Grasping Reality on TypePad, by Brad DeLong

Greg Clark's New Book: "A Farewell to Alms"

Greg Clark's new book may be right, may be wrong, but it is brilliant--the pre-industrial chapters may well be the best short treatment of the topic ever.

Nicholas Wade reviews:

Review - A Farewell to Alms: For thousands of years, most people on earth lived in abject poverty, first as hunters and gatherers, then as peasants or laborers. But with the Industrial Revolution, some societies traded this ancient poverty for amazing affluence.... Gregory Clark, an economic historian at the University of California, Davis, believes that the Industrial Revolution ... occurred because of a change... people gradually developed the strange new behaviors required to make a modern economy work. The middle-class values of nonviolence, literacy, long working hours and a willingness to save.... Because they grew more common in the centuries before 1800, whether by cultural transmission or evolutionary adaptation, the English population at last became productive enough to escape from poverty, followed quickly by other countries with the same long agrarian past....

“This is a great book and deserves attention,” said Philip Hoffman, a historian at the California Institute of Technology. He described it as “delightfully provocative” and a “real challenge” to the prevailing school of thought that it is institutions that shape economic history. Samuel Bowles, an economist who studies cultural evolution at the Santa Fe Institute, said Dr. Clark’s work was “great historical sociology and, unlike the sociology of the past, is informed by modern economic theory.”...

[F]rom 1200 to 1800... the economy was locked in a Malthusian trap--each time new technology increased the efficiency of production a little, the population grew, the extra mouths ate up the surplus, and average income fell back to its former level. This income was pitifully low.... By 1790, the average person’s consumption in England was still just 2,322 calories a day, with the poor eating a mere 1,508.... “Primitive man ate well compared with one of the richest societies in the world in 1800,” Dr. Clark observes....

The Industrial Revolution... occurred when the efficiency of production at last accelerated, growing fast enough to outpace population growth and allow average incomes to rise....

[A]ncient wills... reveal[ed] a connection between wealth and the number of progeny.... Generation after generation, the rich had more surviving children than the poor.... “The modern population of the English is largely descended from the economic upper classes of the Middle Ages,” he concluded. As the progeny of the rich pervaded all levels of society, Dr. Clark considered, the behaviors that made for wealth could have spread with them. He has documented that several aspects of what might now be called middle-class values changed significantly from the days of hunter gatherer societies to 1800. Work hours increased, literacy and numeracy rose, and the level of interpersonal violence dropped.

Another significant change in behavior, Dr. Clark argues, was an increase in people’s preference for saving over instant consumption, which he sees reflected in the steady decline in interest rates from 1200 to 1800. “Thrift, prudence, negotiation and hard work were becoming values for communities that previously had been spendthrift, impulsive, violent and leisure loving,” Dr. Clark writes....

After the Industrial Revolution, the gap in living standards between the richest and the poorest countries started to accelerate, from a wealth disparity of about 4 to 1 in 1800 to more than 50 to 1 today. Just as there is no agreed explanation for the Industrial Revolution, economists cannot account well for the divergence between rich and poor nations or they would have better remedies to offer.... [T]he middle-class values needed for productivity could have been transmitted either culturally or genetically. But in some passages, he seems to lean toward evolution as the explanation. “Through the long agrarian passage leading up to the Industrial Revolution, man was becoming biologically more adapted to the modern economic world.”...

Dr. Clark’s view is that institutions and incentives have been much the same all along and explain very little....

“He deserves kudos for assembling all this data,” said Dr. Hoffman, the Caltech historian, “but I don’t agree with his underlying argument.” The decline in English interest rates, for example, could have been caused by the state’s providing better domestic security and enforcing property rights, Dr. Hoffman said, not by a change in people’s willingness to save, as Dr. Clark asserts.... Dr. Bowles, the Santa Fe economist, said he was “not averse to the idea” that genetic transmission of capitalist values is important, but that the evidence for it was not yet there.... He also took issue with Dr. Clark’s suggestion that the unwillingness to postpone consumption, called time preference by economists, had changed in people over the centuries. “If I were as poor as the people who take out payday loans, I might also have a high time preference,” he said....

“The actual data underlying this stuff is hard to dispute,” Dr. Clark said. “When people see the logic, they say ‘I don’t necessarily believe it, but it’s hard to dismiss.’”

IMHO, in all Malthusian economies downward mobility is the rule: that's what being rich buys you--enough food to feed your children. I am much more inclined to see virtuous circles--especially longer lifespan leading to a longer planning horizon and lower interest rates--and successful institutions driving changes in attitudes and the pace of technological improvement.

But the book is brilliant.

Duncan Black: The Securitization of Mortgages and Ronald Coase's Revenge

Atrios writes:

Eschaton: Who Do You Negotiate With? The other part of the housing/mortgage meltdown is coming out - when your loans are bundled up and resold there's no one to negotiate with.

In 2003, Dianne Brimmage refinanced the mortgage on her home in Alton, Ill., to consolidate her car and medical bills. Now, struggling with a much higher interest rate and in foreclosure, she wants to modify the terms of the loan.

Lenders have often agreed to such steps in the past because it was in everyone’s interest to avoid foreclosure costs and possibly greater losses. But that was back when local banks held the loans and the bankers knew the homeowners, as well as the value of the properties.

Ms. Brimmage got her loan through a mortgage broker, just the first link in a financial merry-go-round. The mortgage itself was pooled with others and sold to investors — insurance companies, mutual funds and pension funds. A different company processes her loan payments. Yet another company represents the investors as the trustee.

She has gotten nowhere with any of the parties, despite her lawyer’s belief that fraud was involved in the mortgage. Like many other Americans, Ms. Brimmage is a homeowner stuck in foreclosure limbo, at risk of losing the home she has lived in since 1998.

...

