## Brendan Nyhan: Wall Street Journal Dissembles on Status of the Poor

Why oh why can't we have a better press corps? The editorial page of the Wall Street Journal and Senator Judd Gregg defecate in the stream of American policy discussion. When Franklin Foer of the New Republic says that liberals should crusade to defend the independence of the Wall Street Journal, this is what he is defending.

Brendan Nyhan reports:

Brendan Nyhan: WSJ dissembles on status of the poor: Time for yet another reminder of why you can never, ever trust the Wall Street Journal editorial page. This is a basic rule for life -- the intellectual equivalent of telling children not to talk to strangers and to look both ways before they cross the street. Here's what the Journal wrote (sub. req.) about a new Congressional Budget Office study (PDF) in an editorial titled "The Poor Get Richer":

It's been a rough week for John Edwards, and now comes more bad news for his "two Americas" campaign theme. A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991.

The CBO results don't fit the prevailing media stereotype of the U.S. economy as a richer take all affair -- which may explain why you haven't read about them. Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured. (See the nearby chart.) The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s.

The Journal then writes euphemistically that "Earnings growth tapered off as the economy slowed in the early part of this decade, but earnings for low-income families have still nearly doubled in the years since welfare reform became law."

However, as [Jon] Chait points out, this portrayal is highly misleading at best:

But wait. Why fifteen years?... 1991... was a recession year, when incomes for [the poor] group collapsed. So the CBO study that [Judd] Gregg demanded measures the change from a recession year to a boom year. Incomes for the poor -- or anybody -- always rise over the course of a business cycle. The measurement Gregg demanded is simply useless. If you look closely at the study, you find that [more than] all the low-income growth occurred in the 1990s.... It peaked in 2000, and has fallen since....

The interesting question is whether, by the time the current business cycle hits its peak, incomes for people at the bottom will recover to where they were at the peak of the last business cycle. As of 2005 they still haven't caught up.

## Marginal Notes Triggered by the U.C. Davis Seminar on Historical Scholarship and New Media

Three Models for Running One's Weblog's Comment Section:

• The Germanic Model: The weblog proprietor is Herr Doktor Professor or Frau Doktorin Professorin. The proprietor runs the virtual seminar with an iron hand, eager to have students bring out the important points (for they are much more likely to be remembered when they emerge out of the seminar than when they are handed down from on high), but still more eager to make sure that the important points are brought out and that the seminar discussion is kept on track. The comment section is the ideas that are brought out.
• The American Model: The weblog proprietor is the host at a party, responsible for providing the refreshments (the posts and the links), but then standing back and letting the commenters have a good time. They are, after all the party. Regrettably, some will have to be asked to leave and driven home after they have embarrassed themselves, but the host's role is limited to helping people avoid self-embarrassment. The comment section is the participants who enjoy themselves.
• The Australian Nodel: The weblog proprietor gets out of the way as fast as they can. The comment section is the Thunderdome.

## Hegemonic Stability Theory at the Council on Foreign Relations

Doug Henwood files from the Upper East Side:

Doug Henwood Talks » Blog Archive » missing hegemon at the CFR: I was at one of those Council on Foreign Relations public events this morning - Larry Summers and Paul Volcker on a successor to the Bretton Woods system, moderated by James Grant.

Coupla things:

1) Summers pronounced himself a “chastened prophet” for saying that the U.S. current account deficit was unsustainable since it has gone on for so long. Volcker agreed. Summers added that it’s interesting that there were more people worried about the U.S. stock market when the Nasdaq was at 2500 than there were at 3500, and quoted his “good friend” Rudi Dornbusch as saying things always go on longer than you expect, and then when they go bad, it all happens much more quickly than you’d expect.

2) From the questions, the CFR audience was seriously concerned about the c/a deficit and the weakening of U.S. power in the world. They’re all very polite, but it sounded like they don’t think Bush has been good for the imperium. One questioner noted that today’s world looks like one without a hegemon, and when that’s happened in the past, bad things ensued (e.g., Depression and world war). He noted that since both Summers and Volcker occupied seats of power when the U.S. was an unchallenged hegemon, how different do they think things would be now were there some sort of financial crisis, esp one featuring the U.S.

Both Summers and Volcker looked stunned into silence for a while, and then Summers said that that was a “powerful” observation couched as a question. And Volcker expressed concern that managing a crisis would be much more difficult now with the U.S. “politically weakened” and the target of so much “antagonism” around the world. He worried that Europe and the Asia might go off on their own. Someone else asked who out there might “lend a hand” if the U.S. hit a wall. Another long pause, and then Volcker doubted anyone would raise his hand as volunteer, which prompted nervous chuckles.

The view that the Great Depression happened because Britain was no longer strong enough to manage the international monetary system and the United States had not--as it ought to have--stepped into the role was the view of my old teacher Charlie Kindleberger. I tend to place more weight on ideology: even had Britain possessed much greater economic strength in the late 1920s and early 1930s, I don't think they would have used it constructively. On the security side, Britain and France ought to have deterred Nazi Germany from launching its invasion of Poland. Their error was in not understanding that Hitler was crazy early enough, and not having taken steps to remove him from power earlier in the 1930s. And World War I... I still don't understand the origins of World War I.

So I don't agree with the premise of the question. But the question is, as Summers said, a powerful observation. Hegemonic stability theory might be true. Certainly Charlie Kindleberger thought that it was.

## Learning the Wrong Lessons from the Asian Financial Crisis: Martin Wolf Glosses Nouriel Roubini

Martin Wolf in the FT glosses Nouriel Roubini, but ends this episode with a cliff hanger:

FT.com / Columnists / Martin Wolf - What Asians learnt from their financial crisis: The Asian financial crisis of 10 years ago taught two contrasting lessons: the one the majority of western economists thought the Asians should learn; and the one Asians did learn. The western economists concluded that emerging economies should adopt flexible exchange rates and modern, well-regulated and competitive financial markets. The Asians decided to choose competitive exchange rates, export-led growth and huge accumulations of foreign currency reserves. The question is whether the Asians need to change their choice. The answer, I believe, is “yes”.

When downward pressure on the Thai baht started 10 years ago, nobody expected what followed – its devaluation in early July. That seemingly small event generated a financial tsunami that engulfed most of east Asia and overwhelmed Indonesia, Malaysia, the Philippines, South Korea and Thailand. Exchange rates collapsed, financial systems went bankrupt, governments teetered on the edge of default and economies succumbed to deep recessions....

With the important, but geographically limited, exceptions of Argentina and Turkey in 2001, the crises of 1997-98 have so far been the last in the long series of financial crises that afflicted emerging economies in the 1980s and 1990s. Today, the desire of outside investors to put their money in these economies is overwhelming, as is shown in the strength of their financial markets, the low spreads on external borrowing and the size of the private capital inflow.... The IMF is now almost entirely out of business.

What explains this new stability? As Nouriel Roubini of New York University’s Stern School of Business argues, the Asians did not learn the lessons most western economists thought they should.... [T]he great mistake, Asian policymakers concluded, was not pegged, but overvalued, exchange rates. That error was what had brought the humiliating dictation by IMF officials operating under the thumb of the US Treasury. “Never again” became the watchword. Never again has been the result. Now the east Asian emerging economies are mostly creditor nations. Moreover, much of their accumulation of external assets is in official hands (see chart). By February of this year, the foreign currency reserves of east and south Asian countries had reached $3,280bn.... The scale of the reserve accumulation demonstrates the obvious: these countries have refused to adopt the freely floating exchange rates many outside economists recommended. They have, instead, chosen to keep their exchange rates down. This, in turn, has generated current account surpluses. Sustaining such surpluses requires a stable excess of savings over domestic investment. One instrument they have used has been sterilisation of the monetary consequences of reserve accumulations, to prevent the normal expansion of money and credit, overheating, inflation and so loss of external competitiveness. If a substantial part of the world economy is generating huge current account surpluses, somebody else has to run offsetting deficits.... It is no accident then that the US has emerged as the world’s chief deficit country – its “borrower of last resort”. It alone is able to be a vast net borrower without risking the health of its financial system.... Mr Roubini argues that... [this] policy generates ultimately unsterilisable increases in foreign currency reserves. This causes excess monetary growth, domestic asset price bubbles, overheating, inflation and the loss in competitiveness that governments had tried to prevent by suppressing the rises in nominal exchange rates. It distorts domestic financial systems, by pushing interest rates below equilibrium levels. It generates a waste of resources in accumulation of low-yielding foreign currency assets exposed to the likelihood of huge capital losses. It makes Asian economies excessively dependent on demand from outside the region. It exacerbates US protectionism. Finally, it compels US monetary authorities to sustain easy monetary policy, in order to offset the leakage from domestic demand caused by the huge current account deficits. The post-crisis policy system has proved more durable than many (including myself) expected. At its heart, however, is China. Though not affected directly by the crisis, it was one of the countries that learnt its lessons in the Asian way. Today’s result is a dynamic behemoth accumulating foreign currency reserves at a rate of$50bn a month in the first quarter of the year and expected by the IMF to generate a current account surplus of 10 per cent of gross domestic product this year. I do not believe these astonishing trends are desirable or sustainable. Why that is so and what to do about it I intend to discuss next week...

