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July 2007

Will Severus Snape Die Well? Or Die Badly?

We are about to find out. (I assume the chance that Severus Snape will actually survive the book is too small to measure.)

All over the United States today, small nature and wildlife centers were being begged by bookstores to loan out their stuffed owls for this evening. Overheard:

We couldn't get the Snowy Owl. All we could get was the Barn Owl. It will have to do...

The Past Week in "Shrillblog": July 20, 2007

Our numbers are now legion: those of us who have been driven into shrill unholy madness by the mendacity, malevolence, disconnection from reality, and incompetence of George W. Bush, his administration, and his enablers and sycophants.

We are now so many that it is impossible to document the shrillness. All we can now do is provide a sample of those who, in the past week, have visibly demonstrated their membership in our ranks. Few can match the shrillness of our grand heresiarchs: not everyone can attain the standing of a Paul Krugman or an Andrew Sullivan or a Duncan Black or a Colonel Wilkerson. But we can all try in our own little way. And we can all chant the ancient chant:

Phnglui Mglw'nafl Krugman R'lyeh W'gahnagl Fhtagn! Sullivan Fhtagn! Black Fhtagn! Krugman Fhtagn!

links for 2007-07-21

Why We Should Love Those Twingly Internettube Things

Less than two hours after I write, Roger Bigod tells me:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Somewhat OT, but there's a Russell Baker piece in the current New Yawk Review of Books on the decline of newspapers. Though blogs are no replacement, this illustrates an advantage of the form. Before the internet, the only place to find this Broder fex would have been on microfilm in a newspaper margue or a few libraries. And anyone who located it would have no place to re-publish. The Shrill Professor has discovered the Reverse Memory Hole.

Baker notes that the great family owned newspapers are a uniquely important cultural resource, one of the last best hopes for accurate public information. Then he has to admit that during the run-up to the Iraq War, their performance was comparable to Pravda or Izvestia under Comrade Stalin. There's probably a terrific movie there, but not one I expect to see, and not one that ends happily.

The Past Week in "Egregious Moderation": July 20, 2007

Here is my last week's worth of rotisserie-league discourse and debate on politics and reality. It's for people who want to know what my ideal online source for punchy liberal analysis and evisceration--especially evisceration--would look like:

The Highest Broderism of Them All: A Historical Document

A correspondent wonders what David Broder thought of impeachment back in mid-1974. The answer is that he hoped it would fail--and that Richard M. Nixon would have his revenge.

Let's roll the tape:

David S. Broder (1974), "If Congress Refuses to Impeach..." Washington Post (July 10), p. A 30:

With the oral arguments before the Supreme Court completed and the parade of witnesses before the House Judicary Committee coming to an end, the case of Richard Nixon is moving inexorably toward its first real climax: the House vote on impeachment.

No one knows what the outcome of that vote will be, for it depends on the weight of the evidence the committee has still to assemble in coherent fashion. But the political ramifications of the pending decision are beginning to come into clear focus.

If the House votes to impeach Mr. Nixon, there would be little need to revise the widespread predictions of significant Democratic gains in the November election. In truth, those predictions are premised on an unfavorable verdict against the President.

But suppose the House goes the other way? Suppose there are few Republican defections and that enough Democrats cross the line to exonerate Mr. Nixon of every charge leveled against him by the Judiciary Committee in its expected bill of impeachment? Legally, that would be the end of the matter. The cloud over Mr. Nixon's future would disappear and he could go back to being a full-time President. Congress could go back to legislating. Messrs. Doar, Jenner, and St. Clair could return to their firms.

But politically, the fireworks would just be starting, for anyone can see that a drama as great as Watergate itself would begin no more than 24 hours after the House refused to vote impeachment.

The first reaction would probably be a wave of recriminations within the House itself--with the anti-impeachment majority lashing out against the Judiciary Committee members for spending $1.5 million and uncounted thousands of manhours to produde an indictment so weak that the House itself would not sustain it.

But that reaction would be a passing ripple compared to the tidal wave of public sentiment that would sweep over the Congress if the House voted against impeachment.

Mr. Nixon's spokesmen have already made the accusation that the impeachment investigation ordered by the Democratic leadership last October is nothing but a partisan assault on the integrity of the presidential office. If the Judiciary Committee were repudiated by a majority of the 248 Democrats and 187 Republicans in the House--no matter in what proportions--the White House charge would surely have been proven to the public's satisfaction.

The President's supporters in the country would cry vengeance against a Congress which spent the better part of two years not dealing with energy or inflation but harassing the President for no purpose. The President's critics would no doubt take a vote against impeachment as a final proof of the craven cowardice of congressmen.

Instead of Republican candidates trying to escape the drag of Watergate and Richard Nixon, Democratic candidates would find themselves on the defensive about a 93rd Congress which did little but posture on impeachment for two year and then proved by its own votes that there was no need for the nation to have been subjected to that ordeal.

Resurgent Republicans, rallying around the vindicated President, would almost certainly regain the offensive, exploiting the predictable public reaction against the press and the Democratic Congress which had burdened the country with the Watergate-impeachment fiasco.

The big political story of the fall would not be a replay of the spring and summer saga of the demoralization of the Republican campaign organization. It would be the story of activist Democratic worker and contributors asking bitterly, "What's the use of controlling Congress when things like this happen?"

But not all Republican congressmen would be enjoying the turnabout. Those few dozen who had broken ranks to vote for impeachment would find themselves pariahs in the party of Richard Nixon.

If they managed to escape repudiation by the voters this year, they would be guaranteed strong pro-Nixon primary opponents in 1976. Many of them would undoubtedly wonder whether there was any way to remain in public office as Republicans.

Meanwhile, the anger of liberal Democrats against those conservatives in their party's ranks whose votes had given Mr. Nixon his vindication would surpass in bitterness the old Democratic divisions over civil rights and Vietnam.

Talk of disciplining or expelling the dissidents in both parties would mount. Political scientists would dust off their articles on realignment--asking whether the friends and foes of President Nixon would not constitute themselves into separate parties, obliterating past affiliations.

All this is well within the realm of possibility. All that has to happen is for the House to exonerate the President by voting no bill of impeachment.

David Broder: He came to Washington. He trashed the place. And it wasn't his place. It was never his place.

links for 2007-07-20

Clive Crook vs. The Populist Democratic Politicians

Daniel Drezner directs us to Clive Crook: :: Daniel W. Drezner :: Clive Crook vs. economic populism: Clive Crook's Financial Times column today ($$) plows a familar road -- the Democratic turn towards economic populism:

Whoever wins their party’s presidential nomination, the Democrats are preparing to fight the next election on a platform of left-leaning populism. The contrast with Bill Clinton is evident. He was a centrist, pro-trade, pro-enterprise president – an avowed “New Democrat”. The next Democratic occupant of the White House, if the candidates’ campaigns are to be believed, will be old-school.

Mr Clinton campaigned against the odds to secure passage of the North American Free Trade Agreement. Today the party is against such deals. Mr Clinton worked hard to get China into the World Trade Organisation. Hillary Clinton and Barack Obama are Senate co-sponsors of a new China-bashing law. And the move to the populist left is not confined to trade. All the Democratic contenders are turning up the volume on stagnating middle-class wages, soaring profits, swindling bosses, dwindling union membership (Mrs Clinton and Mr Obama back the abolition of secret ballots on union representation), tax loopholes for the super-rich, oil company gouging, insurance company gouging, drug company gouging and every other kind of gouging....

Mr Clinton’s conviction that globalisation was good for America owed a lot to the experts – including economists of the highest professional standing – who surrounded him. Recently, eminent economists such as Alan Blinder, Paul Krugman, Larry Summers (who served as Mr Clinton’s Treasury secretary) and Brad DeLong have all expressed new doubts about the benefits of globalisation for the US. It is all more complicated than we thought, they say. It was hard enough for Mr Clinton to fight for freer trade when every highly regarded economist in the country said it was good for the US. Now that their message has changed to “We might have been wrong about this. We’ll get back to you”, the prospects for liberal trade have dimmed....

Economic populism traditionally marries scepticism on trade with fear of big business: “It’s all about profit.” A striking feature of many Democratic proposals is the belief that cheaper petrol, cheaper drugs, universal health insurance, higher wages, more generous employment benefits, almost any good thing you can think of, can be achieved by demanding them, in one way or another, from companies, or else by raising taxes on the super-rich....

There is no question that the Democratic contenders are talking about the issues that concern most Americans. There is an excellent centrist case to be made for tax reform, to lift the burden of income and payroll taxes from the low-paid and to increase the burden on the better-off. Universal healthcare is long overdue, a shameful state of affairs in so rich a country. Americans pay more than they should for their medicines. More generous and more imaginative assistance for Americans who lose their jobs because of trade – or because of changing tastes and technology – is needed.

The present administration has little to offer on any of these questions. But the costs of reform cannot be confined to foreigners and plutocrats.

It's a somewhat odd column. The Democratic economists--Summers, Blinder, Krugman, and that other guy who doesn't belong in such company--are right to say that things are complicated: globalization has not delivered the growth-accelerating flow of capital to the developing world that it was supposed to, and the Clinton focus on restoring fiscal stability to America was then immediately undone by Bush who used the running room we had created to redistribute income upward. Knowing what we know now about the morals, competence, and values of the bush administration and the Republican congressional leadership, I do not know a single Democratic economist who does not wish that we had raised taxes on the rich more, reduced the deficit less, and spent more on infrastructure and social programs than the Clinton administration actually did. And while we are franticallhy and desperately trying to mark our beliefs to market with respect to international monetary and financial affairs so that we can give good policy advice, we have not yet succeeded in doing so. This is how things are: Would Clive Crook rather we sent our time telling lies?

It's a somewhat odd column. As best as I can tell, Clive Crook approves 100% of the Democrats' substantive policy agenda: "There is an excellent centrist case to be made for tax reform, to lift the burden of income and payroll taxes from the low-paid and to increase the burden on the better-off. Universal healthcare is long overdue, a shameful state of affairs in so rich a country. Americans pay more than they should for their medicines. More generous and more imaginative assistance for Americans who lose their jobs because of trade – or because of changing tastes and technology – is needed." If this be "populism," let us make the most of it.

