This, in turn, would lead them all (with the rare exception of a maverick critic like William Greider) to understand and approve, and to agree that talking in "Greenspanese" is essential for enabling central banks to ensure price stability.

There seems to be general agreement today that this argument no longer applies, if it was ever truly valid. Voters and politicians today, it seems, fear inflation and are willing to accept occasional economic recessions and unemployment above its natural rate as unfortunate but inevitable consequences of the necessary and beneficial pursuit of long-term price stability. The debate about monetary policy can thus be fruitful and productive even if it is no longer restricted to those who have learned "Greenspanese".

Thus, all across the North Atlantic core of the world economy, central banks have embarked on a "transparency" initiative to make their organisation's goals, guesses, procedures, and policies more widely and clearly known. They are relying on economists' basic predisposition to believe that more information is always better than less, that individuals are good judges of what they need to know, and that they are able to evaluate and place in perspective what they know.

But recently - and increasingly so in recent months - central bankers' doubts about the utility of the transparency initiative have increased. The more central banks talk, and the clearer they try to make their language, the more it seems that markets may be reacting excessively and inappropriately to statements that are not really news at all. More information may be leading not to better knowledge, but to more confusion.

We economists have a hard time figuring out why there appears to be so much static on the communications line. Why were so many people in financial markets so sure that the Fed's late-March meeting statement heralded a likelihood of interest-rate hikes soon, rather than being simply an acknowledgement (as the Fed explicitly stated) that what had been very unlikely was now a possibility? Why are cable TV personalities so eager to overstate how quickly central banks change their view of the likely future? Why do participants in financial markets trade on the advice of cable TV personalities when a small amount of number-crunching reveals that the benefits must be lower than the transactions costs incurred by over-frequent trading?

We don't have answers to these questions. So we really don't know whether we should tell central bankers to brush up on their Greenspanese

## Distract and Disenfranchise

Paul Krugman:

Distract and Disenfranchise - New York Times: I have a theory about the Bush administration abuses of power that are now, finally, coming to light. Ultimately, I believe, they were driven by rising income inequality....

In 1980, when Ronald Reagan won the White House, conservative ideas appealed to many, even most, Americans. At the time, we were truly a middle-class nation. To white voters, at least, the vast inequalities and social injustices of the past, which were what originally gave liberalism its appeal, seemed like ancient history....

Since then, however, we have once again become a deeply unequal society. Median income has risen only 17 percent since 1980, while the income of the richest 0.1 percent of the population has quadrupled. The gap between the rich and the middle class is as wide now as it was in the 1920s, when the political coalition that would eventually become the New Deal was taking shape. And voters realize that society has changed....

Today's Republicans can't respond in any meaningful way to rising inequality, because their activists won't let them. You could see the dilemma just this past Friday and Saturday, when almost all the G.O.P. presidential hopefuls traveled to Palm Beach to make obeisance to the Club for Growth, a supply-side pressure group dedicated to tax cuts and privatization.... So how can it win elections? The answer, for a while, was a combination of distraction and disenfranchisement.

The terrorist attacks on 9/11 were themselves a massive, providential distraction; until then the public, realizing that Mr. Bush wasn't the moderate he played in the 2000 election, was growing increasingly unhappy with his administration. And they offered many opportunities for further distractions. Rather than debating Democrats on the issues, the G.O.P. could denounce them as soft on terror.... Several of the fired U.S. attorneys were under pressure to pursue allegations of voter fraud -- a phrase that has become almost synonymous with "voting while black."... The good news is that all the G.O.P.'s abuses of power weren't enough to win the 2006 elections. And 2008 may be even harder for the Republicans, because the Democrats -- who spent most of the Clinton years trying to reassure rich people and corporations that they weren't really populists -- seem to be realizing that times have changed...

## Why Oh Why Can't We Have a Better Press Corps? (More Washington Post Journamalism with Jonathan Weisman Edition)

Matt Stoller reads Jonathan Weisman in the Washington Post so the rest of us don't have to.

MyDD :: Direct Democracy for People-Powered Politics: I don't know why, but when Jonathan Weisman's reporting at the Washington Post is bad, it's really irritating. I think it's because he more than most 'straight' journalists is obvious about what he wants to say and fishing for quotes and sources to help him say it. Here, for instance, is a typically article titled Democrats To Widen Conflict With Bush.

Despite the threats, Democratic lawmakers expect to open new fronts against the president when they return from their spring recess, including politically risky efforts to quickly close the prison at Guantanamo Bay, Cuba; reinstate legal rights for terrorism suspects; and rein in what Democrats see as unwarranted encroachments on privacy and civil liberties allowed by the USA Patriot Act.

Note that Weisman supplies no evidence that any of these are politically risky, or that it's solely Democrats that see these laws as violating civil rights and privacy. A few Google searches leads me to evidence to the contrary. There's this ABC News poll on Guantanamo Bay (which is confirmed here).

A new ABC News poll finds that more than 70 percent of Americans oppose imprisoning suspects there indefinitely without charges. Many of the Guantanamo prisoners are suspected terrorists who have not been formally charged with crimes.