## The Death of Ken Sokoloff

Naomi Lamoreaux writes:

With great sadness we announce the death of Kenneth L. Sokoloff, Professor of Economics at UCLA and longtime member of the Economic History Association.

A memorial service will be held at the Chapel at Westwood Village Memorial Park, 1218 Glendon Ave., at 3:00 on Wednesday, May 23.

Donations in his memory may be made to the Kenneth L. Sokoloff Memorial Fund at the Economic History Association, Department of Economics, 500 El Camino Real, Santa Clara University, Santa Clara, CA 95053-0385.

Checks should be made payable to the Economic History Association, with a notation that they are for the Sokoloff endowment, income from which will be used to provide Sokoloff fellowships for the support of young scholars.

So say we all.

A wonderful human being: one of those teachers and scholars who make one proud to be a professor. A tall fellow, in the Newtonian sense. The last thing of his I read was his paper with Stan Engermann, "Digging the Dirt at Public Expense: Governance in the Building of the Erie Canal and Other Public Works"

## The Blood Burst from My Eyes and My Liver Curl[ed] Up and Turn[ed] Black

Kate G. Harvard-Radcliffe '82 riffs on Matt Yglesias '03 and his fear of being thought a Starbucks person. She almost makes me wish I were going to our 25th reunion (I'm not: things are simply too crazy around here):

Kate G. on Matthew Yglesias Is Insecure!: Well, I don't know what kind of person it makes me--actually I do, I'm intolerant--but the last stupid "as I see it" cup from Starbucks which I saw online attacking Darwin for social Darwinism and eugenics made the blood burst from my eyes and my liver curl up and turn black.

Not really.

But it did cause me to blast off a furious letter to Starbucks about the vapidity and idiocy of their choices which, infamously, include Jonah Goldberg as a "person" whose "viewpoint" an actual human being is supposed to want to know. I got back a letter explaining that they were trying to recreate a kind of 17th century coffee house milieu and I was welcome to try to join the fun and discuss my opinions on their web site. Unable to imagine frequenting any kind of `17th century coffee house in which Jonah Goldberg would have been allowed in other than a floor sweeping capacity I declined.

Luckily there are lots of other better coffee shops in my area and I never have to resort to Starbucks anymore. But I think they may actually geographically segregate the cups because I've only seen a few of the more objectionable ones by right wing trust fund babies.

Kate G.

"But I think they may actually geographically segregate the cups because I've only seen a few of the more objectionable ones by right wing trust fund babies."

Wow, that is just a perfect "the calculating evil of corporations" rumor. It demands to be mongered!

jerry

## The American Prospect Is Shrill!

The most senior people at the American Prospect may think that Robert Rubin ranks high among the seraphim of evil, and they may have fired Ana Marie Cox, but their group weblog can always be counted upon to bring rays of unbalanced and shrill unholy madness into our lives. Here's Sam Rosenfeld, whom we promise will be transmogrified and given two extra tentacles on The Day of the Shrill:

TAPPED | The American Prospect: JUST SHOOT ME. Today's Washington Post op-ed page self-parody comes from David Ignatius, who passes on the exciting new "post-surge" plan floated by White House officials:

President Bush and his senior military and foreign policy advisers are beginning to discuss a "post-surge" strategy for Iraq that they hope could gain bipartisan political support. The new policy would focus on training and advising Iraqi troops rather than the broader goal of achieving a political reconciliation in Iraq, which senior officials recognize may be unachievable within the time available.

Which is to say, the new plan consists of nothing that we haven't already been attempting for the last several years, and nothing that in any way addresses the underlying political dynamics that are fuelling the sectarian conflict. Is training the national Iraqi military going to fare any better than our training of the Iraqi police? (It should also be noted that targetting of "Iranian-backed sectarian militias" will also remain a top priority in this plan, just to complete the incoherence nice and tidily.)

Ignatius reports that the administration's hope for this hilariously empty non-plan is that it "would have sufficient bipartisan support so it could be sustained even after the Bush administration leaves office in early 2009." And what is Ignatius's conclusion from all this? Well, here's where the self-parody part comes:

The wild cards in this new effort to craft a bipartisan Iraq policy are the Republican and Democratic leaders, President Bush and House Speaker Nancy Pelosi. They both say they want a sustainable, effective Iraq policy, but each is deeply entrenched in a partisan version of what that policy should be. America is in a nosedive in Iraq. Can these two leaders share the controls enough that Iraq will become a U.S. project, rather than George Bush's war? There's a bipartisan path out of this impasse, but will America's leaders be wise enough to take it?

Indeed, that is the question! The only thing that could possibly stop this pony plan from being a total success is petty domestic U.S. partisanship. In this op-ed genre, there is always -- always -- "a bipartisan path out of this impasse," no matter what that "impasse" may be, no matter how many years it has remained, and no matter how many thousands of people have been killed as a result of it.

Spot on. I have only one thing to add:

Five years, Washington Post. Five years.

## Does China's Exchange-Rate Policy Matter?

Over at the Wall Street Journal's op-ed page, Matthew Slaughter says that Americans should not care about the magnitude of reserve asset purchases by the People's Bank of China or about the level of the PBoC's peg of the yuan to the dollar. These policy actions, Slaughter says, are not connected with the large and growing American goods-and-services trade deficit vis-a-vis China: "Economic theory and data are very clear.... [This] has no long-run effect on real economic outcoems such as output and trade flows."

Yuan Worries: Fact 1: China runs a large and growing trade surplus with the United States. In 2006, the goods-trade surplus exceeded $232 billion. This was an increase from 2005 of$31 billion, an amount larger than the entire deficit just 12 years ago. Fact 2: China focuses its monetary policy on fixing the exchange value of its currency, the yuan, relative to the U.S. dollar.

Many policymakers and pundits connect these two facts by asserting that an unfairly low value of the dollar-yuan peg is causing the massive bilateral trade imbalance. The 109th Congress introduced 27 pieces of anti-China trade legislation. The current Congress already has over a dozen such bills, many aiming to force an overhaul of China's exchange-rate regime. And late last week dozens of House members were poised to file a Section 301 petition, asking the U.S. Trade Representative to investigate undervaluation of the Chinese yuan.

These misgivings about the dollar-yuan peg are misplaced. Economic theory and data are very clear here on two critical points. Controlling a nominal exchange rate is a form of sovereign monetary policy. And monetary policy, in turn, has no long-run effect on real economic outcomes such as output and trade flows...

And Greg Mankiw applauds Slaughter:

Greg Mankiw's Blog: Slaughter on the Yuan: The dollar-yuan exchange rate is an economic fetish of many people unschooled in basic economics (a topic previously discussed here.) In today's Wall Street Journal (subscription required), Dartmouth economist Matthew Slaughter, fresh from a stint at the CEA, tries to bring some rationality to the issue...

This sends both Milton Friedman and John Maynard Keynes spinning in their graves: Uncle Milton because the thing he disliked most about his successors at Chicago was their claim of "policy irrelevance"--that as long as monetary (including exchange rate) policy was predictable, it didn't matter what it was: production and employment and saving would be the same--which is the claim that Matthew Slaughter is making here. And Uncle Maynard for the same substantive reasons, although he put it more strongly because he was a more forceful debater than Milton Friedman:

Keynes: Tract on Monetary Reform: Now "in the long run" this is probably true. If, after the American Civil War, the American dollar had been stabilized... ten per cent below its present value... [the American money stock today] and [the American price level today] would now be just ten per cent greater than they actually are [with no effect on production and empo.... But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

In actual experience, a[ny] change in [monetary or exchange rate policy] is liable to have a reaction both on [the velocity of money] and on [production and employment]...

For the details, because I have been slow in weblogging today I can simply turn the microphone over to the mysterious and vowelless knzn:

Economics and...: Aaaargh!!! (Slaughter on China): Why do economists writing about China pretend not to know the difference between sterilized and non-sterilized [foreign exchange] intervention [policy]? We've been through this before, but the latest case in point is Matthew Slaughter, writing in the Wall Street Journal (and cited uncritically by Greg Mankiw and Mark Thoma).... [I]f the central bank is truly trying to "control one nominal price" with "sovereign monetary policy" the level of [foreign exchange] reserves should not show a dramatic trend over time. As its level of foreign reserves increases, the central bank should recognize the increased demand for money and satisfy that demand by adding domestic reserves to the banking system. That's the way "monetary policy" works.

What the People's Bank of China is doing is something quite different. Even as it maintains its effective dollar peg, it is attempting to cool the economy by raising interest rates. It is not controlling "one nominal price"; rather, it is attempting (with limited success) to control two things at once. It is trying to keep exports strong by keeping the currency weak, and at the same time, it is trying to reduce domestic demand by tightening domestic monetary policy. As a result, it is accumulating a huge, huge, huge quantity of dollar-denominated assets, and this rate of accumulation is clear evidence of a policy conflict...