What Clive Crook wants, I believe, is Whig measures sponsored by Tory men (and women). But that would reauire a very different Republican Party than America has today. Perhaps Clive Crook should devote himself 24/7 to trying to build such a party--certainly nobody else is. But until those reality-based Tory men (and women) supporting Whig meassures whom Crook wishes we could vote for emerge, we have the poiticians we have. The constructive strategy is then not to lament that they have populist goals, but to demand that they pursue their populist goals by adopting policies that might actually work rather than policies that sound good in focus groups. And the constructive strategy is also to demand that America's business elite that they support policies that make them partners with rather than adversaries of the rest of America.

Hoisted from Comments: The End of the Old Republican Party

Hoisted from comments: vtcodger submitted a comment to 'The Buried Past of the Democratic Party'

vtcodger submitted a comment to 'The Buried Past of the Democratic Party': A minor point, but the Republicans were pretty good on civil rights as late as 1964. In June of 1964, Senate Minority Leader Everett Dirksen delivered 27 of 33 Republican votes for cloture -- the key vote on the Civil Rights Act of 1964. See

If I recall correctly Goldwater was one of the six Republicans who voted against cloture. Says all that needs to be said about that guy I think.

Unfortunately, the course of the Republican party since then has been pretty much downhill including skimming a considerable amount of Dixiecrat scum into their ranks. I don't know how one is going to gloss that decent into darkness over.

Tyler Cowen Finds Angus Deaton on "Happiness"

Tyler Cowen writes:

Marginal Revolution: The best mid-sized chunk I read today:

...the fraction of Kenyans who are satisfied with their personal health is the same as the fraction of Britons and higher than the fraction of Americans.  The US ranks 81st out of 115 countries in the fraction of people who have confidence in their healthcare system, and has a lower score than countries such as India, Iran, Malawi, or Sierra Leone. While the strong relationship between life-satisfaction and income gives some credence to the measures, the lack of such correlations for health shows that happiness (or self-reported health) measures cannot be regarded as useful summary indicators of human welfare in international comparisons.

That is Angus Deaton...

Angus is highly likely to be right.

Jim Hamilton on Ben Bernanke on the Economic Outlook

Jim Hamilton writes:

Econbrowser: Bernanke on the economic outlook: In testimony before the U.S. Congress yesterday, Fed Chair Ben Bernanke continued his policy of greater openness and transparency for Federal Reserve policy, trying to lay out clearly what the Fed is most worried about. Bernanke's statement included the following details:

The central tendency of the [FOMC member] growth forecasts, which are conditioned on the assumption of appropriate monetary policy, is for real GDP to expand roughly 2-1/4 to 2-1/2 percent this year and 2-1/2 to 2-3/4 percent in 2008. The forecasted performance for this year is about 1/4 percentage point below that projected in February, the difference being largely the result of weaker-than-expected residential construction activity this year. The unemployment rate is anticipated to edge up to between 4-1/2 and 4-3/4 percent over the balance of this year and about 4-3/4 percent in 2008, a trajectory about the same as the one expected in February.

Putting out specific numbers like this is intimidating-- we're much too chicken to do it here at Econbrowser-- since even the best numbers are sure to be wrong. Bernanke is giving us these numbers not because he's sure it's going to happen this way-- he knows it won't. But the numbers do communicate exactly what the Fed is thinking in a way that Greenspan's mushy sentences never did. The Fed's best guess is that the current slow growth rates will continue for another year, and the reason is the ongoing problems with housing:

The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that--despite the recent increase--remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.

Bernanke also acknowledged that the Fed has become more concerned about mortgage defaults:

conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans. In recent weeks, we have also seen increased concerns among investors about credit risk on some other types of financial instruments. Credit spreads on lower-quality corporate debt have widened somewhat, and terms for some leveraged business loans have tightened. Even after their recent rise, however, credit spreads remain near the low end of their historical ranges, and financing activity in the bond and business loan markets has remained fairly brisk.

Bernanke's concerns, however, are not as great as those of Brad DeLong, who concludes... that it's time for the Fed to lower its target for the fed funds rate.... The concern is then how broad the financial ramifications would prove to be if we see high default rates outside of the subprime categories. But I think Bernanke is unlikely to follow DeLong's advice, because the Fed Chair is in the same box he's been in all along-- fears about rising inflation.... Bernanke is... well aware that these futures-based forecasts historically have a huge forecasting error, and no one can rule out a continuation of the recent surge in energy and food prices.

All of which leaves the Fed no alternative but to keep the target fed funds rate steady for now. But I share DeLong's big worries, and suspect that Bernanke must to some degree as well. My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.

Daniel Drezner on the Dangers of Protectionism

Kevin Drum writes:

The Washington Monthly: MORE TRADE....If you're interested in some more free trade bloggery, Dan Drezner has responded to the questions I asked on Monday. Here's his take on why he's so adamant about pushing free trade even though trade is already pretty darn open:

The trouble with populism is (mostly) not about the remaining 10% of barriers to trade (though see below), it's about efforts to f$%& up the 90% of barriers that have been dismantled. The Baucus-Grassley-Schumer-Graham bill, for example, isn't about halting new trade openings — it's about finding new ways to clamp down on existing openness.

Furthermore, this is never going to go away. Protectionism is a great way to reward concentrated interests with diffuse costs, so members of Congress will always have an incentive to act in this way.

There's something to this. The Baucus bill doesn't get me all that excited, though. It's all about China bashing, a perennial favorite among politicians for at least the last 20 years, and it rarely goes anywhere. It probably won't go anywhere this time either. (Though, granted, that's partly because of people like Dan.)

In any case, the big issue is what to do to mitigate the effects of trade agreements on the working class, and Dan has some good suggestions. However, I asked for things that "conservatives wouldn't assault like mad dogs until the last breath was torn kicking and screaming from their bodies," and I'm not sure any them qualify. Conservatives should feel free to set me straight if I'm wrong about that.

Okun’s Law and Potential Output Growth

Greg Ip writes:

More on Okun’s Law: The Fed thinks the economy’s potential growth rate is at least 3%, Goldman Sachs concludes after examining the forecasts of Fed officials in this week’s Monetary Policy Report. Chief U.S. economist Jan Hatzius applied “Okun’s law” to the FOMC “central tendency” forecasts of unemployment and inflation. Mr. Hatzius disputes Real Time Economics’ conclusion that the FOMC forecasts imply a potential growth estimate of 2.5% to 2.75%.... Mr. Hatzius writes in an email:

Even small projected changes in the unemployment rate matter quite a lot in this type of calculation/ Take the Okun’s law equation : Actual growth = potential growth - a * d(unemployment rate), which implies: Potential growth = actual growth + a * d(unemployment rate).

Looking forward over the next 6 quarters, assuming they estimate 3pc actual for Q2 06, and using the midpoint of the central tendencies, they are projecting an annualized 2.72pc actual growth rate and an annualized 0.166pp rise in the u rate. The estimates of the Okun’s law coefficient “a” generally vary between 2 and 3. If you use 2, you get a potential growth estimate of 2.72+2*0.166=3.05%. If you use 3, you get 2.72+3*0.166=3.22%.

I agree that taking these numbers literally can be dangerous given the strange way in which the central tendencies are constructed, although the place has become so academic that they probably pay more attention to the appearance of internal consistency than they used to do. In any case, if you do take them at face value, I think they point to a potential growth estimate of well above the 2.5%-2.75% range...

Poll Coverage: Stop the Insanity!

What the Wall Street Journal's Washington Wire column should have said:

Virtually no Republican primary voters have yet thought much about whether Rudy Giuliani or Fred Thompson would make a better president. Virtually no Democratic primary voters have yet thought much about whether Barack Obama or Hillary Rodham Clinton would make a better president. The Harris Organization is wasting its time conducting horse-race polls. We will not waste our readers' time by covering them.

What the Wall Street Journal's Washington Wire column did say:

Washington Wire: Thompson Catches Giuliani in Latest Harris Poll: Matt Phillips breaks down the latest Harris Interactive poll: Though not yet an official candidate, actor and former Tennessee Sen. Fred Thompson is now in a statistical dead heat with former New York City Mayor Rudy Giuliani atop the pack of potential Republican presidential nominees, the latest survey from Harris Interactive shows.

With 29% of Republican primary or caucus voters saying they’d be most likely to vote for Mr. Thompson, he leads Mr. Giuliani by just one percentage point, according to the July survey. Mr. Thompson’s edge is within the 4.2-percentage-point margin of error on the question, and thus not conclusive, but his months-long surge in popularity is not in dispute. Since the poll Harris Interactive published in May, Mr. Thompson has risen by 11 percentage points among respondents. At the same time, Mr. Giuliani has slid by 10 percentage points since May, when 38% of Republican primary and caucus voters said he would likely get their vote.

Perhaps best known for his portrayal of no-nonsense District Attorney Arthur Branch on the hit NBC series “Law and Order,” Mr. Thompson served as a senator from 1994 to 2003. He has been taking steps — including fundraising — that leave open the possibility of a presidential run. And while he has not yet made an official announcement, his presence has caused a stir among the ranks of Republicans. His Harris Poll ratings this month among potential GOP primary voters put him 12 percentage points ahead of Arizona Sen. John McCain, who was once considered a Republican front-runner. Of the Republican primary voters polled in July, 17% responded that they would be most likely to vote for McCain. Mr. Thompson also leads former Massachusetts Gov. Mitt Romney, the top fundraiser in the GOP race, by 20 percentage points.

Meanwhile, in the Democratic race, Sen. Barack Obama of Illinois slipped further behind Sen. Hillary Clinton of New York in July, as more than one-third — 35% — of Democratic primary and caucus voters said she would most likely get their vote. Out of the same pool of people, 28% said they would most likely vote for Mr. Obama, that’s down from 32% in June.