“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”

links for 2007-08-07

• Tyler Cowen recommends Steve Ettinger's Twinkie, Deconstructed: My Journey to Discover How the Ingredients Found in Processed Foods Are Grown, Mined (Yes, Mined), and Manipulated Into What America Eats.... "So far this is my pick for the best food book of

Signs of the Impending Apocalypse:

Is this a sign of the impending apocalypse, or just of how easy it is
to sign away your tort rights? "Downhill biking" is a sport in Vail,
requiring special equipment and apparatus. You take the gondola up,
and then bicycle more or less straight down.

Can centrifugal-bumble-puppy be far behind?

Places You Must See: Mesa Verde

Mesa Verde, Colorado. Population ca. 1270, ca. 5000. Population of the Four Corners in ca. 1270 ca. 45000--more than today. Perhaps 500 people slept in this, with a natural roof, steady seep-springs of water, and lots of defensive protection. Their corn-beans-squash farms were on the mesa proper above.

By 1300 they were all gone...

---

Mesa Verde National Park: http://www.nps.gov/meve/

Hoover in China: Yet Another Note

Hugh Deane (1990), Good Deeds and Gunboats: Two Centuries of American-Chinese Encounters (San Francisco/Beijing: China Books and Periodicals/New World Press: 0835123782), pp. 75-6:

In 1920, having gained an international reputation through relief work, and thinking of public office, Hoover began an extraordinary and costly effort to blur and falsify the record of the trial... instructed his London solicitor to "spare no expense or effort" to purchase all existing copies of the trial transcript. Burner's biography indicates that Hoover thought he had succeeded, but in fact his agents were unable to obtain the copy in the Bodleian Library at Oxford. In the early 1930s [John Hamill]... observed... that, trying to check on certain accusation, "At many sources we came only to find that somebody had been there before us, going over the hard-beaten track of Mr. Hoover's past, and taking up, buying up, and otherwise obliterating important records"....

[T]he reality was expressed at the time of the swindle by Britain's charge d'affaires in Beijing, Arthur Townley. With the help of a Yankee [Hoover], he said, an Anglo-Belgian gang had "fleeced" the Chinese, and Moreing and associates had "made pretty pile at their expense"...

A Historical Document: The Kaiping Mines: The Times of London, March 2, 1905, p. 9

The Kaiping Mines: The Times of London, March 2, 1905, p. 9

The remarkable action brought by Chang-Yen-Mao and tried for many days before Mr. Justice Joyce has ended in favor of the plaintiff on all important points. The proceedings were unique and important in several respects. It is rare that a Chinese mandarin seeks justice in our courts; and involved in the dispute between him and the defendants were issues of far-reaching consequence. Had Chang-Yen-Mao lost his action he would probably have fared very badly at the hands of his Government, which had charged him with "fattening" on teh rpoceeds of a fraudulent sale of the property which was the subject-matter in dispute. He has been deprived of the office of Director-General of Mines; his ruin and disgrace, if not worse still, would have followed an adverse decision. It is not too much to add that his failure would have been a misfortune to British interests, and injurious to our good name in the Far East. Chang-Yen-Mao is a representative of the more enlightened of his countrymen, who see that, not hostility to western civilization, but frank recognition of its value is their best policy. With proper guarantees against evils and abuses too common in Oriental countries, European capital might now develop the resources of China in many ways. There are railways to be made, mines to be opened or worked with modern appliances, and all this is to be done only with the cooperation of the better class of officials who have put aside ancient prejudices against the foreigner. Chang-Yen-Mao, who is, as he showed in the witness-box, shrewd and intelligent, seems to have aided not a little the industrial development of his country. He has believed that true patriotism is consistent with the employment of skilled European advisers and the encouragement of European capital. He has suffered not a little for having, in the opinion of the narrow minded, sacrificed Chinese interests to the foreign capitalist. His success in an English court of law will have effects going much beyond the decision of the controversy before Mr. Justice Joyce. His countryment who are suspicious of western finance will know that redress can be had if they are wronged. News of his success will gradually percolate into even remote parts of China, and will inspire confidence in the impartiality of our tribunals. The judgment of yesterday will, perhaps, smooth the way for the entrance of British capital into a country where, given an honest administration, it might be largely employed to the profit of native and western investors.

Stripped of details, the point at issue in the action was simple. Chang-Yen-Mao was director-general of a Chinese company formed in 1882 to work certain mines in the provinces of Chi-li and Johol. Fresh capital was required for the undertaking, and Mr. Detring, a German, who was a Commissioner of Customs in China and also a director of the company, was authorized to take measures to raise the necessary capital. He put himself in communication with the defendants, Moreing and Co., and the result was that by a conveyance of February 19, 1901, all the property of the plaintiff company was transferred to the defendent company. The contention of the plaintiff was that this transfer was executed upon the express condition that a memorandum of even date whould be executed, and should be binding upon the new company. One of the conditions was that the shareholders, Chinese and foreign alike, should have equal votes; that the company should be managed by two boards, English and Chinese; that Chang-Yen-Mao should continue to be director-general; and that the Chinese board should manage the property in China. These provisions, it was said, had not been carried out. The new company refused to recognize them. The Chinese board was powerless; a manager was sent out who said he knew nothing of the memorandum, and the official business of the company was not transacted at Tien-tsin. The plaintiff sought a declaration that the terms of the memorandum were binding upon th ecompany, or that the deed of transfer should be set aside. The defendants did not say that the memorandum was of no effect. Mr. Moreing, in his cross-examination, said that:

some of the directors took the view that the memorandum was not vital, but they still endeavoured to carry it out. It was true that the majority of the board took the view that the memorandum had no legal effect, but witness always dissociated himself from that.