This policy conflict could end in one of several ways:

1. A sudden large burst of inflation in China, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the second to the first.
2. A sudden large rise in the value of the yuan, as the PBoC finds that it can no longer maintain both the current exchange-rate peg and a stable effective money stock, and sacrifices the first to the second.
3. Slow and gradual versions of (1) and (2) as holders of nominal yuan assets in the first case and nominal dollar assets in the second let their wealth be gradually but substantially be eroded without ever taking steps to cut their losses.
4. Something more unpleasant.

It's frustrating: Matthew Slaughter's assertions are based on his assumption that full long-run monetary and price-level adjustment has already taken place, yet the pace and magnitude of Chiana's reserve accumulation (and Japan's) are very strong signs that the PBoC and the BoJ are blocking monetary and price-level adjustment--and that is the problem. To state that if we assume that the problem doesn't exist then we conclude we don't have a problem is just not very helpful. And not one in a hundred readers of the WSJ op-ed page will be able to diagnose just how Slaughter's piece is a misleading tautology.

## Choosing the Next World Bank President

Dani Rodrik directs us to the Center for Global Development website, where you too can become part of global civil society and express your views on World Bank governance and on who the next president should be:

Center for Global Development : Article: Online Survey: Choosing the Next World Bank President: Invitations to complete the survey are being sent to several thousand people on the CGD mailing list. Members of the development community who are not on the list and wish to participate may take the survey on the CGD website. Responses are anonymous and results will be published daily.

## Matthew Yglesias Is Insecure!

Matthew Yglesias worries:

Matthew Yglesias: The Starbucks Factor: Is it a bad thing that Feist's The Reminder is on sale in Starbucks? I'll admit that when I saw the album there I was disturbed. Upon a moment's reflection, though, this is just snobbery. I don't like the idea that, in the future, if I praise Feist this may indicate to other people that I'm the sort of person who gets his music recommendations from Starbucks rather than the sort of person who knows a lot about Canadian indie music...

It's too late, Matt. You have revealed that you are the kind of person who fears that other people may think that you are the kind of person who gets his music recommendations from Starbucks.

It would be much better for you if you were to fear that you might be turning into the kind of person who fears that other people may think you are the kind of person who gets his music recommendations from Starbucks.

## Hoisted from Comments: Lunch with Chinese Society

In comments, Tom H. provides his diary entry from his lunch with Chinese Society:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Thomas P.M. Barnett Is Unhappy with the Fearmongers: [Thomas Barnett] "It is a self-liquidating model: eventually the society wants more political freedom to go with that wealth."

[Tom H:] Note to diary: Lunched with Chinese Society today. She had the noodle soup. I ate a hamburger. Things are going well for Society. Thriving factories, rising middle class, new roads going everywhere. But I could tell she was secretly unhappy. I urged her to confide. She looked around for eavesdroppers, and then leaned close to whisper: "I want more political freedom. I mean, not yet exactly, but when I get a little wealthier." She urged me to get the message out as soon as I returned to the States.

I explained to Society that I have my own blog, and I'm often quoted by others as an authority. I promised to pass along her important message to the American people. Then she paid the check - so liberated!

Posted by: TomH | May 22, 2007 at 07:25 AM

## George Borjas Has a Weblog

George Borjas writes:

The Borjas Blog: Hello everyone. I've been thinking about doing a blog for some time now. Some of my colleagues, particularly Dani Rodrik, have started one. If Dani, who has a brand new baby, can somehow manage to find the time to write some first-rate commentary on trade issues, I figure I can at least try to express some of my thoughts on matters that interest me. Plus--there's no time like now to comment on immigration issues...

## Thomas P.M. Barnett Is Unhappy with the Fearmongers

He writes, apropos of those who seek to embroil the United States in a new Cold War with China:

An overwrought, ideologically myopic argument (Thomas P.M. Barnett :: Weblog): "THE CHINA CHALLENGE: A Shining Model of Wealth Without Liberty," By James Mann.... An overwrought argument from Mann, who specializes in them. China is no "new" model or threat. It follows the model of Singapore, and before that South Korea, and before that Japan: a single-party state that bases almost all of its legitimacy on rising income and development through export-driven growth. It is a self-liquidating model: eventually the society wants more political freedom to go with that wealth. China's just so fricking huge and so poor that this process isn't going fast enough for Mann--hence the inevitable "threat."

Mann recognizes neither those past examples nor the significant economic and personal freedoms unleashed inside China over the past quarter century. His Z not having been reached fast enough, he discounts all movement from A since the bizarre depths of Mao's cultural revolution, which is no more distant politically than our Vietnam.... As for our take on it, we should logically welcome any so-called model that promotes external economic connectivity, because we know where that goes historically (i.e., where Japan and South Korea finally ended up: creating political freedoms that match their system's potential--something that took us a while to achieve as well).... China's path is but a steppingstone to outcomes we naturally seek. I mean, crawling might be described as an alternative to walking, but only until you're able to walk, then it suddenly seems like a passing phase.

China's "model"... is about transforming a hugely rural, impoverished, disconnected society (one-sixth of humanity) into an urban, consumeristic, connected one. Once achieved, and China is nowhere near that at this time, with well over half its population still living in very Gap-like conditions, then its model self-liquidates that all before it. China's future leaders know this, so do our smart observers. Mann ain't one of the them...

## Wednesday Lunchtime at U.C. Davis with Tedra Osell, Eric Rauchway, and Scott Eric Kaufmann

Since I'm still not sure what I am going to say at lunch on Wednesday with Tedra, Eric, and Scott, let me just send around five URLs:

U.C. Davis History Department - Schedule of Events: Colloquium on Blogging and Scholarship: Date: Wednesday, May 23, 2007Time: 12:00 PMInformation: Colloquium on Blogging and Scholarship, May 23, 12:10, Andrews Room, with Tedra Osell, Scott Eric Kaufman, and Brad DeLong...

Weblogging and Scholarship: An item on my calendar for which I am not prepared looms out of the mists of time...

Acephalous: During the hour I'd be codifying my stray silliness into material suitable for you, dear readers (you no doubt remember my schedule) I'm... frantically preparing for next week's talk and how to deal with the inevitable, nay, threatened interruptions...

## Yet More Journamalism from the New Republic

It has never been clear to me whether the Wall Street Journal is, on net, a force for good or a force for evil. The excellence of the news pages is offset by the atrociousness of the editorial pages. Plus the editorial pages gain additional weight and power by their association with the excellent news pages. Would the world be a better place without the Wall Street Journal? Unclear. Would the world be a better place if the Wall Street Journal's news pages were replaced by news pages of the quality of, say. Murdoch's New York Post? Probably not--but even on this I am still a bit uncertain.

Franklin Foer of the New Republic and his homies, however, have no doubts whatsoever. He says the Wall Street Journal is a mighty force for good, and its editorial page--well, he can't bring themselves to even hint that the Wall Street Journal has an editorial page. But they do say that liberals should fight to defend the Wall Street Journal--as it is currently constituted, with its editorial page.

Craven. Mendacious. Journamalists. How dumb does Franklin Foer think that I am? How dumb is Franklin Foer?

Frank Foer and Company: [Defending the Wall Street Journal as it exists toay] should be a pivotal moment for liberals--a time to dial back their relentless hostility to newspapers and start crusading for them: We don't mean to sound naïve about the shortcomings of these institutions.... But you need only consider the contributions of the Journal to understand the stakes of the present moment... the great chronicler of capitalism... one of the most important checks against its excesses. The paper has regularly exposed important failings of the market--from the leveraged buyouts and insider trading of the 1980s to the stock manipulation of recent years. In the era of deregulation, it's hard to imagine that the government would have uncovered these epic cases of malfeasance.

Sadly, these great feats haven't won the newspaper business liberal love. There are many, especially in the blogosphere, who can't wait to dance on the graves of the crusty old MSM "gatekeepers." They champion the rise of "citizen journalism," as techno-enthusiasts like to describe the bloggers and their Wikipedia model of media: Unlike the MSM brontosaurs, bloggers will actually report the truth without fear of losing access to Washington cocktail parties or pressure from corporate bosses....

But there's a problem with the new order they imagine... bloggers chasing Truth without the shackles of objectivity. You can always dismiss a blogger, or a partisan paper like the New York Post.... But... [with the] Wall Street Journal... this complaint... rings so empty. The MSM makes an earnest (albeit occasionally flawed) effort to achieve a neutral understanding of events, and that's the source of an authority and prestige that even its harshest critics... must respect....

While the MSM's authority and prestige persist, they are in peril.... Newspapers themselves have squandered the sense of self-confidence that they once oozed.... [T]he timidity that characterized prewar WMD reporting and led the Times to sit on its domestic wiretapping stories for a year....

How can newspapers recover their mojo? For starters, they should stop sounding apocalyptic.... [P]rofit margins at most papers remain high.... The crisis in newspapers relates more to perceptions than the actual bottom line. While the Times, the Post, and the Journal are still run by their founding families... they must answer to investors who continue to demand cost-cutting that boosts share prices but undermines their mission.

As stewards of their papers, the Sulzbergers, the Grahams, and the Bancrofts have exuded the best spirit of Progressive-era elites, a commitment to reform and independence...