The most recent online poll was conducted July 6-13. In it, Harris surveyed 2,225 adults, out of whom 822 said they would vote in a Democratic primary or caucus and 560 said they would vote in a primary or caucus for Republicans. Questions asked just of potential Democratic primary or caucus voters have a margin of error of plus or minus 3.5 percentage points. Questions put to potential Republican primary or caucus voters have a margin of error of 4.2 percentage points.

links for 2007-07-19

Recent Delinquency Rates by Mortgage Type

Felix Salmon directs us to Aleablog, which digs out a graph from the Federal Reserve's Monetary Policy Report to Congress:

Alea: Subprime “Problems” : Contained: A picture is worth a thousand words. This one comes from the Monetary Policy Report to the Congress. Clearly the so-called subprime problem is limited to subprime-variable rate loans. All others mortgages have deliquency rates below or even well below... the rates seen in 2001/2002.

The composition of mortgages has, however, shifted: there are a lot more subprime adjustable than there used to be. Subprime-variable mortgages are now up to 9% of the outstanding mortgage stock, according to the Fed.

This is a series to watch as ARM resets kick in over the next year.

Felix Salmon Says that the New York Times Shrinks Its Economics Coverage

Perhaps we are to be replaced by more stories about "hero CEOs"--although Steve Greenhouse has an excellent piece in that genre up right now:

Finance Blog - Market Movers: The New York Times, until now, has had three economics columns. Economic Scene was written by economists: it rotated between Tyler Cowen, Austan Goolsbee, Robert Frank, and Hal Varian. Economic View was written by journalists, including Daniel Altman, Dan Gross, and Louis Uchitelle. Finally, Times staffer David Leonhardt had his own Wednesday column, Economix.

Today, all that changed.

Leonhardt's column is still there, but it is now called Economic Scene. And so the question arises: if Economix has become Economic Scene, what has happened to the Economic Scene of old? Leonhardt answered that at the end of his column: it has become Economic View. All the old Scene columnists bar Varian will be squeezed into View, along with new columnists Greg Mankiw, Alan Blinder, Judith Chevalier, Robert Shiller, and Lester Thurow. (Varian apparently doesn't have the time to continue to write for newspapers, now he's working for Google.)

For those of you keeping count at home, that's eight high-profile economists sharing one slot in the Sunday newspaper.

And what's happened to Economic View? Leonhardt doesn't come right out and say so, but it seems to have been killed off entirely.

Was there too much economics in the NYT, which is literally shrinking in August and might need to make cuts? Elsewhere in the NYT there's Paul Krugman, of course, with his own op-ed columns, but those are rarely particularly economics-based these days. And every so often the Levitt 'n' Dubner team writes a Freakonomics column in the Sunday magazine – there have been four of those so far this year.

This is not good news for economic discourse in the mainstream press. One column every two months is not much of a platform: it will take years for readers to get a decent feel for where each of the columnists stands. And while the Economic View column was not always scintillating, it was a million times better than the half page of undigested tripe filed every week by the dreadful Ben Stein. To kill View but to keep Stein alive betrays a sense of priorities which can't bode well for the NYT Business section.

How Costco Became the Anti-Wal-Mart

Steven Greenhouse has a nice story about Costco, where we dropped $500 last weekend:

How Costco Became the Anti-Wal-Mart - New York Times: Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

He also dismisses calls to increase Costco's product markups. Mr. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall. "When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," he said. "We don't want to be one of the casualties. We don't want to turn around and say, 'We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices."

At Costco, one of Mr. Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more. "They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now"...

High-Grade Structured Credit, and Time for the Fed to Start Cutting Interest Rates

BondDad writes:

Daily Kos: $10 Billion Hedge Fund Now WORTHLESS: $10 Billion Hedge Fund Now WORTHLESS: From CBS Marketwatch:

A Bear Stearns Cos. hedge fund that made leveraged bets in the subprime mortgage market is worth nearly nothing, according to two people briefed by the investment bank. Investors have been waiting for Bear to update them on the High-Grade Structured Credit Enhanced Leveraged Fund and a larger, less leveraged fund called the High-Grade Structured Credit Fund. The Wall Street Journal reported on Tuesday that the larger High-Grade Structured Credit Fund is worth roughly 9% of its value at the end of April.

bonddad's diary :: :: For those of you catching up on this story, here's the short version.  About 2-3 weeks ago, Bear Stearns announced that two hedge funds invested primarily in the structured finance area (Collateralized Debt Obligations and Collateralized Loan Obligations) were experiencing record redemption requests.  The problem with these requests is the fund was heavily leveraged -- meaning they had borrowed a ton of money.  Reports have the leverage ratio at either 9 or 10 to 1, meaning for every $1 in equity/investment there were at least $9 or $10 in borrowed funds.  These redemptions forced the funds creditors to make a margin call, or asking for their money back. Eventually, Bear made a loan of $1.6 billion to the funds to bail them out.  Now, a few weeks later, we learn the [HGSC] fund is pretty much worthless.

I have been an optimist about the subprime market. It seemed to me that there would be four and only four consequences. (1) People sold zero-down effectively non-recourse loans at teaser rates who found that they could not afford the reset payments will have to move, but will have gotten several years of relatively cheap rent. (2) People with equity in their homes sold negative-amortization loans that they could not afford will get creamed: they will lose their equity, which will have been effectively stolen from them by financial sharpies. (3) Wall Street professionals and investors who did not read or understand the fine print as to what the ABX was or how the rating agencies did their backward-looking calculations will lose--some because they didn't understand that you cannot hedge a prospective loss by shorting a retrospectively-calculated index, some because they bet the liqudity flood would push spreads even smaller, and some because they didn't understand how large the nonlinearities were that meant that the synthetic risky securities you created by leveraging-up higher-grade ones didn't behave like the real risky tranches. (4) Wall Street professionals and investors who did read and understand the fine print as to what the ABX was and how the rating agencies did their backward-looking calculations will profit, and will boast to prospective investors in the future about their high returns.

Of these, only the second is worth worrying about--only the second group is truly getting the shaft.

It seemed to me that these would be the four and the only four consequences because the losses would be contained. They would not spill over into massive numbers of foreclosures and substantial housing price declines in large chunks of the country. Because there would be no melt-down in the price of the underlying--the actual houses--the tempest would be confined to the financial teapot rather than spreading throughout the rest of the economy to wreak havoc (with the exception of the people who are fleeced of their equity by financial sharpies).

Now I am not so sure. It no longer looks like things are as contained as I had thought.

Duncan Black directs us to:

Irvine Housing Blog: 100% Financing Failure: Part of the bearish argument for a dramatic drop in prices is predicated on an infusion of “must sell” inventory to the housing market. Sellers won’t sell at a loss unless they have no choice. This is why prices generally are sticky in a housing market decline. Foreclosures and short sales are by their nature must-sell inventory. For this must-sell inventory to be forced onto the market people must be unable or unwilling to make the payments on their mortgage. The “unable” part will come from reseting ARMs with higher interest rates; the “unwilling” part will come from people walking away from 100% financing deals when market prices do not continue to rise.

It is this latter category of unwilling homedebtors that is unusual in this market. In previous bubbles, lenders were not so stupid as to offer 100% financing, so there were not as many people who utilized “jingle mail” as they went underwater. It is my opinion that jingle mail will be epidemic as this bubble unwinds. Today’s property is a typical short sale. The seller overpaid with 100% financing and now is going to walk away...

And to Nouriel Roubini:

RGE - U.S. Homebuilder Confidence Drops to 16-Year Low as Housing Slump Persists: There are at least four factors that will increase the excess supply of new and existing homes this year and next and lead to even lower home prices:

  • First, the credit crunch in the subprime market will reduce the demand of new homes by potential subprime borrowers. Goldman Sachs estimated this effect to be as large as 200k less new homes sold this year.
  • Second, about  $1.5 trillion of ARM will be reset this year and next: a rising fraction of these borrowers will be unable to afford the much higher rates on their mortgages and will be forced to sell their homes.
  • Third, it takes about six months or so for a subprime mortgage deliquency to lead to foreclosure, and the bank taking over the home and then putting it on sale in the market; once that occurs, the supply of homes in the market will increase. Some forebearance will occur but many homes will end up in foreclosure and then sold by the creditors adding to the housing supply glut.
  • Fourth, folks who bought homes in the last two years for speculative reasons with little equity (the condo flippers) will sell their homes as rapidly as possible as now falling home prices are wiping out the little equity they did have in these homes.

In summary, all four factors will increase the excess supply of unsold new and existing homes and will push further downward home prices. The housing carnage will get much worse before it gets any better. And the financial fallout of this subprime - and now near prime - mortgage meltdown is only beginning to show its effects in financial markets: not just in the RMBSs, CDOs,  TABX and the ABX markets; but increasingly in commercial real estate and corporate risk spreads as the recent market performance of the CMBX, LCDX, CDX, ITRAXX indices shows. Certainly the contagion to the LBO loan financing market is already clear...

Certainly it's time for the Federal Reserve to make noises about how minimizing foreclosures and evictions is a good strategy for financial institutions to adopt. And if I were on the FOMC I would start voting to cut interest rates.

Those Poor People! Mark Kleiman Needs to Learn Theology from "Galaxy Quest"

Mark Kleiman attacks P.Z. Myers:

The Reality-Based Community: Atheistic bigotry and religous metaphor: Meyers, it seems to me, is just the flip side of Michael Gerson. Meyers furiously denounces as false the sort of childish religion that Gerson exemplifies but that thoughtful worshippers of every persuasion have always despised.

Religious thought, writing, and speech, at its adult level, is always metaphorical. "Humans are created in the Image of God," taken literally, is nonsense, if you remember that it is a part of a religious tradition that says that God is an infinite, omniscient, beneficent, immortal being "without parts or passions," which is the opposite of finite, finitely rational, ethically challenged mortal beings with physical bodies and emotional drives.... (Of course religious writers don't generally assert that "God" names a metaphor rather than an entity, any more than the actor playing Hamlet looks at the audience and says, "I'm not really the Prince of Denmark" or any more than a Pynchon novel carries a disclaimer on the title page, "None of this stuff really happened.")...

[I]f, like anyone who has thought deeply about these matters, you think of God as an especially potent metaphor (or, to put in more flowery terms, "a mystery to be understood only in part, and then by faith") — if you think that, then the whole debate is pointless. Both Gerson and Meyers are just being silly: it's two blind men debating the nature of the elephant while groping around different parts of a Land Rover.