The main point upon which the counsel for the defendants relied was that the memorandum had, according to its reasonable construction, been acted upon, and that the proviso about making Chang director-general "as before" was in direct violation of English law. After a patient hearing the Judge has, in regard to the principal points of the case, decided in favour of the plaintiff. Unless within a reasonable time the terms and conditions of the memorandum are complied with, the Court will do what it can to restore the property, and will take measures by injunction to restrain the defendants from parting with it. What is scarcely less important is the expression of opinion by the Judge that Chang-Yen-Mao had been guilty of no bad faith, whil ethe conduct of some of those concerned in the matter was open to criticism.

Chang-Yen-Mao will go back to China with the esteem of all who heard him give his evidence. He will be able to assure the retrograde party at home that relations with astute British financiers do not necessarily turn out badly. There is no doubt that the events which he disclosed in Court profoundly affected the better class of Chinese, and shook their confidence in British good faith. Justly open to censure, the action of the English company was represented by enemies of this country in the worst colours, and if it had been uncorrected, it would have stood seriously in the way of British enterprise.

Many other lessons are to be deduced from a singularly interesting case. One is the inexpediency of the participation in the affairs of any company by officials at all connected with the Customs administration and the public service which has, under Sir Robert Hart's supervision, gained the confidence of the people of China. Englishmen are jealous of anything that might affect the reputation that he has created for the Imperial Maritme Customs. But the chief reflection which the case suggests is that the victory of Chang-Yen-Mao is also of public importance, and that it will be useful to British capital and enterprise in the struggle now going on against formidable commercial rivals. In restoring his own good name he benefits the credit of this country.

See also:

• Herbert Hoover in China http://delong.typepad.com/sdj/2007/07/herbert-hoover-.html
• A Historical Document: Kaiping Mines Memorandum of Agreement http://delong.typepad.com/sdj/2007/07/kaiping-mines-m.html
• A Historical Document: The Pall Mall Gazette on the Kaiping Mines http://delong.typepad.com/delong_economics_only/2007/07/the-pall-mall-g.html

Why Oh Why Can't We Have a Better Press Corps? (Ross Douthat Feels Compelled to Apologize for Not Being Ignorant Edition)

Ross Douthat writes:

Ross Douthat: Wonk's Delight: That would be the ongoing Bruce Bartlett-Eric Kleefeld discussion about supply-side economics and the tax system, over at Andrew's place. It starts here; the conversation about the benefits and drawbacks of shifting from income to consumption taxes (like Bartlett, I'm a fan) kicks off here.

(And yes, it's a sign that you've been in Washington too long when you refer to yourself as a "fan" of consumption taxes.)

Think what this means: Ross Douthat feels compelled to apologize for knowing about and caring about an important issue of public policy.

Ross: You have not been in Washington too long. You have hung around ignorant and scornful know-nothing media types too long.

Bruce Bartlett on Bush v. Gore

Bruce Bartlett writes:

The Daily Dish: Over at the Washington Monthly blog, Kevin Drum discusses my previous post about not believing what Bush said in 2000. In a comment, Al Gore's college roommate Bob Somerby asks what I said about George W. Bush contemporaneously. This is a reasonable question, so I went back and looked at every column I wrote in 2000.

I see that I very seldom mentioned the campaign one way or another. The vast bulk of my writings dealt with current policy issues--the Federal Reserve, estate taxes, the state of the economy and so on. I wrote a couple of columns critical of Gore, but I could only find one largely devoted to Bush. I see in that column I was hopeful that the high quality of Bush's advisers indicated good judgment on his part. I knew most of his economic advisers personally and had a high opinion of all of them. On foreign policy, I mentioned Colin Powell's likely appointment as secretary of state as indicating a steady, moderate approach by Bush in this area.

I found a column I wrote for the Los Angeles Times on September 20 about Bush's tax plan that was decidedly lukewarm. I held out hope that once in office he would take the opportunity to fine-tune his campaign tax plan, about which I was unenthusiastic.

What comes across to me in rereading what I wrote is that Bush was simply the lesser of two evils. He might not have been very good, but at the time I thought he was better than Gore. I still don't think Gore would have been a good president. But I sure wish the Republicans had nominated someone else.

The question left hanging is why an economic policy team that looked very good at the time to Bruce (and that looked good at the time to me) turned out to do so badly--and why the foreign-policy team turned out to do much, much worse.

There's more from Bruce:

The Daily Dish: [I]t was pretty clear [in 2000] that Bush was no Reaganite, small-government kind of guy. He gave plenty of speeches on the need to expand government for all kinds of things. My friend Ed Crane of the Cato Institute is always reminding me that he wrote an article in the New York Times back in 1999 that fingered Bush's big government proclivities pretty accurately. It was also pretty clear that he was a foreign policy neocon. In short, it was all there for those who knew what to look for.

My own excuse for not predicting the disaster that Bush's presidency has been is that I simply didn't believe a word he said during the 2000 campaign. I assumed that every word out of his mouth had been put there by Karl Rove and it was all based on polling and focus groups. I knew that Bush is a bit of a dim bulb, so it never occurred to me that he actually had any ideas of his own. I just assumed that he would be a rerun of his father. I was never a big fan of George H.W., even though I worked for him at the Treasury Department, but looking back I can appreciate that he had his virtues. Bush 41 was at least a serious, responsible person--exactly the opposite of his oldest son.

My point is that it is very easy to get cynical about politics and think it is all a game. That was the mistake I made in 2000, along with lots of other people. If we don't want to make the same mistake again, all of us who comment on politics need to pay closer attention to what these guys are saying and make some allowance for the possibility that they actually believe it.

Remember that Reagan was no small-government Reaganite either: he shied at the jump when Stockman presented him with serious domestic spending cut options, and I've never figured out why anybody in the early 1980s thought we needed to spend so much more money on the navy.

Matthew Yglesias on Michael Ignatieff as Not-too-Bright Student

Matthew Yglesias writes:

Matthew Yglesias: I found Michael Ignatieff's reflective essay on getting things wrong about Iraq to be somehow pleasantly soothing. But then someone pointed out to me that the whole thing is founded on the absurd premise that his errors in judgment have something to do with the mindset of academia versus the mindset of practical politics.