Most of the article is consumed with Weisman quoting insiders discussing how terrorism is scary and how Democrats need to be wary of appearing to knuckle under to terrorists. There is no evidence that the public shares these apprehensions, or that the public has any role in the political process. And there's no recognition that Republicans threw a bunch of aggressive ads against Democrats on wiretapping and terrorism in the closing days of the 2006 elections, and that they didn't work.... Despite the fact that the public rejected the premise that standing up for civil rights coddles terrorists in the last election, and is doing so in polling data as well, Weisman is writing evidence-free conventional wisdom that suggests precisely the opposite. I don't know why, but my sense is that he just thinks what he thinks, and he's going to find sources to justify his opinions.

Matt's got it. That's what he does. Plus his opinions are knee-jerk and, as a rule, uninformed.

Five years. With reporters like Weisman, the Post won't last five years.

## Bush's Support for Gonzales Is Almost Welcome as Evidence of Who Bush Really Is

Josh Micah Marshall: "that President Bush has renewed his support for Alberto Gonzales even after new evidence has emerged that the Attorney General has repeatedly lied... confirms the nature of the debate we're having":

Talking Points Memo: by Joshua Micah Marshall: March 25, 2007 - March 31, 2007 Archives: For some, it is a matter of outrage that President Bush has renewed his support for Alberto Gonzales even after new evidence has emerged that the Attorney General has repeatedly lied about the US Attorney Purge. Myself, I see it more as a matter of confirmation and almost a welcome one in that it confirms the nature of the debate we're having.

This isn't a case where Alberto Gonzales has fallen short of the president's standards or bungled some process. This is the standard. The Attorney General has done and is doing precisely what is expected of him....

?It is not too much to say that everything that has come out of Alberto Gonzales' mouth on this issue has been a lie. Sure, that sounds like hyperbole. But it's just a factual summary of what the public record now shows. On the very day his second lie was being exposed Gonzales was publicly claiming "it's reckless and irresponsible to allege that these decisions were based in any way on improper motives."

And the president is fine with all of this. Fine with the fact that the Attorney General has not only repeatedly lied to the public but has also been exposed as repeatedly lying to the public. He's fine with at least two US Attorneys being fired for not giving in to pressure to file bogus charges to help Republican candidates.

Of course he's fine with it. Because it comes from him. None of this is about Alberto Gonzales. This is about the president and the White House, which is where this entire plan was hatched. Gonzales was just following orders, executing the president's plans. This is about this president and this White House, which... let's be honest, everyone on both sides of the aisle already knows.

Impeach Alberto Gonzales. Impeach Richard Cheney. Impeach George W. Bush. Do it now.

## Bush Acknowledges Rising Income Inequality

The Reality-Based wing of the administration makes a push. Greg Ip and John McKinnon:

Bush Reorients Rhetoric, Acknowledges Income Gap - WSJ.com: 'The term 'income inequality' is a bit misleading because it suggests in a somewhat pejorative way that the rich are getting richer at the expense of the poor," Edward Lazear, a Stanford University labor economist who is now chairman of Mr. Bush's Council of Economic Advisers, said last May. While it's a concern that some people are being left behind, he said, "There is some good news...most of the inequality reflects an increase in returns to 'investing in skills.'"

Mr. Lazear has nurtured his relationship with Mr. Bush. His office is decorated with photos of the two mountain biking. When he gave Mr. Bush a copy of the Economic Report of the President this year, Mr. Bush gave him a bear hug and kissed the top of his bald head, according to people who were present.

Some economists question Mr. Lazear's assertion that, for instance, raising taxes on higher-wage earners will reduce individuals' incentive to acquire new skills. Lawrence Katz, a Harvard University labor economist who served in the Clinton Labor Department, says there's "not a shred of evidence" lower taxes boost educational attainment. "That's first-order goofball."

Even before Republicans' November defeat at the polls, some administration allies were warning that economic insecurity was eroding Republican support. A business coalition hired pollster David Winston to figure out why voters remained so dissatisfied with the economy. His focus groups of middle-income voters in Cincinnati and Pittsburgh found voters going deeper into debt to keep up with rising costs of health care and energy. Executive compensation "is getting to the point where it's obscene," said one focus-group participant.

The more politicians talked about how good the economy was, the worse these voters felt. "It's almost as if these folks are floating around in the ocean, watching the yachts and speedboats go by, thinking, 'Hey, I'm here, someone notice me,'" says Dirk Van Dongen, a co-chairman of the coalition and president of the National Association of Wholesaler-Distributors. Mr. Winston advised Republicans: "Our message should be that while the economy is getting back on track, we need to do more to help people with the cost of living."

But Republican strategists largely ignored the findings. Led by Karl Rove, they wanted to avoid blunting one of their few advantages in the 2006 campaign -- the economy's broad strength. One adviser adds that Iraq would have overshadowed any new economic proposals. Mr. Rove notes the president did talk about health care, college and other pocketbook issues during the campaign.