There is a movie, Galaxy Quest, in which a group of aliens--Thermians--kidnap some out-of-work actors who had starred in a 1960s space travel show, and ask them to command their forces in a war of self-defense. The actors try to explain that the TV broadcasts the Thermians have picked up--what the Thermians call the "historical documents" are not fact but fiction, and make reference to other TV broadcasts, like "Gilligan's Island." "You don't believe 'Gilligan's Island' really happened, do you?" the actors say.

The Thermians shake their heads and murmur: "Those poor people."

I suggest that Mark Kleiman turn on his cable TV channels, and watch: UCLA Religous Studies professors' God-talk is a metaphor for concepts and ideas our monkey-brains grapple with; the God-talk of cable TV broadcasters and watchers is of a very different order--it's talk about an entity that sounds an awful lot like a three-year-old's view of an abusive father: the entity that personally hardened Pharoah's heart, slew the firstborn of Egypt, and with his strong right hand and outstretched arm, with signs and wonders, led the people out of Egypt. The God-talk of the philosophers is not the God-talk of the Pillar of Fire Repentance Tabernacle. Not at all. To call them both "religion" is an abuse of language

They are out there, frantically running from auction to auction looking for Lot 49 or busily writing to the government of England begging it not to execute Rosencrantz and Guildenstern. There are an awful lot of them.

The Big Picture: Unglued

Barry Ritholtz is a bear:

The Big Picture | "Right now things are starting to come unglued": The latest example of how well "contained" the sub-prime fall out is comes to us via a letter to hedge fund investors from Bear Stearns. From this communique, we learn that the two funds that have had everyone so worried are mostly worthless. The "better" fund is down 91%, while the "lower quality" fund is down 100%.

In the letter, Bear claims to have drawn down only $200 million of the $1.6 billion it put up, essentially to ensure an orderly liquidation of the market in the CDO derivatives the fund held. 

As we noted late Monday... the RMBS/CDO market, as shown in the ABX indexes, are reflecting that "orderly liquidation," as well as ongoing Subprime mortgage risk. 14 of 15 ABX indexes declined to new lows yesterday, according to Markit Group. I have little doubt that CDO traders knew the Bear Stearn's funds were near worthless, and were front-running the liquidation all this week.

We must note, not coincidentally, that one of the biggest sources of all this sub-prime junk, Southern California, saw home & condo sales tank 36% in June. That's the biggest decline in 14 years, according to DataQuick Information Systems. It is almost enough to make one ignore the abysmal Home Builders Index, now scraping new 16 year lows.   

After the NYSE close, Intel defiled the parade of tech and capex bulls. Intel said demand for flash products is lower than expected, and it lowered capex to $4.9B from $5.5B. Q2 revenue declined 2 %and operating income 19% from Q1. The tax rate was 29%: 31% was expected - but for that, they would have missed consensus forecasts. A JPMorgan analyst stated Tuesday morning, “Clearly business has bottomed for Intel.”  You know, kinda like housing has bottomed. So much for the coming capex boom.

Justin Fox: The Real Estate Slump and Newspapers

Justin Fox writes:

The real estate slump claims another victim: newspapers: The real estate boom/bubble of the past few years had a lot of interesting effects on the American economy that are now being unwound. One was that everybody's brother in law became a mortgage broker. Another was that consumer spending kept rising even though incomes were stagnant. Yet another, which I hadn't really thought about before, was that it made the struggling newspaper industry look slightly healthier than it actually was. From today's W$J:

In the first quarter, revenue for every major ad category -- classified, national and retail advertising -- was down. The sharpest declines were for classifieds, where spending dropped 13.2% -- not so much a result of competition from the Web as of economic woes affecting certain categories of advertisers. Real-estate classifieds, until recently a bright spot for the industry, have plunged along with the property market. Auto and employment classifieds are also sinking. Financial-news outlets such as the Journal are being hurt by a slump in technology advertising.

"Right now, you've got a perfect storm," says Edward Atorino, an analyst with financial broker Benchmark Co. He predicts total ad revenue will fall 4.3% this year. The decline will be one of the steepest in history...

Nevertheless, the macro numbers don't look all that bad. Overall consumption spending is still stronger than I, at least, expected. And maybe we will get some exports...

Tyler Cowen on IQ Tests and Development

If the seventeen-year-old had dropped out of school at 15, stopped reading and writing and stopped going to math class and doing math homework, and gone to work on a farm in poor rural Mexico, his math SAT score right now would be close to his PSAT score then rather than 210 points higher, and his reading and writing SAT scores right now would be close to his PSAT score then rather than 180 points higher.

Tyler Cowen on IQ and development:

Marginal Revolution: IQ and the Wealth of Nations: IQ How many more times will someone suggest this book in the comments section of this blog?  I like this book and I think it offers a real contribution.  Nonetheless I feel no need to suggest it in the comments sections of other peoples' blogs. I do not treat this book as foundational because of personal experience.  I've spent much time in one rural Mexican village, San Agustin Oapan, and spent much time chatting with the people there.  They are extremely smart, have an excellent sense of humor, and are never boring.  And that's in their second language, Spanish. I'm also sure they if you gave them an IQ test, they would do miserably.  In fact I can't think of any written test -- no matter how simple -- they could pass.  They simply don't have experience with that kind of exercise.

When it comes to understanding the properties of different corn varieties, catching fish in the river, mending torn amate paper, sketching a landscape from memory, or gossiping about the neighbors, they are awesome. Some of us like to think that intelligence is mostly one-dimensional, but at best this is true only within well-defined peer groups of broadly similar people.  If you gave Juan Camilo a test on predicting rainfall he would crush me like a bug.

OK, maybe I hang out with a select group within the village.  But still, there you have it.  Terrible IQ scores (if they could even take the test), real smarts. So why should I think this book is the key to understanding economic underdevelopment?

The Buried Past of the Democratic Party

Bruce Bartlett writes: - Bartlett's Notations: I originally set up this blog to respond to the many critics of my syndicated column, which appeared at Townhall.  I have since decided to give up the column--not because of my critics, but because I have decided to concentrate my writing efforts on book projects.

For those who may be interested, my next book is titled, Wrong on Race: The Democratic Party's Buried Past.  It's scheduled for January, 2008 by Palgrave Macmillan and is available for preorder at 

It basically argues that, historically speaking, the Democratic Party has been the party of racism in this country throughout most of its existence.  I am hopeful that the book will open the door to Republicans in the black community.  For their own good, I think African American voters need to be courted by both parties.  As it is, they are essentially ignored by both--the Democrats take them for granted, while Republicans have given up hope and don't even try to get black votes any more.

Furthermore, I believe that the growing problem of immigration may be a wedge issue for Republicans because blacks share their concerns about it.  I think it is revealing that Congressman Tom Tancredo--a one-issue, anti-immigration candidate--was the only Republican who showed up to speak to the NAACP convention on July 12.  Moreover, he appears to have gotten a good bit of applause for his comments.  I discuss the similarity between black views of immigrants and those of Republicans in my book...

It is certainly true that up until some moment not all that long ago--1933? 1948? 1960?--the Democratic Party was the party of racism: winning elections in the South by reminding voters that Lincoln had freed the slaves, and winning elections in the urban North by telling poor immigrants to the cities from other countries that the Republican Party was on the side of the poor Negro migrants to the cities from the South. But the Democratic Party changed, and people like Strom Thurmond and Jesse Helms and George Wallace and Trent Lott became first Dixiecrats and then American Party members and now Republicans.

The process of the transformation of the Democratic Party interacted with the congressional seniority system in odd ways. For twenty years, up until 1965 or so, northern Democrats in favor of civil rights voted southern Democrats opposed to civil rights into committee chairmanships, and so the Democratic congressional leadership was a drag on civil rights. Then for thirty years after 1965 southern Democrast opposed to civil rights voted northern Democrats in favor of civil rights into committee chairmanships, and so the Democratic congressional leadership was far, far to the left of the country as a whole--a fact reinforced by the destruction of Republican congressional power first by the Goldwater movement and second by Richard M. Nixon.

Today things are complicated. I think Bruce could do us all a good service by telling us a good chunk of this story that we Democrats prefer to forget. We prefer to remember things like this:

Sidney Blumenthal: Lady Bird Johnson and civil rights: The night before [Lyndon Johnson's] visit to New Orleans, Moyers sent him a campaign memo noting that "several people in New Orleans, including our advance men, feel the President should not refer to 'civil rights.'" On Oct. 9, 1964, Johnson delivered the most dramatic speech of the campaign.

Now, the people that would use us and destroy us first divide us.... But if they divide us, they can make some hay. And all these years they have kept their foot on our necks by appealing to our animosities, and dividing us. Whatever your views are, we have a Constitution and we have a Bill of Rights, and we have the law of the land, and two-thirds of the Democrats in the Senate voted for it and three-fourths of the Republicans. I signed it, and I am going to enforce it...

Then Johnson recounted the story of an old Southern senator who confided to Rep. Sam Rayburn, Johnson's mentor from Texas, "'Sammy, I wish I felt a little better. I would like to go back to old' -- and I won't call the name of the state; it wasn't Louisiana and it wasn't Texas -- 'I would like to go back down there and make them one more Democratic speech. I just feel like I have one in me. The poor old state, they haven't heard a Democratic speech in 30 years. All they ever hear at election time is "Nigger, Nigger, Nigger!"'"...

And we would prefer to forget things like this from Texas Democratic Governor Coke Stevenson (a man whom Robert Caro, for some reason, prefers to Lyndon Johnson): [United States] Attorney General Francis Biddle wrote a distressed letter to [Texas] governor Stevenson urging him to bring the murderers to trail. Stevenson refused... he made a sly argument in favor of lunch mobs. "Certain members of the Negro race," he wrote, "from time to time furnish the setting for mob violence by the outrageous crimes which they commit."... Stevenson shrewdly played to the galleries...

Carpetbaggers and Scalawags...