This is, when you think about it, totally wrong. Academics in the field of Middle East studies were overwhelmingly opposed to the war. Similarly, international relations scholars opposed the war by a very large margin. The war's foci of intellectual support were in the institutions of the conservative movement, and in the DC think tanks and the punditocracy where the war had a lot of non-conservative support. People with relevant academic expertise -- notably people who weren't really on the left politically -- were massively opposed to the war. To imply the reverse is to substantially obscure one of the main lessons of the war, namely that we should pay more attention to what regional experts think and give substantially less credence to the idea that think tankers are really "independent" of political machinations.

Here is Michael Ignatieff:

Getting Iraq Wrong: The unfolding catastrophe in Iraq has condemned the political judgment of a president. But it has also condemned the judgment of many others, myself included, who as commentators supported the invasion. Many of us believed, as an Iraqi exile friend told me the night the war started, that it was the only chance the members of his generation would have to live in freedom in their own country. How distant a dream that now seems.

Having left an academic post at Harvard in 2005 and returned home to Canada to enter political life, I keep revisiting the Iraq debacle, trying to understand exactly how the judgments I now have to make in the political arena need to improve on the ones I used to offer from the sidelines. I’ve learned that acquiring good judgment in politics starts with knowing when to admit your mistakes.

The philosopher Isaiah Berlin once said that the trouble with academics and commentators is that they care more about whether ideas are interesting than whether they are true. Politicians... can’t afford the luxury of entertaining ideas that are merely interesting.... In academic life, false ideas are merely false and useless ones can be fun to play with. In political life, false ideas can ruin the lives of millions and useless ones can waste precious resources....

I’ve learned that good judgment in politics looks different from good judgment in intellectual life. Among intellectuals, judgment is about generalizing and interpreting particular facts as instances of some big idea. In politics, everything is what it is and not another thing. Specifics matter more than generalities. Theory gets in the way....

As a former denizen of Harvard, I’ve had to learn that a sense of reality doesn’t always flourish in elite institutions.... The only way any of us can improve our grasp of reality is to confront the world every day and learn, mostly from our mistakes, what works and what doesn’t. Yet even lengthy experience can fail us....

A sense of reality is not just a sense of the world as it is, but as it might be. Like great artists, great politicians see possibilities others cannot and then seek to turn them into realities. To bring the new into being, a politician needs a sense of timing, of when to leap and when to remain still. Bismarck famously remarked that political judgment was the ability to hear, before anyone else, the distant hoofbeats of the horse of history....

Benchmarks for progress in Iraq can help to decide how long America should stay there. But in the end, no one knows — because no one can know — what exactly America can still do to create stability in Iraq.

The decision facing the United States over Iraq is paradigmatic of political judgment at its most difficult. Staying and leaving each have huge costs. One thing is clear: The costs of staying will be borne by Americans, while the cost of leaving will be mostly borne by Iraqis. That in itself suggests how American leaders are likely to decide the question....

We might test judgment by asking, on the issue of Iraq, who best anticipated how events turned out. But many of those who correctly anticipated catastrophe did so not by exercising judgment but by indulging in ideology. They opposed the invasion because they believed the president was only after the oil or because they believed America is always and in every situation wrong.

The people who truly showed good judgment on Iraq predicted the consequences that actually ensued but also rightly evaluated the motives that led to the action.... They labored, as everyone did, with the same faulty intelligence and lack of knowledge of Iraq’s fissured sectarian history. What they didn’t do was... suppose, as President Bush did, that because they believed in the integrity of their own motives everyone else in the region would believe in it, too. They didn’t suppose that a free state could arise on the foundations of 35 years of police terror. They didn’t suppose that America had the power to shape political outcomes in a faraway country of which most Americans knew little. They didn’t believe that because America defended human rights and freedom in Bosnia and Kosovo it had to be doing so in Iraq. They avoided all these mistakes.

I made some of these mistakes and then a few of my own.... I let emotion carry me past the hard questions, like: Can Kurds, Sunnis and Shiites hold together in peace what Saddam Hussein held together by terror? I should have known that emotions in politics, as in life, tend to be self-justifying.... People with good judgment listen to warning bells within. Prudent leaders force themselves to listen equally to advocates and opponents of the course of action they are thinking of pursuing. They do not suppose that their own good intentions will guarantee good results. They do not suppose they know all they need to know....

[P]rudent leaders will not inspire a democracy to give its best. Democratic peoples should always be looking for something more than prudence... daring, vision and — what goes with both — a willingness to risk failure...

Not everybody labored with the same faulty intelligence. Not everybody labored with the same ignorance of Iraq's fissured sectarian history.

I think Ignatieff has it wrong when he contrasts realistic politicans with academic visionaries. The academics I know and respect labor under three ethical prime directives:

• Learn as much as possible about the issue.
• Fairly present all points of view that have significant support.
• Always remember that the world is a complex and surprising place, and that our theories, models, and data are limited: the map is not the territory.

The academics I know and respect don't make mistakes like those Michael Ignatieff attributes to an academic mode of thought: they don't believe that the ideas they play with are ultimately useless, and they desperately want to think thoughts that are true rather than thoughts that are false.

I think what Michael Ignatieff is talking about is not an academic mode of thought but a student mode of thought--a not-too-bright-student mode of thought. A not-too-bright student achieves success by (a) figuring out which book on the syllabus is favored by the instructor, (b) taking that book to be the gospel, and (c) regurgitating large chunks of that book on the exams and in the papers.

It surprises me that Michael Ignatieff thinks that opining about a situation while knowing that one is massively ignorant about it is an academic mode of thought.