## Reason Enough to Retire Wolf Blitzer (Why Oh Why Can't We Have a Better Press Corps?)

From Atrios:

Eschaton: Notable Quotables: "I was listening to [Rush Limbaugh] earlier today..."--Wolf Blitzer

A man who doesn't have a better way to spend his time learning about the world should not be on TV.

## Hitsville, USA, Increasing Returns, and Path Dependence

Tom Slee writes:

Whimsley: Predicting hits may be like predicting the weather: [P]hysicist turned sociologist Duncan Watts writes about how cultural hits may be, like the weather, impossible to predict. It comes down to how much we like stuff because it's good and how much we like it because other people like it. If it's the latter, then it becomes impossible to predict at some point. What's nice is that they did some experiments to demonstrate some of this in the lab.... A side effect of this would be that there is a strong limit to the effectiveness of recommendation schemes from Amazon and Netflix and so on.... Here's a few paragraphs from the article:

Conventional marketing wisdom holds that predicting success in cultural markets is mostly a matter of anticipating the preferences of the millions of individual people who participate in them.... The common-sense view, however, makes a big assumption: that when people make decisions about what they like, they do so independently of one another. But people almost never make decisions independently... in part because what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing.... Ultimately, we’re all social beings... our mutual dependence has unexpected consequences, one of which is that... when people tend to like what other people like, differences in popularity are subject to what is called “cumulative advantage.”... random fluctuations can blow up, generating potentially enormous long-run differences among even indistinguishable competitors.... Madonna would have been popular in this world, but in some other version of history, she would be a nobody, and someone we have never heard of would be in her place.

## Pros and Cons of the Top 20 Democratic Presidential Candidates.

McSweeney's Internet Tendency:

Pro: Size; power; ability to emit short-range optic blasts.

Con: Potential attack ad: "Sometimes Optimus Prime is a robot, other times a truck. Which is it, Mr. Prime? America deserves a leader that doesn't transform whenever it's convenient."

## Mark Krikorian Warns of the Hispanic Pizza Menace!

Now remind me again how to distinguish National Review from the Onion? National Review's anti-immigration crusader Mark Krikorian warns us of the Histpanic pizza menace:

New York Times: Mr. Swad, who is Italian-Lebanese and was born and raised in Columbus, Ohio, did not speak Spanish when he opened his first take-out pizzeria in Dallas in 1986. But he saw a business opportunity in the growing Latino minority in his neighborhood, and the way his customers struggled to order in English. A year later he changed the name from Pizza Pizza to Pizza Patrón, hired bilingual staff members and added items like La Mexicana, a pizza that includes spicy chorizo sausage and jalapeños. Pizza Patrón became a franchise in 2003, and same-store sales were up more than 34 percent in the most recent quarter compared with last year, Mr. Swad said. From 10 to 15 percent of business at his five Dallas pizzerias has been in pesos, he said. Despite the criticism, he said he would continue the promotion until the end of February as planned.

Mark Krikorian, executive director of the Center for Immigration Studies in Washington, a group that seeks to limit immigration, said he was concerned that Hispanics could create a parallel mainstream in the United States. "It's a trivial example, but Hispanics now have their own pizza chain," Mr. Krikorian said. "It's a consequence of having too many people arrive from a single foreign culture, and may well reflect a kind of cultural secession."

## Modern Packaging Materials

Tom Slee has a problem:

Whimsley: Packaging: I bought a pair of heavy duty kitchen scissors.

They are secured to a cardboard backing panel by two thick translucent plastic bands, one around the blade and one around the handles.

I need to cut these plastic bands.

I need a pair of heavy duty kitchen scissors.

## Mathing Up "Why Bubbles Are Great for the Economy" (It Has Been Done Before Department)

Hoisted from Comments: Robert Waldmann asks, apropos of Daniel Gross's book Pop!: Why Bubbles Are Great for the Economy:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: A Review of Daniel Gross's Book "Pop": Yes, but do you know an academic economist who has formalized this argument [that bubbles are good for the economy by] writing a [formal] model in which irrationality is necessary for growth? It would not be hard. And have you asked yourself "If not me, who? If not now, when?" Posted by: Robert Waldmann | May 13, 2007 at 11:55 PM.

It was done two decades ago, Robert: a model in which the introduction of investors subject to irrational exuberance and panic can either raise or lower the economy's productive capital stock and hence enhance or diminish the economic welfare of others in the economy. The model doesn't have all the channels that Gross discusses, but it has some of them--and enough to make the point.

Unfortunately, the authors were chasing the case in which bubbles and panics were socially harmful--not the case when bubbles are beneficial to the rest of society. But that case is there in the model, if the parameter ρ is big enough and the shock variance ratio (ση2)/(σε2) is small enough.

Here's an excerpt from the core of the argument:

Size and Incidence: There are two reasons why the capital stock [in the absence of bubbles and panics] is different.... If... misperceptions... are on average bullish [i.e., prone to bubbles, investors]... on average demand [more stock].... [I]f noise traders are on average bearish [i.e., prone to panics], the equilibrium capital stock is lower.... [I]nvestors’ demands [also] depend on the risk borne.... The θ2ση2 term in the denominator of [equation] (15) captures the reduction in the [economy's] capital stock that arises from aversion to noise trader-generated price risk.... The second term dominates, and the capital stock is lower in the presence of noise traders, if:

(17) ρ/(δ -r) < (θ/((1+r)2))((ση2)/(σε2))

For ρ≤0 [i.e., a market at least as prone to panics as bubbles], it is always the case that the presence of noise traders reduces the capital stock.

Even if ρ is positive, only if both the noise trader wealth share θ is small and if noise traders’ opinions are not volatile relative to dividend risk (that is, ((ση2)/(σε2)) relatively small) is the ratio of productive capital to wealth increased because of noise traders.

A lower capital stock implies a lower average level of consumption. Since capital gains and losses on stockholdings simply redistribute wealth from one generation to another, the average level of consumption of a generation is simply:

(18) (1+r)W + K(δ-r)

which is an increasing function of the capital stock.

The reference?

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696 http://www.j-bradford-delong.net/pdf_files/Noise_Traders_Incidence.pdf.

Note: Robert's comment--that the source of utility gains to the sophisticated in DSSW (1990) is different from the source in Gross (2007)--is completely correct. Gross argues that volatility of opinions is good. DSSW argue implicitly that irrational exuberance can be good when such exuberance is not very volatile.

## Robert Waldmann on Education and Growth

Robert Waldmann writes:

Robert's Stochastic thoughts: Mark Kleiman writes... that there are [extra] social returns [from investing more in education] due to knowledge spillovers, the contribution of an educated electorate to democracy, and reduced inequality due to supply and demand for degrees.... However, to the extent that education works as a signal of something (intelligence, willingness to defer consumption and, maybe, other gratification or willingness and ability to sit quietly and submit to authority) it has private returns which aren't social returns.

Oddly this happens to be almost exactly what I wrote in my one and only newspaper column (in Il Corriere della Sera).

He reaches an inconclusion, not knowing it expansion of schooling would be socially beneficial.

I actually went on and got to an a conclusion. I agree that it is very hard to tell based on theory or micro data. Sad to say, this leaves us with crude macro data on enrollment and welfare.... [N]o country, state or other political entity has ever spent too much on public education (I admit that the case for university level education is weaker than for secondary and especially primary). The countries with bizarrely high enrollment given current income are well known growth miracles (Taiwan. Singapore and especially South Korea). The first states to have high enrollment in high school (midwest in the 19th century) went on to become relatively much richer than they had been (kids in New England were lured off to the then high tech textile mills and New England suffered relative economic decline until the mills went South, kids studied and they got going on the new high tech (the Reagan defense buildup helped a lot too)).

Crude -- sure. Too crude for someone who doesn't depend on such data to get publications -- yeah guess so. Enough to convince me that more money should be shoved into education -- hey a flipped coin that comes up either heads or tails would be enough to convince me.

## Politico Plagued by Rookie Mistakes

Atrios says:

Eschaton: Do Democrats Exist? Not to the Politico.

Yep, it's Mike Allen on immigration: quoting a White House press release, Deputy White House Chief of Staff Joel Kaplan, and McCain, Romney, and Giuliani.

## Summer 2007 Schedule

Graduation was May 17, and it is now summer. I will be in and out, but not necessarily in at any guaranteed regular time. Truth be told, if you want to catch me by surprise you are more likely to find me in Doe Library D-Level or in Nefeli's (on Euclid, near Hearst) than in Evans 601 or 611. But calling 510 643 4027 or emailing delong@econ.berkeley.edu for an appointment is likely to produce the best results.

## The Web Ouroboros...

So there I was surfing along, reading:

The Net Ecology

and I was thinking, "this makes a lot of sense." And then I come across the line:

Bruce Sterling doesn't get it, but Brad DeLong does.

Ah. No wonder.

Here's how Jim ends his very nice piece, a superior quality anti-Bruce Sterling rant:

The end of scarcity?

Commerce and technology are creating a world of abundance. Is there a chance that somewhere along the way, we eliminate scarcity?