Note: Robert Caro, in Means of Ascent, as quoted by Sidney Blumenthal: [Richard Coke] a Confederate veteran who in 1873 wrested the government of Texas from the Carpetbaggeres and freed the state from the injustices of Reconstruction..."

links for 2007-07-18

Norwegian Petroleum Directorate: The Norwegian Petroleum Tax System

The Norwegian Petroleum Tax System:

Norwegian Petroleum Directorate - The Norwegian Petroleum Tax System: An overview of the calculation of the tax base:

Operating income

  • Operating expenses
    • Linear depreciation for investments (6 years)
    • Exploration costs
    • Royalty, CO2 tax, area fee
    • Net financial costs  (limited by the thin capitalisation rule; 20 % equity)
    • Losses from previous years

= Corporation tax base  (tax rate: 28 %)

  • Uplift   (7,5 % of investment for 4 years)
    • Excess uplift from previous years

= Special tax base  (tax rate: 50 %)

Matthew Yglesias Thinks Little of Anne Applebaum and David Brooks

Young Yglesias thinks little of Anne Applebaum:

Matthew Yglesias: Hypocrites Everywhere: Anne Applebaum:

No troops? Though deeply appealing to the "we told you so" crowd, this plan is clothed in the greatest degree of hypocrisy. How many of the people who clamor for intervention in Darfur will also be clamoring to rush back into Iraq when full-scale ethnic cleansing starts taking place? How many will take responsibility for the victims of genocide? I'm not saying there will be such a catastrophe, but there could be: Mass ethnic murders have certainly been carried out in Iraq before.

This line of argument has been in vogue for some time now, but it seems singularly nonsensical. For one thing, I think there are real questions about the math -- how many people arguing for withdrawal for Iraq really are advocates of large-scale insertion of US ground forces to Darfur? Not me! Numbers aside, I think it's fairly obvious that if the US does withdraw from Iraq and full-scale ethnic cleansing does result (something Applebaum concedes is by no means certain) that very few withdrawal advocates are going to be clamoring for intervention. Here, I guess, is where the hypocrisy comes into play.

But it's not actually hypocritical to favor interventions to prevent mass slaughter where you think such interventions will be effective, but not otherwise. The idea that consistency's sake requires one to either be a pacificist or else to support whatever military adventure happens to be fashionable in the Washington Post opinion pages at the moment is daft.

And he thinks less of David Brooks:

Matthew Yglesias: Conservatives and the Government: His conclusion is odd, but today's David Brooks column is pregnant with things to blog about. For example:

Conservatives are supposed to distrust government, but Bush clearly loves the presidency. Or to be more precise, he loves leadership. He’s convinced leaders have the power to change societies. Even in a place as chaotic as Iraq, good leadership makes all the difference.

Now I suppose there must be some conservatives for whom this "are supposed to distrust government" dictum applies, but for the past fifty or so years that's clearly not the case. The mainstream conservative belief is that the government needs to be given dramatically greater scope to gather information and to deploy force -- including deadly force -- and threats thereof. This isn't an innovation of the Torture and Arbitrary Detention administration, it's a longstanding pattern. Conservatives didn't like the Warren Court's criminal justice jurisprudence, they didn't like the Church Commission's inquiries into the CIA, they chafe at contemporary military reticence about civilian casualties, etc.

There are exceptions to this (as there are exceptions to everything), but the dominant view in post-war American conservatism has been of almost boundless faith in violence and in large government institutions like the military, the prison system, etc.

This is what Jim Henley calls Heinlein-Goldwater Fusionism: "limited" government plus militarism.

Kevin Drum Is Shrill!

He writes, apropos of the sewer that is John Harris, Mike Allen and the rest of the staff of The Politico:

The Washington Monthly: MAKE IT STOP.... From the front page of The Politico on Monday:

Romney spent $300 on makeup 'consulting'

Presidential candidate Mitt Romney recorded $300 in payments to a California company that describes itself as "a mobile beauty team for hair, makeup and men's grooming and spa services."

Romney spokesman Kevin Madden confirmed that the payments — actually two separate $150 charges — were for makeup, though he said the former Massachusetts governor had only one session with Hidden Beauty of West Hills, Calif.

Seriously. Can we just stop this stuff? Does anyone really think that the problem with presidential campaign coverage is that it isn't vapid and half-witted enough already? Jeebus.

Let Us Now Praise Famous Men

Alex Tabarrok directs our attention to the farmeres of Xiaogang:

Marginal Revolution: China and Industrial Policy: Brad goes over the top for Deng Xiaoping.... Without denying Deng's importance, I would say that China's great leap forward came with the death of Mao Zedong. Once Mao - quite possibly the greatest human killer of the twentieth century - was dead, China could almost not help but improve.... [T]he Chinese people, especially the peasant farmers, deserve a huge amount of credit.  Here's a couple of paragraphs I wrote recently:

The Great Leap Forward was a great leap backward - agricultural land was less productive in 1978 than it had been in 1949 when the communists took over.  In 1978, however, farmers in the village of Xiaogang held a secret meeting.  The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep.  The agreement violated government policy and as a result the farmers also pledged that if any of them were to be jailed the others would raise their children.

The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased.  “You can’t be lazy when you work for your family and yourself,” said one of the farmers.

Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides.  But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property.

Deng and others in the central leadership are to be credited with recognizing a good thing when they saw it but it was the farmers in villages like Xiaogang that began China's second revolution.

Addendum: For the story of Xiaogang I draw on John McMillan's very good book, Reinventing the Bazaar.

Posted by Alex Tabarrok

Being Administrator of China's FDA Can Be Hazardous to Your Health

Kill the chicken to scare the monkey. Justin Rohrlich reports:

Minyanville - NEWS & VIEWS-Article: The Speedy Execution of Zheng Xiaoyu: China "proves" to the world that they’re serious about product safety. The Beijing No. 1 Intermediate People’s Court carried out the execution of Zheng Xiaoyu, the former head of China’s State Food and Drug Administration, yesterday. He was sentenced to death for taking $832,000 in bribes to approve drugs that led to at least ten deaths. 

China Daily said: “Zheng’s death sentence was unusually heavy, even for China, and likely indicates the leadership’s determination to confront the country’s dire product safety record. The unusually harsh sentence and its prompt enforcement reflect the resolve of Beijing to fight against corruption and ensure consumer (sic).” With the recent spate of recalled Chinese goods further tarnishing the export market upon which the country’s growing economy largely depends (China’s exports in June rose 27.1% year-on-year to $103.27 bln), the government set out to “prove” that they’re serious about product safety. The state-run Xinhua news agency estimates that more than 330 tons of fruit and vegetables, 131 tons of meat, 82 tons of seafood, 21 tons of cheese and 3 million bottles of beverages will be consumed during the 2008 Olympics in Beijing, and officials are desperate to stave off a quality-related disaster.

Though Zheng’s sentence was described as “unusually heavy,” China carries out more court-ordered executions than the rest of the world combined. The Globe and Mail of Canada quoted Chinese legal expert Liu Renwen as saying that China is executing about 8,000 people each year...

But who, exactly, is the monkey here? Is this for foreign consumption, or the beginning of a drive to seriously alter the incentives of domestic regulators? And how would this be accomplished--independent testing laboratories and grassroots riots in response to adulteration would not seem to be the direction that China's State Council would choose.

Two-Buck Chuck Strikes!

From ABC channel 6: California's Wine Surprise: Charles Shaw Chardonnay, better known as "Two Buck Chuck," beat hundreds of other wines and was named the top prize in a prestigious tasting competition in California.

"The characteristics that we look for in our gold medal winner & a nice creamy butter, fruity & it was a delight to taste," said 2007 California State Fair Commercial Wine Competition judge Michael Williams.

The affordable wine beat out 350 other California chardonnays to win the double gold. Second place went to an $18 bottle, and the most expensive wines at the event, at the price of $55, didn't even medal.

To find this prize winner, you need not go to a fancy wine shop or elite retailer. Charles Shaw Chardonnay is mass produced in California and only sold through the quirky Trader Joe's grocery stores.

"We choose to sell good quality wines at $2 a bottle because we think it's a fair price," winemaker Fred Franzia told ABC News' Ryan Owens. "We think the other people are charging too much."

Get What You Pay For?

After its big win, ABC News decided to put the cheap stuff to a blind taste test and see if it would repeat the victory. It was disguised and served along with chardonnays of various prices, including a $120 bottle.

In this test, Caroline Styne, co-owner and wine director of two trendy Los Angeles area restaurants, judged the wines -- but to a different outcome. She ranked "Chuck" dead last, but second-to-last was the $120 variety.

No one said this was an exact science. Just ask the chief judge of the competition that gave the gold to a wine that costs less than a latte.

"There's going to be people out there that don't like the wine and that's OK," said chief judge G. M. "Pooch" Puchlowski. "You know, there are a lot of wines I don't like. & So you drink what you like, don't drink what you don't and you go home a happy camper."

Dan Froomkin: How Bush Uses His Generals

Dan Froomkin says that it is not too soon for General Petraeus to start watching his own back:

Dan Froomkin - How Bush Uses His Generals: President Bush says that he should be trusted on military issues because he listens to his commanders. But he has a tendency to celebrate his generals when they're providing him political cover -- then stick a knife in their backs when they're no longer of any use to him.

Last week, Bush rejected any blame for the chaos that ensued in Iraq after the March 2003 invasion. So whose fault was it? Bush pointed the finger at Gen. Tommy Franks, the Central Command chief at the time. "My primary question to General Franks was, do you have what it takes to succeed? And do you have what it takes to succeed after you succeed in removing Saddam Hussein? And his answer was, yes," Bush said.

That's the same Tommy Franks to whom Bush awarded a Medal of Freedom in 2004.

And when virtually all of Bush military line of command, including the entire Joint Chiefs of Staff, opposed his "surge" proposal late last year, Bush responded not by listening, but by removing the top two commanders responsible for Iraq and replacing them with more amenable leaders, including Army Lt. Gen. David H. Petraeus

Petraeus, as it happens, wrote an op-ed in The Washington Post just five weeks before the 2004 election describing what he called "reasons for optimism" in Iraq. Now Petraeus is Bush's "main man." Maybe he should be watching his back.

Thomas E. Ricks writes in Sunday's Washington Post: "Almost every time President Bush has defended his new strategy in Iraq this year, he has invoked the name of the top commander, Army Gen. David H. Petraeus."Speaking in Cleveland on Tuesday, Bush called Petraeus his 'main man' -- a 'smart, capable man who gives me his candid advice.' And on Thursday, as the president sought to stave off a revolt among congressional Republicans, he said he wanted 'to wait to see what David has to say. I trust David Petraeus, his judgment.'"