Fear of Finance II

I wound up being quite unhappy with my "fear of finance" piece, because it completely ducked one of the most important questions: why the extraordinarily outsized pay packets of the high financiers? Why doesn't competition--which sorta works elsewhere in the economy--cause us to see greatly reduced earnings? We understand, we think, why celebrities get paid so much--a combination of increasing returns in distribution, being the genuinely best in the world, and being well-known for your well-known-ness. But why financiers?

What is it that blocks effective entry and competition, exactly?

Fear of Finance

For Project Syndicate:

We are at that turn of the intellectual cycle where the world's great and good become fearful of finance: distrustful of the rich and high-paid people who live very well indeed and work behind computer screens in the cores of the world's major cities doing... well, doing something that doesn't look like work, or productive, or useful. Each turn the fears are similar: paper-shufflers are doing better than makers, speculators are doing better than managers, traders are doing better than entrepreneurs, rootless global cosmopolites are doing better than those with their toes and ancestors in the soil, arbitrageurs are doing better than accumulators, the clever are doing better than the solid, the (financial) market is more powerful than the (regulatory, bureaucratic) state. This, the current of opinion goes, is an inversion of the normal and the natural and the just. We must cast down, as Franklin Delano Roosevelt put it, the "money changers" from their "high seats in the temple of our civilization." We must "restore the ancient truths" that growing, making, managing, and inventing things should have higher status, more honor, and greater rewards than whatever it is that financiers do.

Truth to be told, there is a lot to fear in finance. The rewards to the successful are staggeringly outsized. The punishments to the unwary are brutal. The average investor in individual stocks achieves risk-adjusted returns of the overall global stock market return--call it 6% per year in inflation-adjusted terms--minus 3%. The average investor in a managed mutual fund receives the overall return minus 2%. The average investor in an index fund receives the overall return minus 0.5%. Since the average return must be average, the informed financiers pocket the vast gaps that the poor trading strategies of the uninformed and the rash open up between their returns and the average. And it is true that nothing visible is created.

Truth be told, the scale of modern global finance is staggering: more than 4 trillion dollars of mergers and acquisitions this year, with tradeable and (theoretically) liquid financial assets reaching perhaps 160 trillion dollars by the end of this year, all in a world where annual global GDP is perhaps 50 trillion dollars. Martin Wolf of the Financial Times quotes the McKinsey Global Institute as estimating that world financial assets, which today are more than three times world GDP, were only equal to world GDP in 1980 (and to only two-thirds of world GDP in the aftermath of World War II). And then there are the numbers that sound very large and are hard to interpret: 300 trillion dollars in value of "derivative" securities; 3 trillion dollars of wealth managed by 12,000 global "hedge funds"; 1.2 trillion dollars a year committed behind the screen of "private equity."

But things are created in our modern financial system: important things, and valuable things--both positive and negative.

Consider the 4 trillion dollars of mergers and acquisitions this year, as companies acquire and spinoff branches and divisions in the hopes of gaining synergies or market power or better management. Those owners who sell these assets will gain roughly 800 billion dollars relative to what the pre-merger speculation value of their assets had been. The owners of the companies that buy--the shareholders of the acquirers--will lose roughly 300 billion dollars in market value, as markets take the acquisition as a signal that managers are exuberant and uncontrolled empire-builders rather than flinty-eyed trustees maximizing payouts to shareholders. This 300 billion dollars is a tax that shareholders of growing companies think is worth paying (or perhaps cannot find a way to avoid paying) for energy in their corporate executives.

There is left a net gain of roughly 500 billion dollars in global market value. Where does this come from? We don't know. Some of it is a destructive transfer from consumers to shareholders as corporations gain more monopoly power, some of it is an improvement in efficiency coming from better management and more appropriate scales of operations, and some of it is an overpayment by those who become irrationally exuberant when companies get their names in the news that will be taken back over time as irrational exuberance dissipates. The proportions? We don't know.

Let us, however, guess that the proportions are 1/3, 1/3, 1/3. Then several conclusions follow:

The first is that, once we look outside transfers within the financial sector, the total global effects of this chunk of finance is a gain of perhaps 340B in increased real shareholder value from higher expected future profits counterbalanced by a loss of 170B in future real wages, for households will find themselves paying higher margins to companies with more market power.

Subtract one number from the other and get a net gain of 170B of added social value in 2007: it's 0.3% of world GDP, equal to the average product of 7M of the world's workers. In one sense we should as a globe be glad that we have our M&A technicians, well-paid as they are, hard at work: it is very important that businesses with lousy managements or that are operating at inefficient scale be under pressure from those who think they could do better, and can raise the money to attempt to do do so. We certainly cannot rely on shareholder democracy as our only system of corporate control.

The second conclusion is that the gross gains--fees, trading profits, and capital gains to the winners--of perhaps 800B from this year's M&A--are greatly in excess of the perhaps 170B of net gains. Governments have a very important educational, admonitory, and regulatory role to play in this business: people should know the risks and probabilities, for they may wind up among the 630B worth of losers. So far there is little sign that they do.

Third, finance has long had--since before the days of J.P. Morgan it has had--an interest in stable monopolies and oligopolies with high profit margins, while the public has an interest in competitive markets with low margins. The more skeptical you are of the ability of government-run antitrust policy to offset the monopoly power-increasing effects of M&A, the more you should seek for other sources of countervailing power--which means progressive income taxation--to offset any upward leap in income inequality.

The eighteenth-century Physiocrats thought that only the farmer was productive--that the rest were somehow cheating the farmers out of their fair share. The twentieth-century Marxists thought that only the factor worker was productive--that the traders and the organizers were somehow cheating the factory workers out of their fair share. Let us educate and regulate our financial markets so that outsiders who invest are not sheared. But let us not make the mistake of fearing finance too much.

links for 2007-08-05

• Mesa Verde: People
• Petroglyph Point Trail
• John Cole: Saving Private Beauchamp
• Charlie Stross: Experiments in Publishing
• Shah Alam II
• Muhammad Shah
• List of Mughal emperors
• 1 square mile = 640 acres
• Schwartzberg Atlas: Digital South Asia Library
• Abul Fazl: Ain-i-Akbari
• James Fallows: China and the Smiley Curve

Were They Mad?