Nanotechnology might do for matter what the Internet has done for information. This world is coming, and it is a vastly different world. Bruce Sterling could have written about that, he is a science fiction writer after all. I'm just a businessman.

But here is my take: limits are a surprisingly resilient thing. The state of things on the margin tends to shape the rest of the landscape.The Internet seems like it makes information free, but it doesn't quite. Information won't be free because its creation has costs. At the root, these costs derive from the fact that the production of information takes time and effort, and time and effort are scarce. We can only do one thing at a time, and only so many things in a lifetime. There are opportunity costs, and so there will have to be priorities, choices, things foregone. That means, I will bet, that there will be commerce.

Nano-tech won't make material things free either. Scarcity will find new corners to pop out of. There is a finite supply of matter with which it make things out of, a finite supply of energy. There is friction, entropy.

But what wonderful limits to come up against! How much richer we will be by the time we face these issues as pressing problems and not interesting concepts for speculation. I'd give my right arm to live to see those problems solved (why not? by then it will be trivial to get me a new one). And even if they are not solved -- even if limits and asymptotes and life-on-the-margin all prevail -- well, what of it?

It won't be so bad to have to meet in the marketplace every once in a while.

## 3,634

Tom Slee has a weblog, and says:

Whimsley: A response to Alex Tabarrok: Update 2: The other day I was pleased that my amazon.com Sales Rank was around 42,000. It is now 3634 - entirely due to the review...

Alex Tabarrok's reading Tom Slee's No One Makes Your Shop at Wal-Mart and consequent throwing the book against the wall and desiring to kick Tom Slee in the shins has boosted Tom's book's amazon.com sales rank by a factor of ten.

If it will boost the book's ranking further, I will promise to throw one of my two copies out my sixth-floor office window and to trap Tom Slee in the Evans Hall middle south elevator for no less than thirty minutes--it is a very nice book. Almost as nice as Bryan Caplan's The Myth of the Rational Voter.) And good anti-market books defending social democracy in this neoliberal age are scarce (bad books are plentiful).

Such books deserve to be rewarded by the market. Let's see how we can do...

## Newt Gingrich Follows the Advice of His Consultants and Focus Groups

Newt Gingrich says: My consultants and focus groups have told me to denounce consultants and focus groups:

The Carpetbagger Report: "We have shrunk our political process to this pathetic dance in which people spend an entire year raising money in order to offer non-answers, so they can memorize what their consultants and focus groups said would work,” Gingrich said.

## Matthew Yglesias on Paul Wolfowitz--and Steven Weisman

Steven Weisman's obtuseness drives Matthew Yglesias shrill:

Matthew Yglesias: Steven Weisman offers us an all-too-sympathetic Paul Wolfowitz retrospective:

Now, as friends and critics sort through the wreckage of Mr. Wolfowitz’s bank career, they wonder if it was doomed from the outset. Supporters say he arrived at the bank, a citadel of liberalism, from a four-year stint at the Pentagon, where he was an early champion of going to war with Iraq and left bearing its stigma. [...] But others say Mr. Wolfowitz repeated the mistakes he had made at the Pentagon: adopting a single-minded position on certain matters, refusing to entertain alternative views, marginalizing dissenters...

Look, I have no doubt Wolfowitz was doomed from the state. But to comprehend his doomed-ness and what to make of it, one needs to step back. Why was he given the job in the first place? He had no obviously qualifications for it. He's read some neoliberal political commentary about the need for international development strategies to focus more on good governance. I've read that stuff, too. As have a lot of people. It's convincing stuff. But, genuinely, folks who've read it are a dime a dozen in this town. Do I get to run the World Bank? No. Wolfowitz had no genuine expertise in Africa, in development policy, in economics, in governance, or in any of the relevant fields.

What he did have, that I lacked, was a track-record as a high-level political employee. It was a track-record marked by... spectacular failure. Failure so spectacular that George W. Bush decided Wolfowitz needed to be fired from his job because he was so incredibly bad at it. In order to fire him while minimizing feather-rumpling, he was dumped on the Bank, even though he had no relevant expertise and a long track-record of failure (think Team B) in his previous work. So, yes, he was doomed from the start. Boo-hoo.

But he wasn't doomed from the start. It required a special series of mistakes to doom him, even given his lack of qualifications and previous track record of failure. Here's how Wolfowitz describes his own management style at the World Bank:

Wolfowitz: Let's discuss what this is really about:

With respect to my leadership and management style... there are some significant things that I need to change in order to regain the trust of the staff. Among the most important are:

• I relied much too long on advisers who came in with me from outside for managerial functions... [that should belong to] the normal organizational structure.... [C]hange in this regard was overdue and I intend to make it, and make it decisively.
• I have plans... to make [my office] more efficient... facilitate unimpeded acces... communication between me and the Vice Presidents.
• I now... am very comfortable empowering [Vice Presidents] and delegating to them, and working with them in a trusting relationship.
• [I will make] a clear separation between managerial and advisory roles and [ensure] that my advisors not cross over....
• I... need to place more trust in the staff.... I truly believe that I can do much better... provided a make a number of other changes.
• [I need to have] more frequent and direct engagement with the staff on substance.... I think significant improvement is possible... by a different allocation of time... more time in Washington and less time traveling...

And even given all this, Wolfowitz would still be head of the World Bank if he hadn't engaged in penny-ante corruption to get a sweet deal for his significant other.

## Tyler Cowen Alex Tabarrok on Tom Slee's "No One Makes You Shop at Wal-Mart"

Nobody makes Tyler Cowen Alex Tabarrok shop at Wal-Mart, but Tyler Cowen Alex Tabarrok thinks that the government should not make him not shop at Wal-Mart:

Marginal Revolution: No one makes you shop at Wal-Mart: [Tom] Slee['s No One Makes You Shop at Wal-Mart] attacks MarketThink:

In the world according to MarketThink, the combination of choice and the market is a mechanism for solving problems and improving outcomes in areas as diverse as education, city growth and culture.Hmmm...sound familiar?  (The links, also ironic, are mine not Slee's.) Let the irony continue, I recommend No One Makes You Shop at Wal-Mart

Slee's book is the best of the anti-market books: it is well written, serious, and knowledgeable about economics.  In fact, I regard Slee's book as an excellent primer on asymmetric information, free riding, externalities, herding, coordination problems and identity - Economics 301 for all those budding young Ezra Klein's.... Here is one bit.  Early on Slee makes a good point about preferences and outcomes:

The prisoner's dilemma shows how, as soon as one person's choice alters the outcome for another person... choices do not reveal preferences... instead of thinking about choices as revealing preferences, it pays to think of choices as 'replies' to the actions or likely actions of others.  The best choice you can make is the best reply to the likely actions of others.

Later, he drives the point home with a nice example:

Faced with the observation that few children walk to school anymore, we commonly hear that this tendency represents our preferences: that "people won't walk" anymore.  But this is oversimplified.  What we are seeing is one equilibrium among many, and perhaps not the best one.  There is an equilibrium in which no one wants their children to walk along empty streets, and so no children walk, but there is another equilibrium in which many children enjoy walking with groups of other children, and parents feel safe about their children because there is safety in numbers on the busy sidewalks.... Too many cities have concluded that empty sidewalks are a result of our preferences... but once a city takes it as a given that most children will be driven to school, there is no need for the city to even build sidewalks in new subdivisions, and there is more temptation to build fewer, bigger schools rather than more, smaller, easily accessible schools.  With these decisions, the empty-sidewalks equilibrium becomes even more entrenched: we are trapped in an outcome that was the result of individual choices, but that may not represent our true preferences.

Naturally, I have some criticisms.... As noted, the heart of the book is a well-written primer on let's call it new economics.  As such, this book would make a good supplement to an advanced undergraduate class....

As [a] primer, it's fine to illustrate with examples and move on but as an attack on markets one expects a balanced consideration of opposing theories.  For example, Slee looks at beer micro-breweries vs. mass brewers arguing that we are currently stuck in the bad mass-equilibrium because micro-breweries rely on word-of-mouth but the institutions which sustain the word-of-mouth equilibrium only work when there are already lots of micro-breweries about which one can talk.  Nice, but here is an alternative theory.  Economies of scale made mass produced beer cheaper and when push came to shove consumers chose the cheaper good product over the more expensive but slightly better product (I don't eat at 5 star restaurants every night).  New technologies, however, have made micro-brewing more economic and as they have done so we are moving to the mass-customization world that Slee prefers.  Consumers have gotten the best of all worlds - given scarcity - in both time frames.  The beer activists in England that Slee likes moved the process along but in the direction that it was already going.

There is no comparative analysis in the book at all.  No discussion, for example, of how free riding, asymmetric information, herding etc. distorts government choice.  Also, no appreciation that what some of us MarketThink people really advocate is civil society which includes non-profits and voluntary collective action of all kinds.  And, no we are not all corporate shills (p. 106).

It's true that outcomes do not always illustrate preferences but often they do.... Tom seems all too eager to call in the government to force us into the better equilibrium.  I worry when people start talking about how government can help us to express our true preferences....