Yet Ricks continues: "Some of Petraeus's military comrades worry that the general is being set up by the Bush administration as a scapegoat if conditions in Iraq fail to improve," he writes. "'The danger is that Petraeus will now be painted as failing to live up to expectations and become the fall guy for the administration,' one retired four-star officer said. . . .

"When Bush and his aides shift military strategy, they seem to turn on the generals on whom they once relied publicly, said Lawrence Korb, a former Pentagon official. During the run-up to the war, when Gen. Eric Shinseki, the former Army chief of staff, told Congress that more troops were needed to secure Iraq, he was publicly rebuked by then-Deputy Defense Secretary Paul D. Wolfowitz.

"More recently, Gen. George W. Casey Jr., Petraeus's predecessor, was blamed for not doing more to improve security for Iraqi civilians, and Gen. Peter Pace, the chairman of the Joint Chiefs of Staff, was effectively fired last month by Defense Secretary Robert M. Gates.

"'This is an administration that wants to blame the generals,' Korb said."

I Write to Jay Carney at Time Magazine...

Dear Mr. Carney--

We don't know very much about Bill Richardson. Even though we are the kind of geeks who hang around political websites, the world is big and we have day jobs: we don't know that much about him.

You by contrast know a lot about Bill Richardson: watching him and a few other people like him is your day job.

So why the "arguably the most qualified candidate"? Is he or isn't he the most qualified candidate. You know. We don't. Why the references to the conventional wisdom (the "CW")? You know more than the CW does about this.

What we want to hear from you is this: What are the reasons to think that Bill Richardson would make a better president than other candidates?


Brad DeLong

I am responding to this:

Bill Richardson: More Than a Great Resume - Swampland - TIME: Chris Cillizza over at The Fix has an intriguing post about Bill Richardson's slow and steady progress towards the top tier of the Democratic field of presidential candidates. He's raised a respectable amount of money, hasn't spent it all, has a solid organization in Iowa and is polling a reasonably strong fourth both there and in New Hampshire. By dint of experience -- congressman, UN ambassador, Energy Secretary, governor -- Richardson is arguably the most qualified candidate in either party to be president. And he's hispanic, which helps differentiate him from the other second-tier Democrats (Biden, Dodd, Kucinich, Gravel). The CW about Richardson is that he's aiming for the second slot on a ticket, but that's the rap usually accorded underdog candidates with serious resumes. While it's hard to imagine, given Obama and Clinton's overall strength and Edwards' potential to win Iowa, that Richardson could end up with the nomination, these are still early days. As Cillizza says, if the campaign takes an unpredictable turn, and a frontrunner or two stumbles, Richardson might be positioned to capitalize. What do Swampland readers think of New Mexico's governor and his campaign?

DeLong Smackdown Watch: Dani Rodrik Strikes Back

The learned and thoughtful Dani Rodrik has a good response. He writes:

Dani Rodrik's weblog: What's different about international trade?: UPDATE: Brad DeLong does not express my views accurately. He writes:...

Dani Rodrik's country whose "labor force that is producing at low levels of productivity" is doing so because it has lousy political institutions: it lacks the "constitution... judiciary, nation-wide financial regulation, and free flow of labor" that have underpinned economic growth in the rich post-industrial core. The poor country is poor because its government is incompetent, and corrupt...

No, the argument that poor countries are and remain poor because their governments are incompetent and corrupt is one of the absurd reductionisms of the day which I do not believe in and have written against. The point I made was that a poor country would have the real prospect of converging in living standards with rich countries if international economic integration were near-total (involving free labor mobility, truly integrated capital markets, and a transnational set of regulatory, legal and political institutions that underpin this integration). In the absence of these, trade liberalization does not get you there. You are in a second-best world and you need to think appropriately. The idea that developing countries cannot employ industrial policy in such a world to good effect is downright silly.

Here is a thought experiment: does anyone really believe that China would have grown as fast as it did if it had removed all its tariffs and trade restrictions in 1978, instead of liberalizing strategically and sequentially--first in agriculture, than in industry, then on the export side, and only later in the 1990s on the import liberalization side?  There are many reasons why the Chinese strategy worked, but one of them is that it protected employment while industrial capabilities were being built up.

I would put the story of China since 1978 differently than Dani would, I think...

First, I would start with the proposition that the Chinese government from, say, 1955 (the start of the reenserfment of the peasantry) to 1978 was massively, massively incompetent and massively, massively corrupt. And its massive, massive incompetence and massive, massive corruption were so the reasons that China was then so very, very poor. If you don't start there--if you denounce that fact as "absurd reductionism"--you can't make any sense of the story.

The fact that China's government had been so bad before 1978 meant that there were enormous problems and enormous opportunities for a government that was both competent and (relatively) benevolent--in the sense of wanting to see the economy grow rapidly if that could be accomplished without endangering its hold on power. And in 1978 China had its first piece of great good luck in a long, long time--perhaps the first time some important chance broke right for China since the end of the Sung dynasty. China acquired as its paramount ruler one of the most devious and effective politicians of this or indeed any age, a man who was quite possibly the greatest human hero of the twentieth century: Deng Xiaoping. Deng sought to maintain the Communist Party oligarchy's control over China's politics while also seeking a better life for China's people, and he is guided by two principles: (i) be pragmatic ("what matters is not whether the cat is red or white, what matters is whether the cat catches mice), and (ii) be cautious ("cross the river by feeling for the stones at the bottom of the ford with your feet").

The Chinese economy as of 1978 had two main features: (i) a peasantry whose agricultural production was half of what it should have been because the peasants were serfs on communes working for lords who were party bosses, and (ii) a value-subtracting Soviet-style heavy-industrial sector. Freeing up the peasantry to work for themselves on their own land and sell their produce on markets promised to instantly double agricultural output and living standards--hence liberalizing agriculture first was a no-brainer: it promises only gains.

Immediately opening up the industrial sector to international trade, however, would have led to (a) a rapid rise in imports of foreign-manufactured industrial goods, (b) a rapid rise in exports of agricultural products to pay for those imports, (c) mass urban unemployment as the value-subtracting Soviet-style heavy industries found that they could not compete and closed, and (d) riots and revolution as the now-unemployed urban manufacturing workers overthrew the government. Hence Deng Xiaoping kept China closed in the early years, and used tax revenue from the productive countryside to keep the Soviet-style industrial sector running--value-subtracting as it was--while another, alternative industrial base was gradually built up, a market-oriented sector in which local party bosses had an important and very profitable stake. And then they were off and running.

The key elements of the situation of China in 1978 relevant to the theory of the second best from the standpoint of the Communist Party oligarchy are (i) the threat to the regime from mass urban unemployment, (ii) the fact that the economically-rational closing-down of the Soviet-style industrial base would have generated such mass urban unemployment, (iii) the need to start up exports that took advantage of China's extraordinarily low wages in order to earn foreign exchange to purchase technology-bearing capital and other goods from abroad, (iv) the need to find a supply of entrepreneurship somewhere to start up the market-sector manufacturing industries needed for development, (v) the need to find a way to protect the growing market industrial sector from predatory local party bosses, and (vi) a central government that actually sought not the enrichment of its functionaries but the prosperity of its people as its highest priority. Given (vi), realying on township and village enterprises for industrial development took care of (v), drawing on Taiwan and Hong Kong gave China a leg up on (iv), and (i) and (ii) were dealt with by protecting and subsidizing the Soviet-style industrial sector for a long, long time.

The price was retardation of (iii). IIRC, Manchuria, Shandong, Wuhan, and Shanghai were China's industrial centers in 1978. Guangzhou (with Shenzhen leading the pack), Shanghai, and Zhejiang are its industrial centers today because those were the first areas where SEZs were opened to international trade. A lot of human resources and infrastructural capital was wasted becuase Deng Xiaoping did not dare risk the political consequences of the economic process of shifting resources out of the old Soviet-style industrial sector. I think he was right--from his perspective at least--to initially limit market manufacturing to the south. However, the logic is not economic but political.

Note that the success of the strategy that was in fact adopted hinged on element (vi): Deng Xiaoping's power and status as paramount leader, and the wisdom exercised by him and his team, and their goal of making the Chinese rich. Dani Rodrik's praise of policies that "protected employment while industrial capabilities were being built up" strikes an echo of Juan Peron's development strategy in Argentina in 1950--keep the descamisados employed and the price of beef low. It was a strategy that sounded good to many at the time (including Raul Prebisch). It was was justified in economic terms by assertions about market failures and the second best. And it turned into a complete and total disaster.

links for 2007-07-16

Let's Not Tell Hilzoy!

Yesterday Hilzoy--driven into shrill unholy madness by Fred Hiatt's publication in the Washington Post of Michael Gerson's jejune version of arguments that have not survived the first two weeks of any philosophy class taught in the past 2500 years--wrote:

Obsidian Wings: Michael Gerson: Keep Your Day Job: If one of Bush's speechwriters wanted to write an op-ed on the latest advances in entomology, or some unique properties of eight-dimensional space, or the best techniques to use in constructing a certain kind of organic lattice, I imagine that the editors of the Washington Post would recognize that some fact-checking was in order. But moral philosophy? Anyone can do that!...

Let's not tell her that today the New York Times published Greg Mankiw's one-paragraph missketch of John Rawls:

Fair Taxes? Depends What You Mean by ‘Fair’ - New York Times: Professor Rawls concluded that the primary goal of public policy should be to redistribute resources to help those at the very bottom of the economic ladder. If Professor Rawls were alive today, he would most likely want to raise the top income tax rate of 35 percent in order to finance a more generous safety net. And for much the same reason, he would probably raise taxes on the middle class as well...

This is, of course, wrong. Rawls does not think that the primary goal of public policy should be to redistribute resources to help those at the very bottom. Rawls thinks that the first goal of public policy is to maximize liberty for all. He thinks that the second goal of public policy is to make everybody better off. Redistribution plays third fiddle in Rawls's orchestra: it is a constraint on social wealth maximization--things that make people better off must be shared: choose that set of social and economic arrangements that makes everybody better off, but don't choose a set of social and economic arrangement that makes some people better off at the price of making the worst-off even worse off.