The engineers, that is. The engineers who drove I-70 through western Colorado over the Eisenhower pass, down Vail valley, and through Glennwood Canyon. For a road for trucks to drive on.

They cannot have been quite sane, can they?

Michael Scherer: http://www.whymichaelscherersucksthisweek.com

A nice take by Michael Scherer:

War Room: Political News, Politics News - Salon: CHICAGO -- For many here at YearlyKos, especially the political reporters, the biggest event of the conference on Friday was a panel discussion that featured Salon's Glenn Greenwald, the Politico's Mike Allen, Time's Jay Carney and Feministe's Jill Filipovic. It was billed as a confrontation between the crusty old mainstream media and the tough and truth-telling blogoshere. Lots of spittle, raised voices and loose fists could be expected.

None of that happened. Allen and Carney went out of their way to praise Greenwald. Greenwald forcefully repeated his longtime criticisms of Washington journalism.... Filipovic made solid points about the power and usefulness of the blogs in improving the national dialogue. At a few points, the crowd tried to get a fight started, by jeering Allen for dodging a query or asking Allen and Carney questions that amounted to "Why do you reporters suck so bad?"

That question is certainly not new or surprising, and I can say with authority that a lot of political reporters these days are thinking about it pretty closely. As a Salon writer, I long ago got used to reader comments that call me out for many of the decisions I make....

Most of the time, the challenges are good ones. Like other reporters, I don't always agree with the criticisms, but I take them seriously. I try to avoid repeating my mistakes and I try to get better with each story. But the attacks on me and other writers signal... news is no longer a one-way process. It is now much more of a conversation between journalist and reader. Reporters at major news organizations no longer have the omnipotent authority they once had. The news process, in a word, has been democratized. Readers feel entitled to get just the information they want, in the form they want it. They feel entitled to talk back. Slowly but surely, we reporters are beginning to accept that readers do actually have this right....

So the trend is clear. In private conversations with colleagues, which often sound like therapy sessions, I have joked about the possibility of jumping ahead of the curve. I could start a blog, www.whymichaelscherersucksthisweek.com, where I could comment on each one of my own stories, measuring the extent to which it a) advances my own social calendar in Washington, b) inadvertently or intentionally advances any partisan or interest group narrative, c) is lazy, d) shames my profession, e) is wrong or f) proves that I am captive to either my editors or my advertisers. I could try to get myself hired as a Salon ombudsman to analyze the attacks blogger Michael Scherer is making on reporter Michael Scherer.... I could hold a panel discussion at the National Press Club between blogger Michael Scherer, reporter Michael Scherer and ombudsman Michael Scherer. The transcripts of these discussions would be forwarded to a therapist who would be working to get the human being Michael Scherer out of bed in the morning...

Three Miles East of East Inlet Trailhead, Rocky Mountain National Park

A dialogue:

Two hundred feet of vertical will get you to where there is almost nobody in any American national park. So what is this chipmunk doing chittering at us from the creekbed?

Shoo! Shoo!

Why are you doing that?

It's not good for it to be dependent on humans for food. It needs to associate humans with unpleasant sensations and danger. Shoo! Shoo!

You know the telos of a chipmunk?

It's not like there are a lot of people up here. We haven't seen anyone for a mile and a half.

It's not as though the meadow is overrun with chipmunks, distorting the ecology...

Its life is nasty, British, and short enough even with occasional granola crumbs...

"British"?

Blame the iPhone's autocomplete feature for that one.

Then how did it learn to beg?

Al Gore.

What did you say?

Al Gore. It's one of Al Gore's creatures. It's one of Al Gore's lieutenants, who wander the earth tirelessly spreading the good news of environmentalism.

The altitude has gotten to you.

No it hasn't! People go to national parks. They see a cute chipmunk. They engage in a gift-exchange relationship with it. They feel happy. They feel interdependent with other humans and with the planet. They vote for Al Gore-approved candidates. We protect the environment. The world goes to its happy place.

But anyone who makes it up here is already a believer...

So you are proposing an alternative telos for the chipmunk?

Yes. As a neuron in the universe's coming to self-consciousness.

But we didn't feed it, and now it's gone...

I still want to know how it learned to beg. Its life is short. This trail is snowed-in until May, and the snow falls again in October. This is 10000 feet, after all...

There it is again...

High in Colorado

Where Bradford once again painfully learns the difference between (a) sea level, (b) 8000 feet, and (c) 11000 feet...

links for 2007-08-03

• John Holbo: Oh, wise crowd of Valve readers: what slightly less painfully simple rating question(s) could Netflix ask customers, such that genuinely interesting (and predictive) data would potentially result?
• Jon Chait on Rudy Giuliani's anti-health plan
• Ezra Klein on Rudy Giuliani on Health Care: A Man With a (Non-)Plan
• Lieberman's Losing Battle for Influence: New York Observer

The Bushies' Strategy in Iraq

Ioz sums up the state of play:

Who Is IOZ?: Who's On First?: Consider. The United States invaded Iraq and deposed its Sunni Arab Ba'athist government. After months of inept proconsular hijinks that guaranteed Insurgency Now! instead of Insurgency One-ah-dese-days!, hasty elections were mounted under a bloc-lists system of proportional representation, which guarnateed that Iraqis would not actually know whom they were voting for, and which also guaranteed a substantial Shia majority in the parliament. At about this point, the Americans discovered--holy shit!--that Iran is, in fact, a Shia nation, and that these Shia politicians had the backing of Iran. And not only that, but they were, like, trying to consolidate their power with private militias and death squads and various and sundry other subversions of that old shibboleth, Democracy. Of course, America took the only reasonable course of action. It began arming the very Sunni Arab groups that had been fighting both the American occupation and the Iranian-occupied government, in order that the Sunni Insurgents--now referred to, of course, as former Sunni Insurgents--could contain the Iranian influence and combat these death squads and whomever else it was they were supposed to be combatting. Meanwhile, in the North, the Kurds basically created their own country, with their own military, governmental institutions, laws, customs, and flag. Turkey, America's nominal ally, didn't like this one bit. But of course, America was funding and supporting Iraqi Kurdistan--an oasis of relative calm in a bloody desert. Now, it turns out, America is also supporting Turkish efforts to wage a cross-border counterinsurgency against the coethnoreligionist Kurds in Iraq as an outgrowth of their repressive efforts against Turkish Kurds.