The chapter on power is terrible, I did throw the book against the wall.  Perhaps in order to prepare us to welcome government as the deliverer of our true preferences, Slee wants to diminish the distinction between liberty and coercion.  But a true liberal should never write things like this:

...the formal structure of democracy and free markets is not enough to rule out exploitation and plunder - characteristics usually associated with repressive regimes....

[R]epressive governments around the world threaten, rob, torture and murder with impunity.  Courageous individuals have died trying to escape such regimes while others have died fighting for their rights.  No matter how great are differences in wealth, it is morally wrong to equate what goes on in repressive regimes with capitalist acts between consenting adults.

## Why Oh Why Can't We Have a Better Press Corps?

Outsourced to Emptywheel, who takes on the latest that the Washington Post's Fred Hiatt thinks is deserving of a megaphone. Five years. I give the Washington Post as we know it five years:

The Next Hurrah: Hiatt's Crumbling Soapbox: I rarely engage with Fred Hiatt's personal soapbox because the WaPo's choice of columns has already been so discredited. But... two problems with Douglas Kmiec's op-ed this morning.

First, Kmiec is necessarily wrong in his depiction of whether a crime did or did not take place.... "Comey... did his best not to disclose that his testimony related to an interpretive disagreement over the highly classified but nevertheless well-known terrorist surveillance program. Sparring between the Office of Legal Counsel (OLC) and the White House... over the legal basis for this program in wartime is leagues different from burglary for purposes of political dirty tricks." Quite simply, both statements--that there is no crime and that Comey's testimony relates to a "well-known terrorist surveillance program" cannot be true. Because if Comey's testimony relates to the program that is well-known--wiretapping those with a close association to Al Qaeda without a warrant--then Alberto Gonzales has perjured himself on at least two occasions in his statements to Congress.

If Kmiec is ignorant about which program we're discussing, then why should we believe Kmiec knows a damn thing about what kind of certification the program required?... And while he's at it, Kmiec collapses Comey's statements. Comey would not commit to whether or not reauthorizing the program without his signature was a violation of law. But he was clear that OLC as a whole could not find any legal basis for the program. As Comey pointed out in a part of his testimony Kmiec chooses to ignore, OLC judgments are legally binding throughout the Executive Branch.

All of which is a nice way of saying that Kmiec can borrow Hiatt's soapbox for yet another argument defending the unitary executive all he wants. But he's either ignorant about key facts or Gonzales has broken a law. In which case, the entire premise of the op-ed falls apart. Either Kmiec doesn't know whether Comey's tale involves crime, venal political intrigue, and raw politics. Or the comparison between this domestic spying program and that of Watergate is apt.

## Scott Horton Thinks Bernard Lewis Has Turned into a Real Loser

It is a conclusion that is hard to avoid, and shared by many:

"The Creeping Senility of Bernard Lewis": Recently I was up at Princeton listening to some faculty trade barbs about Bernard Lewis. Lewis is a media darling, but some folks who deal with Middle East studies as a profession think his ideas are off the rails. I first chalked this up to academic envy.... But having read his last op-ed piece at the Wall Street Journal, I see what the critics mean.

Lewis does a side-by-side comparison of United States and Soviet foreign policy towards the Middle East. Evidently, Americans are weaklings who can’t stay through a conflict, who withdraw when barracks are bombed in Beirut (oh my God, an attack on Ronald Reagan) and now who are preparing to quit Iraq. On the other hand, Soviets have gumption and staying power, which explains why they are so damned successful. "If you did anything to annoy the Russians, punishment would be swift and dire. If you said or did anything against the Americans, not only would there be no punishment; there might even be some possibility of reward, as the usual anxious procession of diplomats and politicians, journalists and scholars and miscellaneous others came with their usual pleading inquiries: 'What have we done to offend you? What can we do to put it right?'"

So, Lewis puts it to us that the Soviets had exactly the right approach to the Middle East. Which explains several things. The glorious victory of the Soviet Union in Afghanistan against the mujahedeen, for instance. Then the spectacular fashion in which the Russians smashed the Chechen Islamicists in the North Caucasus. And the effective Russian suppression of the Muslim upstart states in the Soviet Union’s southern periphery, followed by the spread of fraternal Russian treaty relationships across the Muslim world.

Obviously, Prof. Lewis is living in a different universe from the one I inhabit. In mine, the Soviet Union is no more, with its empire having been consigned to the dung heap of history.... But one thing about Lewis’s analysis impresses me. He has a penchant for seeing things exactly the way that the leadership of Al Qaeda does.... I’m no expert in the Middle East, of course. But neither, it seems, is Bernard Lewis.

## George Borjas on Immigration: He Doesn't Like the Deal

Mark Thoma sends us to George Borjas, who is unhappy with immigration proposals:

Economist's View: Borjas on Immigration: A Lemon in the Senate: George Borjas on the immigration reform bill:

1. Amnesty for 12 million illegal immigrants.
2. A guest-worker program that will admit 400,000 workers each year.
3. Vague promises of border enforcement sometime in the future.
4. A proposed change in the legal immigration system, away from the family preferences that now dominate the system and towards a point system that rewards skills.

Any “reform” that gives amnesty to 12 million illegal immigrants without taking care of the underlying illegal-immigration problem is a lemon. After all, what guarantees that the current batch of 12 million illegal immigrants will not be replaced by another 12 million in just a few years? What guarantees that guest workers will not stay illegally in the United States after their visa expires? What guarantees that border enforcement will be taken seriously...? There is one dim light at the end of this dark tunnel, however. Much of the political elite in the Senate is now on record as supporting a point system that allocates entry visas on the basis of skills — a move that I have long advocated....

No bill is better than this bill.... An amnesty is an amnesty, no matter how it is packaged and spun. The guest worker program will... exacerbate the downward trajectory in the economic status of poorer workers.... [T]he Bush administration will [not] seriously enforce border security in the time they have left.

The bill neatly summarizes the intellectual flimsiness of the Bush administration — a flimsiness that has cost us dearly in so many other areas. Perhaps they can convince themselves otherwise.... But we all know that, in the end, their promises are a sham, a travesty, and a mockery of what immigration policy should be about...

Mark Thomas remarks:

I don't think there is a good answer to the immigration question. It helps the poor in Mexico raise their standard of living and that is certainly worth something. But although the evidence is mixed, the work Borjas has done indicates that immigrants do depress the wages of low-income workers and may also increase the cost of social services.... Since Borjas has his say above, and since it's a view that is more nationalistic than my own, I'll repeat this from Alex Tabarrok:

I would argue... that economists are too quick to take the nation as the relevant moral community.... Why should we cut the cake in one way, excluding some from the moral community, but not in another?... I understand individual rights and I understand [utilitarian] counting everyone equally but I see less value in counting some in and some out based on... which side of the border the actors fall on...

## Can't You Do Better than This, Mr. Harwood?

John Harwood writes:

Edwards's Hedge-Fund Tie Hurts Populist Campaign: HEDGE-FUND MONEY fattens Edwards’s wallet but hurts populist message. The Democratic presidential candidate’s $1.7 million in pay and investment income from Fortress Investment Group gives target for rivals after his campaign emphasis on poverty. Edwards has explained Fortress affiliation as part of effort to learn about financial markets. “What will get him in trouble is not the amount but rationales that seem false and weaselly to the voters,” says Democratic pollster Geoff Garin. Edwards’s campaign says he paid regular personal-income-tax rates on his$479,512 salary, not preferential “carried interest” rates some hedge-fund principals use.

Of $29.5 million in assets Edwards reported to FEC, aides say investments in Fortress represent$16.1 million.

Any evidence that John Edwards's tie to Fortress is hurting his populoist campaign? I see none. I see a Democratic pollster saying that it might hurt his populist campaign if voters conclude that Edwards seems "false and weaselly."

Shouldn't the lead be, "operatives working for Edwards's Democratic competitors beg me to claim that Edwards's hedge-fund tie hurts his populist message"? Isn't that what is really going on? Evidence that it is hurting his populist message would be interesting and newsworthy. But that doesn't seem to be what we have going on here.

## Why Oh Why Can't We Have a Better Press Corps?

Atrios asks us why David Broder cannot consult the fact machine, and sends us to Media Matters:

Media Matters: In his May 17 column... David Broder asked whether congressional Democrats will renew President Bush's trade promotion authority... the "same free hand that [Bush's] predecessors have enjoyed." But... Clinton was deprived of trade promotion authority... [it] expired in 1994 during Clinton's first term [and] was not renewed.... Broder wrote:

The issue of trade policy... is now squarely before the Democratic Congress. It will almost certainly provide a huge challenge to its leadership.... And then comes the monumental question of whether to give President Bush the same free hand that his predecessors have enjoyed in negotiating global and regional trade agreements, not amendable by Congress but subject only to an up-or-down vote...

It's not rocket science we're dealing with here. And if David Broder can't fact-check himself, the Post could still afford to have somebody fact-check him.