Here is what I think is the best way to think of this third point, of Rawls's "Difference Principle":

A group of people are sitting around the campfire, after a hard day's worth of work and pay in which what jobs people did and how hard they worked and how they were rewarded was determined by some complicated and not very transparent process.

Looking around, the person who is worst off says: "Hey! Wait a minute! This isn't fair. Everybody else is better off than I am."

And one of the others replies: "I'm sorry. You do get less than everybody else. But we set things up in the best way we could. Given the constraints imposed by human psychology and the natural world, we couldn't have set things up in any way so that you would have been better off."

"Oh. That's OK then."

According to Rawls, an arrangement that passes this test is "just" and "fair."

Now I don't think that Rawls has it correct: I don't think that socioeconomic arrangements that pass Rawls's test are necessarily just, and I don't think socioeconomic arrangements that are just necessarily pass Rawls's test. There are too many lexicographic orderings wandering around Rawls's setup for any economist to be happy with it.

But the fact that Rawls did not get it right is no reason for Mankiw to get Rawls's argument wrong.

Let's also not tell Hilzoy that Mankiw also gets Robert Nozick's argument wrong. Mankiw writes:

Nozick wrote: “We are not in the position of children who have been given portions of pie by someone who now makes last-minute adjustments to rectify careless cutting. There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something, or as a gift. In a free society, diverse persons control different resources, and new holdings arise out of the voluntary exchanges and actions of persons.” To libertarians like Professor Nozick, requiring the rich to pay more just because they are rich is little more than officially sanctioned theft...

It is true that this is a fair thumbnail sketch of what many of Nozick's followers believed that his argument said--and perhaps it is a fair thumbnail sketch of what Nozick encouraged his followers to believe his argument said (my elders at Harvard did not think Nozick was the most scrupulous of men). But it's not where Nozick's argument leads: the logic of Nozick's argument points in a very different direction than Mankiw claims it does.

First we have to inquire into how the rich became rich. If they became rich because of theft--either their own theft, or theft on the part of somebody who then gave them something or sold them something at an especially good price, et cetera--requiring them to pay more in taxes is not "officially sanctioned theft" but rather simple justice. The same holds if they are rich because their appropriation of rights to control and benefit from pieces of property from the Lockeian store originally held in common has reduced the opportunities of others. Only after concluding that the wealth of the rich (a) is not the result of some act of theft in either the recent or the deep past, (b) is not the result of appropriation from the Lockeian common store that has diminished others' opportunities, and (c) is not justified by the fact that the rich receive services (i.e., protection of property against theft) from the government more valuable than the poor, are you then allowed to say that differential taxation is "officially-sanctioned theft."

And, of course, it is not clear that Nozick's argument is correct. I don't think his argument nails it any more than I think Rawls's argument does.

But let's not tell Hilzoy any of this. I don't think she'd be heartened by it--not even if we also tell her that--for reasons outlined by Tyler Cowen--Mankiw gets the technical economics more wrong than the moral philosophy.

PGL and Mark Thoma on Greg Mankiw

Mark Thoma and PGL at Angry Bear are unhappy with Greg Mankiw. So am I. He knows better than to write:

[T]here is still a looming long-run fiscal gap. The short-run fiscal picture, however, does not look historically anomalous...

The right thing for an economist--especially a right-of-center economist--to write is that:

The modest current deficit masks a larger cyclically-adjusted deficit and a very large gap between the current budget deficit and appropriate fiscal policy. There is still a looming long-run fiscal gap...

Cf. Andrew Samwick. Greg is deciding whether he wants to be an economist or a politician. I fear he is making the wrong choice.

Here is Angry Bear:

Angry Bear: Fair Taxation: Mark Thoma reads a NYTimes oped by Greg Mankiw and has this comment:

Greg's use of the word "only" in the sentence "The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent" makes it seem as though he does not consider that amount to be much of a burden to the poor, not like a rich taxpayer who "forks-over" 31.1 percent of their income which seems to imply much more hardship. But remember, "Fairness is not an economic concept."

Mark continues by reminding us of his essay from a couple of years ago. But I have a couple of other objections to what Greg wrote:

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) ... A question for any political candidate today is whether he or she agrees with the Bush tax ceiling. If not, how high above a third is he or she willing to go?

It seems Greg left out two important items. By focusing on Federal taxes, he has omitted state and local taxes. Most people do pay these. And by looking at 2004, he is forgetting that the budget is not exactly in balance. Yes, the General Fund deficit was rather large so current tax obligations do not capture the cost of government as in all those deferred tax bills thanks to the Bush tax “cuts”. But one might try Greg did that the unified deficit is not that large:

At 1.5% of GDP, this year's deficit is well below the 40-year average of 2.4% of GDP... Of course, there is still a looming long-run fiscal gap. The short-run fiscal picture, however, does not look historically anomalous.

Greg leaves out the fact that we have a large Social Security surplus, which is the reason why he can argue that the “deficit” is not that large. Implicit in the use of this figure is the proposition that those payroll “contributions” we are making are NOT to become our retirement benefits down the road.

As long as we are posing questions for political candidates, let’s pose this one for Mitt Romney (as Greg is one of his advisors): do you intend to slash Social Security benefits in the future as you continue to impose these employment taxes? After all, you want to maintain the Bush tax “cuts” and still have a large defense department.

The Record Industry's Decline

Brian Hiatt and Evan Serpick on how the record industry got into its current mess:

Rolling Stone : The Record Industry's Decline: CD sales have plummeted sixteen percent for the year so far -- and that's after seven years of near-constant erosion. In the face of widespread piracy, consumers' growing preference for low-profit-margin digital singles over albums, and other woes, the record business has plunged into a historic decline.

The major labels are struggling to reinvent their business models.... "The record business is over," says music attorney Peter Paterno, who represents Metallica and Dr. Dre. "The labels have wonderful assets -- they just can't make any money off them." One senior music-industry source who requested anonymity went further: "Here we have a business that's dying. There won't be any major labels pretty soon."

In 2000, U.S. consumers bought 785.1 million albums; last year, they bought 588.2 million (a figure that includes both CDs and downloaded albums), according to Nielsen SoundScan.... Digital sales are growing -- fans bought 582 million digital singles last year, up sixty-five percent from 2005, and purchased $600 million worth of ringtones -- but the new revenue sources aren't making up for the shortfall. More than 5,000 record-company employees have been laid off since 2000.... About 2,700 record stores have closed across the country since 2003....

[R]ecord executives now seem to understand that their problems are structural: The Internet appears to be the most consequential technological shift for the business of selling music since the 1920s, when phonograph records replaced sheet music as the industry's profit center....

When YouTube started showing music videos without permission, all four of the labels made licensing deals instead of suing for copyright violations....

So who killed the record industry as we knew it? "The record companies have created this situation themselves," says Simon Wright, CEO of Virgin Entertainment Group, which operates Virgin Megastores.... [A] series of botched opportunities... among the biggest... was the labels' failure to address online piracy at the beginning by making peace with the first file-sharing service, Napster. "They left billions and billions of dollars on the table by suing Napster -- that was the moment that the labels killed themselves," says Jeff Kwatinetz, CEO of management company the Firm. "The record business had an unbelievable opportunity there. They were all using the same service. It was as if everybody was listening to the same radio station. Then Napster shut down, and all those 30 or 40 million people went to other [file-sharing services]."

It all could have been different: Seven years ago, the music industry's top executives gathered for secret talks with Napster CEO Hank Barry. At a July 15th, 2000, meeting, the execs -- including the CEO of Universal's parent company, Edgar Bronfman Jr.; Sony Corp. head Nobuyuki Idei; and Bertelsmann chief Thomas Middelhof -- sat in a hotel in Sun Valley, Idaho, with Barry and told him that they wanted to strike licensing deals with Napster. "Mr. Idei started the meeting," recalls Barry, now a director in the law firm Howard Rice. "He was talking about how Napster was something the customers wanted."

The idea was to let Napster's 38 million users keep downloading for a monthly subscription fee -- roughly $10 -- with revenues split between the service and the labels. But ultimately, despite a public offer of $1 billion from Napster, the companies never reached a settlement. "The record companies needed to jump off a cliff, and they couldn't bring themselves to jump," says Hilary Rosen, who was then CEO of the Recording Industry Association of America. "A lot of people say, 'The labels were dinosaurs and idiots, and what was the matter with them?' But they had retailers telling them, 'You better not sell anything online cheaper than in a store,' and they had artists saying, 'Don't screw up my Wal-Mart sales.'" Adds Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani, "Innovation meant cannibalizing their core business."...

In the fall of 2003, the RIAA filed its first copyright-infringement lawsuits against file sharers. They've since sued more than 20,000 music fans. The RIAA maintains that the lawsuits are meant to spread the word that unauthorized downloading can have consequences. "It isn't being done on a punitive basis," says RIAA CEO Mitch Bainwol. But file-sharing isn't going away -- there was a 4.4 percent increase in the number of peer-to-peer users in 2006, with about a billion tracks downloaded illegally per month....

Consumers have bought more than 100 million iPods since their November 2001 introduction, and the touring business is thriving, earning a record $437 million last year. And according to research organization NPD Group, listenership to recorded music -- whether from CDs, downloads, video games, satellite radio, terrestrial radio, online streams or other sources -- has increased since 2002. The problem the business faces is how to turn that interest into money. "How is it that the people that make the product of music are going bankrupt, while the use of the product is skyrocketing?" asks the Firm's Kwatinetz. "The model is wrong."...

Nearly every corner of the record industry is feeling the pain. "A great American sector has been damaged enormously," says the RIAA's Bainwol, who blames piracy, "from songwriters to backup musicians to people who work at labels. The number of bands signed to labels has been compromised in a pretty severe fashion, roughly a third." Times are hard for record-company employees. "People feel threatened," says Rosen. "Their friends are getting laid off left and right"...

Caccianli i Ciel per Non Esser Men Belli,/ Né lo Profondo Inferno Li Riceve...

A correspondent directs me to the following bizarre comment by the Economist, starring Megan McArdle, on the latest atrocity from the Wall Street Journal.

If you recall, the atrocity was this "Laffer curve":

which we talked about here.