So. To keep score. The United States is supporting: the Shia government, which funnels money and arms to Shia militias, death squads, and insurgent/terrorist groups; the Sunni opposition, which funnels money and arms to the Sunni insurgency; the Sunni insurgency directly, so that they will combat the Shia militias as well as al-Qaeda in Iraq, a group of Sunni terrorists supposedly supported by Shia Iran; the Saudis, who fund Sunni insurgents as well--almost surely--as Sunni terrorist groups; the Iraqi Kurds, who have their sights set on an independent nation that includes a de-Arabized Kirkuk; and the Turks, who have their sights set on never, ever seeing an independent Kurdish entity anywhere, anyhow, anyway, ever, amen...

Impeach George W. Bush. Impeach him now.

links for 2007-08-02

• Glenn Greenwald: Anonymity is still critical for good investigative journalism. Without it, we would not know about NSA warrantless eavesdropping or CIA black sites or "rendition" programs and a whole slew of other illegal and destructive acts engaged in
• CEPR (the Centre for Economic Policy Research) a network of over 700 economists based across Europe
• Sagebrush BBQ & Grille
• Fighting Terrorism Since 1492 - Apache White T-Shirt
• Lakota River Guides

Sagebrush BBQ

http://sagebrushbbq.com

Max Sawicky Objects to a Paragraph in the Club for Growth's Petition

Max Sawicky doesn't like this:

MaxSpeak, You Listen!: MAKE THAT 1,027 OF
"AMERICA'S TOP ECONOMISTS": And it says this:

In 1930, Congress passed and President Hoover signed into law the Smoot-Hawley Tariff Act. At the time, this protectionist measure was vigorously opposed by 1,028 of the nation's top economists. They rightly predicted the tariffs would devastate the economy. And, in fact, the country subsequently plunged into the Great Depression...

I could see why the eminent economist Grover Glenn Norquist would adhere to this opinion, since he has proved it in his vast production of scientific papers, monographs, books, and Parade Magazine articles. Of the rest, it's a bit of a puzzle...

I stubbornly resist China-bashing, and these protectionist bills strike me as first-order China bashing, to be stubbornly resisted.

But I also agree with Max that this Club for Growth petition is bad juju: the word describing the effects of Hawley-Smoot on the economy should be "damage," not "devastate." And the Great Depression would have come whether or not Hoover vetoed Hawley-Smoot--it was a third-order problem in the early 1930s. That paragraph Max quotes shouldn't be there: opposition to protectionism is a good thing, and good things do not have to be supported with lies.

I presume that few of the economists who signed the Club for Growth knew that the paragraph above would be put in BIG PRINT above their names. But they should have known something would go wrong: it's not like the Club for Growth doesn't have a history, after all.

Barry Eichengreen: Manufacturing Doesn't Matter (Much) (Any More)

Mark Thoma sends us to Barry Eichengreen on the German economy:

Economist's View: Barry Eichengreen: The German Economy: Be Careful What You Ask For: Germans are having a hard time getting their minds around the fact that their economy is doing better.... Hans-Werner Sinn... [fears] that Germany is losing its manufacturing prowess. It is becoming a “bazaar economy” in which its celebrated consumer and producer durables are cobbled together from imported components. Professor Sinn’s favorite example is the Cayenne, Porsche’s luxury SUV. While the car is nominally assembled in Leipzig, many of the parts are sourced abroad. Even the basic assembly is done in Bratislava. Only the engine is installed in Leipzig. Domestic content is at most a third of final product.

[Sinn's] explanation is simple: expensive German labor cannot compete with equally skilled but immensely less expensive workers to the east. No wonder, then, that Porsche offshores the production of components and assembly operations. No wonder that the share of share of manufacturing jobs in German employment has been falling steadily and with it Germany’s ranking in the GDP per capita leagues.

[Sinn's] solution is equally simple. Reform labor markets so that wages are more flexible. Restructure an overly generous welfare state so that it no longer saps the incentive to work at rates that firms can afford. Germany’s manufacturing champions will then be able to survive and prosper.

There are only two problems with this story. The first one is that Germany has in fact been doing rather well recently. Growth appears to be accelerating from 2.8 per cent in 2006 to upwards of 3 per cent this year. Exports are up by nearly 50 per cent since the beginning of the decade. Even unemployment, a lagging indicator, is coming down. Inconveniently for the undertaker, the patient evidently refuses to die....

If one wants to worry about Germany’s economic prospects, then one must make a rather more subtle argument... the country may have been too successful at retaining manufacturing jobs.... [T]his traditional specialization now places it squarely in the sights of China, India and other emerging markets. These countries have immensely cheaper labor. They are already learning to use and will soon learn how to produce sophisticated machine tools themselves, just as they have learned to produce auto parts. Precisely the same thing that happened to Italy as China moved up the technology ladder into the production of more sophisticated consumer goods will happen to Germany as China moves into the production of more sophisticated producer goods.