## DeLong Smackdown Watch: Dani Rodrik

Dani Rodrik clearly explains just what parts of the "trade lowers prices" arguments are erroneous:

Dani Rodrik's weblog: Brad DeLong, prices, and trade: The argument on prices is often presented as if it is an add-on to the income-side effects of trade, and one that can override otherwise important distributional consequences. "Yes, these workers might lose their jobs, but look how much the rest of us benefit on account of lower prices."  See for example the post by Dan Drezner that started me off. My point  was that the "but..." part of the argument is irrelevant or need not hold. In particular:

(a) In our workhorse model of trade (the HOS model), certain groups will lose out from trade, regardless of price movements.

(b) And in other models (such as those with some sector-specific factors), whether any particular group of workers gains from the price effects of trade depends on how their consumption basket relates to traded goods.  If you are a worker who consumes a lot of the export good (my Argentine example), you will be worse off, regardless of the aggregate relationships discussed by Brad (i.e., even though exportables may have a smaller share in consumption than in production in aggregate).

I should add that because of these distributional effects, the median (i.e., typical) consumer can also end up worse off, to the extent that her income sources and budget shares differ from those of the average. So before you take too much comfort about all the cheap prices at Wal-Mart, these are some of the things you have to worry about...

## Take Education as the Key Link!

Tyler Cowen accuses me of being "too quick" to resort to the Marshallian scissors in defending Goldin-Katz "inequality the result of too few people going to college" against Becker-Murphy "inequality the result of wonderful technological progress." How can an economist be too quick to resort to the Marshallian scissors--i.e., supply and demand? As J.R. MacCulloch said in the early 19th century:

It is very simple to turn a parrot into a tolerable political economist. All you must do is to teach it to say, "Supply and demand! Supply and demand!"

Apparently, "Pieces of eight!" and "Yo, ho, ho, and a bottle of rum!" are optional.

Here's Tyler:

Marginal Revolution: Education as the critical problem behind current inequality: Here is an excerpt from my New York Times column today:

The return for a college education, in percentage terms, is now about what it was in America’s Gilded Age in the late 19th century; this drives the current scramble to get into top colleges and universities.  In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs.... Goldin and Katz portray a kind of race. Improvements in technology have raised the gains for those with enough skills to handle complex jobs.  The resulting inequalities are bid back down only as more people receive more education and move up the wage ladder.

Income distribution thus depends on the balance between technological progress and access to college and postgraduate study. The problem... is that American lower education does not prepare enough people to receive gains from American higher education. Bottlenecks currently keep more individuals from improving their education...

Note that education is a fundamental issue behind the kinds of inequality we should worry about most, namely the failure of many poor people to do better over time.... In a dynamic era does educational access have much of a chance of keeping up with technological improvement?

The answer is "Yes." 1915-1950 was a time of extraordinary technological dynamism. And it does not seem to be the case that lousy public schools diminish the returns to higher education. Lousy schools lead people not to pursue further education, they don't seem to make further education unuseful. As Tyler says:

the data (see David Card's Econometrica 2001 piece, plus the work of James Heckman) still find relatively high returns to additional education...

And this seems to be as true for those who have no college as for those with some college and those with B.A. degrees: it seems that there is a 7% to 10% real return on investments in education, including as a cost of the investment the money you don't earn because you are in school rather than working, no matter how much education you have. (Some disciplinary Ph.D. programs excepted, of course.)

One additional point: the "current scramble to get into top colleges and universities" is the result of a large increase in the pool applying--300 million Americans rather than 200 million, plus a huge increase in foreigners who can afford American college--coupled with a failure of the "name" colleges to add slots for students. Demand for places at the top 50 name colleges has outrun supply, demand for places at colleges has not.

Clark Kerr saw this coming fifty years ago: that Berkeley-the-city was happy to benefit from surrounding Berkeley-the-university, but that Berkeley could not grow as fast as California would. Hence his attempt to make "University of California" the brand. To this day my stationery lists all the UC campuses: Berkeley, Davis, Irvine, Los Angeles, Merced, Riverside, San Francisco, San Diego, Santa Barbara, Santa Cruz, and, of course, Sunnydale[1]. (And we professors at the older campuses resist this common branding: we teach at "Cal" or "Berkeley" and our colleagues in Westwood teach at "UCLA" rather than at "UC.")

And with that, it's time for graduation.

[1] University of California at Sunnydale is, of course, a special case with a faculty and student body with some unique qualifications. It is the sibling school to the well-known Miskatonic University in Arkham, Massachusetts.

## Robert Waldmann Calls for Right-Wing Land Reform in Venezuela

Robert Waldmann writes:

Robert's Stochastic thoughts: Land Reform in Venezuela: My personal thought is that it's about time.... [Simon Romero's] article is interesting but I think it is slanted against the land reform which is described as "brutal and legal" because:

The violence has gone both ways in the struggle, with more than 160 peasants killed by hired gunmen in Venezuela, including several here in northwestern Yaracuy State, an epicenter of the land reform project, in recent years. Eight landowners have also been killed here.

Sounds to me that the resistance to land reform is roughly 20 times as brutal as the land reform effort. The disproportion between quotes of supporters and opponents is much less extreme. The part that irritated me (and makes an alternative title "why do people hate economists") is that "economists" appear to be all opposed to land reform. "Economists say the land reform may have the opposite effect of what Mr. Chavez intends, and make the country more dependent on imported food than before." "agricultural economists say the government bureaucracy, which runs a chain of food stores, is also rife with inefficiencies" Finally economists get a name:

Carlos Machado Allison, an agricultural economist at the Institute for Higher Administrative Studies in Caracas.... “The double talk from the highest levels is absurd,” Mr. Machado said. “By enhancing the state’s power, the reforms we’re witnessing now are a mechanism to perpetuate poverty in the countryside.”

SIMON ROMERO notes, in his own voice, that "Top-down land redistribution projects have a troubled history in Latin America" which is true. However, Latin America is not the whole world. Consider some countries which have had massive Top-down land redistribution projects : Japan, Taiwan, South Korea and Italy. Italy might seem to be l'uomo dispari fuori (odd man out), but [even it] experienced an economic miracolo from the year of the reform 1953 through 1962.

Key feature[s] of successful land reforms include enough compensation of landowners that they don't fight... and clear rules. The Venezuelan approach based on the initiative of squatters does not work.... [E]ach of the four miracle-preceding land reforms... were implemented by anti-leftists who wanted to get it over with.

I do fear that Venezuela will follow the path of Peru, Mexico or Zimbabwe exactly because the struggle is politically useful to Chavez. However, the facts about the ground make it possible that a land reform has great potential.... [O]il wealth plays [havoc with] the economy... a strong currency during times of high oil prices [makes] it cheaper to import food than to produce it at home.... [Smallholder sa]griculture less integrated into world markets will suffer less from exchange rate havoc and, more importantly, [currently] production is kept low because landlords have less fear that cattle will get uppity than that tenants will become squatters.

The pattern of low productivity land use reminds me of what I heard from an extremely elderly Italian once.

But why oh why did Simon Romero have to make these obvious arguments in his own voice. Has no economist in Venezuela noticed the costs of the current pattern of ownership?

## The Palestinian Catastrophe

Scott MacLeod writes at Time's Middle East weblog:

The Palestinian Catastrophe: Arab satellite channels carried live pictures from Gaza of dozens of journalists trapped inside a building and ducking to the floor to shield themselves a little better from the blasts of rocket and gun fire outside. The dramatic images perfectly captured the sorry state of Palestinian affairs.... Palestinian journalists who risk their lives to inform the world about the tragic struggle between Israelis and Palestinians, now cowering on the floor as the leading Palestinian factions try to wipe each other out....

The timing of the latest outbreak of factional killing, which has left nearly 50 Palestinians dead, made it as ironic as it was pathetic. Tuesday was the 59th anniversary of... the founding of Israel and wartime exodus of hundreds of thousands of Palestinians. A day earlier, European foreign ministers held a first-ever collective meeting in Brussels Monday with their Arab counterparts to discuss the 2002 Arab peace initiative.... But... Israel didn't need to complain there was "no Palestinian partner for peace." The Palestinians themselves, it seems, illustrated that to the world....

To be fair, of course, the Palestinians are in miserable straits. Years of Israeli and U.S. neglect of the peace process have contributed to destructive political, economic and social pressures within Palestinian society. The reasons for the breakdown in Palestinian cohesion is similar to what happened in Iraq. Years of sanctions and isolation weakened Iraqi society to the point that when Saddam fell, chaos ensued. Unrelenting violence and poverty has done the same in Gaza now. It has scarcely helped that Israel and the U.S. have made a practice of refusing to talk to Palestinian leaders, or that they have effectively embargoed Palestine since the democratic victory of Hamas last year.

Yet... leaders and political groups have to earn respect.... Mandela and freedom-seeking South Africans... somehow managed to keep their dignity and honor. If the Palestinians can't produce leaders who serve rather than spoil their just cause, they may be in store for some more catastrophes still.

It was a much nearer-run thing in South Africa than MacLeod admits to himself: too much "necklacing." And MacLeod soft pedals his conclusion. He doesn't say that only with peace and order in a Palestine-ruled Gaza is there a chance for progress on any issue involving the West Bank. But that is the case. I would not have thought that the Palestinians could have worse "leadership" than Yasser Arafat. Yet that is the case today.