Here's Megan:

Outlandish | Free exchange | The Wall Street Journal is wrong; their line is not the only, or even the obvious, one to draw through noisy data, even without omitting Norway...

Megan is trying to take a middle position between Mark Thoma's sensible criticism and Donald Luskin's idiotic defense of the clown show that is the Journal editorial page.

I see three misrepresentations by the Economist here:

  1. The WSJ line is not "draw[n] through noisy data." It is drawn above noisy data.
  2. To say that the WSJ line is "not... the obvious" one to draw implies that there might be some non-obvious reason to draw it. There isn't.
  3. The claim that the WSJ line is "not the only... one to draw" is a statement that it is one of the lines that one might draw with some justification. It isn't.

All I can say is:

Questo misero modo/ tegnon l'anime triste di coloro/ che visser sanza 'nfamia e sanza lodo./ Mischiate sono a quel cattivo coro/ de li angeli che non furon ribelli/ né fur fedeli a Dio, ma per sé fuoro./ Caccianli i ciel per non esser men belli,/ né lo profondo inferno li riceve...

This is indeed the behavior of the banner-chasers of Dante's Inferno: those who did not have the morals to be worthy of heaven but also lacked the guts to sin enough to be worthy of hell, and who were thus rejected by both.

One more point, with respect to "omitting Norway": Personally I see no need to omit Norway. I do see a need to plot the Norway point on the graph correctly. The revenues plotted on the vertical scale include oil excise taxes levied on corporations. The tax rates plotted on the horizontal scale do not--hence the Norway "tax rate" of 28% rather than the correct 52%. Move Norway out to its proper position--with the same tax concept on both axes--and everything is fine.

links for 2007-07-15

Books Do Furnish a Room

Tyler Cowen on books that require extra-sharp eyes:

Marginal Revolution: Which are the books with the smallest print?: Editions of Dostoyevsky and Tolstoy often have excessively small print.  Why?  The major works by those authors are long.  Larger print will make the volumes too long and thus too expensive.  Perhaps more importantly the volumes will appear too forbidding to the average buyer. But isn't miniscule type for Raskolnikov hard to read?  Ah... most of the people who buy the book don't read it.  If miniscule type gets them to stop reading sooner rather than later, you might even call it a Pareto improvement.

Self-help books almost always have reasonably large print or even ridiculously large print.  The author doesn't have much to say and the publisher wishes to pad the book so it looks real.  Furthermore most self-help books are read (at least in part), so to keep the reader happy the print should be large.

Can you think of other generalizations?

Which books are most likely to go into "Large Print" editions?

Stupidest Man Alive Emeritus Strikes AGAIN!!

A correspondent writes that there is one and only one person who supports and endorses the Wall Street Journal's latest Laffer curve--the one that when Ezra Klein saw it he said:

Ezra Klein: Is The Wall Street Journal Worth Saving?: [When] Brad DeLong described this as "Most Dishonest Wall Street Journal Editorial Ever." I thought that was obvious hyperbole, if for no other reason than the data set encompassing dishonest Wall Street Journal editorials is far, far too large for Brad to have comparatively evaluated in a mere day or two. It'd be like declaring a yawn from moments ago your favorite breath of air ever. It might have felt that way, but that's a hasty choice from a large pool.

Brad, however, may be right. One of the ways that mendacious ideologues can lie with statistics is to simply draw and ill-fitting line through the data, pretending it shows something entirely different than it really does... the Wall Street Journal did exactly that the other day, and in a particularly transparent and embarrassing way...

The endorser? Donald Luskin of National Review:

Why am I not surprised?

It is an absolutely amazing chart: if we would only cut our corporate income tax rate by eight percentage points, we could collect an extra $900 billion a year in tax revenue--$3,000 per person per year!

UPDATE: Donald Luskin whines and whimpers:

The essence of the matter is whether the trendline in the chart is legitimate. No doubt a graphic artist at the Journal took some liberties in drawing it through the highest datapoint, Norway -- but that said, the Journal editorial never said the line was a formal trendline, anwyay...

links for 2007-07-14

The Past Week in "Egregious Moderation": July 13, 2007

Bruce Bartlett has observed that with the coming of the internet everyone can become a pundit and a columnist. Everyone can also become editor of a small weekly magazine. Here is my last week's worth of rotisserie-league discourse and debate on politics and reality for people who want an online source for punchy liberal analysis and evisceration; especially evisceration:

The Past Week in "Shrillblog": July 13, 2007

We still remember the early days, when the Ancient, Hermetic, and Occult Order of the Shrill was so small that its Grand Conventions consisted of Paul Krugman talking to himself while warming a can of baked beans over a can of sterno while he huddled from the rain beneath a New Jersey Turnpike overpass. Wow, have things changed. Our numbers are now legion: never mind that many of the most shrill are still too embarrassed by their own previous subservience and mendacity to acknowledge that everything they say today was predicted by Paul Krugman and the other Elders of the Shrill back in 2000.

We are now so many that it is impossible to document the shrillness. All we can now do is provide a sample of those who, in the past week, have been visibly driven into shrill unholy madness by the mendacity, malevolence, disconnection from reality, and incompetence of George W. Bush, his administration, and his enablers and sycophants:

Don Boudreaux vs. Dani Rodrik on Industrial Policy: I Call This One for Don--I Think It's a Knockout

In the ring, Dani Rodrik stumbles into a knockout punch from Don Boudreaux:

Don Boudreaux:

Cafe Hayek: "Faith" In Free Trade?: I don't want here to rehearse debates over the meaning of the term "faith."  I would say that I have no "faith" in free trade; rather, the evidence and the theory of free trade are powerful enough to convince me that it is practically superior to any form of protectionism if the goal is widespread prosperity.  Faith is required when neither evidence nor theory support whatever proposition you choose to (or happen to) believe.  Even if Rodrik is correct about the errors and oversights of traditional trade theory and evidence, it is an unjustified smear to say that those who accept these as the basis for supporting a policy of free trade do so as a matter of "faith."

But my problem with Rodrik's position runs even more deeply.  If it's true that theory and evidence in favor of protectionism are sufficiently strong to warrant economists abandoning their conclusion that free-trade policy is generally sound, then why shouldn't economists -- led by Dani Rodrik -- also start exploring the potential benefits of intra-national protectionism?  Surely a scholar not benighted with the free-trade "faith" ought to take seriously the possibility that, say, Tennesseeans could be made wealthier if their government in Nashville restricts their ability to trade with people in Kentucky, Texas, Rhode Island, and other states?...

I suspect that if someone proposed to Dani Rodrik that he explore the wealth-creating potential of state-level protectionism, he would refuse.  He would likely (and correctly) say that it's ridiculous on its face to suppose that such protectionism would make the people of Tennessee as a group wealthier over time.  If my suspicion is correct, then to what would Rodrik himself attribute his out-of-hand dismissal of the notion that Tennessee tariffs might well make Tennesseeans richer?  Would he realize to his chagrin that he is a benighted, faith-based non-scholar?  Or would he instead understand that the case for an extensive, market-driven division of labor is so strong -- and that the political border that separates Tennessee from other states is so economically meaningless -- that it would be as pointless for a serious economist to explore the economic potential of Tennessee protectionism as it would be for a serious oncologist to try to cure a patient of cancer by bleeding that patient with leeches.

Dani Rodrik:

Let me confirm Boudreaux's suspicion that I would indeed be against imposing intra-state trade restrictions in general (or to be more precise, that I would have a strong presumption against them). So the question he asks is an important one. Why then do I not take an equally strong position against trade restrictions in international trade?

The answer is that the... two situations are alike only in the limiting (and counterfactual) case where government-imposed tariffs are the only transaction costs blocking economic exchange across international borders. In reality, national borders demarcate political and legal jurisdictions, which means that there remain plenty of transaction costs which block economic convergence. Capital flows are hindered by sovereign risk and the absence of international regulation and lender-of-last resort functions, which create the kind of syndromes that I often discuss in this blog. Labor mobility is severely restricted. And differences in regulatory regimes impose severe transaction costs (estimated by Jim Anderson and Eric van Wincoop to be of the order of 40% in tariff equivalents) on international trade. In the presence of these transaction costs, free trade in goods (in the sense of zero import tariffs) is in general incapable of achieving rapid economic growth and economic convergence in poorer nations of the world. If you do not believe this, just ask the Mexicans.

Within this U.S., economic convergence is achieved because there is a common constitution, a federal judiciary, nation-wide financial regulation, and free flow of labor. This ensures that a lagging region (such as the South until recently) catches up by a combination of capital coming in and labor moving out. Neither of these channels are operative in a world economy that is divided into nation-states. Removing restrictions on international trade in goods, services, and capital simply does not do it. Trade ends up being too small, and capital flows in the wrong direction (from poor to rich countries)....

Now, there is still the question of how trade restrictions may help in the kind of imperfectly integrated world economy I have discussed. I think the answer is that when you are stuck with a labor force that is producing at low levels of productivity, there exists a bunch of arguments having to do with learning and (domestic) market failures under which subsidization of tradable activities could speed up your economic growth. There also exists a bunch of historical and current instances where the evidence seems to have lined up with these theoretical presumptions. That is why I am not a free trade fundamentalist and believe that there are circumstances under which trade restrictions may serve a valuable function...

The knockout punch, of course, is that Dani Rodrik's country whose "labor force that is producing at low levels of productivity" is doing so because it has lousy political institutions: it lacks the "constitution... judiciary, nation-wide financial regulation, and free flow of labor" that have underpinned economic growth in the rich post-industrial core. The poor country is poor because its government is incompetent, and corrupt.

And yet Dani wants--in this situation--to enhance and extend the role and powers of the poor-country government by asking it to implement an active protectionist industrial policy because "there exists a bunch of arguments having to do with learning and (domestic) market failures under which subsidization of tradable activities could speed up your economic growth."

As Lant Pritchett put it once: "there is nothing as catastrophic as state-led development led by an anti-developmental state." Any argument to commit a government to an active protectionist industrial policy must be accompanied by arguments about why the government will be capable and effective in this role when it has not been capable and effective in its primary roles of establishing property rights, providing tolerable administration of justice, building infrastructure, and providing education.

So I score this for Don: a knockout.