Over the past several months, debate inside the administration has shifted some. When he ran Goldman Sachs Group Inc., Mr. Paulson had invited former Clinton aides Gene Sperling and Princeton University labor economist Alan Krueger to brief him on the impact of globalization on wages and inequality. At a staff meeting soon after taking the Treasury post in July, he expressed puzzlement about the administration's opposition to raising the minimum wage, a person familiar with the meeting says. He has dispatched Undersecretary Robert Steel, another Goldman alumnus, to scout for ideas to boost the lower middle class.

Other officials -- including White House international-economics aide David McCormick and Matthew Slaughter, until recently a member of Mr. Lazear's council -- argued internally that addressing inequality was needed to damp protectionist sentiment fueled by voters who believe they are hurt, not helped, by globalization, insiders say.

Mr. Bush's acknowledgment that inequality is widening and the renewed focus on health care and revamping aid to dislocated workers suggest the administration appreciates the issue's political potency. "Voters' perceptions of economic health are very different than they used to be," said Mark McKinnon, Mr. Bush's former media adviser and now an adviser to Sen. John McCain, the Arizona Republican seeking to succeed Mr. Bush. "The old indicators that we reliably counted on -- unemployment, the stock market -- don't seem to matter much anymore. And other things do -- health care and pensions."

Adds former Treasury Secretary John Snow, now chairman of private-equity buyout firm Cerberus Capital Management: "The Democrats sense they have an issue here and are going to try to push it, and the Republicans are going to have to have an answer."

## Roger Ehrenberg on Blackstone

When a firm whose raison d'etre is that engagement in the public marketplace slows you down and distracts your attention and costs your money decides that it should go public--why, yes, you might reasonably conclude that there is something bubbleicious going on. Maybe they can take it public now, and after the next turn of the macroeconomic wheel take themselves private again in five or ten years:

FT.com / Home UK / UK - Why the Blackstone offer may signify a bubble: We can feel it in our bones. Something is happening here. First, the alternative asset management firm Fortress Investment Group goes public and trades up to previously unheard-of valuations for companies in the investment arena. Next, the private equity colossus Blackstone files for its own initial public offering, with the potential of generating a huge payout for its chairman, Stephen Schwarzman.

These self-motivated, intelligent individuals are trying to tell us something important. The question is: do we have the ability to look beyond their words and actions and intuit motivation? Greed, uncertainty and fear. What are the implications? That the equity markets are in trouble? That the credit markets are on the verge of a sharp sell-off? That we are at the dangerous stage of a private equity bubble?

My assessment is that we are in a private equity bubble of sorts. However, it is not one that has ghastly implications for the overall market but, instead, will have negative outcomes for those invested in private equity funds - and certainly for those buying into the public shares of private equity management companies such as Blackstone.

Consider this: Blackstone is a great firm. Going public will bring even greater riches to those at the top. That said, great riches have already been captured by those up and down the management hierarchy. This is not the case of a go-go high-technology firm that generates little free cash flow and requires an IPO or a sale to crystallise value for its shareholders. Blackstone has been and will continue to be a cash machine that can distribute substantial sums to its minions every year. Therefore, either an IPO or a leveraging of the balance sheet is simply a means of extracting even more cash from the business. Given the friendly nature of today's equity markets, going public offers the best risk/reward decision for Blackstone's existing shareholders. This is an opportunistic step driven by the state of today's equity markets and other considerations such as the state of the private equity market.

Hundreds of billions of dollars of new deal capacity has been created by private equity firms in the past 12 months. This is a classic case of too much liquidity chasing too few opportunities, giving rise to stretched debt-to-cash flow multiples, club deals where multiple private equity firms share risks and rewards and the re-emergence of complex debt instruments that give great flexibility to the private equity issuers but scant protection for debt investors. This cycle we have seen repeated every 20 years or so, the difference here being the scale and number of private equity firms and the leveraged capital at their disposal.

As long as the debt markets co-operate, all is well. But when debt investors wake up to the fact that they are systematically underpricing risk, the highly leveraged deal structures simply will not work. Deals will still get done because private equity firms need to deploy their capital to build franchises and justify their fees but leverage ratios will fall and returns will decline. Bad for the overall market? Not really, because competition for doing deals in general will remain strong owing to liquidity considerations. But bad for private equity investors? Certainly, and now there will be one more constituency at the table: investors in the public equity of these private equity firms. Here is the rub.

Will Blackstone pull off a wildly successful IPO? It is almost a certainty. Will Blackstone trade at a multiple that implies rapid growth in assets under management and therefore in management and performance fees? Absolutely. What will happen when the debt markets grow less friendly and additional equity is required to get deals done? Returns will fall. What will happen to those who have invested in private equity funds? They will not be happy. And those who have invested in common shares of the private equity management company? Unhappier still.

Mr Schwarzman knows this full well, as do his colleagues at Kohlberg Kravis Roberts, Texas Pacific Group, Apollo and others thinking about following in Blackstone's footsteps. They understand that the risk/reward calculus of the private equity business (largely being borne by debt holders in today's frothy environment) could shift rapidly, closing a historically attractive window for them to monetise their franchises. They see the private equity bubble and want to extract value before it pops. But where does that leave the rest of us? Unhappy, indeed.