## Statisticians and Economists Look at Each Other

But I'm not a supervising technician! I'm a technical supervisor!

Social Science Statistics Blog: Is There a Statistics/Economics Divide?: OK, so now that I have a job, I feel like I can stick my foot in something smelly to see what happens. When I was on the market this past year, I was often asked about the difference (lawyers are always careful to ask about "the difference, if any") between a degree in statistics and a degree in something more "traditional"... particular interest in the difference between statistics and economics/econometrics. I had a certain amount of trouble answering the question.... [T]he statistical version of things... is that statisticians invent data analysis techniques and methods that, after ten to twenty-five to forty years, filter into or are reinvented by other fields....

So what is the difference between an empirical, data-centered economist and an applied statistician?... [E]conomists tend to focus more on parameter estimation, asymptotics, unbiasedness, and paper-and-pencil solutions to problems (which can then be implemented via canned software like STATA), whereas applied statisticians are leaning more towards imputation and predictive inference, Bayesian thinking, and computational solutions to problems (which require programming in packages such as R)...

## Does Free Trade Bring Lower Prices?

I'm confused. Dani Rodrik says that free trade does not bring lower prices:

Dani Rodrik's weblog: Does Free Trade Bring Lower Prices?: Advocates of globalization love to argue that free trade lowers prices, and the argument seems sensible enough. Think of all the cheap goods from China that we can buy at Wal-Mart.  But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors).  When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up!  Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.

Consider your typical Argentinian for example, who consumes a lot of wheat and beef. Since these are export products for Argentina, free trade implies a rise in the relative price of the Argentine consumption basket. (The gains from trade are still there, of course, but they derive from the usual allocative efficiency improvements, not from lower prices across the board.) And in the U.S., the Wal-Mart effect has to be qualified to take into account the fact that the relative price of the goods that the U.S. exports (including for example agricultural commodities) is higher than it would have been absent trade.  Similarly, when the U.S. gets better market access abroad for its agricultural exports (a key demand under the Doha round), you can be sure that this will raise domestic prices for these goods, not lower them.

Yes, prices of exportables rise and prices of importables fall. But importables have a higher weight in consumption than in production (that's why we import them). And exportables have a lower weight in consumptio than in production (that's why we export them). So if the average price of production stays the same--and incomes stay the same, because everything paid to buy our production winds up as somebody's income--then the average price of consumption falls.

It seems perfectly fine to me to give the following shorthand description of trade: Trade on average raises the prices of what you make and sell, and lowers the prices of what you buy and consume. A better description might be: Trade raises your income relative to the prices you pay if you are a net buyer of importables, and lowers your income relative to the prices you pay if you are a net buyer of exportables--but as a country, on average, we are net buyers of importables (that's why we import them) and net sellers of exportables (that's why we export them). But the first shorthand description seems to me to be correct, if incomplete.

## Research Continues on the Stupidity Rays Emanating from the American Enterprise Institute...

Only Shrillblog can deal properly with American Enterprise Institute economist Kevin Hassett's declaration that the Russian economy is outperforming America's--because, you see, dictatorships like Vladimir Putin's "are not hamstrung by the preferences of voters for, say, a pervasive welfare state."

Research continues on just what kind of rays emanate from 1150 17th Street that make dumb people dumber, and smart people dumb. The latest volunteers were the brilliant Kevin Murphy and Gary Becker, who were strapped into a test capsule that was sent in a close flyby by the AEI. This is what emerged:

The Upside of Income Inequality: This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavorable development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human capital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to investments in education and other human capital...

In their normal state, Kevin and Gary would say that there are two possible causes of rapid growth in skills and education premiums: demand and supply. If it is demand--if technological progress accelerates so that it outstrips the previously-expected growth path, and if education and skills are strongly complementary with technology (as we believe them to be), the education and skills premiums would increase as the productivity of the American economy grew rapidly. This would be good news.

If it is supply--if for some reason the share of Americans receiving educations and gaining skills falls below previously-expected trends, and no longer keeps pace with the normal advance of technology, then the education and skills premiums would increase as the productivity of the American economy grew less rapidly than had been expected. This would be bad news.

We can, Murphy and Becker would say, tell the difference. If the rise in inequality over the past generation is due to good news, we would expect the share of Americans going to college to advance faster than previous historical trends and we would expect overall economy-wide productivity growth over the past generation to have been faster than usual. If the rise in inequality over the past generation is due to bad news, we would expect the share of Americans going to college to fall short of normal trends, and we would expect economy-wide productivity growth to have been slower than normal.

And guess what? over the past generation--even taking into account the very good decade since 1996--productivity growth has been slow, and the share of Americans going to college has not risen rapidly. On the quantity-of-education side, the news is not good:

[W]hy haven’t more high school graduates gone on to a college education when the benefits are so apparent? Why don’t more of those who go to college finish a four-year degree? (Only about half do so.) And why has the proportion of American youth who drop out of high school, especially African-American and Hispanic males, remained fairly constant? The answers to these and related questions lie partly in the breakdown of the American family, and the resulting low skill levels acquired by many children in elementary and secondary school—-particularly individuals from broken households.... Most high school dropouts certainly appear to be seriously deficient in the noncognitive skills that would enable them to take advantage of the higher rates of return to education and other human capital...

And yet this passage is followed by the conclusion:

For many, the solution to an increase in inequality is to make the tax structure more progressive—-raise taxes on high-income households and reduce taxes on low-income households.... A more sensible policy is to... encourage more human capital investment. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—-human capital.

Becker and Murphy thus argue, in the space of three paragraphs, that (a) increases in the net return to education caused by spreading inequality generated by rising pretax wage differentials won't lead to increases in educational attainment, but (b) decreases in the net return to education caused by reducing inequality through progressive taxation will lead to decreases in educational attainment.

All are urged to remain far from 1150 17th Street until the mechanism of these effects is better understood.

## Read the Financial Times, Not the New York Times

In comments. Bupa says that I should praise the New York Times's Steven Weisman because he gets the punch line right on the latest developments in the Wolfowitz-Riza affair:

Bush Opens Door to Wolfowitz’s Resigning - New York Times: A factor that kept emotions high was the disclosure on Tuesday of documents that seemed to buttress the bank committee’s conclusion that Mr. Wolfowitz tried to keep the pay and promotion arrangement for Ms. Riza a secret. According to one document, Mr. Wolfowitz had a bitter showdown with the bank’s personnel director, Xavier Coll, in March 2006.... Mr. Coll recounted that Mr. Wolfowitz became "increasingly agitated"... using expletives and threatening retaliation.... [T]he document seemed to demonstrate that Mr. Wolfowitz was aware six months after he arranged for Ms. Riza’s [large raise in salary] that few people at the bank knew about it. This appeared to contradict his contention that it was well known at the bank and deemed appropriate.

I'm not so sure. I think I would set the bar higher. First of all, these are the last paragraphs of Weisman's story, not the first. They belong high up in the story.

Second, there are a good many things that Weisman does not say in the story that he should. For example, he should say that on Sunday he reported on the Coll memos like this:

[World Bank o]fficials... said testimony and notes that Xavier Coll, vice president of human resources, provided to a bank committee investigating the matter supported the charge that Mr. Wolfowitz was aware of engaging in favoritism. One said the documents were "devastating" to Mr. Wolfowitz’s case... and... have become central to the charges Mr. Wolfowitz is fighting. The officials did not provide the documents.

It was unclear whether Mr. Wolfowitz’s supporters would read the same information differently and insist that it buttressed his insistence that his actions were encouraged by others and subsequently cleared by them. Robert S. Bennett, Mr. Wolfowitz’s lawyer... disputed that any such evidence existed and suggested that there might be some misinterpretation of the evidence. Mr. Bennett has reviewed extensive amounts of the testimony in the case.... "I will say that a careful review of all the documents shows, if anything, that there was no bad faith on Mr. Wolfowitz’s part."

Weisman should say that Robert Bennett lied to him: Coll's document says that there was bad faith on Wolfowitz's part. And Weisman should also explain to his readers why he gave Bennett as much relative weight as he did in his story of last Sunday.

Perhaps this is setting the bar too high--perhaps no establishment Washington reporter can be asked to press Robert Bennett rather than simply printing what Bennett wants to say. But on this issue, Krishna Guha and Eoin Callan's reporting in the Financial Times has been earlier, more comprehensive, better, and fairer than the reporting in the New York Times or the Washington Post: http://www.ft.com/cms/s/2378a922-0358-11dc-a023-000b5df10621,dwp_uuid=2114d450-df62-11da-afe4-0000779e2340.html, http://www.ft.com/cms/s/ef1356a6-0310-11dc-a023-000b5df10621,dwp_uuid=2114d450-df62-11da-afe4-0000779e2340.html, http://www.ft.com/cms/s/0f18fcf0-0251-11dc-ac32-000b5df10621,dwp_uuid=2114d450-df62-11da-afe4-0000779e2340.html, http://www.ft.com/cms/s/35c4cbe0-f9dc-11db-9b6b-000b5df10621.html.