The key to growth thus lies in getting out of the way of these behemoths and finding alternative forms of high-value-added employment. That will mean moving out of fabrication in favor of product design. It will mean moving out of industry in favor of services... figuring out how to deploy information technology to raise productivity in retailing, finance and other service sectors....

The UK has enjoyed such a successful economic run precisely because, for peculiar reasons by the name of Maggie Thatcher, it got out of manufacturing and into financial and other services at the right time. My own state, California, has similarly been able to grow and prosper because the defense build-down of the early 1990s caused industries like aerospace assembly to wind down in favor of software and systems design for a host of products manufactured elsewhere.

The real problem in Germany is not the country’s inability to retain more manufacturing employment but its failure to recognize that industry and prosperity are no longer synonymous. The challenge going forward is to adapt the country’s university system, financial system and labor market to what will have to become a post-industrial economy. Here, unfortunately, there has not been much progress. Many Germans have a visceral distaste for service sector jobs. Providing a service to someone else makes one feel like the customer’s inferior, in contrast to a solid and respectable job in manufacturing...

The first requirements for a country to be wealthy are its existing in a world with a high level of technology. The second requirements of wealth are a government strong enough and well-ordered enough to establish private property and the market sytem. The third requirements are, as Adam Smith laid them out, "peace, easy taxes and a tolerable administration of justice." The fourth requirements are a government competent and energetic enough to make the desirable investments in infrastructure and, especially, education to allow the citizens to grasp the opportunities opened by the first four.

Barry Eichengreen is worried about requirement number five: that the culture and the detailed institutions and practices of a country be such as to not penalize forms of economic activity that promise to generate large external benefits for others, and to not subsidize forms of economic activity that promise to impose external costs. Barry believes that the details of Germany's political economy give it a bias toward manufacturing--and that the time when there was a reason for a bias toward manufacturing as the driver of technology has passed.

Has it passed for the developed post-industrial economies? I don't know.

John Berry on the Fed's Decisions This Week

He writes, for Bloomberg:

The Federal Open Market Committee will keep its overnight lending rate target at 5.25 percent and say its ``predominant policy concern'' is that inflation may not moderate as expected. Neither the recent drop in stock prices nor the rise in yields on riskier debt has gone far enough to cause Fed officials to alter their forecast for continued moderate growth in this year's second half.... Because of the sudden return of market volatility, some analysts again are predicting the Fed will cut rates before the year is out. Of course that could happen if the economy turned really sour, though there are few signs of that....

As Fed Chairman Ben S. Bernanke told Congress on July 18, 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.'' The latest figures indicate that is already happening. Thecentral tendency'' of Fed officials' latest forecasts is for GDP to expand 2.25 percent to 2.5 percent this year. Given the 2 percent growth rate of the first half, it would take 2.5 percent to 3 percent growth for the rest of the year to realize those forecasts....

Meanwhile, there was also some good news about inflation in the GDP figures. The inflation measure most closely watched by the Fed, the personal consumption expenditure price index, rose at just a 1.4 percent annual rate in the second quarter and was up 2 percent from the second quarter of last year. Certainly a 1.4 percent inflation rate would satisfy just about everyone at the Fed -- if it were to continue....

[Data] evisions suggest that productivity -- output per hour worked -- also grew less rapidly. That may indicate that the economy's potential to grow without overheating probably isn't as great as has been thought. In 2005, for example, GDP growth of a bit more than 3 percent was fast enough to cause the U.S. jobless rate to fall slowly. Since last fall, just a 2 percent growth rate has been enough to keep unemployment at a low 4.5 percent level. So long as unemployment is in that range, Fed officials aren't going to cut rates.

Alan Blinder on Taxing Private Equity Managers

Very nicely done:

The Under-Taxed Kings of Private Equity: AN arcane debate is raging in Congress over the appropriate taxation of the bountiful incomes of people who manage private-equity and hedge funds.... [O]ne thing is easy to understand, though hard to swallow: Some people who are richer than Croesus are paying 15 cents in federal income taxes on the marginal dollar, while you may be paying 25 or 35 cents.

To be clear, I hold no brief against the kings of private equity. Their clients are consenting adults who sign up with full knowledge of the lush fees that private equity managers receive. Some of these managers may even earn their rich rewards. My question is simply this: Why shouldn’t they pay taxes like the rest of us?... [I]s the low 15 percent tax rate justified? For better or, as I will argue shortly, worse, capital gains are taxed far more lightly than wages. Since carry stems mostly from capital gains, defenders of the status quo argue that it deserves the low tax rate. Critics, however, object that carry looks and feels like payments for managing money, that is, like earnings.

Who’s right? It’s true that carry is mostly derived from gains on capital — but it’s mostly someone else’s capital. Which is presumably why former Treasury Secretary Robert E. Rubin said at a conference last month, “I think what they’re doing is getting paid a fee for running other people’s money.”

Sounds right to me. This judgment does not dispute the fact that fund managers’ compensation is risky. But so are the incomes of movie actors, the royalties of authors and the prize winnings of golfers — none of which is treated as capital gains....

Why do we have a preference for capital gains in the first place? The main argument is that lower taxes on capital gains boost investment. But the evidence on that point is iffy at best, and there are better ways to spur investment, like, say, the investment tax credit. Besides, lower taxes on capital gains reduce the tax bills of the rich relative to the rest of us — after all, they own most of the capital. But in this age of hyper-inequality, shouldn’t we be making the tax code more progressive, not less?

A far more important objection is that the tax preference for capital gains undermines capitalism — a system in which capitalists, not the state, are supposed to make the investment decisions. When I discuss this issue with my Economics 101 students, I show them an example of a proposed investment that loses money before tax (and which, therefore, should be rejected) but which actually turns a profit after tax because of the preferentially low capital gains rate. (Accountants and tax lawyers live this example every day.) The government thus induces people to make bad investments...

I'm much for sympathetic to the capital gains tax preference than Alan Blinder is, but the article is very good.